How Should Payers Respond to Consolidation in Healthcare Markets?

44 Pages Posted: 19 Jul 2021

See all articles by Houyuan Jiang

Houyuan Jiang

University of Cambridge

Zhan Pang

Purdue University - Krannert School of Management

Sergei Savin

University of Pennsylvania - Operations, Information and Decisions Department

Date Written: July 15, 2021

Abstract

Our paper studies the role of the performance-based incentives in managing the effects of consolidation in healthcare markets. We consider a transition between the ``pre-merger'' market configuration where a payer manages a system with two competing hospitals and one of the two ``consolidated'' configurations: a horizontal consolidation under which both hospitals are run by the same management team and a vertical consolidation under which the payer directly manages one of the hospitals. Policymakers in the Federal Trade Commission, and Centers for Medicare and Medicaid Services in the U.S., the Trust Development Authority, and Clinical Commissioning Groups in the NHS England will benefit from our analysis of the performance-based incentives in the presence of increasing market consolidation. We use queueing dynamics to describe patient care processes and analyze Nash equilibria emerging in different market configurations in the presence of performance-based incentives. We derive the optimal bonus-type incentives that the payer can use to adapt to changes in market concentration and quantify the resulting impact on patient access to care and social welfare. We identify the market conditions where bonus-type incentives are effective in generating the socially-optimal levels of patient access to care, as well as settings where changes in the market concentration create welfare gaps. The strength of competition for patient demand and the operating costs are two major factors shaping the access and welfare outcomes of market consolidation. Our analysis advises policymakers and payers on how to use performance incentives to blunt the anti-competitive effects of horizontal consolidation, and to enhance the effects of vertical consolidation on patient access to care and social welfare.

Keywords: Competition; mergers and acquisitions; access to care; performance-based incentives

Suggested Citation

Jiang, Houyuan and Pang, Zhan and Savin, Sergei, How Should Payers Respond to Consolidation in Healthcare Markets? (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3887843 or http://dx.doi.org/10.2139/ssrn.3887843

Houyuan Jiang (Contact Author)

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Zhan Pang

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Sergei Savin

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
546 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States

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