Working Paper: CEPR ID: DP10812
Authors: 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.
Keywords: bargaining; health care markets; vertical contracts
JEL Codes: I11; L10; L13; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reduced insurer competition (L13) | increased premiums (G52) |
| reduced insurer competition (L13) | increased payments to hospitals (H51) |
| reduced insurer competition (L13) | strengthened insurers' bargaining leverage (G52) |
| removal of a small insurer (G52) | decrease in premiums (G52) |
| removal of an insurer (G22) | heterogeneity in hospital price adjustments (L11) |
| insurer market power (G52) | hospital pricing strategies (D49) |