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The Welfare Economics of a Health Plan Merger


  • Feldman, Roger


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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    References listed on IDEAS

    1. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
    2. Berg, Sanford, 2000. "Developments in Best-Practice Regulation: Principles, Processes, and Performance," The Electricity Journal, Elsevier, vol. 13(6), pages 11-18, July.
    3. Pollitt, Michael, 2005. "The role of efficiency estimates in regulatory price reviews: Ofgem's approach to benchmarking electricity networks," Utilities Policy, Elsevier, vol. 13(4), pages 279-288, December.
    4. Paul L. Joskow, 1997. "Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 119-138, Summer.
    5. Preetum Domah & Michael G. Pollitt, 2001. "The restructuring and privatisation of the electricity distribution and supply businesses in England," Fiscal Studies, Institute for Fiscal Studies, vol. 22(1), pages 107-146, March.
    6. Crew, Michael A & Kleindorfer, Paul R, 1996. "Incentive Regulation in the United Kingdom and the United States: Some Lessons," Journal of Regulatory Economics, Springer, vol. 9(3), pages 211-225, May.
    7. Severin Borenstein & James B. Bushnell & Frank A. Wolak, 2002. "Measuring Market Inefficiencies in California's Restructured Wholesale Electricity Market," American Economic Review, American Economic Association, vol. 92(5), pages 1376-1405, December.
    8. Jamasb, T. & Pollitt, M., 2000. "Benchmarking and regulation: international electricity experience," Utilities Policy, Elsevier, vol. 9(3), pages 107-130, September.
    9. Jamasb, Tooraj & Pollitt, Michael, 2003. "International benchmarking and regulation: an application to European electricity distribution utilities," Energy Policy, Elsevier, vol. 31(15), pages 1609-1622, December.
    10. Jamasb, Tooraj & Nillesen, Paul & Pollitt, Michael, 2003. "Gaming the Regulator: A Survey," The Electricity Journal, Elsevier, vol. 16(10), pages 68-80, December.
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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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