Insurer Competition in Health Care Markets

Abstract

The impact of insurer competition on welfare, negotiated provider prices, and premiums in the U.S. private health care industry is theoretically ambiguous. Reduced competition may increase the premiums charged by insurers and their payments made to hospitals. However, it may also strengthen insurers' bargaining leverage when negotiating with hospitals, thereby generating offsetting cost decreases. To understand and measure this trade-off, we estimate a model of employer-insurer and hospital-insurer bargaining over premiums and reimbursements, household demand for insurance, and individual demand for hospitals using detailed California admissions, claims, and enrollment data. We simulate the removal of both large and small insurers from consumers' choice sets. Although consumer welfare decreases and premiums typically increase, we find that premiums can fall upon the removal of a small insurer if an employer imposes effective premium constraints through negotiations with the remaining insurers. We also document substantial heterogeneity in hospital price adjustments upon the removal of an insurer, with renegotiated price increases and decreases of as much as 10% across markets.1 insights are relevant not only when employers change insurance plan menus offered to employees, but also when insurers merge, and when they enter or exit markets.One of this paper's primary contributions is identifying and quantifying the mechanisms by which insurer competition affects negotiated hospital prices in equilibrium. If reducing insurer competition raises premiums via an increase in the remaining insurers' market power, there may be an upward pressure on negotiated prices as hospitals capture part of the increased industry surplus. 4However, there are offsetting effects that arise if insurers consequently have greater bargaining leverage. This can occur if an insurer loses fewer enrollees to a rival insurer upon disagreement with a hospital and if a hospital "recaptures" fewer enrollees through a rival insurer upon disagreement with an insurer. If substantial, these additional effects-variants of countervailing power (Galbraith, 1952)-imply that greater downstream concentration can reduce total hospital payments.Previous papers have examined the relationship between market concentration and medical provider prices, often within a regression framework (c.f. Gaynor and Town, 2012;Gaynor, Ho and Town, 2015). 5 We build on this literature by imposing structure derived from a theoretical model of competition in health care markets in order to uncover heterogeneous responses across firms and markets and conduct counterfactual simulations. Our approach is also related to Gowrisankaran, Nevo and Town (2015) who use a structural model of hospital-insurer bargaining to estimate the impact of hospital mergers on negotiated prices. 6 Our contributions include estimating a model of insurer competition for households in our empirical analysis and incorporating employer bargaining over premiums with insurers. 7 Capturing these interactions is...

The price effects of cross‐market mergers: theory and evidence from the hospital industry

“…Consider two upstream suppliers (hospitals), , bargaining with a monopolist downstream intermediary (insurer). For the sake of exposition, we present a stylized version of a bargaining model that highlights our key theoretical points; see Ho and Lee () for a more generalized treatment of hospital‐insurer bargaining…”

“…Consider first a household (or family) that chooses an insurance plan to satisfy the needs of all its members. This is the assumption made by Ho and Lee (), in which households f choose an insurance plan j in geographic market m to maximize a utility function similar to: where are plan‐market fixed effects, is the WTP generated by plan j in market m for individual k in the household, and is an i.i.d. demand shock.…”

“…As in our model, a necessary condition for a cross‐market effect is the existence of common customers who value both merging parties. However, Peters emphasizes a mechanism that does not require the insurer's objective function to be submodular in the provider network: changes in hospitals' disagreement points upon merging (see also Ho and Lee, )…”

Do Health Insurers Contract the Best Providers? Provider Networks, Quality, and Costs

“…In the applied literature on network formation in health‐care markets, the equilibrium concept NiN bargaining is often used; see, for example, Gowrisankaran et al. () or Ho and Lee () and the references therein. Above we use BW, as it facilitates the exposition of our main idea, but results are robust to using NiN.…”

Geography, Transportation, and Endogenous Trade Costs

“…We then set as their weighted average based on each commodity's frequency in shipping contracts; we find to equal 7 million U.S. dollars. This approach of estimating the Nash bargaining weight is inspired by the empirical literature on oligopoly bargaining (e.g., Crawford and Yurukoglu (), Ho and Lee ()).…”