Weighing the Effects of Vertical Integration versus Market Concentration on Hospital Quality

Provider organizations are increasing in complexity, as hospitals acquire physician practices and physician organizations grow in size. At the same time, hospitals are merging with each other to improve bargaining power with insurers. Greater integration should increase care coordination and limit redundancies, which could improve patient outcomes. However, larger organizations could instead feel less incentive to compete on the basis of quality. We analyze multiple measures of quality from the Medicare Hospital Compare to test whether vertical integration between hospitals and physicians or increases in hospital market concentration influence patient outcomes. We analyze data on 30 measures of hospital quality that were reported to the Center for Medicare and Medicaid Services for the years 2008 to 2015. The measures include hospital readmission rates, process of care measures, and patient satisfaction scores. Identifiers for different types of vertical integration (e.g. no integration, vs. independent practice association, vs. physicians employed by hospitals) are drawn from the American Hospital Association annual survey. We use panel data methods to estimate the effects of within-hospital changes in vertical integration and hospital market concentration on hospital quality, controlling for costly hospital services. We find that vertical integration reduces hospital readmission rates for pneumonia, but less so for other disease conditions. We also find that vertical integration improves quality for a limited set of process and patient satisfaction measures. Yet, increased hospital market concentration is strongly associated with reduced quality across multiple measures, particularly patient satisfaction measures. While better patient experience may not always correlate with higher clinical quality, it is imperative that policies consider the data such as that presented in the CAHPS survey since consumers are now shifting their focus to these and similar reviews of patient experience to select their providers. Our results suggest that regulators should continue to focus scrutiny on proposed hospital mergers. Although vertical integration does not necessarily harm quality, future studies should test whether it is associated with increased hospital prices.