Mergers and Exclusionary Practices in Health Care Markets

We evaluate the relationship between insurers (payers) and providers of health care (hospitals) when they each have a nonnegligible share of the market. We focus in particular on their incentives to merge and the existence of equilibria where payers offer preferential treatment to a subset of hospitals. We demonstrate that hospitals are more likely to merge without consolidating their capacities the less competitive they are vis‐à‐vis the payer's market. Payers are more likely to merge without consolidating their capacities the less competitive either the hospitals' or the payers' market is. A given payer follows an exclusionary strategy when its starting bargaining position vis‐à‐vis hospitals is weak. At such exclusionary equilibria, payers tend to distinguish themselves from neighboring payers by contracting with a different subset of hospitals.