Hospital Mergers, Patient Demand, and the Price of Care

[Hospital] prices would rise by 3.7 percent if coinsurance rates were zero, but would drop by 16 percent if coinsurance rates were ten times as high as at present.

Managed care organizations (MCOs) can obtain lower prices from healthcare providers than traditional fee-for-service purchasers because of their bargaining leverage. In part to counterbalance the growing market power of MCOs, some hospitals have merged in recent decades.

In Mergers When Prices Are Negotiated: Evidence from the Hospital Industry (NBER Working Paper No. 18875), Gautam Gowrisankaran, Aviv Nevo, and Robert Town investigate the extent to which hospital bargaining and patient coinsurance restrain prices of medical services. They use discharge data from Virginia Health Information and administrative claims data from payers, and then model patient behavior by constructing prices for each hospital-payer-year as well as patient-specific coinsurance rates.

After the authors estimate the demand for care, they use their findings to analyze the impact of a proposed merger between Inova Health System and Prince William Hospital, a transaction that was challenged by the Federal Trade Commission and ultimately abandoned. They conclude that the proposed merger would have raised the quantity-weighted average price of the merging hospitals by 3.1 percent.

The authors also examine a remedy proposed by the FTC in a different hospital merger case, where the newly acquired hospitals were forced to bargain separately to maintain competition in the marketplace. They find that separate bargaining does not eliminate the anticompetitive effects of the merger because bargaining leverage diminishes on both sides of the market.

They estimate that mean prices would rise by 3.7 percent if coinsurance rates were zero, but would drop by 16 percent if coinsurance rates were ten times as high as they are now. Because patient cost-sharing has trended upwards recently, these results suggest that if the trend continues, it could result in a substantial reduction in provider prices. The authors determine that patient demand for healthcare is quite inelastic because patients typically pay only about 3 percent of the cost of their hospital care out-of-pocket. Prices are significantly constrained by MCO bargaining leverage, although still much higher than they would be in the absence of insurance.

--Matt Nesvisky