Dynamic Bargaining between Hospitals and Insurers

Abstract

This paper quantifies the role of government-driven benchmark rate inflation in spending on behalf of privately insured patients. When contracts are formed simultaneously, anticipated price inflation has no effect in net present value terms. When contracts are multiyear and staggered and negotiators discount future payments, anticipated inflation is passed through to real spending due to the asymmetric discounting from the perspective of negotiation and the market. I leverage panel data on hospital–insurer contracts from West Virginia to show that contracts are multiyear and staggered, with even short-lived contracts remaining in place for three years or more. I estimate a structural model of bargaining with staggered contracts to characterize the degree to which negotiators discount future profits. I find that negotiators were substantially, but incompletely, forward-looking: I reject the null hypothesis of myopia and estimate an annual discounting rate of β = 0.899. I use the estimated dynamic model to quantify the forward-looking response to a proposed government-driven reform that would have increased private payment inflation between negotiations. The reform would not have any effect under a static model. I find that the reform would increase private spending after nine years by $4.98 billion, while a myopic model lacking forward-looking responses would overestimate the effect by $2.35 billion and miss short-term dynamics, including the possibility of payment decreases.