A Nationwide Assessment of Bargaining and Competition in Hospital Markets

Recently, mergers and consolidations in health care markets have increased and there is growing interest in the effects of these activities on consumers and competitors. This paper assesses the competitive environment in a set of hospital markets across the U.S. There is a rich literature examining hospital prices, hospital - health insurer negotiations, and demand for hospital services, but these papers usually focus on a single hospital or a single market. This paper contributes to the existing literature by estimating measures of market performance for multiple markets, allowing for consistent comparisons of markets and a more holistic assessment of the competitive environment of the U.S. health care system. The paper also demonstrates how administrative claims databases and current econometric techniques can be used for regulatory and policy relevant analyses. Prior research has shown that the risk-reduction component of insurance diminishes consumers’ responsiveness to prices, relative to no insurance, which will typically result in higher hospital prices. However, an insurer’s bargaining leverage mitigates the moral hazard effects of insurance, resulting in prices closer to what they would be in a world without health insurance. Using 2012 and 2013 administrative claims data from the Health Care Cost Institute, which includes approximately 40 million privately insured individuals per year from three national health insurers, we are able to evaluate the impact of insurer leverage on prices in multiple hospital markets. The methodology is based on a novel approach to modeling and estimating prices in markets where prices are negotiated – exactly the type of negotiation that occurs between health insurers and hospitals – allowing for estimations of consumers’ price elasticity and firms’ market power. From the results of econometric estimation, patients’ actual and effective sensitivity to prices are estimated and used to construct hospital market competition indices.