Bargaining in Markets with Exclusion: An Analysis of Health Insurance Networks

This paper proposes a theoretical and empirical framework to quantify the welfare consequences of narrow network health insurance plans, under the hypothesis that insurers exclude hospitals from their networks to gain bargaining leverage. I propose a model, which builds off the Nash-in-Nash framework that has been used in the recent hospital-insurer bargaining literature, but allows network choice to be endogenous to price formation. If insurers exclude hospitals from their network, they lose revenue due to their more restrictive networks necessitating lower premiums. However, they can offset this lost revenue by reimbursing in-network hospitals at lower rates due to their increased bargaining leverage. I estimate the model using data on the non-group insurance market from the Colorado All-Payer Claims Database. I find that a counterfactual law which restricts insurers ability to form narrow networks, would lead to higher negotiated prices and higher premiums for consumers. The welfare losses depend on how consumers tradeoff more valuable networks with higher prices. I find small reductions in consumer surplus and therefore, enrollment, while hospitals are much better off due to this policy.