What does Willingness-to-Pay reveal about hospital market power in merger cases?

In hospital merger cases, the courts have often based geographic market areas on patient flow criteria. Given patient heterogeneity and the importance of distance to hospital and health plan restrictions on hospital choice, Capps et al. (2003a) show that potential market power effects can be understated. While willingness-to-pay(WTP) measures derived from individual choice models provide an alternative assess­ ment, antitrust law is, however, framed in terms of the likely price effects of mergers. This paper examines the connection between health plan prices and WTP that results from bargaining between managed care plans and hospitals. Empirically, we use merger cases in Florida and New York State to evaluate the accuracy of pre-merger predictions from patient-level choice models to assess mergers’ effects on patients’ aggregate WTP. Employing data available before a merger has occurred, we find that this method can pro­ vide reliable predictions of patients’ post-merger willingness-to-pay, and thereby help inform the pre-merger investigation concerning likely price effects.