The Effect of Vertical Integration on Physician Referrals

Nearly 30% of all physicians are financially integrated with a hospital (AMA, 2017). CMS (the Center for Medicare and Medicaid Services) currently reimburses outpatient physicians at a higher rate for claims billed in hospital facilities than in independent offices. This billing policy potentially generates incentives for physicians to financially integrate with hospitals and for hospitals to contract with physicians for referrals to capture profits. I examine the effect of hospital-physician acquisition on physician referral choice using the universe of Medicare claim-level data from 2007-2012. I use panel difference-in-difference methods along with a Coarsened Exact Weighting algorithm to show that physicians are 7 to 10 percentage points more likely to refer to the owning hospital for the first two years post-acquisition. At present, I’m working on extending this paper to examine the effect of these acquisitions on patient quality of care along with private insurance premiums.