Does Health Plan Generosity Enhance Hospital Market Power?

Laurence C. Baker, M. Kate Bundorf, Daniel P. Kessler

NBER Working Paper No. 21513
Issued in August 2015
NBER Program(s):Health Care, Law and Economics

We test whether the generosity of employer-sponsored health insurance facilitates the exercise of market power by hospitals. We construct indices of health plan generosity and the price and volume of hospital services using data from Truven MarketScan for 601 counties from 2001-2007. We use variation in the industry and union status of covered workers within a county over time to identify the causal effects of generosity. Although OLS estimates fail to reject the hypothesis that generosity facilitates the exercise of hospital market power, IV estimates show a statistically significant and economically important positive effect of plan generosity on hospital prices in uncompetitive markets, but not in competitive markets. Our results suggest that most of the aggregate effect of hospital market structure on prices found in previous work may be coming from areas with generous plans.

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Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w21513

Published: Laurence C. Baker & M. Kate Bundorf & Daniel P. Kessler, 2015. "Does health plan generosity enhance hospital market power?," Journal of Health Economics, vol 44(), pages 54-62.

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