Hospital and insurer market power, prices, and bargaining: from the literature

The recent paper in Health Economics, Policy and Law by Asako Moriya, William Vogt and Martin Gaynor “Hospital prices and market structure in the hospital and insurance industries” includes an excellent literature review on hospital and insurer market power and the effect of each on prices, as well as hospital-insurer bargaining.

Early research on insurers’ exercise of monopsony power analyzes the relationship between the market share of Blue Cross/Blue Shield and the size of hospital/physician discounts from list prices. Feldman and Greenberg (1981), Adamache and Sloan (1983), Frech (1988), and Foreman et al. (1996) all find positive relationships between Blue Cross/Blue Shield share and provider discounts, whereas Staten et al. (1987, 1988) find no significant relationship between these variables. A more recent study by Feldman and Wholey (2001) finds a negative relationship between an Health Maintenance Organization (HMO) buying power and prices. Bamezai et al. (2003) analyze the California’s Medicaid Program’s exercise of monopsony power, and conclude that there is no significant relationship between its buying power and growth in reimbursement. Sorensen (2003) identifies the positive relationship between insurer sizes and discounts, and finds that an insurer’s ability to channel their patients to hospitals is a major determinant of discounts. In summary, most previous studies find a negative relationship between insurer market share and prices.

To these papers referenced above, I would add that of Bates and Santerre (2008), whose findings are consistent with those of Feldman and Wholey (2001), namely that  greater health insurer market concentration is not associated with monopsony power, suggesting that insurers use their power to offset monopolistic providers.

Moriya, Vogt, and Gaynor continue,

There are a large number of studies assessing hospital market power. These include Noether (1988), Melnick et al. (1992), Dranove et al. (1993), Lynk (1995), Connor et al. (1998), Simpson and Shin (1998), Dranove and Ludwick (1999), Keeler et al. (1999), Lynk and Neumann (1999), and Melnick and Keeler (2007). These studies regress prices on HHI (and other control variables). The vast majority of these studies find that concentration increases hospital prices. Dor et al. (2004a, 2004b) analyze the effect of managed care on discounts […] and also find a positive relationship between hospital concentration and prices.

There is another strain of literature, which models the bargaining between insurers and hospitals. Brooks et al. (1997) consider a potential gain from bargaining divided by insurers and hospitals, and identifies the exercise of bargaining power by both sides. Town and Vistnes (2001) model a situation in which hospitals compete for inclusion in the networks of HMO, and find that as the value a hospital adds to a network increases, the hospital’s bargaining power and prices increase. Capps et al. (2003) model a similar situation and measure each hospital’s market power by an aggregation of consumers’ willingnesses to pay to go to the hospital. They also find that the prices become higher as hospital bargaining power increases.

To the referenced papers on hospital-insurer bargaining I would add that of Ho (2009). She modeled the division of profits between hospitals and insurers, finding that hospitals capacity constraints or large brand power secure a greater share of the profits relative to other types of hospitals.


Adamache, K. W. and F. A. Sloan (1983), ‘Competition between non-profit and for-profit health insurers’, Journal of Health Economics, 2(3): 225–243.

Bates L. and R. Santerre (2008), ‘Do health insurers possess monopsony power in the hospital services industry?’ International Journal of Health Care Finance and Economics 8(1).

Bamezai, A., G. A. Melnick, J. Mann and J. Zwanziger (2003), ‘Hospital selective contracting in the absence of consumer choice: what can we learn from Medi-Cal?’, Journal of Policy Analysis and Management, 22(1): 65–84.

Brooks, J. M., A. Dor and H. S. Wong (1997), ‘Hospital-insurer bargaining: an empirical investigation of appendectomy pricing’, Journal of Health Economics, 16(4): 417–434.

Capps, C. S., D. Dranove and M. A. Satterthwaite (2003), ‘Competition and market power in option demand markets’, Rand Journal of Economics, 34(4): 737–763.

Connor, R. A., R. D. Feldman and B. E. Dowd (1998), ‘The effects of market concentration and horizontal mergers on hospital costs and prices’, International Journal of the Economics of Business, 5(2): 159–180.

Dor, A., M. Grossman and S. M. Koroukian (2004a), ‘Hospital transaction prices and managed-care discounting for selected medical technologies’, American Economic Review, 94(2): 352–356.

Dranove, D. and R. Ludwick (1999), ‘Competition and pricing by nonprofit hospitals: a reassessment of Lynk’s analysis’, Journal of Health Economics, 18(1): 87–98.

Dranove, D., M. Shanley and W. D. White (1993), ‘Price and concentration in local hospital markets: the switch from patient-driven to payer-driven competition’, Journal of Law and Economics, 36(1): 179–204.

Feldman, R. and W. Greenberg (1981), ‘The relation between the Blue Cross market share and the Blue Cross ‘discount’ on hospital charges’, Journal of Risk and Insurance, 48(2): 235–246.

Feldman, R. and D. Wholey (2001), ‘Do HMOs have monopsony power?’, International Journal of Health Care Finance and Economics, 1(1): 7–22.

Foreman, S. E., J. A. Wilson and R. M. Scheffler (1996), ‘Monopoly, monopsony, and contestability in health insurance: a study of Blue Cross plans’, Economic Inquiry, 34(4): 662–677.

Frech, H. E.III (ed.) (1988), ‘Monopoly Health Insurance: the Economics of Kartell v. Blue Shield of Massachusetts’, in Health Care in America: The Political Economy of Hospitals and Health Insurance, San Francisco: Pacific Research Institute for Public Policy, 293–322.

Ho, K. (2009), ‘Insurer-provider networks in the medical care market’, The American Economic Review, 99(1): 393-430.

Keeler, E. B., G. Melnick and J. Zwanziger (1999), ‘The changing effects of competition on non-profit and for-profit hospital pricing behavior’, Journal of Health Economics, 18(1): 69–86.

Lynk, W. J. (1995), ‘Nonprofit hospital mergers and the exercise of market power’, Journal of Law and Economics, 38(2): 437–461.

Lynk, W. J. and L. R. Neumann (1999), ‘Price and profit’, Journal of Health Economics, 18(1): 99–105.

Melnick, G. and E. Keeler (2007), ‘The effects of multi-hospital systems on hospital prices’, Journal of Health Economics, 26(2): 400–413.

Melnick, G., J. Zwanziger, A. Bamezai and R. Pattison (1992), ‘The effect of market structure and bargaining position on hospital prices’, Journal of Health Economics, 11(3): 217–233.

Noether, M. (1988), ‘Competition among hospitals’, Journal of Health Economics, 7(3): 259–284.

Simpson, J. and R. Shin (1998), ‘Do nonprofit hospitals exercise market power?’, International Journal of the Economics of Business, 5(2): 141–158.

Sorensen, A. T. (2003), ‘Insurer-hospital bargaining: negotiated discounts in post-deregulation Connecticut’, Journal of Industrial Economics, 51(4): 469–490.

Staten, M., W. Dunkelberg and J. Umbeck (1987), ‘Market share and the illusion of power: can Blue Cross force hospitals to discount?’, Journal of Health Economics, 6(1): 43–58.

Staten, M., W. Dunkelberg and J. Umbeck (1988), ‘Market share/market power revisited, a new test for an old theory’, Journal of Health Economics, 7(1): 73–83.

Town, R. and G. Vistnes (2001), ‘Hospital competition in HMO networks’, Journal of Health Economics, 20(4): 733–753.

Hidden information below


Email Address*