Insurer-Provider Networks in the Medical Care Market

Who benefits from quality competition in health care? A theory and a laboratory experiment on the relevance of patient characteristics

We study how competition between physicians affects the provision of medical care. In our theoretical model, physicians are faced with a heterogeneous patient population, in which patients systematically vary with regard to both their responsiveness to the provided quality of care and their state of health. We test the behavioral predictions derived from this model in a controlled laboratory experiment. In line with the model, we observe that competition significantly improves patient benefits as long as patients are able to respond to the quality provided. For those patients, who are not able to choose a physician, competition even decreases the patient benefit compared to a situation without competition. This decrease is in contrast to our theoretical prediction implying no change in benefits for passive patients. Deviations from patient-optimal treatment are highest for passive patients in need of a low quantity of medical services. With repetition, both, the positive effects of competition for active patients as well as the negative effects of competition for passive patients become more pronounced. Our results imply that competition can not only improve but also worsen patient outcome and that patients' responsiveness to quality is decisive.

The Rise Of Cross-Market Hospital Systems And Their Market Power In The US

Although hospital consolidation within markets has been well documented, consolidation across markets has not, even though economic theory predicts-and evidence is emerging-that cross-market hospital systems raise prices by exerting market power across markets when negotiating with common customers (primarily insurers). This study analyzes hospital systems using the American Hospital Association Annual Survey Database and defines hospital geographic markets as commuting zones that link workers to places of employment. The share of community hospitals in the US that were part of hospital systems increased from 10 percent in 1970 to 67 percent in 2019, resulting in 3,436 hospitals within 368 systems in 2019. Of these systems, 216 (59 percent) owned hospitals in multiple commuting zones, in part because 55 percent of the 1,500 hospitals targeted for a merger or acquisition between 2010 and 2019 were located in a different commuting zone than the acquirer. Based on market-power differences among hospitals in systems, the number of systems in urban commuting zones that could potentially exert enhanced cross-market power increased from thirty-seven systems in 2009 to fifty-seven systems in 2019, an increase of 54 percent. The increase in cross-market hospital systems warrants concern and scrutiny because of the potential anticompetitive impact of hospital systems exerting market power across markets in negotiations with common customers.

Hospital Price Transparency in the United States: An Examination of Chargemaster, Cash, and Negotiated, Price Variation for 14 Common Procedures

BACKGROUND

Effective January 1, 2021, US hospitals were required to upload information on their chargemaster prices (database of list prices), discounted cash prices (commonly charged to self-pay patients), and payer-specific negotiated prices.

OBJECTIVE

Examine how prices vary and are associated with hospital characteristics, market competition, and hospital quality.

DESIGN SETTING AND PARTICIPANTS

This observational study used data on 14 common medical services across 1599 hospitals in 2021. Descriptive and regression analyses were used to study price variation. Analyses adjust for hospital characteristics, market competition and state fixed effects.

RESULTS

Ninetieth -to-10th-percentile price markups factors (ratios) range between 3.2 and 11.5 for chargemaster; 6.1 and 19.7 for cash; and 6.6 and 30.0 for negotiated prices. Adjusted regression results indicate that hospitals' cash prices are on average 60% ( P <0.01) higher, and list prices are on average 164% ( P <0.01) higher, than negotiated prices. Systematic pricing differences across hospitals were noted, with urban hospitals having 14% ( P <0.01) lower prices than rural hospitals, teaching hospitals having 3% ( P <0.01) higher prices than nonteaching hospitals, and nonprofit hospitals pricing 9% ( P <0.01), and for-profit hospitals 39% ( P <0.01), higher than government owned hospitals. In addition, hospitals that contract with more insurance plans have higher prices, hospitals in more competitive markets have lower prices, and higher quality hospitals have on average 5% ( P <0.01) lower prices than lower quality hospitals.

CONCLUSIONS

Prices all vary considerably across US hospitals. High quality hospitals are associated with lower pricing across all three sets of prices examined. Hospital price transparency may help consumers better identify hospitals that provide both high quality, and low cost, care.

