Essays on the Industrial Organization of Health Care Markets

Abstract

This dissertation examines three separate issues of the industrial organization of health care markets. There are a number of features which differentiate health care from other industries. In my dissertation I examine three features: (1) the role of government setting prices, (2) the use of networks, or refusing to contract in order to gain bargaining leverage and, (3) adverse selection. The second chapter explores the role of government reimbursement in providing incentives for manufacturing quality. To do this my coauthors and I examine whether the Medicare Modernization Act (2003), which reduced the reimbursement for physicians for certain drugs, affected the amount of drug shortages. We hypothesize that as these drugs become less profitable, there is less incentive for manufacturers to invest in the reliability of their manufacturing lines, double source ingredients or build newer facilities. This would lead to more drug shortages. We use a difference-in-difference approach and find evidence that more drug shortages are correlated with drugs that are most affected by the policy change. The third chapter explores the common story that insurance companies exclude hospitals from their networks to gain bargaining leverage in contract negotiations. To do this, I propose a novel model of price formation in a bilateral oligopoly setting where the networks are endogenous. The endogeneity of its network allows the insurer to threaten to exclude hospitals. I show that exclusion is an equilibrium outcome of the model; the insurer offsets the loss of premiums from a less valuable network by reimbursing hospitals less. I then estimate this model using data from the Colorado All-Payer Claims Database. I find, using a counterfactual analysis, that restricting insurers' ability to exclude would lead to 20 percent higher prices negotiated between hospitals and insurers, which is mostly passed through to consumers as higher premiums. This worsens consumer surplus as the value of broader networks is offset by the higher premiums consumers face.The fourth chapter incorporates adverse selection into the standard model of price formation in hospital markets. A typical merger analysis seeks to quantify the anti-competitive effects of a merger. For example, do hospitals gain more power by merging? However, in a market with adverse selection, if a merger leads to hospitals to negotiate higher prices, this may lead to higher premiums, and the healthiest consumers being priced out of the market. This may raise premiums even more. Therefore, a hospital merger may also have welfare consequences through the channel of adverse selection. This suggests that a merger analysis which focuses solely on competitive effects may underestimate the welfare consequences of a merger.