The separate bargaining units remedy

Imagine you want to buy ten pieces of the thousands of pieces of Halloween candy your two kids have collected, but you don’t care from which kid you buy what amount of candy. Being a shrewd, candy-loving economist who studied physics and engineering, you figure you can get your kids to bargain down the candy price. Both being flush with candy (more than they can eat before you throw it away at Christmas time anyway), you figure each one will undercut the other to get a little cash. You’ll have your candy fix cheap!

But, suppose unbeknownst to you, they’ve agreed in advance to split whatever money they can extract from you in exchange for their candy. All of a sudden, what appeared to be two units (kids are “units” to physicist-engineer-economists) bargaining separately isn’t so much. Neither kid has an incentive to cut her price. If kid A loses the sale to kid B, what’s it to A? She still gets half the money. This is a cartel, despite seemingly separate bargaining units.

This is analogous to the story told in a new paper by Gautam Gowrisankaran, Aviv Nevo, and Robert Town. They explain why forcing hospitals within a hospital system to bargain with insurers separately does not fully address antitrust concerns.

In the Evanston Northwestern hospital merger case [summarized here], the FTC imposed a remedy requiring the Evanston Northwestern system to negotiate separately with MCOs (with firewalls in place) from the newly acquired hospital, Highland Park Hospital.

What could go wrong?

Even though the negotiations are separate, [one hospital] bargainer might internalize the incentives of the system, namely that if a high price discouraged patients from seeking care at [that hospital], some of them would still divert instead to other [system] hospitals which is beneficial for the parent organization. [… Under this theory,] [w]e find that the [separate bargaining units] remedy performs similarly to the base merger outcomes.

In other words, with the threat of patients going to competitors reduced, it’s no remedy at all.

The FTC in its Evanston decision hoped that this conduct remedy would re-inject competition into the market by reducing the leverage of the hospital that bargains separately […]. However, this remedy also reduces the leverage of the MCO since if it offers an unacceptable contract to [one hospital], some of its [] patients would certainly go to other [system] hospitals. […] Empirically, separate negotiations do not appear to solve the problem of bargaining leverage by hospitals.

The moral of the story is to buy your candy at the supermarket. You’d have known this if you’d actually studied economics in school.


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