Insurer Competition and Negotiated Hospital Prices∗

We measure the impact of increased health insurer competition on negotiated hospital prices using detailed 2004 California claims data. We develop a theoretical bargaining model to motivate our empirical analysis, and use the competitiveness of Kaiser Permanente, a large vertically integrated insurer, in a hospital’s market as a measure of insurer competition. We find that increasing competition reduces hospital prices on average, but that the most attractive hospitals can leverage increased competition to negotiate higher rates. This bargaining effect creates incentives for further hospital consolidation and implies that hospital market power can impact prices even in markets with many insurers.