A. Sera Diebel

Ph.D. in economics

Vertical Integration in the U.S. Health Care Market: An Empirical Analysis of Hospital-Insurer Consolidation

This paper examines the effects of vertical integration between hospitals and insurers on market outcomes and welfare. To assess the impact on market outcomes, I estimate reduced-form regressions that demonstrate vertically-integrated entities engage in market foreclosure (both upstream and downstream), and offer lower-premium higher-quality health plans. To determine the overall impact on welfare, I estimate a structural model, use the estimates in a policy experiment that prohibits vertical integration, and calculate the change in consumer and producer surplus. The structural model captures consumer behavior by estimating discrete choice models of hospital and insurer demand, while it captures the hospital-insurer contracting process by estimating a bargaining model that reveals consolidation increases vertically-integrated hospitals' bargaining power. My findings illustrate that vertical integration acts as an entry barrier to the downstream market due to the cost advantages vertically-integrated entities achieve through upstream foreclosure. Additionally, I find that vertical integration benefits consumers at the expense of the producers. Banning exclusionary restrictions gets rid of market foreclosure and gives access to vertically-integrated entities. As a result, insurers offer wider hospital networks but increase their premiums, which harms consumers. Producers, on the other hand, are better off in the absence of vertical integration as many hospitals and insurers enjoy higher profits driven by higher market shares and increased premiums.


Welfare Effects of Using Hospital Rate Setting as an Alternative to Bargaining  (with Nicholas Diebel)

Prices paid by insurers to hospitals are determined by bilateral negotiations in all U.S. states except Maryland, where a unique all-payer rate setting health care regulation sets common prices for all insurers. Theoretical predictions on how bilateral bargaining affects total welfare are ambiguous. We empirically analyze how a Maryland style regulation would affect overall welfare relative to bilateral bargaining, using the New Jersey health care market as an example. Using hospital-, insurer-, and patient-level data from 2010, we estimate a structural model of hospital and insurer demand, and simulate consumer and insurer responses to the new price regime. We find that replacing bargaining with all-payer rate setting increases total surplus in the market. However, not all agents benefit, and the effects depend on how the largest player in our market, Blue Cross Blue Shield (BCBS), sets premiums. If BCBS sets premiums à la Bertrand Nash, consumer surplus decreases, but joint hospital-insurer surplus increases by more. The number of uninsured increases by two percent. Total surplus increases are robust to different pricing strategies of BCBS, which account for its non-profit status, but diminish the magnitude of surplus gain.


Welfare Impacts of Full-line Forcing Contracts in the U.S. Health Care Market 

I study the welfare implications of bundling practices exercised by hospital systems in the negotiation process with insurers. Hospital systems offer full-line forcing contracts to ensure insurers carry all hospital system members in their networks. Such contracts have potential efficiency-inducing and anti-competitive effects from a theoretical standpoint, making welfare implications ambiguous. Using regression analysis, I demonstrate efficiency gains present themselves through their impact on market coverage, but not on premiums. Moreover, hospital systems are unable to use these contracts to gain leverage over their rivals, making anti-competitive effects absent from the picture. To quantify the overall impact on welfare, I estimate structural models of hospital and insurer demand along with a bargaining model, and use the parameter estimates in a counterfactual policy experiment that prohibits such contracts. Results from counterfactual simulations suggest that removal of full-line forcing contracts from the market leads to a $16 billion decline in overall welfare. Consumers are worse off because they face higher premiums in the absence of vertical bundling. Removal of vertical restraints benefits majority of insurers, but many hospitals suffer losses. System hospitals lose the most since they no longer can use bundling to maximize their profits. Individual hospitals also lose as a result of increased competition in the upstream market.