Mergers When Prices Are Negotiated: Evidence from the Hospital Industry

TLDR

The study estimates a bargaining model of competition between hospitals and managed care organizations to evaluate the effects of hospital mergers. The model captures hospital–MCO bargaining dynamics and uses the estimates to assess merger impacts. Results show that MCO bargaining restrains hospital prices, higher patient coinsurance reduces prices by 16 %, a proposed Northern Virginia acquisition would raise prices, and remedies based on separate bargaining fail to mitigate these increases. JEL codes: C78, G34, I11, I13, L13.

Abstract

We estimate a bargaining model of competition between hospitals and managed care organizations (MCOs) and use the estimates to evaluate the effects of hospital mergers. We find that MCO bargaining restrains hospital prices significantly. The model demonstrates the potential impact of coinsurance rates, which allow MCOs to partly steer patients toward cheaper hospitals. We show that increasing patient coinsurance tenfold would reduce prices by 16 percent. We find that a proposed hospital acquisition in Northern Virginia that was challenged by the Federal Trade Commission would have significantly raised hospital prices. Remedies based on separate bargaining do not alleviate the price increases. (JEL C78, G34, I11, I13, L13)