Market Structure and Hospital-Insurer Bargaining in the Netherlands

In 2005, competition was introduced in part of the hospital market in the Netherlands. Using a unique dataset of transaction and list prices between hospitals and insurers in the years 2005 and 2006, we estimate the influence of buyer and seller concentration on the negotiated prices in the first two years after the institutional change. First, we use a traditional Structure- Conduct-Performance model (SCP-model) along the lines of Melnick et al. (1992) to estimate the effects of buyer and seller concentration on price-cost margins. Second, we model the interaction between hospitals and insurers in the context of a generalized bargaining model (Brooks et al., 1997). In the SCP-model, we obtain that the concentration of hospitals (insurers) has a significantly positive (negative) impact on the hospital price-cost margin. In the bargaining model, we also find a significant negative effect of insurer concentration on the bargaining share of hospital, but no significant effect of hospital concentration on the division of the gains from bargaining. In both models we find a significant impact of idiosyncratic effects on the market outcomes, consistent with the fact that the Dutch hospital sector is not yet in a long-run equilibrium.