Market Power in Dutch Hospital Sector: Bargaining between Hospitals and Insurers
- Presenter:
Chair: Michael Hagan; Discussant: Herb Wong Tue June 6, 2006 13:45-15:15 Room 213
Rationale: Competition was introduced in parts of the hospital market in the Netherlands in 2005. According to a monitoring report of the Dutch Health Care Authority, the introduction of competition lead to an average increase of 5% of the estimated cost prices. However, prices differ amongst hospitals, diagnosis and regions. In this paper we investigate the consequences of market power and bargaining power of both hospitals and insures on prices after the institutional change. We have a unique dataset consisting of about 60.000 observations of both list prices per product and prices per product contracted between hospitals and insurers.
Objectives: In this paper we would like to show the effects of buyer and seller concentration on the price of hospital care. Next we investigate whether hospitals strategically interact in a transitional phase, just after the introduction of competition. Furthermore, we will try to identify possible unilateral market power of certain hospital types. Finally we estimate the relative bargaining power of hospitals and insurers in determining the negotiated prices.
Methodology: First we use a traditional Structural Conduct Performance model to estimate the effects of market structure on price mark-ups in the competitive segment of the hospital market. These models normally are based on the Cournot model in which it is assumed that there is strategic interaction between sellers.
Using the SCP model we will estimate to which extend hospitals are able to coordinate their actions in the period just after the introduction of competition. Within the SCP framework we identify possible unilateral market power by introducing dummy variables for different types of hospitals (e.g. academic hospitals).
We also model the interaction between a hospital and an insurer in the context of a bargaining model (similar to Brooks et al., 1997), by estimating the share a hospital receives (defined by the contracted price minus the cost price) from the total gain of contracting (defined as a list price for non insured consumers minus the cost price).
Conclusions: Preliminary estimation results show that hospitals are, just after the introduction of competition, unable to coordinate their actions. The concentration of hospitals does not have a significant effect on the observed price mark-ups. However, large insurers can negotiate significantly lower prices. Furthermore, academic hospitals are able to negotiate significantly higher prices for hospital services than general hospitals. Since patients are willing to travel larger distances to get a treatment from an academic hospital, we conclude that academic hospitals are able to exert unilateral market power. On average insurers have more bargaining power. We will also investigate the effect of the market structure on the division of bargaining power between hospitals and insurers.
Possible Extensions: We will try to include simultaneous testing for excessive pricing, predatory pricing, and countervailing power by insurers in the model. Furthermore, we might extend the paper with a spatial regression model, which would estimate the spatial interaction between neighboring hospitals.