The Impact of Narrow and Tiered Networks on Costs, Access, Quality, and Patient Steering: A Systematic Review

Health insurers use narrow and tiered networks to lower costs by contracting with, or favoring, selected providers. Little is known about the contemporary effects of narrow or tiered networks on key metrics. The purpose of this systematic review was to synthesize the evidence on how narrow and tiered networks impact cost, access, quality, and patient steering. We searched PubMed, MEDLINE, and Cochrane Central Register of Controlled Trials databases for articles published from January 2000 to June 2020. Both narrow and tiered networks are associated with reduced overall health care costs for most cost-related measures. Evidence pertaining to access to care and quality measures were more limited to a narrow set of outcomes or were weak in internal validity, but generally concluded no systematic adverse effects on narrow or tiered networks. Narrow and tiered networks appear to reduce costs without affecting some quality measures. More research on quality outcomes is warranted.

Do pharmaceutical prices rise anticipating branded competition?

Growth in pharmaceutical prices is a major policy issue in the United States. Competition is encouraged to counteract such growth, yet less is known about the effect of brand competition on prices. We discover a unique feature of this market by studying the pricing strategies of incumbent drug manufacturers under tiered-insurance anticipating branded competition. Using the insulin market as a natural experiment, we exploit exogenous variation in several potential entrants' completion of clinical trials to identify the effect of drug pipeline pressure on the prices of incumbent drugs. We find that pipeline pressure exerts cumulative and significant upward pressure on prices of incumbent drugs. In the insulin market such pressure explained 10.5% of the growth of prices. We were able to replicate these findings among incumbents with other emerging biosimilars. Insurance designs that fail to promote price competition through negotiations and value-based principles may contribute to such price increases.

How important is price variation between health insurers?

Prices negotiated between payers and providers affect a health insurance contract's value via enrollees' cost-sharing and self-insured employers' costs. However, price variation across payers is difficult to observe. We measure negotiated prices for hospital-payer pairs in Massachusetts and characterize price variation. Between-payer price variation is similar in magnitude to between-hospital price variation. Administrative-services-only contracts, in which insurers do not bear risk, have higher prices. We model negotiation incentives and show that contractual form and demand responsiveness to negotiated prices are important determinants of negotiated prices.

Prices and market power in mental health care: Evidence from a major policy change in the Netherlands

In the Dutch health care system of managed competition, insurers and mental health providers negotiate on prices for mental health services. Contract prices are capped by a regulator who sets a maximum price for each mental health service. In 2013, the majority of the contract prices equaled these maximum prices. We study price setting after a major policy change in 2014. In 2014, mental health care providers had to negotiate prices with each individual health insurer separately, instead of with all insurers collectively as in 2013. Moreover, after a cost-price revision, the regulator increased in 2014 maximum prices by about 10%. Insurers and mental health providers reacted to this policy change by setting most contract prices below the new maximum prices. We find that in 2014 mental health providers with more market power, that is, a higher willingness-to-pay measure, contracted significantly higher prices. Some insurers negotiated significantly lower prices than other insurers but these differences are unrelated to an insurers' market share.

Treatment flows after outsourcing public insurance provision: Evidence from Florida Medicaid

While politics can determine what public goods are available, elected officials must decide on the method of allocation. Commonly, governments provide public health insurance directly or pay private parties to administer it on their behalf. Such contracting can leverage private sector expertise but also raises agency concerns. In particular, little is known about how private provision of public health insurance impacts medical decision-making and treatment flows for low-income populations. An example comes from the Medicaid program, which has increasingly relied on outside insurers to deliver health services to enrollees. We exploit a large legislative intervention in Florida to show that Medicaid managed care (MMC) organizations generally do not skimp on short-run treatment delivery in the inpatient setting. In fact, patients with severe and chronic illnesses receive more inpatient services under these contracts, especially in relation to managing care transitions. We also document increased competition in the MMC market following the state's policy intervention.

