Essays in Healthcare Market Regulation

Vatter, Benjamin

doi:https://doi.org/10.21985/n2-64zr-a865

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Essays in Healthcare Market Regulation

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This dissertation studies three aspects of healthcare market regulation. Chapter 1 studies the optimal design of quality scores for health insurance plans. Regulators often generate quality scores to help consumers with limited information about product quality, as in schooling, healthcare, and financial markets. When designing scores, regulators must not only anticipate how they will influence consumer choices but also the resulting impact on firms' incentives to invest in quality. In this work, I draw on theoretical insights, econometric strategies, and computational methods to develop an empirical scoring design methodology. I apply it to a large health insurance market and find an alternative policy that vastly improves the market's performance. The new design coarsens consumers' information about lower-quality insurance options but refines it for higher-quality ones. Changes to available product information generate a shift in demand towards higher-quality plans, triggering additional firm investments and making consumers better informed about a menu of superior options. The new design also optimally aggregates different quality dimensions, tackling a multitasking moral hazard problem. The friction is due to firms' (agent) private incentives to attain scores using cost-efficient investments instead of consumer-valued ones, preferred by the regulator (principal). Overall, the alternative policy increases welfare by \$669 per enrollee per year. The analysis reveals that simple scores can be remarkably effective if well-designed and provides a method to construct them. Chapter 2 (which is joint with Jose Ignacio Cuesta and Carlos Noton) studies the effect of vertical integrations between insurers and hospitals. The welfare effects of vertical integration are ambiguous. Cost efficiencies and the elimination of double marginalization may offset increases in market power and incentives to raise rivals' costs. To study the effects of vertical integration between insurers and hospitals, we develop a model of bargaining and competition in the health care market. The model shows that vertically integrated firms have incentives to increase negotiated hospital prices to rivals to steer demand to their integrated partners. We estimate the model using administrative data on membership and claims data from the Chilean private health market, where vertically integrated hospitals account for almost half of all admissions. Using our structural estimates, we show that steering incentives are significant and that vertical integration decreases welfare in our setting. However, vertical integration increases welfare under counterfactual cost efficiencies and consumer price sensitivity. Finally, Chapter 3 (which is joint with David Dranove) studies the effect of cross-market hospital mergers. Economic analysis of merger effects usually focuses on firms that participate in the same market. However, recent evidence suggests that mergers of hospitals serving different geographic markets – so-called “cross-market mergers” - often result in higher prices at target hospitals. Prior literature suggests that price increases occur when insurers sell to employers whose operations cross geographic boundaries so that they have “overlapping customers.” Using actual prices negotiated between a large health insurer and hospitals, we show the existence of cross-market merger effects. While the presence of overlapping customers sometimes matters, we attribute cross-market merger effects to artifacts of contracting, specifically contracting costs and employer-imposed access requirements. These findings have important implications for antitrust enforcement of cross-market mergers.

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