Leverage and Bargaining Benefits: Evidence from U.S. Hospitals

I use the health care industry as a novel laboratory in which to study a firm’s strategic use of debt to enhance their bargaining power during negotiations with non-financial stakeholders. I show that reimbursement rates negotiated between a hospital and insurers for a specific procedure are higher when the hospital has more debt. I also show that this effect is stronger when hospitals have less bargaining power relative to insurers ex ante, and that hospitals take on more debt when they have less bargaining power. I exploit differences in state laws generating plausibly exogenous variation in hospital bargaining power to further strengthen identification. This is the first paper to provide direct evidence that debt improves a firm’s bargaining outcomes. ∗I am very grateful to Andres Almazan, Aydoğan Altı, Cesare Fracassi, Jay Hartzell, Zack Liu, John McInnis, Laura Starks, Sheridan Titman, Parth Venkat, and especially Jonathan Cohn for their comments. All remaining errors are my own.