Provider networks and health plan premium variation

OBJECTIVE

To examine how plan premiums are associated with physician network breadth, hospital network breadth, and hospital network quality on the Affordable Care Act's Health Insurance Marketplaces in all 50 states and the DC in 2016.

DATA SOURCES

Data on plan premiums and characteristics came from 2016 Robert Wood Johnson Foundation Health Insurance Exchange (HIX) Compare. Provider network information was obtained from Vericred. Hospital characteristics were obtained from CMS Hospital Compare and the American Hospital Association (AHA) survey.

STUDY DESIGN

We analyzed how plan premiums were associated with variations in physician network breadth, hospital network breadth, and hospital network quality using ordinary least square regressions with state-rating area fixed effects and carrier fixed effects.

PRINCIPAL FINDINGS

Plan premiums were positively associated with physician network breadth and hospital network breadth. We find the following statistically significant results: a one standard deviation increase in physician network breadth was linked to a premium increase of 2.8 percent or $101 per year; a one standard deviation increase in hospital network breadth was linked to a premium increase of 2.4 percent or $86 per year. There was no significant association between premiums and hospital network quality, as measured by hospital star ratings and the inclusion of teaching hospitals or the top-20 hospitals nationwide.

CONCLUSIONS

Physician network breadth and hospital network breadth contributed positively to plan premiums. The roles of the two types of provider network breadth are quantitatively similar. Premiums appear to be insensitive to hospital network quality.

Does price deregulation in a competitive hospital market damage quality?

Regulators may be hesitant to permit price competition in healthcare markets because of its potential to damage quality. We assess whether this fear is well founded by examining a reform that permitted Dutch health insurers to freely negotiate prices with hospitals. Unlike previous research on hospital competition that has relied on quality indicators for urgent treatments, we take advantage of a plausible absence of selection bias to identify the effect on the quality of elective procedures that should be more price responsive. Using data on all admissions for hip replacements to Dutch hospitals and a difference-in-differences comparison between more and less concentrated markets, we find no evidence that price deregulation in a competitive environment reduces quality measured by hip replacement readmission rates.

A game theoretic setting of capitation versus fee-for-service payment systems

We aim to determine whether a game-theoretic model between an insurer and a healthcare practice yields a predictive equilibrium that incentivizes either player to deviate from a fee-for-service to capitation payment system. Using United States data from various primary care surveys, we find that non-extreme equilibria (i.e., shares of patients, or shares of patient visits, seen under a fee-for-service payment system) can be derived from a Stackelberg game if insurers award a non-linear bonus to practices based on performance. Overall, both insurers and practices can be incentivized to embrace capitation payments somewhat, but potentially at the expense of practice performance.

Health provider networks with private contracts: Is there under-treatment in narrow networks?

Contracts between health insurers and providers are private. By modelling this explicitly, we find the following. Insurers with bigger provider networks, pay providers higher fee-for-service rates. This makes it more likely that a patient is treated and hence health care costs and utilization increase with provider network size. Although providers are homogeneous, the welfare maximizing provider network can consist of two or more providers. Provider profits are positive whereas they would be zero with public contracts. Increasing transparency of provider prices increases welfare only if consumers can "mentally process" the prices of all treatments involved in an insurance contract. If not, it tends to reduce welfare.

Provider responses to online price transparency

Price transparency initiatives have recently emerged as a solution to the lack of health care price information available to consumers. This paper uses the staggered and nationwide diffusion of a leading internet-based price transparency platform to estimate the effects of price transparency on provider prices. I find a 1-4% reduction in provider prices for homogenous services, laboratory tests, but find no price response for differentiated services, office visits. Price responses are driven by active consumer use of price information. This paper demonstrates how reducing consumer search costs can spur limited firm price competition in health care markets.

