How do hospitals exert market power? Evidence from health systems and commercial health plan prices

Consolidation of independent hospitals and physician practices into integrated health systems has reshaped the delivery of health care. While the literature suggests that provider consolidation raises prices, few studies have examined the interplay of health systems and insurers in relation to prices. Using negotiated price data that commercial insurers recently released under the Transparency in Coverage Final Rule, we examined the association between hospital concentration under health systems and prices for outpatient procedures in local health care markets with different levels of insurer concentration. We found that hospital prices are higher in more concentrated hospital markets, while lower in more concentrated insurer markets. However, the negative relationship between insurer concentration and hospital prices is attenuated in highly concentrated hospital markets, suggesting that insurers' bargaining leverage is lessened at greater levels of hospital consolidation. Considering the continued consolidation among hospitals and vertical integration of physician practices into health systems, our findings suggest that commercial payers may encounter increased challenges in controlling health care spending for their beneficiaries as providers' bargaining power continues to grow.