The Welfare Economics of a Health Plan Merger
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
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