Insurer Competition and Negotiated Hospital Prices

Kate Ho (Columbia) Robin S. Lee (NYU) analyze Insurer Competition and Negotiated Hospital Prices.

ABSTRACT: We examine the impact of increased health insurer competition on negotiated hospital prices. Insurer competition can lead to lower premiums and reduced industry surplus, thereby depressing hospital prices; however, hospitals may also leverage fiercer insurer competition when bargaining in order to negotiate higher prices. We rely on a theoretical bargaining model to derive a regression equation relating negotiated prices to the degree of insurer competition, and use the presence of Kaiser Permanente in a hospital's market as a measure of insurer competition. We estimate a model of consumer demand for hospitals and use it to derive many of the other independent variables specified in the regression equation. Leveraging a unique dataset on negotiated prices between hospitals and commercial insurers in California in 2004, we find that increased insurer competition reduces hospital prices on average, but has a positive and empirically meaningful effect on the prices of attractive and high utility generating hospitals. This heterogeneous effect across hospitals—which has not been emphasized in the recent literature on hospital-insurer bargaining—provides incentives for hospital investment and consolidation, and implies that hospital market power can lead to high input prices even in markets where many insurers are present.