lecture 2 - network formation and price negotiation

Question 1

Specific markets

Answer 1

competitive interactions between providers and payers around provider prices and payer networks in a biliteral (insurer and provider) bargaining framework

Question 2

4 key disguising features of healthcare that effect bilateral negotiations

Answer 2

• Set of available hospitals (if they are included in the network and what price they are going to pay)
• Prices for patients (close to 0, patients do not pay that much)
• Timing of choice (when a patient actually chooses to go to hospital they are sick, but when they buy health insurance they often do not know if they will need it)
• Different incentives (hospital focus on highest price and largest group of patients they can get. Insurers want lower prices and higher quality)

Question 3

why not offer unrestricted hospital choice?

Answer 3

We treat quality and price as given. In reality, this is not the case. Premiums are likely to increase because they are not able to perform managed competition (negotiating). There is no bargaining power if insurers have to include all hospitals.

Question 4

5 stages

Answer 4

1. hospitals make price offers to plan
2. plans choose their hospital networks
3. plans set premiums
4. consumers and employers jointly choose plans
5. sick consumers visit hospitals: plans pay hospitals per service provided

Question 5

three types of hospitals

Answer 5

1. star status
2. capacity constraint
3. system hospitals

Question 6

star status

Answer 6

a. They have something extra: academic hospitals
b. Do we want those hospitals in or out the network

Question 7

capacity constraint

Answer 7

a. Have a capacity constraint (demographic location, or they decide to constraint)
b. You are either going to contract with A or B because you don’t have the capacity
c. You can outplay the insurers

Question 8

system hospitals

Answer 8

a. What if hospitals merge? Do you include that hospital
b. Have a market availability advantage on those who don’t merge

Question 9

merger analysis

Answer 9

Estimate the change in WTP resulting from the merged entity being part of the network as compared to situation where each hospitals in in the network separately. The model then attempts to predict the change in price post-merger based on this change in WTP.

Question 10

main findings

Answer 10

• Patient demand is pretty inelastic
  o People do not really respond to price differences, because they do not feel the price
• Bargaining matters
  o Have biliteral bargaining game does restrain prices
  o Introducing some form of competition, might lead to lower prices
• Co-insurance is having an influence on the bargaining game
  o Might limit moral hazard
  o Insurers might be able to steer patient from high cost providers to low cost providers
  o They can influence the bargaining game
• Hospital mergers
  o Hospital mergers have an increasing effect on prices