The welfare effects of restricted hospital choice in the US medical care market


  • Katherine Ho

    Corresponding author
    1. Economics Department, Columbia University, New York, USA
    • Economics Department, Columbia University, 1037 International Affairs Building, 420 West 118th Street, New York, NY 10027, USA.
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Managed care health insurers in the USA restrict their enrollees' choice of hospitals to within specific networks. This paper considers the implications of these restrictions. A three-step econometric model is used to predict consumer preferences over health plans conditional on the hospitals they offer. The results indicate that consumers place a positive and significant weight on their expected utility from the hospital network when choosing plans. A welfare analysis, assuming fixed prices, implies that restricting consumers' choice of hospitals leads to a loss to society of approximately $1 billion per year across the 43 US markets considered. This figure may be outweighed by the price reductions generated by the restriction. Copyright © 2006 John Wiley & Sons, Ltd.