Bargaining in Markets with Exclusion: A Welfare Analysis of Narrow Network Insurance Plans

The literature on managed care and narrow networks, more broadly, has shown large price and expenditure savings compared to plans with less restrictive insurance networks. I find evidence that narrow network plans get better prices because they are able to bargain down prices and because they exclude high cost providers. I then develop a bargaining model which nests some of the extreme results from the industrial organization literature on exclusion to create a framework that can determine the welfare effects of insurers getting better prices by restricting their networks. Specifically, I show how insurers can use exclusion to gain a larger share of the surplus between themselves and healthcare providers, by shrinking the total amount of surplus to be shared. This is a source of deadweight loss.

I then show how the most popular models of Nash bargaining cannot account for this deadweight loss. I estimate my model, which can account for this deadweight loss, using data from the Colorado All-Payer Claims database. I then compute counterfactuals in which only broad network plans are allowed to operate. My analysis of the welfare consequences of narrow networks is guided by the tradeoff between higher consumer surplus due to extra choice in the insurance market versus the size of the deadweight loss created between the insurer and the provider.