Welfare Loss of Bundling Discount and Cost Containment Strategies for Hospitals

To understand how bundled contracts affect the prices to hospitals and compare the price to a scenario where hospitals do not accept bundled contracts. It is common that a medical supplier ties a number of products across multiple categories in a bundle and sells it to hospitals at a discounted price. We consider a situation where a seller with partial monopoly power in one category offers a price discount by bundling its products across multiple categories. This study analytically investigates the welfare implications of bundling discount in the context of health care industry with hospitals as customers. The hospital market is characterized as (1) price contracts are negotiated with individual hospitals and (2) suppliers have a good understanding of the preferences for competing products among physicians. The managerial implications of our model for hospitals are then discussed. Extraction methods: Based on the literature review on bundling contracts, we develop a model of cross-category bundling tailored to a hospital setting, using standard game theoretic tools for strategic analysis. Within this analytical framework, we derive optimal bundled and unbundled prices and identify conditions where bundled prices are higher than unbundled counterparts. Our analysis shows that cross-category bundling arises as an equilibrium outcome in the competitive market situation, derives its optimal price, and identifies conditions under which it raises the total price paid by buyers. Hospitals may be better off if they reject bundle discounts in favor of unbundled pricing contracts. Cross-category bundling, despite its nominal price discount, can lead to overpricing relative to the sum of unbundled prices and therefore cause welfare loss to buyers. Our analytical findings may provide insights to the health care industry by providing managerial guidance to hospitals in negotiations involving bundled contracts.