Vertical Integration between Hospitals and Insurers

With Jose Ignacio Cuesta and Carlos Noton

We study vertical integration between insurers and hospitals. The welfare effects of vertical integration are ambiguous and depend on a trade-off between a variety of economic forces, including solving double marginalization and improving the use of resources within the firm, but also increasing market power and providing incentives to affect rivals' costs. To study the effects of vertical integration, we develop a model of health markets and show that vertically integrated firms have incentives to increase negotiated hospital prices to rivals in order to steer demand to their integrated partners. We estimate the model using administrative data on plan choices and hospital admissions from the Chilean private health market, where vertically integrated systems account for almost half of the market. Using our structural estimates, we find that banning vertical integration increases total welfare.