Quality and Financial Incentives as Causes of Hospital-Physician Vertical Integration

Vertical integration of hospitals and physicians has accelerated in the past decade, with an estimated half of practices now owned by hospitals. Most research on vertical integration has explored its effects on prices and quality. Comparatively little research has examined the causes of integration. Some hypothesize that providers integrate to improve the quality of care, while skeptics suspect that market power and site-based billing opportunities are the true motivations. In this research, we explore whether pre-integration care quality and financial incentives are drivers of vertical integration. We link physician-level demographics from a proprietary dataset from the American Medical Association to Medicare administrative claims; this data linkage is underused in health economics research and provides a rich set of covariates. We test an instrumental variables approach to address the problem of selection into integration, in which we calculate, for each physician, the Medicare reimbursement available for their set of services if performed in an outpatient department compared to the reimbursement in an office setting. We also estimate a longitudinal model that relies on fixed effects for physician commuting zones and time trends. We expect to find that both quality and financial incentives are significant predictors of integration, but that financial incentives are stronger predictors than quality.