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Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs

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  • Katherine Ho

Abstract

I investigate the reasons why market expansion attempts by vertically integrated health insurers have largely failed. I use an econometric model of consumer demand for hospitals and insurers to simulate entry of an integrated plan into 28 new markets. The results indicate that entry would increase social surplus by over $34 billion per year. I then investigate several potential barriers to entry. Three are particularly important. Integrated plans cannot attract enough enrollees to support their provider networks unless they exceed competitor quality levels and convince consumers of this benefit. Regulatory restrictions on plans building new facilities may also be important.

Suggested Citation

  • Katherine Ho, 2009. "Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(2), pages 487-545, June.
    • Handle: RePEc:bla:jemstr:v:18:y:2009:i:2:p:487-545
    DOI: 10.1111/j.1530-9134.2009.00221.x
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Justine S. Hastings & Richard J. Gilbert, 2005. "Market Power, Vertical Integration And The Wholesale Price Of Gasoline," Journal of Industrial Economics, Wiley Blackwell, vol. 53(4), pages 469-492, December.
    4. Katherine Ho, 2006. "The welfare effects of restricted hospital choice in the US medical care market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 1039-1079, November.
    5. Gaynor, Martin, 2006. "Is vertical integration anticompetitive?: Definitely maybe (but that's not final)," Journal of Health Economics, Elsevier, vol. 25(1), pages 175-180, January.
    6. Tasneem Chipty, 2001. "Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry," American Economic Review, American Economic Association, vol. 91(3), pages 428-453, June.
    7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    Cited by:

    1. David M. Cutler, 2011. "Where Are the Health Care Entrepreneurs? The Failure of Organizational Innovation in Health Care," NBER Chapters, in: Innovation Policy and the Economy, Volume 11, pages 1-28, National Bureau of Economic Research, Inc.
    2. Pelech, Daria, 2017. "Dropped out or pushed out? Insurance market exit and provider market power in Medicare Advantage," Journal of Health Economics, Elsevier, vol. 51(C), pages 98-112.
    3. Gaynor, Martin & Town, Robert J., 2011. "Competition in Health Care Markets," Handbook of Health Economics, in: Mark V. Pauly & Thomas G. Mcguire & Pedro P. Barros (ed.), Handbook of Health Economics, volume 2, chapter 0, pages 499-637, Elsevier.
    4. Cutler, David M., 2010. "Where Are the Health Care Entrepreneurs? The Failure of Organizational Innovation in Health Care," Scholarly Articles 5345877, Harvard University Department of Economics.

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