Over recent years, the number of hospitals and health insurance markets has decreased, leading to a higher market concentration in both industries. Previous studies have concluded that increasing market concentration of hospitals results in increased transaction prices. Conversely, studies have shown that increased health insurance market concentration leads to depressed prices. However, prior studies have been limited because they have not considered the bilateral effect of changing both hospital and health insurance market concentration on prices. Furthermore, previous studies tended to be cross-sectional and did not consider how changing market concentrations effected transactional prices over time.
The author conducted a study that addressed these limitations by considering both hospital and health market concentrations together when determining the effect on prices for health care services. The study revealed the importance of the underlying definition of geographic market boundaries – the regions used to determine market concentrations and potential monopoly risks. The author’s results suggest that courts considering antitrust cases might be using geographic market boundaries that are far too large.
The study showed that shifts in market concentrations within the smallest two market boundaries (a 10-minute and a 20-minute drive distance) produced significant price effects. Specifically, increasing hospital market concentrations caused an increase in prices while increasing insurance market concentrations produced a decrease in prices. Comparing the two market concentrations, shifts in hospital market concentrations tended to have greater price effects than shifts in health insurance concentrations.
Moving forward, it is important to consider how we choose the boundaries used to determine market concentrations for both hospitals and health insurance companies. Current geographic market definitions may prove to be too lenient, allowing health care providers to unnecessarily increase prices. Furthermore, consolidating insurance suppliers may initially lead to lower prices, but it is beyond the scope of this study to consider what effect a complete health insurance monopoly – such as a single payer system – might have on prices.
This Policy Prescriptions® review is written by Malik Tahir as part of our collaboration with the Health Policy Journal Club at Baylor College of Medicine. Mr. Tahir is a first year medical student.
OBJECTIVE: To examine the effects of hospital and insurer markets concentration on transaction prices for inpatient hospital services.
DATA SOURCES: Measures of hospital and insurer markets concentration derived from American Hospital Association and HealthLeaders-InterStudy data are linked to 2005-2008 inpatient administrative data from Truven Health MarketScan Databases.
STUDY DESIGN: Uses a reduced-form price equation, controlling for cost and demand shifters and accounting for possible endogeneity of market concentration using instrumental variables (IV) technique.
PRINCIPAL FINDINGS: The findings suggest that greater hospital concentration raises prices, whereas greater insurer concentration depresses prices. A hypothetical merger between two of five equally sized hospitals is estimated to increase hospital prices by about 9 percent (p < .001). A similar merger of insurers would depress prices by about 15.3 percent (p < .001). Over the 2003-2008 periods, the estimates imply that hospital consolidation likely raised prices by about 2.6 percent, while insurer consolidation depressed prices by about 10.8 percent. Additional analysis using longer panel data and applying hospital fixed effects confirms the impact of hospital concentration on prices.
CONCLUSION: The findings provide support for strong antitrust enforcement to curb rising hospital service prices and health care costs.