Hospital and Health Insurance Markets Concentration and Inpatient Hospital Transaction Prices in the U.S. Health Care Market

By Seidu Dauda, Ph.D.
HSR, April 2018 (first published May 11, 2017)


To examine the effects of hospital and insurer markets concentration on transaction prices for inpatient hospital services.

Data Sources:
Measures of hospital and insurer markets concentration derived from American Hospital Association and HealthLeaders‐InterStudy data are linked to 2005–2008 inpatient administrative data from Truven Health MarketScan Databases.

Study Design:
Uses a reduced‐form price equation, controlling for cost and demand shifters and accounting for possible endogeneity of market concentration using instrumental variables (IV) technique.

Principal Findings:
The findings suggest that greater hospital concentration raises prices, whereas greater insurer concentration depresses prices. A hypothetical merger between two of five equally sized hospitals is estimated to increase hospital prices by about 9 percent (p < .001). A similar merger of insurers would depress prices by about 15.3 percent (p < .001). Over the 2003–2008 periods, the estimates imply that hospital consolidation likely raised prices by about 2.6 percent, while insurer consolidation depressed prices by about 10.8 percent. Additional analysis using longer panel data and applying hospital fixed effects confirms the impact of hospital concentration on prices.

The findings provide support for strong antitrust enforcement to curb rising hospital service prices and health care costs.

From the Conclusion

This study examines the price effects of hospital and insurer concentrations using a large data set with actual transaction prices. I find that hospitals in more concentrated markets are able to use their market power to secure significantly higher prices from insurers and insurers in more concentrated markets are able to exercise a countervailing power and offer significantly lower prices to hospitals.…

Kenneth Arrow; “Uncertainty and the Welfare Economics of Medical Care,” The American Economic Review, December 1963:…

This study shows what other studies have already demonstrated. When hospitals become concentrated, prices go up. When insurers become concentrated, prices go down. These concentrations are often a result of mergers or acquisitions in either the hospital or insurer markets.

It is instructive to note that this was a very large study of the private commercial insurance market, not of government programs such as Medicare. Why should that matter?

The United States is still trying to pretend that we can depend on the marketplace to bring us higher quality health care at a lower cost. Little does it seem to matter than Nobel laureate Kenneth Arrow demonstrated the fallacy of that concept half a century ago.

The government must be involved. The author of this study states that the results “provide support for strong antitrust enforcement to curb rising hospital service prices and health care costs.” But we have had decades of antitrust activity and yet prices have remained far higher than in all other systems. Although supposedly insurer concentration has provided a countervailing downward pressure on prices, obviously it has not been effective since we pay more, per capita, than twice the average of all other wealthy nations.

Private insurers provide the wrong model for health care financing. In sharp contrast is our Medicare program which depends on publicly administered pricing. Now we have a contest between a health care delivery oligopoly and a private insurance industry that tries to capture the market of financing health care, locking horns over what part of the medical-industrial complex reaps the spoils while the patients end up on the short end.

What we need is a benevolent public steward who works with the health care professionals and institutions to optimize quality, access, and value for all patients. Of course, that is what a well designed single payer system – an improved Medicare for all – is precisely designed to do. Let’s quit pretending that the markets will take care of it for us, and that we can keep the government out of it. We can’t.

If you need a reminder why, read Kenneth Arrow’s “Uncertainty and the Welfare Economics of Medical Care” (link above – long, with economist’s jargon).

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