Mergers When Prices are Negotiated: Evidence from the Hospital Industry

Gautam Gowrisankaran, Aviv Nevo, Robert Town

NBER Working Paper No. 18875
Issued in March 2013, Revised in June 2014
NBER Program(s):Health Care, Industrial Organization

We estimate a bargaining model of competition between hospitals and managed care organizations (MCOs) and use the estimates to evaluate the effects of hospital mergers. We find that MCO bargaining restrains hospital prices significantly. The model demonstrates the potential impact of coinsurance rates, which allow MCOs to partly steer patients towards cheaper hospitals. We show that increasing patient coinsurance tenfold would reduce prices by 16%. We find that a proposed hospital acquisition in Northern Virginia that was challenged by the Federal Trade Commission would have significantly raised hospital prices. Remedies based on separate bargaining do not alleviate the price increases.

A non-technical summary of this paper is available in the September 2013 NBER Digest.  You can sign up to receive the NBER Digest by email.

Acknowledgments and Disclosures

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Document Object Identifier (DOI): 10.3386/w18875

Published: Gowrisankaran, Gautam, Aviv Nevo, and Robert Town. 2015. "Mergers When Prices Are Negotiated: Evidence from the Hospital Industry." American Economic Review, 105(1): 172-203. citation courtesy of