Rising Health Care Costs and the Two Price Market: The Impact of Third-Party Payers

Abstract

Martin Feldstein wrote several important papers in the 1970s concerning the reciprocal growth of health care inflation and insurance levels. This paper attempts to develop a new theoretical model based on a two-price market that will explain the reiprocal nature discovered by Feldstein, but is not dependent purely on moral hazard to explain increased costs. A general two-price model is developed, and then applied to the health care industry.