Firm responses to targeted consumer incentives: Evidence from reference pricing for surgical services

This paper examines how health care providers respond to a reference pricing insurance program that increases consumer cost sharing when consumers choose high-priced surgical providers. We use geographic variation in the population covered by the program to estimate supply-side responses. We find limited evidence of market segmentation and price reductions for providers with baseline prices above the reference price. Finally, approximately 75% of the reduction in provider prices is in the form of a positive externality that benefits a population not subject to the program.

Market environment and Medicaid acceptance: What influences the access gap?

The U.S. health care system is undergoing significant changes. Two prominent shifts include millions added to Medicaid and greater integration and consolidation among firms. We empirically assess if these two industry trends may have implications for each other. Using experimentally derived ("secret shopper") data on primary care physicians' real-world behavior, we observe their willingness to accept new privately insured and Medicaid patients across 10 states. We combine this measure of patient acceptance with detailed information on physician and commercial insurer market structure and show that insurer and provider concentration are each positively associated with relative improvements in appointment availability for Medicaid patients. The former is consistent with a smaller price discrepancy between commercial and Medicaid patients and suggests a beneficial spillover from greater insurer market power. The findings for physician concentration do not align with a simple price bargaining explanation but do appear driven by physician firms that are not vertically integrated with a health system. These same firms also tend to rely more on nonphysician clinical staff.

Dropped out or pushed out? Insurance market exit and provider market power in Medicare Advantage

This paper explores how provider and insurer market power affect which markets an insurer chooses to operate in. A 2011 policy change required that certain private insurance plans in Medicare form provider networks de novo; in response, insurers cancelled two-thirds of the affected plans. Using detailed data on pre-policy provider and insurer market structure, I compare markets where insurers built networks to those they exited. Overall, insurers in the most concentrated hospital and physician markets were 9 and 13 percentage points more likely to exit, respectively, than those in the least concentrated markets. Conversely, insurers with more market power were less likely to exit than those with less, and an insurer's market power had the largest effect on exit in concentrated hospital markets. These findings suggest that concentrated provider markets contribute to insurer exit and that insurers with less market power have more difficulty surviving in concentrated provider markets.

Free to Choose? Reform, Choice, and Consideration Sets in the English National Health Service

Choice in public services is controversial. We exploit a reform in the English National Health Service to assess the effect of removing constraints on patient choice. We estimate a demand model that explicitly captures the removal of the choice constraints imposed on patients. We find that, post-removal, patients became more responsive to clinical quality. This led to a modest reduction in mortality and a substantial increase in patient welfare. The elasticity of demand faced by hospitals increased substantially post- reform and we find evidence that hospitals responded to the enhanced incentives by improving quality. This suggests greater choice can raise quality.

No Significant Association between Anesthesia Group Concentration and Private Insurer Payments in the United States

Background:

Markets for physician services are becoming increasingly concentrated, with many areas being dominated by a few groups. Antitrust authorities are concerned that increasing concentration will lead to inappropriately high payments for physician services from private insurers. The authors examined the association between market concentration and private insurer payments for anesthesia services.

Methods:

The authors obtained data on average payments from private insurers for five commonly used anesthesia Current Procedure Terminology codes for physicians located in 229 counties in the United States between 2002 and 2010. The authors calculated a measure of market concentration (the Herfindahl–Hirschman Index [HHI]) for anesthesiologists in each county using Medicare claims data. The authors then estimated the association between market concentration and private insurer payments using a difference-in-differences approach to minimize confounding.

Results:

Private insurer payments to anesthesiologists in more concentrated markets were not significantly different from payments in less concentrated markets. Compared with the 25% of counties with the least concentration (counties with an HHI in the 0th to 25th percentile), payments in counties in the 25th to 50th percentile of HHI were approximately 0.51% less (95% CI, −2.3 to 1.3%, P = 0.95), whereas payments in counties in the 50th to 75th percentile of HHI were approximately 2.8% less (95% CI, −6.7 to 1.4%, P = 0.41) and payments in counties in the 75th to 100th percentile were approximately 3.1% less (95% CI, −8.1 to 1.2%, P = 0.32).

