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Insurer Competition in Health Care Markets

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  • Ho, Katherine
  • Lee, Robin S.

Abstract

We analyze the impact of insurer competition on health care markets using a model of premium setting, hospital-insurer bargaining, household demand for insurance, and individual demand for hospitals. Increased insurer competition may lead to lower premiums; it may also increase health providers' leverage to negotiate higher prices, thereby mitigating premium reductions. We use detailed California admissions, claims, and enrollment data from a large benefits manager. We estimate our model and simulate the removal of an insurer from consumers' choice sets. Although premiums rise and annual consumer surplus falls by $50-120 per capita, hospital prices and spending fall in certain markets as remaining insurers negotiate lower rates. Overall, the impact on negotiated prices is heterogeneous, with increases or decreases of up to 15% across markets. We conclude that insurer competition can increase consumer surplus but also generate a redistribution of rents across hospitals and greater medical spending in certain markets.

Suggested Citation

  • Ho, Katherine & Lee, Robin S., 2015. "Insurer Competition in Health Care Markets," CEPR Discussion Papers 10812, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10812
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    References listed on IDEAS

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    1. Robin Lee & Michael Whinston & Ali Yurukoglu & Gregory Crawford, 2013. "The Welfare Effects of Vertical Integration in Multichannel Television Markets," 2013 Meeting Papers 81, Society for Economic Dynamics.
    2. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, vol. 102(2), pages 643-685, April.
    3. A. Pakes & J. Porter & Kate Ho & Joy Ishii, 2015. "Moment Inequalities and Their Application," Econometrica, Econometric Society, vol. 83, pages 315-334, January.
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    5. Leemore Dafny & Kate Ho & Mauricio Varela, 2013. "Let Them Have Choice: Gains from Shifting Away from Employer-Sponsored Health Insurance and toward an Individual Exchange," American Economic Journal: Economic Policy, American Economic Association, vol. 5(1), pages 32-58, February.
    6. 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.
    7. Gal-Or, Esther, 1999. "The profitability of vertical mergers between hospitals and physician practices," Journal of Health Economics, Elsevier, vol. 18(5), pages 621-652, October.
    8. Lars A. Stole & Jeffrey Zwiebel, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 375-410.
    9. Matthew Grennan, 2013. "Price Discrimination and Bargaining: Empirical Evidence from Medical Devices," American Economic Review, American Economic Association, vol. 103(1), pages 145-177, February.
    10. Maria Polyakova, 2016. "Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D," American Economic Journal: Applied Economics, American Economic Association, vol. 8(3), pages 165-195, July.
    11. Moriya, Asako S. & Vogt, William B. & Gaynor, Martin, 2010. "Hospital prices and market structure in the hospital and insurance industries," Health Economics, Policy and Law, Cambridge University Press, vol. 5(04), pages 459-479, October.
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    15. Katherine Ho, 2006. "The welfare effects of restricted hospital choice in the US medical care market," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(7), pages 1039-1079.
    16. Alan T. Sorensen, 2003. "Insurer-hospital bargaining: negotiated discounts in post-deregulation connecticut," Journal of Industrial Economics, Wiley Blackwell, vol. 51(4), pages 469-490, December.
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    Citations

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    Cited by:

    1. Gautam Gowrisankaran & Aviv Nevo & Robert Town, 2015. "Mergers When Prices Are Negotiated: Evidence from the Hospital Industry," American Economic Review, American Economic Association, vol. 105(1), pages 172-203, January.
    2. Dubois, Pierre & Sæthre, Morten, 2017. "On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector," Discussion Paper Series in Economics 3/2018, Norwegian School of Economics, Department of Economics.
    3. Rey, Patrick & Verge, T., 2016. "Secret contracting in multilateral relations," TSE Working Papers 16-744, Toulouse School of Economics (TSE), revised Jul 2017.
    4. Matthew Backus & Thomas Blake & Bradley Larsen & Steven Tadelis, 2018. "Sequential Bargaining in the Field: Evidence from Millions of Online Bargaining Interactions," NBER Working Papers 24306, National Bureau of Economic Research, Inc.
    5. Robin Lee & Michael Whinston & Ali Yurukoglu & Gregory Crawford, 2013. "The Welfare Effects of Vertical Integration in Multichannel Television Markets," 2013 Meeting Papers 81, Society for Economic Dynamics.
    6. Martin Gaynor & Kate Ho & Robert J. Town, 2015. "The Industrial Organization of Health-Care Markets," Journal of Economic Literature, American Economic Association, vol. 53(2), pages 235-284, June.
    7. Jason Allen & Robert Clark & Jean-François Houde, 2014. "Search Frictions and Market Power in Negotiated Price Markets," NBER Working Papers 19883, National Bureau of Economic Research, Inc.
    8. Duggan, Mark & Starc, Amanda & Vabson, Boris, 2016. "Who benefits when the government pays more? Pass-through in the Medicare Advantage program," Journal of Public Economics, Elsevier, vol. 141(C), pages 50-67.
    9. Wouters, Olivier J. & Cylus, Jonathan & Yang, Wei & Thomson, Sarah & McKee, Martin, 2016. "Medical savings accounts: assessing their impact on efficiency, equity, and financial protection in health care," LSE Research Online Documents on Economics 65448, London School of Economics and Political Science, LSE Library.
    10. repec:eee:indorg:v:53:y:2017:i:c:p:241-266 is not listed on IDEAS
    11. Samuel Kleiner & William White & Sean Lyons, 2015. "Market power and provider consolidation in physician markets," International Journal of Health Economics and Management, Springer, vol. 15(1), pages 99-126, March.
    12. Sonia Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Health Insurance Markups," Working Papers 2017-084, Human Capital and Economic Opportunity Working Group.
    13. Sonia P. Jaffe & Mark Shepard, 2017. "Price-Linked Subsidies and Imperfect Competition in Health Insurance," NBER Working Papers 23104, National Bureau of Economic Research, Inc.
    14. Leemore Dafny & Kate Ho & Robin S. Lee, 2016. "The Price Effects of Cross-Market Hospital Mergers," NBER Working Papers 22106, National Bureau of Economic Research, Inc.
    15. Jeroen Hinloopen & Adriaan R. Soetevent, 2016. "(Non-)Insurance Markets, Loss Size Manipulation and Competition - Experimental Evidence," Tinbergen Institute Discussion Papers 16-033/VII, Tinbergen Institute.
    16. Gaudin, Germain, 2017. "Vertical bargaining and retail competition: What drives countervailing power?," DICE Discussion Papers 195, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    17. Soetevent, Adriaan & Hinloopen, Jeroen, 2016. "(Non-)Insurance Markets, Loss Size Manipulation and Competition," Research Report 16009-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

    More about this item

    Keywords

    bargaining; health care markets; vertical contracts;

    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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