Three Enquiries Concerning Hospital-Physician Vertical Integration

Abstract

Hospitals and physicians in the United States increasingly work together under common ownership. Over the past decade, physicians have gravitated toward employment at hospital-owned facilities and hospitals have acquired large numbers of physician practices; collectively, these changes have become known as “vertical integration” among these providers. The rapid growth in vertical integration raises questions about the causes and effects of this fundamental realignment in the American health care delivery system. In this dissertation, I explore three economic issues connected to the causes and consequences of this realignment. In the first chapter of this dissertation, I investigate vertical integration from a health care payment policy lens. I explore whether Medicare reimbursement policy created incentives that have driven vertical integration. I measure the size of the differences in Medicare reimbursement at integrated and non-integrated sites for a nationally representative sample of physicians. I then evaluate whether these reimbursement differences stimulated vertical integration activity. I find that despite large financial incentives, these payment differentials exerted little influence on vertical integration, implying only a small role for Medicare payment policy in accelerating or decelerating vertical integration. In the second chapter, I examine vertical integration from a labor economics lens. Since changes in productivity incentives often accompany changes in employment setting, I examine the clinical output of primary care physicians who join hospital systems, i.e., the productivity of physicians who become vertically integrated. I find that when physicians move from a non-integrated practice to an integrated practice, they reduce their clinical output by 10 to 20 percent. They see fewer patients, bill fewer services, and generate less professional revenue. These sizable effects imply that vertical integration could reduce physician workloads, but with fewer primary care appointments available, integration may also threaten patient access to essential care. In the third chapter, I explore vertical integration with an eye toward clinical documentation and alternative payment models. Hospitals and physicians might integrate to prepare for, or to perform better in, alternative payment models that use patients’ documented clinical severity as the cornerstone of risk-adjusted payment. These models create large incentives for provider systems to document patient illness as thoroughly as possible. Hospitals may extend their documentation resources to their integrated physician practices. To test whether vertical integration affects documented patient illness, I examine a sample of several million patients with varying exposure to vertically integrated physicians. Using several statistical approaches, I estimate that patient exposure to vertically integrated physicians is associated with annual increases in reported patient illness of 10-24 percent. These large effects imply that the increasing prevalence of vertically integrated systems may raise costs to Medicare, Medicaid, and commercial health insurers. The continued rise in health care spending constitutes one of the most pressing public policy problems in the United States. Understanding the complex role of vertical integration in this problem is one step toward greater affordability. This dissertation adds three specific insights to increase that understanding.