Vertical Integration between Hospitals and Insurers

76 Pages Posted: 14 Jan 2019 Last revised: 8 May 2019

See all articles by José Ignacio Cuesta

José Ignacio Cuesta

Stanford University, Department of Economics

Carlos Noton

Compass Lexecon

Benjamin Vatter

Northwestern University; Stanford University

Date Written: January 2, 2019


The welfare effects of vertical integration are ambiguous. Cost efficiencies and the elimination of double marginalization may offset increases in market power and incentives to raise rivals' costs. To study the effects of vertical integration between insurers and hospitals, we develop a model of bargaining and competition. Integrated firms have incentives to increase hospital prices to rivals to steer demand to integrated partners. We estimate the model using administrative data on claims and plans from Chile, where vertically integrated hospitals account for half of all admissions. Our estimates imply that steering incentives are significant and that vertical integration decreases welfare.

Keywords: health market, vertical integration, insurance competition, hospital competition, bargaining

JEL Classification: I11, L13, L40

Suggested Citation

Cuesta, José Ignacio and Noton, Carlos and Vatter, Benjamin, Vertical Integration between Hospitals and Insurers (January 2, 2019). Available at SSRN: or

José Ignacio Cuesta

Stanford University, Department of Economics ( email )

579 Jane Stanford Way
Stanford, CA CA 94305
United States
94305-6015 (Fax)

Carlos Noton (Contact Author)

Compass Lexecon ( email )


Benjamin Vatter

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

Stanford University ( email )

366 Galvez St
Stanford, CA 94305
United States


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