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The welfare effects of restricted hospital choice in the US medical care market

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  • Katherine Ho

    (Economics Department, Columbia University, New York, USA)

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Abstract

Managed care health insurers in the USA restrict their enrollees' choice of hospitals to within specific networks. This paper considers the implications of these restrictions. A three-step econometric model is used to predict consumer preferences over health plans conditional on the hospitals they offer. The results indicate that consumers place a positive and significant weight on their expected utility from the hospital network when choosing plans. A welfare analysis, assuming fixed prices, implies that restricting consumers' choice of hospitals leads to a loss to society of approximately $1 billion per year across the 43 US markets considered. This figure may be outweighed by the price reductions generated by the restriction. Copyright © 2006 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.896
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File URL: http://qed.econ.queensu.ca:80/jae/2006-v21.7/
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 21 (2006)
Issue (Month): 7 ()
Pages: 1039-1079

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Handle: RePEc:jae:japmet:v:21:y:2006:i:7:p:1039-1079

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  1. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, December.
  2. Aviv Nevo, 2001. "New Products, Quality Changes and Welfare Measures Computed From Estimated Demand Systems," NBER Working Papers 8425, National Bureau of Economic Research, Inc.
  3. David M. Cutler & Sarah Reber, 1996. "Paying for Health Insurance: The Tradeoff between Competition and Adverse Selection," NBER Working Papers 5796, National Bureau of Economic Research, Inc.
  4. Anne Beeson Royalty & Neil Solomon, 1999. "Health Plan Choice: Price Elasticities in a Managed Competition Setting," Journal of Human Resources, University of Wisconsin Press, vol. 34(1), pages 1-41.
  5. Martin Gaynor & William Vogt, 2002. "Competition Among Hospitals," GSIA Working Papers 2003-E20, Carnegie Mellon University, Tepper School of Business.
  6. Cory S. Capps & David Dranove & Shane Greenstein & Mark Satterthwaite, 2001. "The Silent Majority Fallacy of the Elzinga-Hogarty Criteria: A Critique and New Approach to Analyzing Hospital Mergers," NBER Working Papers 8216, National Bureau of Economic Research, Inc.
  7. Aviv Nevo, 1998. "Measuring Market Power in the Ready-to-Eat Cereal Industry," NBER Working Papers 6387, National Bureau of Economic Research, Inc.
  8. Beaulieu, Nancy Dean, 2002. "Quality information and consumer health plan choices," Journal of Health Economics, Elsevier, vol. 21(1), pages 43-63, January.
  9. Buchmueller, Thomas C. & Feldstein, Paul J., 1997. "The effect of price on switching among health plans," Journal of Health Economics, Elsevier, vol. 16(2), pages 231-247, April.
  10. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  11. Thomas C. Buchmueller, 2005. "Price and the Health Plan Choices of Retirees," NBER Working Papers 11395, National Bureau of Economic Research, Inc.
  12. Town, Robert & Vistnes, Gregory, 2001. "Hospital competition in HMO networks," Journal of Health Economics, Elsevier, vol. 20(5), pages 733-753, September.
  13. Feldstein, Martin S, 1973. "The Welfare Loss of Excess Health Insurance," Journal of Political Economy, University of Chicago Press, vol. 81(2), pages 251-80, Part I, M.
  14. Strombom, Bruce A. & Buchmueller, Thomas C. & Feldstein, Paul J., 2002. "Switching costs, price sensitivity and health plan choice," Journal of Health Economics, Elsevier, vol. 21(1), pages 89-116, January.
  15. Amil Petrin, 2001. "Quantifying the Benefits of New Products: The Case of the Minivan," NBER Working Papers 8227, National Bureau of Economic Research, Inc.
  16. Capps, Cory & Dranove, David & Satterthwaite, Mark, 2003. " Competition and Market Power in Option Demand Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 737-63, Winter.
  17. Tay, Abigail, 2003. " Assessing Competition in Hospital Care Markets: The Importance of Accounting for Quality Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 786-814, Winter.
  18. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  19. Katherine Ho, 2009. "Insurer-Provider Networks in the Medical Care Market," American Economic Review, American Economic Association, vol. 99(1), pages 393-430, March.
  20. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
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Citations

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Cited by:
  1. Sungho Park & Sachin Gupta, 2012. "Comparison of SML and GMM estimators for the random coefficient logit model using aggregate data," Empirical Economics, Springer, vol. 43(3), pages 1353-1372, December.
  2. Abe Dunn, 2010. "The Value of Coverage in the Medicare Advantage Insurance Market," BEA Working Papers 0061, Bureau of Economic Analysis.
  3. Kate Ho & Robin S. Lee, 2013. "Insurer Competition and Negotiated Hospital Prices," NBER Working Papers 19401, National Bureau of Economic Research, Inc.
  4. Martin Gaynor & Kate Ho & Robert Town, 2014. "The Industrial Organization of Health Care Markets," NBER Working Papers 19800, National Bureau of Economic Research, Inc.
  5. Darius Lakdawalla & Neeraj Sood, 2006. "Health Insurance as a Two-Part Pricing Contract," NBER Working Papers 12681, National Bureau of Economic Research, Inc.
  6. Martin Gaynor & Robert J Town, 2012. "Competition in Health Care Markets," The Centre for Market and Public Organisation 12/282, Department of Economics, University of Bristol, UK.
  7. Capps, Cory & Dranove, David & Lindrooth, Richard C., 2010. "Hospital closure and economic efficiency," Journal of Health Economics, Elsevier, vol. 29(1), pages 87-109, January.
  8. Pérez Montes, Carlos, 2013. "Regulatory bias in the price structure of local telephone service," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 462-476.
  9. Gautam Gowrisankaran & Aviv Nevo & Robert Town, 2013. "Mergers When Prices are Negotiated: Evidence from the Hospital Industry," NBER Working Papers 18875, National Bureau of Economic Research, Inc.
  10. Andrew Sweeting, 2007. "Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry," NBER Working Papers 13522, National Bureau of Economic Research, Inc.
  11. Chou, Shin-Yi & Deily, Mary E. & Li, Suhui & Lu, Yi, 2014. "Competition and the impact of online hospital report cards," Journal of Health Economics, Elsevier, vol. 34(C), pages 42-58.
  12. Ho, Katherine & Pakes, Ariel, 2011. "Do physician incentives affect hospital choice? A progress report," International Journal of Industrial Organization, Elsevier, vol. 29(3), pages 317-322, May.
  13. Hugh Gravelle & Rita Santos & Luigi Siciliani & Rosalind Goudie, 2012. "Hospital Quality Competition Under Fixed Prices," Working Papers 080cherp, Centre for Health Economics, University of York.
  14. Bonnet, Céline & Dubois, Pierre, 2008. "Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Non Linear Pricing and Resale Price Maintenance," IDEI Working Papers 519, Institut d'Économie Industrielle (IDEI), Toulouse, revised Dec 2008.
  15. Kate Ho & Ariel Pakes, 2013. "Hospital Choices, Hospital Prices and Financial Incentives to Physicians," NBER Working Papers 19333, National Bureau of Economic Research, Inc.
  16. Powell, Philip T. & Laufer, Ron, 2010. "The promises and constraints of consumer-directed healthcare," Business Horizons, Elsevier, vol. 53(2), pages 171-182, March.

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