Insurer Competition in Health Care Markets
The impact of insurer competition on welfare, negotiated provider prices, and premiums in the U.S. private health care industry is theoretically ambiguous. Reduced competition may increase both the premiums charged by insurers and their payments made to hospitals. However, it may also strengthen insurers' bargaining leverage when negotiating with hospitals, thereby offsetting such increases. To understand and measure this trade-off, we estimate a model of employer-insurer and hospital-insurer bargaining over premiums and reimbursements, household demand for insurance, and individual demand for hospitals using detailed California admissions, claims, and enrollment data from a large benefits manager. We simulate the removal of both large and small insurers from consumers' choice sets. Although consumer welfare decreases and premiums typically increase, we find that premiums can fall upon the removal of a small insurer if an employer imposes effective constraints through negotiations with the remaining insurers. We also document substantial heterogeneity in hospital price changes upon the removal of an insurer, with renegotiated price increases and decreases of as much as 10% across markets.
This paper was revised on May 4, 2016
Document Object Identifier (DOI): 10.3386/w19401
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