Physician Networks and Consumer Welfare

Monday, June 11, 2018: 10:00 AM
Starvine 2 - South Wing (Emory Conference Center Hotel)

Presenter: Nicholas Tilipman

Discussant: Claudio Lucarelli


Recent years have seen insurers and employers turn to narrow-network insurance plans as a means of controlling health care costs. While much attention has been given to narrow hospital networks, few have studied the role that physician markets play in consumer demand and network formation. In this paper, I study the extent to which physician networks drive consumer demand for health plans and the effects of hospital/physician integration on firms' network choices. I also investigate how these networks change under various policy scenarios. Using claims data from a large benefits administrator in Massachusetts, as well as longitudinal data on physician affiliations, I construct a dataset of insurer-practice networks over time. I then estimate a model of supply and demand for health insurance, where I endogenize the product menu offered to consumers with respect to hospital and physician networks for primary care, cardiology, and orthopedics. I find that consumer selection into broad-network plans is largely driven by loyalty to previously used primary care doctors. Ignoring the demand for physician networks tends to both underestimate consumers' premium sensitivity and overestimate their willingness-to-pay for hospitals. This implies that firms would profit by maintaining broad physician networks, but foregoing contracts with expensive hospitals. To test this, I simulate the effect of an increase in the cost of health plans (in the form of an excise tax, similar to the ACA ``Cadillac Tax'') on the number of plans offered and the networks of those plans. When I allow insurers to form physician networks separately from hospital networks, firms offer plans with large physician networks and narrow hospital networks. This results in a large decrease in costs, but only a small decrease in consumer welfare. However, when insurers contract with hospitals and physicians jointly, firms drop all broad-network plans in favor of narrower hospital and physician products in response to an excise tax. This results in a comparable decrease in health costs, but a much larger reduction in consumer welfare.