“Hospital-Insurer Bargaining Power and Negotiated Rates”

Abstract: In the US health care system, insurance plays two roles. One role is risk-sharing. The other, the focus of this study, is that insurance companies negotiate with hospitals for lower prices, so that prices for the same services can vary depending which entity, if any, is insuring the patient. We approach this negotiation between hospitals and insurers as an unstructured bargaining problem. Insurers (and hopefully their customers) benefit from negotiating through lower prices, while hospitals benefit through higher demand for their services. Using the Massachusetts Center for Health Information and Analysis (CHIA) data set, we estimate negotiated prices specific to hospital-insurer pairs. Assuming that these prices are the result of generalized Nash bargaining, we structurally estimate hospitals' and insurers' bargaining power, and how this varies with hospital, insurer, and market characteristics. We assess to what extent the lower prices are passed on to consumers. The results of the estimation are also used to assess possible effects of changes in government policy and market structure, and their implications for consumers' welfare.