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Pricing Coordination Failures and Health Care Provider Integration

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  • Eggleston Karen

    () (Tufts University)

  • Norman George

    () (Tufts University)

  • Pepall Lynne Marie

    () (Tufts University)

Abstract

The rise of managed healthcare organizations (MCOs) and the associated increased integration among providers has transformed US healthcare and at the same time raised antitrust concern. This paper examines how competition among MCOs affects the efficiency gains of improved price coordination achieved through integration. MCOs offer differentiated services and contract with specialized and complementary upstream providers to supply these services. We identify strategic pricing equilibria under three different market structures: overlapping upstream physician-hospital alliances, upstream-downstream arrangements such as Preferred Provider Organizations, and vertically integrated Health Maintenance Organizations. The efficiency gains achieved depend not only on organizational form but also on the toughness of premium competition. We show that, contrary to popular thinking, providers and insurers do not earn maximum net revenue when they are monopolies or monopsonies, but rather at an intermediate level of market power. Furthermore, closer integration of upstream and downstream providers does not necessarily increase net revenues.

Suggested Citation

  • Eggleston Karen & Norman George & Pepall Lynne Marie, 2004. "Pricing Coordination Failures and Health Care Provider Integration," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-31, December.
  • Handle: RePEc:bpj:bejeap:v:contributions.3:y:2004:i:1:n:20
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    References listed on IDEAS

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    Cited by:

    1. Gaynor, Martin & Town, Robert J., 2011. "Competition in Health Care Markets," Handbook of Health Economics, Elsevier.
    2. David Bardey & Ramón Castaño, 2007. "La regulación de tarifas en el sector de la salud en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 9(17), pages 347-357, July-Dece.
    3. Daniel Granot & Shuya Yin, 2008. "Competition and Cooperation in Decentralized Push and Pull Assembly Systems," Management Science, INFORMS, pages 733-747.
    4. Katherine Ho, 2009. "Insurer-Provider Networks in the Medical Care Market," American Economic Review, American Economic Association, pages 393-430.

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