lecture 8 - monopsony power and vertical integration in health care

Question 1

monopsony power

Answer 1

a strong bargaining position of insurance companies –> dominant position on the buyer side

Question 2

highest risk of monopsony power in health care

Answer 2

only one health insurer (buyer) in a local/regional market but multiple competing health care providers (sellers)
o Horizontal mergers in health insurance market
o Strong indication for monopsony if buyer concentration is associated with both (i) reduced prices and (ii) smaller quantities

Question 3

monopsony power in health care

Answer 3

lower prices are normally associated with insurers able to reduce prices that were initially too hig
higher concentration is associated with lower prices
However, mergers might not ultimately reduce the costs of care borne by consumers because the savings that insurers realize from negotiating lower prices might not accrue to consumers.”

Question 4

two main ways in which non-horizontal mergers may significantly impede effective competition

Answer 4

1. foreclosure
2. coordinated effects

Question 5

foreclosure

Answer 5

Foreclosure = after a vertical merger, some rivals do no longer have access to supply or markets or that access is ambered

Ad 1. Non-coordinated effects (foreclosure)
“The term ‘foreclosure’ will be used to describe any instance where actual or potential rivals’ access to supplies or markets is hampered or eliminated as a result of the merger, thereby reducing these companies’ ability and/or incentive to compete. As a result of such foreclosure, the merging companies - and, possibly, some of its competitors as well - may be able to profitably increase the price charged to consumers. These instances give rise to a significant impediment to effective competition and are therefore referred to hereafter as ‘anticompetitive foreclosure’.” (pnt. 18)

Question 6

coordinated effects

Answer 6

Ad 2. Coordinated effects
“Coordinated effects arise where the merger changes the nature of competition in such a way that firms that previously were not coordinating their behaviour, are now significantly more likely to coordinate to raise prices or otherwise harm effective competition. A merger may also make coordination easier, more stable or more effective for firms which were coordinating prior to the merger.” (pnt. 19)

Question 7

advantages insurer-provider integration

Answer 7

o Integration increases insurers’ ability to control costs
- Providers’ incentives are aligned with the insurer’s incentives
o Improvements in coordination may lead to better quality
- Particularly with respect to preventive care
o No need to bargain over prices if insurer owns hospitals
- Problem that most popular hospitals demand very high prices can therefore be avoided
- Increased bargaining clout due to hospital consolidation!

Question 8

barrier for insurer-provider integration

Answer 8

o Importance of scale
o Health care quality is an experience good
o Difficult to assemble the plan’s component parts
o Consumers’ switching costs
o Potential problems if integrated plan becomes too attractive to certain types of consumers
- Adequate risk-equalization is required for investments in good quality care for chronically ill
- Maybe you attract only sick people and go bankrupted

Question 9

possible effects foreclosure

Answer 9

1. reducing number of firms in physician markets
2. increased bargaining power of integrated firm

Question 10

Ad 1. Health insurer DSW and hospital

Answer 10

• DSW could decide to (i) exclusively contract with the Vlietland hospital and (ii) channel their enrolees to this hospital using financial incentives
  o Competing hospitals would have no access to DSW-enrolees
• However, no incentives to do so due to (fierce) competition in the market for health insurance
• Vlietland hospital could decide to (i) exclusively contract with DSW and exclude other insurers and/or (ii) charge DSW a lower price than other insurers
  o Effective competition in health insurance market would be harmed
• Again, however, no (financial) incentives to behave this way

Question 11

Ad 2. GPs and hospital

Answer 11

• GPs (heavily) influence patient hospital choice
• GPs are therefore able to refer patients to ‘own’ hospital
• Financial incentive for GPs to behave this way, due to their investment in Vlietland hospital
• Biased referrals from GPs would harm other hospitals
  o Almost all regional GPs participate in the cooperative
• Indirectly, DSW could also financially benefit resulting in an unlevel playing field in the market for health insurance

Question 12

Ad 3. Nursing homes and hospital

Answer 12

• Vlietland hospital is important for the inflow of patients in the participating nursing homes
• Hospital is able to influence patients’ nursing home choice
• Nursing homes have financial incentive to receive as many patients as possible from their ‘own’ Vlietland hospital
• Hospital has financial incentive to shorten the length of stay and therefore to refer patients to the participating nursing homes as soon as possible
  o These nursing homes would have a “quiet life”; i.e. no effective competition