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Managed Health Care and Provider Integration: a Theory of Bilateral Market Power


  • Karen Eggleston
  • George Norman
  • Lynne Pepall


Recent empirical studies point to the need for a model of bilateral market power between health plans and provider organizations. We develop such a model and use it to analyze the impact on cost and access of alternative contractual relationships between plans and providers. The plans differentiate themselves through distinct, albeit overlapping, provider networks of specialized, complementary inputs (physician groups and hospitals). We analyze subgame perfect strategic pricing equilibria for a range of possible contractual relationships between the upstream providers and the downstream insurers, including different internal organizational structures of vertically integrated health plans, such as group- and staff-model HMOs and PPOs. The model suggests that forms of provider integration that help to overcome pricing coordination failures can have efficiency benefits above and beyond those associated with economies of scope in outpatient and inpatient delivery.

Suggested Citation

  • Karen Eggleston & George Norman & Lynne Pepall, 2002. "Managed Health Care and Provider Integration: a Theory of Bilateral Market Power," Discussion Papers Series, Department of Economics, Tufts University 0204, Department of Economics, Tufts University.
  • Handle: RePEc:tuf:tuftec:0204

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    References listed on IDEAS

    1. Cuellar, Alison Evans & Gertler, Paul J., 2006. "Strategic integration of hospitals and physicians," Journal of Health Economics, Elsevier, vol. 25(1), pages 1-28, January.
    2. Gaynor, Martin & Vogt, William B., 2000. "Antitrust and competition in health care markets," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 27, pages 1405-1487 Elsevier.
    3. Lynne Pepall & George Norman, 2001. "Product Differentiation and Upstream-Downstream Relations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(2), pages 201-233, June.
    4. Esther Gal-Or, 1999. "Mergers and Exclusionary Practices in Health Care Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 8(3), pages 315-350, September.
    5. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    6. Glied, Sherry, 2000. "Managed care," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 13, pages 707-753 Elsevier.
    7. David M. Cutler & Mark McClellan & Joseph P. Newhouse, 2000. "How Does Managed Care Do It?," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 526-548, Autumn.
    8. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
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    More about this item


    managed care; HMO; PPO; networks; physician-hospital organizations; provider integration;

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets

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