Sera Diebel is an economics doctoral student at The Graduate Center, CUNY.
Seminar topic: “Vertical Integration in the U.S. Health Care Market: An Empirical Analysis of Provider-Insurer Consolidation”
Abstract: 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 with the removal of vertical integration from the market, social surplus would increase by $20 billion per year. Banning exclusionary restrictions gets rid of market foreclosure, gives access to vertically-integrated entities, and enables insurers to contract with less expensive hospitals. As a result, insurers offer wider hospital networks and lower premiums that benefit consumers. Producer surplus also goes up as many hospitals and insurers enjoy higher profits driven by higher market shares and reduced costs.