Intermediation and Vertical Integration in the Market for Surgeons

Health care markets are increasingly dominated by large, highly-integrated systems. Understanding the impact of this integration on market outcomes is central to designing good antitrust and regulatory policy. Integration presents a central efficiency trade-off: It may improve the productive efficiency of care through coordination between primary care providers (PCPs) and specialists, but it may also reduce allocative efficiency by allowing systems to distort PCPs’ care recommendations through encouragement to steer patient referrals towards affiliated specialists. We study how these forces shape referrals to orthopedic joint surgeons in Massachusetts. We find that both are present, but that internal referrals are primarily driven by anticompetitive steering rather than efficiencies, and removing steering incentives would reduce internal referrals by over half. Counterintuitively, dis-integrating health systems would increase expected costs by 5%. We find that this is explained by the absence of referral cost-sensitivity. In the status quo, the only forces that improve allocative efficiency are the steering efforts of low-cost systems. We study insurers' attempts to enhance competition through the use of "global budget" capitation contracts, which force PCPs to bear a share of the cost of their referrals. We find that the introduction of capitation contracts do introduce cost-sensitivity and shift referrals towards orthopedists who are 3-6% less expensive. Nonetheless, these incentives would need to have 42% stronger effects to offset the efficiency losses of dis-integration.