Mergers When Prices are Negotiated: Evidence from the Hospital Industry

50 Pages Posted: 9 Mar 2013 Last revised: 28 Jan 2022

See all articles by Gautam Gowrisankaran

Gautam Gowrisankaran

Columbia University; HEC Montreal; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Aviv Nevo

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Robert J. Town

National Bureau of Economic Research (NBER)

Date Written: March 2013

Abstract

We estimate a bargaining model of competition between hospitals and managed care organizations (MCOs) and use the estimates to evaluate the effects of hospital mergers. We find that MCO bargaining restrains hospital prices significantly. The model demonstrates the potential impact of coinsurance rates, which allow MCOs to partly steer patients towards cheaper hospitals. We show that increasing patient coinsurance tenfold would reduce prices by 16%. We find that a proposed hospital acquisition in Northern Virginia that was challenged by the Federal Trade Commission would have significantly raised hospital prices. Remedies based on separate bargaining do not alleviate the price increases.

Suggested Citation

Gowrisankaran, Gautam and Nevo, Aviv and Town, Robert J., Mergers When Prices are Negotiated: Evidence from the Hospital Industry (March 2013). NBER Working Paper No. w18875, Available at SSRN: https://ssrn.com/abstract=2230765

Gautam Gowrisankaran (Contact Author)

Columbia University ( email )

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HEC Montreal ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Aviv Nevo

Northwestern University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Robert J. Town

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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