Hospital competition in HMO networks.

We develop a framework for analyzing bargaining relationships between hospitals and HMOs under selective contracting. Using a unique dataset on hospitals in the Los Angeles area from 1990 to 1993, we estimate the determinants of actual negotiated prices paid to hospitals by two major HMOs. We find that a hospital's bargaining power, and thus its price, decrease when the HMO can readily turn to alternative networks that exclude the hospital. We simulate the effect of hypothetical hospital mergers on bargaining power and find that some hospital mergers, even in urban areas with many nearby hospitals, can lead to significant price increases.