Bargaining and Network Formation: Equilibrium Medical Provider Networks in Health Care Markets

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This project combines economic theory and statistical methods to analyze the strategic interactions between health insurance firms and medical providers in the commercial U.S. health care market. The primary goal is to further our understanding of how rate negotiations between insurers and providers (hospital systems and physician groups) -- responsible for a substantial portion of the $1 trillion of spending in the private health care sector -- affect consumer welfare, utilization, and access to high-quality and cost-effective care. The analysis leverages detailed medical claims and enrollment data to estimate and quantify the effects of selective contracting, or "narrow network" offerings, by insurers, and of provider and insurer consolidation. The empirical findings and applied frameworks from this research will help inform the evaluation of network adequacy regulation, competition policy, and health marketplace design; furthermore, it will assist final payers for health care services -- particularly self-insured employers and government agencies -- in designing welfare-enhancing and cost-reducing plans.This research examines the formation of medical provider networks and determination of reimbursement rates in three projects. The first project develops a theoretical model of selective contracting and bargaining with exclusion; it then pairs the model with estimated parameters from prior work to evaluate the impact of insurance network regulation by simulating equilibrium networks, premiums, and reimbursement rates under different policies. The second project applies a dynamic model of network formation and bargaining among insurers and hospital systems to examine the price effects of hospital consolidation. The model used in this part differs from the first in that it considers competition among several insurers when forming networks, and admits for contracting frictions and dynamic considerations. It also departs from prior work on hospital mergers by explicitly accounting for potential network and rate adjustments. Finally, the third project studies the historic introduction of a narrow physician network plan by a large HMO provider in California, and examines both supply-side (including changes in physician capitation rates) and demand-side (consumer enrollment, utilization) responses.