Gaynor M, Haas-Wilson D & Vogt W, (2000)

‘Are Invisible Hands Good Hands? Moral Hazard, Competition, and the 2nd Best in Health Care Markets’

Journal of Political Economy 108 (5), pp. 992-1005

Critically evaluates the ‘folk theorem of health economics’ – that imperfect competition is desirable in healthcare markets because of the presence of moral hazard.
The argument against competition runs as follows: when individuals have health insurance, they will tend to over-consume healthcare (moral hazard). Imperfect competition, which increases the price of treatments, will limit this moral hazard, and so increase welfare (an example of a ‘second best’ outcome).
The authors model the optimal amount of health insurance and competition, given risk aversion and moral hazard.
They establish that the existence of moral hazard is not, per se, an argument against competition, provided insurance markets are also competitive.
Thus the authors conclude that the existence of moral hazard does NOT justify lax antitrust enforcement in health care markets.