Dynamic Bargaining between Hospitals and Insurers (Job Market Paper)

Abstract

Many markets, including American healthcare markets, feature bilateral bargaining to determine contracts that remain in place for multiple years. Researchers studying these markets generally assume contracts are short-lived. In the United States, hospitals and commercial insurers calculate prices as long-lived multiples of quantities used as benchmarks, such as hospital-set list prices and government-set Medicare payments. This study uses a unique panel dataset on hospital-insurer contracts to study how persistent increases to Medicare reimbursement would impact negotiated payments on behalf of the commercially insured. I extend standard vertical market models to accommodate forward-looking bargaining over multiperiod contracts, and I prove the extension uniquely controls the growth of relevant bargaining states. I apply the model to consider a one-percentage-point annual increase in Medicare payments. The model allows forward-looking negotiators to offset future Medicare-driven price increases by reducing starting prices. After nine years, I estimate that spending on behalf of the commercially insured would increase by 1.319%. Extrapolated nationally, the change would increase 2015 spending by $4.98 billion. In contrast, a myopic model lacking forward-looking offsets would overestimate the effect of the Medicare reimbursement reform by $2.35 billion.