Intermediary Bargaining for Price-Insensitive Consumers

We show that under common assumptions, prices derived from standard bargaining models between insurers and hospitals are such that surplus-maximizing insurers pay more for every patient-service than the value of the service to the patient. We propose an alternative model, consistent with practitioner evidence. The equilibrium of our model and the corresponding equations for estimation are such that prices must be lower than the value of the service. We also show that a commonly-assumed price-monotonicity property may be violated in a variety of standard models and propose a version of the property that is satisfied in our model.