Conclusion:

Increasing market concentration of anesthesia groups is not associated with significantly greater payments from private insurers.

Health Insurance for "Humans": Information Frictions, Plan Choice, and Consumer Welfare

Traditional models of insurance choice are predicated on fully informed and rational consumers protecting themselves from exposure to financial risk. In practice, choosing an insurance plan is a complicated decision often made without full information. In this paper we combine new administrative data on health plan choices and claims with unique survey data on consumer information to identify risk preferences, information frictions, and hassle costs. Our additional friction measures are important predictors of choices and meaningfully impact risk preference estimates. We study the implications of counterfactual insurance allocations to illustrate the importance of distinguishing between these micro-foundations for welfare analysis.

How do health insurer market concentration and bargaining power with hospitals affect health insurance premiums?

The US health insurance industry is highly concentrated, and health insurance premiums are high and rising rapidly. Policymakers have focused on the possible link between the two, leading to ACA provisions to increase insurer competition. However, while market power may enable insurers to include higher profit margins in their premiums, it may also result in stronger bargaining leverage with hospitals to negotiate lower payment rates to partially offset these higher premiums. We empirically examine the relationship between employer-sponsored fully-insured health insurance premiums and the level of concentration in local insurer and hospital markets using the nationally-representative 2006-2011 KFF/HRET Employer Health Benefits Survey. We exploit a unique feature of employer-sponsored insurance, in which self-insured employers purchase only administrative services from managed care organizations, to disentangle these different effects on insurer concentration by constructing one concentration measure representing fully-insured plans' transactions with employers and the other concentration measure representing insurers' bargaining with hospitals. As expected, we find that premiums are indeed higher for plans sold in markets with higher levels of concentration relevant to insurer transactions with employers, lower for plans in markets with higher levels of insurer concentration relevant to insurer bargaining with hospitals, and higher for plans in markets with higher levels of hospital market concentration.

Insurers' Negotiating Leverage and the External Effects of Medicare Part D

By influencing the size and bargaining power of private insurers, public subsidization of private health insurance may project effects beyond the subsidized population. We test for such spillovers by analyzing how increases in insurer size resulting from the implementation of Medicare Part D affected drug prices negotiated in the non-Medicare commercial market. On average, Part D lowered prices for commercial enrollees by 3.7%. The external commercial market savings amount to $1.5 billion per year, which, if passed to consumers, approximates the internal cost-savings of newly-insured subsidized beneficiaries. If retained by insurers, it corresponds to a 5% average increase in profitability.

Market power and provider consolidation in physician markets

Physician services comprise a substantial share of total health care spending, and the price of health care services has been cited as a key contributor to the disproportionately high rate of health care spending in the US. However, despite a large literature analyzing market power in the hospital and insurance industries, less is known about the extent to which physicians exercise market power. In this study we make use of a private health insurance claims data set to analyze physician market power for two specialties within three mid-sized US metropolitan areas. Using a method developed for hospital competition analysis, we estimate measures of consumer willingness-to-pay for physician practices within each of these markets and relate these to the prices paid to these practices for a set of physician services. Our results are suggestive of the presence of market power in the markets that we analyze. We simulate physician practice mergers for the two largest practices in each market for each specialty analyzed. Results suggest that practice mergers could result in price increases deemed significant by antitrust authorities in some markets but not in others.

The Relationship between Commercial Health Care Prices and Medicare Spending and Utilization

OBJECTIVE

To explore the relationship between commercial health care prices and Medicare spending/utilization across U.S. regions.

DATA SOURCES

Claims from large employers and Medicare Parts A/B/D over 2007-2009.

STUDY DESIGN

We compared prices paid by commercial health plans to Medicare spending and utilization, adjusted for beneficiary health and the cost of care, across 301 hospital referral regions.

PRINCIPAL FINDINGS

A 10 percent lower commercial price (around the average level) is associated with 3.0 percent higher Medicare spending per member per year, and 4.3 percent more specialist visits (p < .01).

