Vertical Integration and Plan Design in Healthcare Markets 

Abstract

We measure the impacts of vertical integration between insurers and hospitals. In the Chilean market, where half of private hospital capacity is vertically integrated, integration increases inpatient care spending by 6 percent and decreases consumer surplus and total welfare. Integrated insurers offer generous coverage at integrated hospitals, limited access to rival hospitals, and lower premiums. Competition for enrollees forces non-integrated insurers to provide additional coverage to high-quality non-integrated hospitals, resulting in plan networks that limit hospital competition. Whereas vertical integration reduces double marginalization, skewed cost-sharing structures-and their effect on hospital competition-more than compensate, leading to an overall negative welfare impact.

Keywords: insurers, hospitals, vertical integration, bargaining, competition

JEL Classification: I11, L13, L40