Working Paper: CEPR ID: DP13096
Authors: 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 bene fits 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.
Keywords: health insurance; narrow networks; selective contracting; hospital prices; bargaining; bilateral oligopoly
JEL Codes: C78; I11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Insurer's bargaining power (G52) | Negotiated hospital rates (I11) |
| Regulation prohibiting exclusion (L44) | Prices (D49) |
| Regulation prohibiting exclusion (L44) | Premiums (G52) |
| Regulation prohibiting exclusion (L44) | Consumer welfare (D69) |
| Insurers' decision to exclude hospitals (I13) | Negotiated rates (E43) |
| Insurers' decision to exclude hospitals (I13) | Consumer welfare (D69) |
| Private incentives to exclude hospitals (I11) | Social incentives (Z13) |
| Social-optimal network includes all major hospital systems (D85) | Profit-maximizing insurers prefer narrower networks (L21) |