CONCLUSIONS

Commercial health care prices are negatively associated with Medicare spending across regions. Providers may respond to low commercial prices by shifting service volume into Medicare. Further investigation is needed to establish causality.

Health information exchange, system size and information silos

There are many technology platforms that bring benefits only when users share data. In healthcare, this is a key policy issue, because of the potential cost savings and quality improvements from 'big data' in the form of sharing electronic patient data across medical providers. Indeed, one criterion used for federal subsidies for healthcare information technology is whether the software has the capability to share data. We find empirically that larger hospital systems are more likely to exchange electronic patient information internally, but are less likely to exchange patient information externally with other hospitals. This pattern is driven by instances where there may be a commercial cost to sharing data with other hospitals. Our results suggest that the common strategy of using 'marquee' large users to kick-start a platform technology has an important drawback of potentially creating information silos. This suggests that federal subsidies for health data technologies based on 'meaningful use' criteria, that are based simply on the capability to share data rather than actual sharing of data, may be misplaced.

Is there a Medicaid penalty? The effect of hospitals' Medicaid population on their private payer market share

This study examines whether privately insured patients avoid hospitals with large Medicaid populations. I use a conditional logit model of hospital choice to determine whether the size of a hospital's Medicaid population affects the probability that a privately insured patient will choose that hospital. I focus on the metropolitan area of Tampa, Florida, in the years 1994-1996. I control for hospital fixed effects, hospital-specific time trends, patients' driving time to the hospital, and interactions between patient and hospital characteristics. I also instrument for the Medicaid population using the predicted Medicaid population. The results show that privately insured patients are less likely to choose a hospital if it served a larger number of Medicaid patients who were admitted through the emergency department in the previous 6 months. The effect persists over time-an additional 6-month lag cuts the effect in half. Capacity constraints do not seem to be the reason for the effect. I show that the Medicaid effect size could have a moderate effect on the profits of some hospitals. Although limited in scope, this study suggests that hospitals may experience a negative effect on their private revenues when they admit a large population of Medicaid patients.

Health insurance and hospital technology adoption

PURPOSE

This chapter discusses the relationship between health insurance and hospitals' decisions to adopt medical technologies. I focus on both how the extent of insurance coverage can increase incentives to adopt new treatments, and how the parameters of the insurance contract can impact the types of treatments adopted.

METHODOLOGY/APPROACH

I provide a review of the previous theoretical and empirical literature and highlight evidence on this relationship from previous expansions of Medicaid eligibility to low-income pregnant women.

FINDINGS

While health insurance has important effects on individual-level choices of health care consumption, increases in the fraction of the population covered by insurance has also been found to have broader supply side effects as hospitals respond to changes in demand by changing the type of care offered. Furthermore, hospitals respond to the design of insurance contracts and adopt more or less cost-effective technologies depending on the incentive system.

RESEARCH LIMITATIONS/IMPLICATIONS

Understanding how insurance changes supply side incentives is important as we consider future changes in the insurance landscape. ORIGINALITY/VALUE OF PAPER: With these previous findings in mind, I conclude with a discussion of how the Affordable Care Act may alter hospital technology adoption incentives by both expanding coverage and changing payment schemes.

How much do hospitals cost shift? A review of the evidence

CONTEXT

Hospital cost shifting--charging private payers more in response to shortfalls in public payments--has long been part of the debate over health care policy. Despite the abundance of theoretical and empirical literature on the subject, it has not been critically reviewed and interpreted since Morrisey did so nearly fifteen years ago. Much has changed since then, in both empirical technique and the health care landscape. This article examines the theoretical and empirical literature on cost shifting since 1996, synthesizes the predominant findings, suggests their implications for the future of health care costs, and puts them in the current policy context.

METHODS

The relevant literature was identified by database search. Papers describing policies were considered first, since policy shapes the health care market in which cost shifting may or may not occur. Theoretical works were examined second, as theory provides hypotheses and structure for empirical work. The empirical literature was analyzed last in the context of the policy environment and in light of theoretical implications for appropriate econometric specification.

