Abstract:

The first chapter examines the evidence for managed care plans' price bargaining with hospitals. The observed lower prices in managed care plans could be consistent with three hypotheses: (1)?cost differences, because some plans use lower-cost hospitals or their patients get different levels of care within a hospital; (2)?price discrimination, where a hospital with market power charges lower prices for buyers with more elastic demand; and (3)?managed care's price bargaining, whereby prices vary because insurers have different degrees of bargaining power. Using a unique panel dataset with actual hospital prices in Massachusetts between 1994 and 2000, I find that, although cost differences and price discrimination hypotheses explain some of the variation in expenditures, the results are most consistent with a market where managed care plans actively negotiate prices with hospitals.

The second chapter analyzes hospitals' pricing behavior in response to major financial losses from Medicare. Existing hypotheses provide no clear prediction as to whether this strategic behavior would occur or whether it differs by ownership type. This chapter uses a natural experiment--the Balanced Budget Act (BBA) of 1997 and finds Hospitals in more competitive initial markets offset the burden dollar by dollar by raising prices to private insurers. In addition, hospitals that gained bargaining position through provider consolidations and the relaxation of channeling efforts by managed care were able to raise prices even more.

The third chapter studies the price effects of hospital closures on competitors. The demand for inpatient services has been declining over the last twenty years, accompanied by about a 14 percent contraction in inpatient bed capacity. A large portion of this capacity decline is due to hospital closures. Although hospital closures help to eliminate excess facilities, they also enhance the bargaining position of the surviving hospitals. Analyzing surviving rivals between 1992 and 1998, this paper finds that hospitals located nearer to the closure sites improve their bargaining position more than do other hospitals in the market. In addition, hospitals in areas experiencing multiple closures were able to attain greater price growth.