BUSI 629 Week 4 Discussion Board Forum 4 Example

Discussion Board Forum 4: Market Structure, Market Power and Pricing

BUSI 629 Economic Analysis in Healthcare, Discussion Board Forum 4

Thread by [Student Name]

The hospital, its contracts and the classmates are composites; the textbook and the peer-reviewed sources cited are real.

When our 300-bed hospital posted its federally required price file, our chief financial officer was surprised to see five different commercial prices for a noncontrast lumbar MRI, ranging from $640 for the largest insurer in our region to $1,480 for a small regional plan, and a discounted cash price of $1,150. She asked me whether that spread meant we were pricing irrationally. I argued the opposite: the spread is what economic theory predicts when prices come from bargaining between parties with different amounts of market power. The MRI costs us roughly the same to perform whichever card the patient carries, about $310 in staff time, supplies and scanner depreciation, so the differences in price have nothing to do with cost and everything to do with who negotiated.

Lee (2015) describes a range of market structures, from perfect competition, in which many sellers take the market price, to monopoly, in which a single seller sets price above cost, and explains that most health care markets sit between these poles. Our hospital is one of two in our county, which gives it substantial market power over insurers that need it in their networks. But insurers also hold power, and how much depends on their size. A plan that covers 40% of local employees can credibly threaten to steer patients elsewhere, while a small plan cannot. Lee also discusses price discrimination, charging different buyers different prices for the same service based on their willingness or ability to pay, and our price file is a clear example: each insurer pays what it was able to negotiate, and cash patients, who have no negotiator at all, are charged much more than the biggest insurer.

National data confirm the pattern. Wang et al. (2024) analyzed price transparency files from 1,506 hospitals in metropolitan areas for 44 shoppable and emergency services and compared prices within each hospital. Relative to small insurers, the largest insurer in a market negotiated 23% lower prices for shoppable services, the second largest 16% lower and other major insurers 3% lower, while cash prices were 17% higher. For emergency visits, which patients cannot shop for, only the largest insurer obtained a discount, about 5%. The pattern reaches public programs as well. Wang et al. (2025) examined 39,049 Medicaid managed care prices for 15 outpatient services and found that plans run by insurers with the largest commercial market share negotiated prices 4.6% lower than plans run by insurers with the smallest, including 6.7% lower for emergency visits. An insurer's commercial size, in other words, carries over into its public business.

For our hospital, the lesson has two sides. Strategically, our prices will keep falling with the largest insurer as it grows, so our revenue plan should assume pressure from that contract and seek growth in services where we face less competition, such as our cancer infusion center, where the nearest alternative is an hour away. Ethically and reputationally, our pricing places the highest burden on the people least able to bargain, uninsured and cash-paying patients. I recommended capping our cash price for any service at the median commercial rate and posting those cash prices prominently, which would cost little revenue, since cash payers are few, and would protect patients who most need protection. We should also prepare for local employers that may soon ask to contract with us directly, bringing a new bargainer to the table. A large self-insured employer could offer volume and quick payment in exchange for a price near our largest insurer's, and we should decide in advance what floor we would accept, using our cost of about $310 as the starting point. A price file shows who has power at the bargaining table, and the patient without an insurer is the one with none.

Reply to Anika

Anika, your thread suggested that the hospitals in your market with the highest negotiated prices are likely charging more because they deliver better care, and that price transparency will help patients see that value. Lee (2015) notes that in a competitive market, higher prices often signal higher quality or cost, but in markets shaped by bargaining power, price may reflect bargaining strength instead. A study within one health system tested your assumption directly. Zhuang et al. (2023) analyzed negotiated prices for total joint replacement at 18 hospitals in a large California system, where branding and geography were held roughly constant. The mean negotiated price was about $54,500, but it ranged from about $20,400 for Medicare Advantage and Medicaid to $78,800 for commercial out-of-network care. Across all payer types, prices were not correlated with joint replacement complication rates or readmission rates. Some correlations with patient survey ratings and overall performance scores even ran in the opposite direction, which is the reverse of what a value story would predict, with higher prices linked to lower scores for certain payers. The authors concluded that substantial price variation was not explained by quality. For your market, I would suggest testing your claim with the same approach: pull negotiated prices from transparency files and compare them with public quality measures. If the two do not move together, transparency alone may not steer patients toward value, and payers may need quality-based contracts instead. One caution: the study covered a single health system and only 18 hospitals, so a wider comparison across systems in your region could find a different pattern. Your hospital's quality team already reports complication and readmission rates to the state, so the data for a local test are close at hand, and the comparison could be done in a few weeks with a spreadsheet.

Reply to Russell

Russell, your thread argued that independent hospitals join systems mainly to gain negotiating power over insurers, and you asked whether that power shows up in prices. A recent national study of a high-cost procedure says it does. Wang et al. (2026) analyzed 6,253 commercially negotiated prices for spinal deformity surgery at 2,449 U.S. hospitals across five major payers. System affiliation was the strongest predictor of higher prices, with affiliated hospitals charging 21.1% to 41.8% more, and prices were also higher in less competitive markets, by about 7.5% to 7.8%, and where labor costs and patient complexity were higher. Lee (2015) explains that a seller's market power grows when buyers have fewer alternatives, and a system that bundles many hospitals into one contract leaves an insurer fewer ways to say no. The finding supports your argument, but it also raises a strategic question for your community hospital. If joining a system raises prices, employers and insurers in your region may push back hard, for instance by narrowing networks or steering patients to independent providers, so the expected gain may shrink over time. Regulators also watch these deals closely, and state attorneys general and the Federal Trade Commission have challenged hospital combinations that threatened to raise prices. Because the data come from a single point in time, they establish that system hospitals charge more without proving that joining a system causes the increase; systems may also acquire hospitals that already had strong positions. Still, the size of the gap is hard to ignore. I would suggest that any affiliation plan include an estimate of how much of the price gain could be lost to steering, so the board weighs the strategy on realistic numbers rather than on the full premium the study reports, and revisits the estimate after the first contract cycle.

References

Lee, R. H. (2015). Economics for healthcare managers (3rd ed.). Health Administration Press.

Wang, J., Berreta, R. S., Mao, E., Bai, G., & Jain, A. (2026). Analysis of commercially negotiated hospital prices for spinal deformity surgery in the United States. The Spine Journal. Advance online publication. https://doi.org/10.1016/j.spinee.2026.08.016

Wang, Y., Marr, J., Xu, J., & Meiselbach, M. K. (2025). Commercial insurers' market power and hospital prices in Medicaid managed care. Health Services Research, 60(1), e14407. https://doi.org/10.1111/1475-6773.14407

Wang, Y., Meiselbach, M. K., Xu, J., Bai, G., & Anderson, G. (2024). Do insurers with greater market power negotiate consistently lower prices for hospital care? Evidence from hospital price transparency data. Medical Care Research and Review, 81(1), 78-84. https://doi.org/10.1177/10775587231193475

Zhuang, T., Shapiro, L. M., Baker, L. C., & Kamal, R. N. (2023). The price-quality mismatch: Are negotiated prices for total joint arthroplasty associated with hospital quality in a large California health system? Clinical Orthopaedics and Related Research, 481(6), 1061-1068. https://doi.org/10.1097/CORR.0000000000002489