• Hospital-insurer bargaining in the Netherlands

    I’ll admit to a bias. I tend to overlook health economics papers that don’t focus on the US. But I shouldn’t.

    Luckily a sharp-eyed and/or less biased reader sent me the recent paper by Halbersma, Mikkers, Motchenkova, and Seinen, “Market structure and hospital-insurer bargaining in the Netherlands” (European Journal of Health Economics, 2010). It’s a very good paper, on a hot topic, and with a thorough literature review.

    The paper is technical (can you tell?), so let’s just skip the gruesome details and extract the results and a big chunk of the literature review. First, the results:

    Using a unique dataset of transactions and list prices between hospitals and insurers in the years 2005 and 2006, we estimate the influence of buyer and seller concentration on the negotiated prices. First, we use a traditional structure–conduct–performance model (SCP-model) […] to estimate the effects of buyer and seller concentration on price–cost margins. Second, we model the interaction between hospitals and insurers in the context of a generalized bargaining model. […] In the SCP-model, we find that the market shares of hospitals (insurers) have a significantly positive (negative) impact on the hospital price–cost margin. In the bargaining model, we find a significant negative effect of insurer concentration, but no significant effect of hospital concentration. […]

    The results of the SCP-model […]  imply that […] only an organization’s market share matters in terms of price negotiations rather than HHI per se. Furthermore, teaching hospitals are able to charge a significantly higher price–cost margins than general hospitals as they get about 14% higher markups than general hospitals.

    The results of the bargaining model […] imply [that … t]he average share a hospital gets from the total gains of trade is 47%. This would mean that on average the insurers have slightly more bargaining power. Academic hospitals again are able to charge significantly higher prices, but they do not significantly better bargain, compared to other types of hospitals.

    The literature review cites many papers already described in these three prior posts.

    There is a large amount of literature on the impact of buyer and seller concentration in health care markets. For good reviews, see e.g. Dranove and Satterthwaite [15] and Gaynor and Vogt [23]. […]

    There is a large literature on the unilateral impact of buyer concentration on hospital prices. Examples are Feldman and Greenberg [18], Adamache and Sloan [1], Frech [20], and Foreman et al. [19]. These studies analyze the relationship between the market share of Blue Cross/Blue Shield and the hospital discounts from list prices. All find positive relationships between Blue Cross/Blue Shield share and provider discounts. However, Staten et al. [36, 37] find no significant relationship between these variables. Melnick et al. [29] attribute the insignificant results of Staten et al. [36, 37] to the relative inexperience with selective contracting of the newly formed Blue Cross Indiana PPO. Using more recent data from the same market, they find a significant negative relation between prices and insurers’ market share.

    As alluded to above, the negative relation between prices and buyers’ concentration as measured by insurers market share is not necessarily an indication of monopsony power [23]. Issues such as the market definition on the buyer’s side, endogeneity of insurers’ market share with price and the proper measurement of transaction prices (as opposed to list prices) have affected most studies to date. In summary, the bulk of empirical work has been consistent with the exercise of monopsony power by health insurers but has not tested the monopsony power hypothesis directly. [See Feldman, Wholey (2001) and Bates, Santerre (2008) references in this prior post.]

    There are also a large number of studies assessing the unilateral impact of seller concentration on hospital prices. Examples are Noether [31], Melnick et al. [29], Dranove et al. [13], Lynk [27], Connor et al. [8], Simpson and Shin [35], Dranove and Ludwick [14], Keeler et al. [26], and Lynk and Neumann [28]. These studies regress hospital price on measure of seller concentration (usually a Herfindahl–Hirschmann index) and other control variables. The vast majority of these studies find that hospital concentration increases prices. Again, as with the impact of buyer concentration, the measured positive impact of seller concentration on prices has not directly been identified with the exercise of monopoly power by hospitals.

    Only Staten et al. [36], Melnick et al. [29] and Gaynor et al. [21] analyze the bilateral exercise of market power. However, the first study focuses on the concentration of insurers and, as discussed earlier, has some indeterminate results. Melnick et al. [29] focuses on the concentration of hospitals. In both cases, the measurement of the concentration of the other side is not very precise. For example, Melnick et al. [29] use the Blue Cross market share of the hospital’s inpatient days as a measure of insurer concentration, rather than the share of Blue Cross in the entire local market. This measure is therefore endogenous with hospital price. Gaynor et al. [21] analyze how both hospitals’ and insurers’ concentrations, measured by HHIs on both sides of the market, are related to the prices. Their results indicate that increasing concentration of insurers significantly decreases price, while estimation of the effect of hospital concentration on price does not give any significant results.

