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Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets

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  • Kate Ho
  • Robin S. Lee

Abstract

We evaluate the consequences of narrow hospital networks in commercial health care markets. We develop a bargaining solution, Nash-in-Nash with Threat of Replacement , that captures insurers' incentives to exclude, and combine it with California data and estimates from Ho and Lee (2017) to simulate equilibrium outcomes under social, consumer, and insurer-optimal networks. Private incentives to exclude generally exceed social incentives, as the insurer benefits from substantially lower negotiated hospital rates. Regulation prohibiting exclusion increases prices and premiums and lowers consumer welfare without significantly affecting social surplus. However, regulation may prevent harm to consumers living close to excluded hospitals.

Suggested Citation

  • Kate Ho & Robin S. Lee, 2017. "Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets," NBER Working Papers 23742, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23742
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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. Leemore Dafny & Igal Hendel & Nathan Wilson, 2015. "Narrow Networks on the Health Insurance Exchanges: What Do They Look Like and How Do They Affect Pricing? A Case Study of Texas," American Economic Review, American Economic Association, vol. 105(5), pages 110-114, May.
    3. Cooper, Zack & Craig, Stuart & Gaynor, Martin & Van Reenen, John, 2015. "The price ain’t right? hospital prices and healthspending on the privately insured," LSE Research Online Documents on Economics 66059, London School of Economics and Political Science, LSE Library.
    4. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475, April.
    5. 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.
    6. Ken Binmore & Avner Shared & John Sutton, 1989. "An Outside Option Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 753-770.
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    Cited by:

    1. Michael Geruso & Timothy J. Layton, 2017. "Selection in Health Insurance Markets and Its Policy Remedies," Journal of Economic Perspectives, American Economic Association, vol. 31(4), pages 23-50, Fall.

    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
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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