Vertical Integration: Hospital Ownership Of Physician Practices Is Associated With Higher Prices And Spending

TLDR

Vertical integration can lower spending and improve care coordination, yet it may also increase market power and enable kickbacks for inappropriate referrals. The study examined how vertical integration affects hospital prices, admission volumes, and spending among privately insured patients. Using 2001–2007 Truven MarketScan claims, the authors constructed county‑level price, volume, and spending indices adjusted for age and sex, and measured hospital‑physician integration from American Hospital Association data. Ownership of physician practices was associated with higher hospital prices and spending, while contractual integration modestly reduced admissions, yielding an overall mixed but somewhat negative impact on the privately insured.

Abstract

We examined the consequences of contractual or ownership relationships between hospitals and physician practices, often described as vertical integration. Such integration can reduce health spending and increase the quality of care by improving communication across care settings, but it can also increase providers’ market power and facilitate the payment of what are effectively kickbacks for inappropriate referrals. We investigated the impact of vertical integration on hospital prices, volumes (admissions), and spending for privately insured patients. Using hospital claims from Truven Analytics MarketScan for the nonelderly privately insured in the period 2001–07, we constructed county-level indices of prices, volumes, and spending and adjusted them for enrollees’ age and sex. We measured hospital-physician integration using information from the American Hospital Association on the types of relationships hospitals have with physicians. We found that an increase in the market share of hospitals with the tightest vertically integrated relationship with physicians—ownership of physician practices—was associated with higher hospital prices and spending. We found that an increase in contractual integration reduced the frequency of hospital admissions, but this effect was relatively small. Taken together, our results provide a mixed, although somewhat negative, picture of vertical integration from the perspective of the privately insured.