Tiered Hospital Networks, Health Care Demand, and Prices

Health insurers are increasingly using plan designs that incentivize consumers to shop for health care based on price. I study the effects of one such plan design on demand and equilibrium prices. Tiered hospital networks group hospitals by price ranking and vary consumers' out-of-pocket prices to reflect the price variation faced by the insurer. Proponents argue that tiered networks reduce health care spending by steering consumers toward lower-priced hospitals, and by giving insurers an additional bargaining lever in price negotiations with hospitals. To evaluate these claims, I estimate a structural model of health care demand and insurer-hospital bargaining over prices in the Massachusetts private health insurance market. The model extends the standard Nash bargaining framework to explicitly account for the multiplicity of possible tier outcomes. I find that the effects of tiered networks on demand alone can lead to moderate reductions in hospital spending of 0.7% to 1.8%. The effects on negotiated hospital prices are substantially larger, with an average price decline of 11% across hospitals. I conclude that insurance plan designs with demand-side incentives can have large health care spending reduction effects.