Hospital and insurer market concentration: 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” is on an important topic I’ve thought a lot about. It also has loads of helpful background, which I’m going to provide in this and several future posts. First, here’s an excerpt from the abstract:

We analyze the relationship between insurer and hospital market concentration and the prices of hospital services. We use a national US dataset containing transaction prices for health care services for over 11 million privately insured Americans. Using three years of panel data, we estimate how insurer and hospital market concentration are related to hospital prices, while controlling for unobserved market effects. We find that increases in insurance market concentration are significantly associated with decreases in hospital prices, whereas increases in hospital concentration are non-significantly associated with increases in prices. A hypothetical merger between two of five equally sized insurers is estimated to decrease hospital prices by 6.7%.

I won’t make too much of the results because I have a methodological concern with the work. Market structure variables are not instrumented. To address their endogeneity, the authors use a fixed effects specification that differences out all unobserved factors that do not change over time. Any time-varying unobservables could potentially bias the results, though in an unknown direction. I also worry about the potential for “reverse causal effects”–changes in prices that cause changes in market structure–that are not controlled for in such a specification but would be in an instrumental variables approach. These could potentially bias the results toward zero.

Moving on, about recent trends in hospital and insurer market concentration and related antitrust activities, the authors write,

According to a study by the American Medical Association (AMA), there were over 400 mergers involving health insurers and managed care organizations between 1995 and 2003 (AMA, 2005), whereas more than 1700 hospitals were involved in acquisitions between 1994 and 2000 (Cuellar and Gertler, 2003). On average, the pooled market share of a state’s largest three health insurers rose from 59% in 1997 to 76% in 2001 and 80% in 2003 (Chollet et al., 2000 and AMA, 2003, 2005). [ …]

There has been increasing concern in general (FTC/DOJ, 2004), but in particular by hospitals and physicians, about the growing concentration in health insurance markets and the potential for market domination by large insurers. [See also AHA (2007). … ]

There has also been substantial concern about the impact of hospital and physician consolidation on prices, quality and ultimately health insurance premiums and coverage (FTC/DOJ, 2004; Town et al., 2006; Vogt and Town, 2006). In response, federal and state anti-trust enforcers have challenged a number of mergers in health care. On the insurance side, the Department of Justice (DOJ) challenged Aetna’s acquisition of Prudential Healthcare in 1999, resulting in Aetna divesting some assets. In a more recent challenge, the DOJ forced United Health Group to divest its Medicare Advantage plans in order to merge with Sierra Health Services. The Federal Trade Commission (FTC) and the DOJ challenged seven hospital mergers between 1994 and 2000, although the antitrust enforcers lost all seven cases (FTC and DOJ, 2004).


American Medical Association (AMA) (2003), Competition in Health Insurance: A Comprehensive Study of US Markets: Second Edition, Chicago: AMA.

American Medical Association (AMA) (2004), Competition in Health Insurance: A Comprehensive Study of US Markets: Third Edition, Chicago: AMA.

American Medical Association (AMA) (2005), Competition in Health Insurance: A Comprehensive Study of US Markets: Fourth Edition, Chicago: AMA.

American Hospital Association (AHA) (2007), ‘Ensuring fair marketplace conditions for providers’, Advocacy Issue Paper, AHA.

Chollet, D. J., A. M. Kirk and M. E. Chow (2000), Mapping State Health Insurance Markets: Structure and Change in the States’ Group and Individual Health Insurance Markets, 1995–1997, Washington, DC: Academy for Health Services Research and Health Policy.

Cuellar, A. E. and P. J. Gertler (2003), ‘Trends in hospital consolidation: the formation of local systems’, Health Affairs, 22(6): 77–87.

Federal Trade Commission and Department of Justice (FTC/DOJ) (2004), Improving Health Care: A Dose of Competition, Washington, DC: FTC/DOJ.

Town, R., D. Wholey, R. Feldman and L. Burns (2006), ‘The welfare consequences of hospital mergers’, NBER Working Paper, No. 12244.

Vogt, W. B. and R. Town (2006), ‘How has Hospital Consolidation Affected the Price and Quality of Hospital Care?’, Research Synthesis Report No. 9, Robert Wood Johnson Foundation.

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