The impact of insurer competition on welfare, negotiated provider prices, and premiums in the U.S. private health care industry is theoretically ambiguous. Reduced competition may increase the premiums charged by insurers and their payments made to hospitals. However, it may also strengthen insurers' bargaining leverage when negotiating with hospitals, thereby generating offsetting cost decreases. To understand and measure this trade-off, we estimate a model of employer-insurer and hospital-insurer bargaining over premiums and reimbursements, household demand for insurance, and individual demand for hospitals using detailed California admissions, claims, and enrollment data. We simulate the removal of both large and small insurers from consumers' choice sets. Although consumer welfare decreases and premiums typically increase, we find that premiums can fall upon the removal of a small insurer if an employer imposes effective premium constraints through negotiations with the remaining insurers. We also document substantial heterogeneity in hospital price adjustments upon the removal of an insurer, with renegotiated price increases and decreases of as much as 10% across markets.

We estimate an insurer-specific preference function which rationalizes hospital referrals for privately insured births in California. The function is additively separable in: a hospital price paid by the insurer, the distance traveled, and plan- and severity-specific hospital fixed effects (capturing hospital quality). We use an inequality estimator that allows for errors in price and detailed hospital-severity interactions and obtain markedly different results than those from a logit. The estimates indicate that insurers with more capitated physicians are more responsive to price. Capitated plans send patients further to utilize similar quality, lower-priced hospitals; but the cost-quality trade-off does not vary with capitation rates.

Commercial health insurers in California use provider capitation payments to different extents. These are similar to arrangements introduced by the recent health reforms to give physicians incentives to control costs. In a previous paper we showed that patients whose insurers used capitation incentives traveled further to access lower-priced, similar-quality hospitals than other same-severity patients. This paper predicts the implied effects of a move to widespread capitation. We show that, if the introduction of capitation prompted low-capitation insurers to act like high-capitation insurers, this would generate a 4-5 percent cost saving with some reduction in patient convenience but no reduction in quality.

We investigate how formularies used by pharmacy benefit managers (PBMs) affect equilibrium manufacturer rebates for branded drugs through tiering and exclusion. We develop a theoretical model of multidimensional contracting in which a PBM negotiates with drug manufacturers over menus of formulary‐contingent rebates and chooses a formulary. We then estimate consumer demand responses to tier placement for statins using claims data from Princeton University, a large employer contracting with a single PBM to offer prescription drug coverage to its employees. Combining the theoretical model with demand estimates and observed list prices, we quantify how allowing for differential tier placement and exclusion affect equilibrium rebates. Our predictions are consistent with available aggregate rebate data, and we find that allowing a PBM to place branded drugs on preferred‐ and non‐preferred tiers can substantially increase negotiated rebate payments.

We evaluate the consequences of narrow hospital networks in commercial health care markets. We develop a bargaining solution, "Nash- in-Nash with Threat of Replacement," that captures insurers' incentives to exclude, and combine it with California data and estimates from Ho and Lee (2017) to simulate equilibrium outcomes under social, consumer, and insurer- optimal networks. Private incentives to exclude generally exceed social incentives, as the insurer benefits from substantially lower negotiated hospital rates. Regulation prohibiting exclusion increases prices and premiums and lowers consumer welfare without significantly affecting social surplus. However, regulation may prevent harm to consumers living close to excluded hospitals.

The U.S. health-care sector is large and growing—health-care spending in 2011 amounted to $2.7 trillion and 18 percent of GDP. Approximately half of health-care output is allocated via markets. In this paper, we analyze the industrial organization literature on health-care markets, focusing on the impact of competition on price, quality, and treatment decisions for health-care providers and health insurers. We conclude with a discussion of research opportunities for industrial organization economists, including opportunities created by the U.S. Patient Protection and Affordable Care Act. (JEL J15, J24, J71, J81, K31)

In the United States, households obtain health insurance through distinct market segments. To explore the economics of this segmentation, we consider the effects of pooling coverage provided through small employers and through individual marketplaces. We model households’ demand for insurance and health care along with insurers’ price setting to predict equilibrium choices and premiums. Applying our model to data from Oregon, we find that pooling can mitigate adverse selection in the individual market and benefit small group households without raising taxpayer costs. Our estimates provide insight into the effects of new regulations that allow employers to shift coverage to individual marketplaces.

This paper provides conditions under which the inequality constraints generated by either single agent optimizing behavior or the best response condition of multiple agent problems can be used as a basis for estimation and inference. An application illustrates how the use of these inequality constraints can simplify the analysis of complex behavioral models.