Vertical Integration and Exclusive Vertical Restraints between Insurers and Hospitals

Abstract:     
We examine vertical integration and exclusive vertical restraints in healthcare markets where insurers and hospitals bilaterally bargain over contracts. We employ a bargaining model in a concentrated health care market of two hospitals and two health insurers competing on premiums. Without vertical integration, some bilateral contracts will not be concluded only if hospitals are sufficiently differentiated, whereas with vertical integration we find that a breakdown of a contract will always occur. There may be two reasons for not concluding a contract. First, hospitals may choose to soften competition by contracting only one insurer in the market. Second, insurers and hospitals may choose to increase product differentiation by contracting asymmetric hospital networks. Both types raise total industry profits and lower consumer welfare.

Number of Pages in PDF File: 28

Keywords: insurer-provider networks, vertical integration, exclusive

JEL Classification: G22, G34, I11, L14, L42

working papers series