Physician Market Power and Medical-Care Expenditures

Physicians play a critical role in determining medical-care expenditures. In this study, we empirically assess the degree to which physicians exploit their bargaining leverage over insurance carriers as a means to raise service prices. We also examine the degree to which these potentially higher payments may translate into different levels of service utilization. We find that physicians are able to translate bargaining leverage into both higher fees and higher service utilization. Ceteris paribus, a cardiologist with high market power (concentration in the 90th percentile) will charge 25 percent higher prices and perform 22 percent more services than a cardiologist with low market power (concentration in the 10th percentile). The corresponding orthopedist will charge 24 percent higher prices and perform 4 percent more services. We provide evidence that the effect of bargaining leverage on service utilization may be explained by physicians responding to the negotiated service prices. As measurement of medical-care output requires an accurate decomposition of nominal expenditures into prices and quantities, this paper shows that bargaining leverage can affect both medical-care prices and utilization.