Vertical Integration and Plan Design in Healthcare Markets
We study the impacts of vertical integration between insurers and hospitals. We develop a bilateral oligopoly model of competition with endogenous plan design and hospital prices, and estimate it using administrative data from Chile. Integrated insurers offer plan networks that favor integrated hospitals, and non-integrated insurers restrict access to integrated hospitals to limit the raising rivals’ costs threat. These skewed networks restrict substitution across hospitals, softening price competition. Whereas vertical integration reduces double marginalization, plan design distortions and weaker hospital competition more than compensate. Vertical integration leads to a misallocation of demand across hospitals, higher healthcare spending, and lower welfare.
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