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The Welfare Economics of a Health Plan Merger

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  • Feldman, Roger

Abstract

Recently, two large health maintenance organizations (HMOs) in Minneapolis merged to form a single company with over half of the total Twin Cities HMO enrollment. This paper strongly suggests that the merger will have adverse consequences for consumers. I use a model of health plan rivalry and empirical demand functions to predict that health insurance premiums in six Twin Cities firms will rise by as much as 19 percent after the merger. Next, I show how to calculate the loss in consumer surplus in a "discrete choice" model and predict that the merger will reduce surplus by 4.4 percent on average. Several objections to these conclusions are considered but, on the whole, the analysis raises serious concerns for public policy toward HMO mergers. Copyright 1994 by Kluwer Academic Publishers

Suggested Citation

  • Feldman, Roger, 1994. "The Welfare Economics of a Health Plan Merger," Journal of Regulatory Economics, Springer, vol. 6(1), pages 67-86, February.
  • Handle: RePEc:kap:regeco:v:6:y:1994:i:1:p:67-86
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    Cited by:

    1. Gregory J. WERDEN, 1997. "Simulating The Effects Of Differentiated Products Mergers: A Practitioners' Guide," Department of Resource Economics Regional Research Project 967, University of Massachusetts.
    2. Steven Pizer & Austin Frakt & Roger Feldman, 2009. "Nothing for something? Estimating cost and value for beneficiaries from recent medicare spending increases on HMO payments and drug benefits," International Journal of Health Economics and Management, Springer, vol. 9(1), pages 59-81, March.
    3. Town, Robert, 2001. "The welfare impact of HMO mergers," Journal of Health Economics, Elsevier, vol. 20(6), pages 967-990, November.
    4. Emily Lancsar, 2002. "Deriving welfare measures from stated preference discrete choice modelling experiments, CHERE Discussion Paper No 48," Discussion Papers 48, CHERE, University of Technology, Sydney.
    5. Engberg, John & Wholey, Douglas & Feldman, Roger & Christianson, Jon B., 2004. "The effect of mergers on firms' costs: evidence from the HMO industry," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(4), pages 574-600, September.

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