Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs

Posted by D. Daniel Sokol

Katherine Ho, Columbia University - Department of Economics, explains Barriers to Entry of a Vertically Integrated Health Insurer: An Analysis of Welfare and Entry Costs.

ABSTRACT: I investigate the reasons why market expansion attempts by vertically integrated health insurers have largely failed. I use an econometric model of consumer demand for hospitals and insurers to simulate entry of an integrated plan into 28 new markets. The results indicate that entry would increase social surplus by over $34 billion per year. I then investigate several potential barriers to entry. Three are particularly important. Integrated plans cannot attract enough enrollees to support their provider networks unless they exceed competitor quality levels and convince consumers of this benefit. Regulatory restrictions on plans building new facilities may also be important.