FINDINGS

Most of the analyses and commentary based on descriptive, industry-wide hospital payment-to-cost margins by payer provide a false impression that cost shifting is a large and pervasive phenomenon. More careful theoretical and empirical examinations suggest that cost shifting can and has occurred, but usually at a relatively low rate. Margin changes also are strongly influenced by the evolution of hospital and health plan market structures and changes in underlying costs.

CONCLUSIONS

Policymakers should view with a degree of skepticism most hospital and insurance industry claims of inevitable, large-scale cost shifting. Although some cost shifting may result from changes in public payment policy, it is just one of many possible effects. Moreover, changes in the balance of market power between hospitals and health care plans also significantly affect private prices. Since they may increase hospitals' market power, provisions of the new health reform law that may encourage greater provider integration and consolidation should be implemented with caution.

Hospital mergers and referrals in the United States: patient steering or integrated delivery of care?

Many tertiary care hospitals (acquirers) acquire non-tertiary care hospitals (targets), and some of these mergers lead to a significant increase in referrals from the target to the acquirer. This study examines the hospitals' motives for integration and for increasing referrals using hospital discharge data from the Pittsburgh area. I develop and estimate a model of referral choice based on a reputation mechanism. The results suggest that low- or average-quality acquirers exploit their targets' monopoly power to steer patients to the acquirers. Distinguished acquirers, on the other hand, seem to have motives other than patient steering, including the integrated delivery of care.

The value of coverage in the medicare advantage insurance market

This paper examines the impact of coverage on demand for health insurance in the Medicare Advantage (MA) insurance market. Estimating the effects of coverage on demand poses a challenge for researchers who must consider both the hundreds of benefits that affect out-of-pocket costs (OOPC) to consumers, but also the endogeneity of coverage. These problems are addressed in a discrete choice demand model by employing a unique measure of OOPC that considers a consumer's expected payments for a fixed bundle of health services and applying instrumental variable techniques to address potential endogeneity bias. The results of the demand model show that OOPC have a significant effect on consumer surplus and that not instrumenting for OOPC results in a significant underestimate of the value of coverage.

The revolution in health care antitrust: new methods and provocative implications

CONTEXT

In recent years, federal courts have permitted hospital consolidations and other potentially anticompetitive actions by accepting hospitals' claims that they compete in expansive geographic markets. Recent events, including two actions by the U.S. Federal Trade Commission, suggest that antitrust is undergoing a sea change, thanks in part to new methods for defining geographic markets. This article reviews the recent history of hospital antitrust, describes the methods used to define markets, and illustrates the new methods by considering two consolidations recently proposed by a New York regulatory agency.

METHODS

The new methods for defining geographic markets rely on estimates from conditional choice models using patient-level hospitalization data. These estimates are the raw material for computations of price effects derived from a theoretical model of hospital pricing in a managed care environment.

FINDINGS

Applying these methods to two proposed consolidations in New York shows that one of the mergers would likely raise prices by a substantial amount without the promise of offsetting efficiencies but that the other would not have this effect.

CONCLUSIONS

New methods for geographic market definition may fundamentally alter how courts will evaluate antitrust challenges. Although additional research is necessary to refine the predictions of these new methods, consolidating hospitals, as well as any other hospitals engaging in potentially anticompetitive conduct, can no longer anticipate a friendly reception in the courtroom.

Managed care's price bargaining with hospitals

Research has shown that managed care (MC) slowed the rate of growth in health care spending in the 1990s, primarily via lower unit prices paid. However, the mechanism of MC's price bargaining has not been well studied. This article uses a unique panel dataset with actual hospital prices in Massachusetts between 1994 and 2000 to examine the sources of MC's bargaining power. I find two significant determinants of price discounts. First, plans with large memberships are able to extract volume discounts across hospitals. Second, health plans that are more successful at channeling patients can extract greater discounts. Patient channeling can add to the volume discount that plans negotiate.