Mergers When Prices are Negotiated: Evidence from the Hospital Industry

Posted by D. Daniel Sokol

Gautam Gowrisankaran, University of Arizona – Eller College of Management; National Bureau of Economic Research (NBER), Aviv Nevo, Northwestern University – Department of Economics; National Bureau of Economic Research (NBER) and Robert J. Town, University of Pennsylvania – The Wharton School; National Bureau of Economic Research (NBER) analyze Mergers When Prices are Negotiated: Evidence from the Hospital Industry

ABSTRACT: In healthcare and other bilateral oligopoly markets, prices are often negotiated by the contracting parties. Many hospitals have merged in recent years in part to gain bargaining leverage with managed care organizations (MCOs), leading to several antitrust trials. We specify and estimate a bargaining model of competition between hospitals and MCOs using claims and discharge data from Northern Virginia. We find that MCO bargaining restrains hospital prices significantly relative to standard insurance. Increasing patient coinsurance tenfold would reduce prices by 16%. A proposed hospital acquisition that was challenged by the Federal Trade Commission would have significantly raised hospital prices.