Multimarket Contact in Health Insurance: Evidence from Medicare Advantage

43 Pages Posted: 12 Apr 2018

See all articles by Haizhen Lin

Haizhen Lin

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Ian McCarthy

Emory University - Department of Economics

Date Written: April 2018

Abstract

Many industries, including health insurance, are characterized by a handful of large firms that compete in multiple geographic markets. Such overlap across markets, defined as multimarket contact (MMC), may facilitate tacit collusion and thus reduce the intensity of competition. We examine the effects of MMC on health insurance prices and quality using comprehensive data on the Medicare Advantage (MA) market from 2008 through 2015. Our estimation strategy exploits two plausibly exogenous changes to MMC: 1) a merger-induced change in MMC due to consolidations in other markets; and 2) reimbursement policy changes in which benchmark rates were increased in a subset of markets, encouraging additional entry into those markets and therefore affecting MMC even in markets otherwise unaffected by the policy itself. Across a range of estimates and alternative measures of MMC, our results consistently support the mutual forbearance hypothesis, where we find that prices are significantly higher and quality significantly lower as MMC increases. These results suggest MMC as one potential channel through which cross-market mergers and acquisitions could soften competitiveness in local markets.

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Suggested Citation

Lin, Haizhen and McCarthy, Ian, Multimarket Contact in Health Insurance: Evidence from Medicare Advantage (April 2018). NBER Working Paper No. w24486. Available at SSRN: https://ssrn.com/abstract=3158926

Haizhen Lin (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

Ian McCarthy

Emory University - Department of Economics ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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