Vertical Integration between Hospitals and Insurers

With Jose Ignacio Cuesta and Carlos Noton

The welfare effects of vertical integration are ambiguous; Cost efficiencies and the elimination of double marginalization may offset increases in market power and incentives to foreclose rivals. In the context of vertical integration between insurers and hospitals, we find that integration leads to higher hospital prices, misallocation of demand across hospitals, and inefficient insurance generosity. Vertical integration decreases total welfare and increases inpatient medical spending by 11%. We find that equilibrium plan networks play an outsize role in the effects of integration. Integrated firms skew access towards their hospitals, limiting provider competition and forcing rival insurers to compete on uneven terms. Failure to account for equilibrium network effects leads to the wrong sign on the welfare impact of integration and vastly underestimates the strength of the incentives produced by integration.