Hospital-insurer bargaining: an empirical investigation of appendectomy pricing

Employers' increased sensitivity to health care costs has forced insurers to seek ways to lower costs through effective bargaining with providers. What factors determine the prices negotiated between hospitals and insurers? The hospital-insurer interaction is captured in the context of a bargaining model, in which the gains from bargaining are explicitly defined. Appendectomy was chosen because it is a well-defined procedure with little clinical variation. Our results show that certain hospital institutional arrangements (e.g. hospital affiliations), HMO penetration, and greater hospital concentration improve hospitals' bargaining position. Furthermore, hospitals' bargaining effectiveness has diminished over time and varies across states.