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 of 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 enable forward-looking bargaining over multiperiod contracts. In the model, forward-looking negotiators offset future Medicare-driven price increases by reducing starting prices. I use the model to consider a one-percentage-point annual increase in Medicare payments. After nine years, I estimate spending on behalf of the commercially insured would increase by 1.319%. Extrapolated nationally, the change would increase 2015 spending by $4.98 billion. A myopic model lacking forward-looking offsets would overestimate the effect of the Medicare reimbursement reform by by $2.35 billion.

Type

Work in progress.

Jacob Dorn
Jacob Dorn
PhD candidate in Economics

Jacob Dorn is an economics PhD candidate at Princeton University with interests in the industrial organization of health markets and econometrics. He has accepted a position as Assistant Professor in the Department of Economics at Cornell University.

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