    Another stream of literature directly models the bargaining process between insurers and hospitals. Brooks et al. [5] consider a potential gain from bargaining divided by insurers and hospitals and identifies the exercises of bargaining power by both sides. They specify and estimate a cooperative Nash-bargaining model of hospital– insurer bargaining over prices. Their model is inspired by Svejnar [38], a generalization of the Harsanyi–Nash– Zeuthen bargaining model. Brooks et al. report that hospitals have relatively more bargaining power (as indicated by the magnitude of the estimated bargaining parameter) than insurers. They did not include a measure of insurers’ concentration, although they find that a greater enrollment of the population in HMOs has a positive impact on hospital bargaining power with respect to fee for service plans. There are some methodological issues with the study, however, as the authors do not take into account the censored nature of their dependent variable, raising concerns for the consistency of their estimation results. Furthermore, the model of Brooks et al. [5] is one of bilateral monopoly, rather than a bilateral oligopoly. To the best of our knowledge, for markets with bilateral market power, there are no well-specified generalizations of the Nash-bargaining model for the bilateral monopoly. This potentially reduces the applicability of the model of Brooks et al. [5] to real-word health care markets. Nevertheless, the intuitive results of their paper are very appealing.

    Most of the studies cited earlier were either cross-sectional or panel studies of industry-level data. Brooks et al. [5] and Gaynor et al. [21] use patient-level data. In the more recent literature, consumer-choice models have also been employed to investigate the impact of concentration on prices. Examples are Town and Vistnes [39] and Capps et al. [6]. Town and Vistnes equate a hospital’s bargaining with the value a hospital adds to a network and find a positive impact of bargaining power on prices. Capps et al. [6] model a similar situation and measure each hospital’s market power by an aggregation of consumer’s willingness to pay to the hospital. They find a similar positive link between willingness to pay and prices. Such consumerlevel studies can be used to directly simulate the impact on prices following hospital mergers, making these models relevant in anti-trust cases.


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    3. Bos, J.W.B.: Does market power affect performance in the Dutch banking market? A comparison of reduced form market structure models. De Economist. 152, 491–512 (2004)

    5. Brooks, J.M., Dor, A., Wong, H.S.: Hospital-insurer bargaining: an empirical investigation of appendectomy pricing. J. Health Econ. 16, 417–434 (1997)

    6. Capps, C., Dranove, D., Satterthwaite, M.: Competition and market power in option demand markets. Rand. J. Econ. 34(4), 737–763 (2003)

    8. Connor, R., Feldman, R., Dowd, B.: The effects of market concentrationand horizontal mergers on hospital costs and prices.Int. J. Econ. Bus. 5, 159–180 (1998)

    13. Dranove, D., Shanley, M., White, W.D.: Price and concentration in local hospital markets: the switch from patient-driven to payerdriven competition. J. Law Econ. 36, 179–204 (1993)

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

    15. Dranove, D., Satterthwaite, M.A.: The industrial organization of health care markets. In: Schmalensee, R., Willig, R.D. (eds.) Chapter 20 in the handbook of industrial organization, vol. II. Elsevier, Amsterdam (2000). Third impression

    18. Feldman, R., Greenberg, W.: The relation between the blue cross share and the blue cross ‘discount’ on hospital charges. J. Risk Insur. 48, 235–246 (1981)

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

    20. Frech III, H.E.: Monopoly health insurance: the economics of Kartell v. Blue Shield of Massachusetts. In: Frech III, H.E. (ed.) Health care in America: the political economy of hospitals and health insurance, pp. 299–322. Pacific Research Institute for Public Policy, San Francisco (1988)

    21. Gaynor, M.S., Shimazaki, A., Vogt, W.B.: Bilateral market power: evidence from hospital markets, Mimeo (2006)

    23. Gaynor, M.S., Vogt, W.B.: Antitrust and competition in health care markets. In: Schmalensee, R., Willig, R.D. (eds.) Chapter 27 in the handbook of industrial organization, vol. II. Elsevier, Amsterdam (2000). Third impression

    26. Keeler, E., Melnick, G., Zwanziger, J.: The changing effects of competition on non-profit and for-profit hospital pricing behavior. J. Health Econ. 18, 69–86 (1999)

    27. Lynk, W.J.: Nonprofit hospital mergers and the exercise of market power. J. Law Econ. 38, 437–461 (1995)

    28. Lynk, W.J., Neumann, L.R.: Price and profit. J. Health Econ. 18, 99–105 (1999)

    29. Melnick, G.A., Zwanziger, J., Bamezai, A., Pattison, R.: The effects of market structure and bargaining position on hospital pricing. J. Health Econ. 11(3), 217–233 (1992)

    35. Simpson, J., Shin, R.: Do nonprofit hospitals exercise market power? Int. J. Econ. Bus. 5, 141–158 (1998)

    36. Staten, M., Dunkelberg, W., Umbeck, J.: Market share and the illusion of power: can blue cross force hospitals to discount? J. Health Econ. 6, 43–58 (1987)

    37. Staten, M., Dunkelberg, W., Umbeck, J.: Market share/market power revisited, a new test for an old theory. J. Health Econ. 7, 73–83 (1988)

    38. Svejnar, J.: Bargaining power, fear of disagreement, and wage settlements: theory and evidence from US industry. Econometrica 54(5), 1055–1078 (1986)

    39. Town, R., Vistnes, G.: Hospital competition in HMO networks. J. Health Econ. 20, 733–753 (2001)

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