Six Stylized Facts From Ten Years of Vertical Market Contract Data

Abstract

This paper investigates vertical market contract dynamics by analyzing a novel panel dataset of hospital–insurer contracts in West Virginia. Typically, contracts between downstream retailers and upstream suppliers in vertical markets are closely guarded trade secrets. West Virginia’s policy of making hospital–insurer public records until 2016 provided an unprecedented opportunity to study vertical market contracts over time. This work documents the West Virginia context and provides descriptive evidence from the novel dataset. The largest insurer typically formed three-year and five-year contracts. In contrast, smaller insurers generally formed auto-renew contracts, which initially commit to only one year but typically renew for a decade or longer, generally accompanied by rapid price growth. Further, contract formation was staggered, introducing subtle dynamics of internalized contract spillovers. These findings underscore the need to consider dynamics to accurately capture some markets and some questions, a nuance that is overlooked by the literature’s prevailing static approach. By documenting this unique dataset and stark dynamic implications, this research contributes to a larger understanding of vertical market dynamics and helps set the stage for future work.