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Insurer Competition in Health Care Markets

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  • Kate Ho
  • Robin S. Lee

Abstract

The impact of insurer competition on welfare, negotiated provider prices, and premiums in the U.S. private health care industry is theoretically ambiguous. Reduced competition may increase the premiums charged by insurers and their payments made to hospitals. However, it may also strengthen insurers' bargaining leverage when negotiating with hospitals, thereby generating offsetting cost decreases. To understand and measure this trade‐off, we estimate a model of employer‐insurer and hospital‐insurer bargaining over premiums and reimbursements, household demand for insurance, and individual demand for hospitals using detailed California admissions, claims, and enrollment data. We simulate the removal of both large and small insurers from consumers' choice sets. Although consumer welfare decreases and premiums typically increase, we find that premiums can fall upon the removal of a small insurer if an employer imposes effective premium constraints through negotiations with the remaining insurers. We also document substantial heterogeneity in hospital price adjustments upon the removal of an insurer, with renegotiated price increases and decreases of as much as 10% across markets.

Suggested Citation

  • Kate Ho & Robin S. Lee, 2017. "Insurer Competition in Health Care Markets," Econometrica, Econometric Society, vol. 85, pages 379-417, March.
  • Handle: RePEc:wly:emetrp:v:85:y:2017:i::p:379-417
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    References listed on IDEAS

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    1. Michaela Draganska & Daniel Klapper & Sofia B. Villas-Boas, 2010. "A Larger Slice or a Larger Pie? An Empirical Investigation of Bargaining Power in the Distribution Channel," Marketing Science, INFORMS, vol. 29(1), pages 57-74, 01-02.
    2. Gregory S. Crawford & Robin S. Lee & Michael D. Whinston & Ali Yurukoglu, 2018. "The Welfare Effects of Vertical Integration in Multichannel Television Markets," Econometrica, Econometric Society, vol. 86(3), pages 891-954, May.
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    More about this item

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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