Voluntary Uninsurance. Adverse selection, or more generally ex ante heterogeneity, allows us to analyze the impact of uninsurance on our results. We have shown throughout that insurance eliminates the deadweight loss from monopoly. Obviously, however, monopoly will continue to reduce the welfare of the uninsured. It is straightforward to show that the uninsured are the only consumers to be harmed by monopoly, and that the deadweight loss from monopoly is proportional to the rate of uninsurance. In the standard Xxxxxxxxxx-Xxxxxxxx framework (considered in our appendix), both types purchase some insurance. However, if there is a cost to providing insurance, this may not be the case. Suppose there is some transactions cost or load factor on insurance, so that an insurer’s costs are equal to λC , where C represents claims paid, and λ > 1 . Up to now, we have implicitly assumed that λ = 1. The presence of the load factor creates the possibility that some consumers will choose to forego insurance. For our analysis, the particular group of consumers choosing uninsurance (e.g., high-risk versus low-risk) is not crucial, but for consistency, we continue with the Xxxxxxxxxx-Xxxxxxxx model, in which there are chronically ill and not chronically ill patients. Since the not chronically ill types receive less consumer surplus from insurance, they will be the first to opt for uninsurance. Suppose, therefore, the load factor λ is high enough such that insurance is welfare-reducing for the not chronically ill, but still welfare-improving for the chronically ill. Under competition, the chronically ill receive full insurance, while the not chronically ill opt out of insurance, and instead pay marginal cost for medical care when needed. The impacts of monopoly with two-part health insurance contracts are straightforward: the welfare of the insured chronically ill population does not change, by the arguments given earlier in this section. In particular, copayment rates are set optimally, and the premium is used to extract consumer surplus. However, the monopolist will now sell to the uninsured population at the standard monopoly price, because there is no insurance company mediating the transaction. This results in welfare decline for the uninsured.9 Define CS m and CS c as the per capita consumer surplus enjoyed by the uninsured under monopoly and competition, respectively. If ρ u is the proportion of the population uninsured under competition, the total societal loss from monopoly is given by: ρ u...
