In the United States, hospitals and physicians independently negotiate contracts with insurers. Therefore, a privately insured individual can be treated at an in-network hospital’s emergency department but receive a large unexpected bill from an out-of-network emergency physician working at that facility. Because patients do not choose their emergency physician, emergency physicians can remain out of network and charge high prices without losing patient volume. We illustrate that this strong outside option improves physicians’ bargaining power with insurers. We conclude by analyzing New York’s efforts to address out-of-network billing through binding arbitration between physicians and insurers over out-of-network payments. This intervention reduced out-of-network billing by 12.8 percentage points (88%).

We use insurance claims data covering 28% of individuals with employer-sponsored health insurance in the United States to study the variation in health spending on the privately insured, examine the structure of insurer-hospital contracts, and analyze the variation in hospital prices across the nation. Health spending per privately insured beneficiary differs by a factor of three across geographic areas and has a very low correlation with Medicare spending. For the privately insured, half of the spending variation is driven by price variation across regions, and half is driven by quantity variation. Prices vary substantially across regions, across hospitals within regions, and even within hospitals. For example, even for a nearly homogeneous service such as lower-limb magnetic resonance imaging, about a fifth of the total case-level price variation occurs within a hospital in the cross section. Hospital market structure is strongly associated with price levels and contract structure. Prices at monopoly hospitals are 12% higher than those in markets with four or more rivals. Monopoly hospitals also have contracts that load more risk on insurers (e.g., they have more cases with prices set as a share of their charges). In concentrated insurer markets the opposite occurs-hospitals have lower prices and bear more financial risk. Examining the 366 mergers and acquisitions that occurred between 2007 and 2011, we find that prices increased by over 6% when the merging hospitals were geographically close (e.g., 5 miles or less apart), but not when the hospitals were geographically distant (e.g., over 25 miles apart).