Vertical Integration between Hospitals and Insurers

74 Pages Posted: 14 Jan 2019

See all articles by José Ignacio Cuesta

José Ignacio Cuesta

Department of Economics, University of Chicago

Carlos Noton

Dept of Industrial Engineering - University of Chile

Benjamin Vatter

Northwestern University

Date Written: January 2, 2019

Abstract

We study the vertical integration of insurers and hospitals. The welfare effects of vertical integration are ambiguous and depend on a trade-off between a variety of economic forces, including solving double marginalization and improving the use of resources within the firm, but also increasing market power and providing incentives to affect rivals' costs. To study the effects of vertical integration, we develop a model of health markets and show that vertically integrated firms have incentives to increase negotiated hospital prices to rivals in order to steer demand to their integrated partners. We estimate the model using administrative data on plan choices and hospital admissions from the Chilean private health market, where vertically integrated systems account for almost half of the market. Using our structural estimates, we find that banning vertical integration increases total 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: https://ssrn.com/abstract=3309218 or http://dx.doi.org/10.2139/ssrn.3309218

José Ignacio Cuesta

Department of Economics, University of Chicago ( email )

1126 E 59th Street
Chicago, IL 60637
United States

Carlos Noton (Contact Author)

Dept of Industrial Engineering - University of Chile ( email )

Beauchef 851
Santiago, RM
Chile

HOME PAGE: http://www.dii.uchile.cl/~cnoton/

Benjamin Vatter

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

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