Physician Concentration and Negotiated Prices: Evidence from State Law Changes

We study the relationship between concentration in the market for physician services and prices negotiated between physician practices and private insurance companies.  We develop a new instrumental variable for changes in concentration: state-level judicial decisions that change the enforceability of non-compete clauses in physician employment contracts. These law changes alter the organizational incentives of physicians, causing shocks to the concentration of physician markets without greatly affecting insurers.  Using two databases on the universe of physician establishments and firms in the US between 1996 and 2007, linked to privately negotiated prices with insurance companies, we show that negotiated prices fall when physician establishments become larger due to changes in NCA laws.  Our results imply that a 100 point increase in the establishment-based Herfindahl Index (HHI) causes a 1.2 to 2.6 percent decrease in negotiated prices, suggesting that insurers are able to capture efficiency gains from larger establishments.  In contrast, when physically-distinct establishments negotiate jointly as a firm the opposite is true: a 100 point increase in the firm-based HHI raises negotiated prices by 1.7 percent.  The price effects are largest in metropolitan markets and for non-surgical physician specialties.