The U.S. healthcare system is undergoing a period of substantial change, with hospitals purchasing many physician practices (“vertical integration”). In theory, this vertical integration could improve quality by promoting care coordination, but could also worsen it by impacting the care delivery patterns. The evidence quantifying these effects is limited, because of the lack of understanding of how physicians’ behaviors alter in response to the changes in financial ownership and incentive structures of the integrated organizations. We study the impact of vertical integration by examining Medicare patients treated by gastroenterologists, a specialty with large outpatient volume, and a recent increase in vertical integration. Using a causal model and large-scale patient-level national panel data that includes 2.6 million patient visits across 5,488 physicians between 2008-2015, we examine changes in various measures of care delivery, including quality, operational efficiency, and spending. We find that physicians reduce provisions of recommended care processes (e.g., anesthesia with deep sedation) after they vertically integrate, and this results in a substantial increase in patients’ post-procedure complications. We further provide evidence that the financial incentive structure of the integrated practices is the reason for the changes in physician behavior, since it discourages the integrated practices from allocating expensive resources to relatively unprofitable procedures. We also find that although integration improves operational efficiency (measured by physicians’ throughput), it negatively affects quality and the overall spending. Finally, to shed light on potential mechanisms through which policymakers can mitigate the negative consequences of vertical integration, we perform both mediation and cost-effectiveness analyses. Our results indicate that paying about half as much as the current price for a colonoscopy to encourage the provision of deep sedation can be viewed as a cost-effective mechanism to prevent the vertical integration trends from degrading the quality of care.
Song, Lina D., Soroush Saghafian, Joseph P. Newhouse, Mary Beth Landrum, and John Hsu. "The Impact of Vertical Integration on Physician Behavior and Healthcare Delivery: Evidence from Gastroenterology Practices." HKS Faculty Research Working Paper Series RWP20-031, October 2020.