Better Bargaining or Better Care? Hospital Pricing and Quality following Integration with Physician Practices

The past decade has witnessed a new wave of hospital-physician alignment. From 2009 to 2015, the fraction of physicians owned by hospital systems in an average hospital market (defined as hospital referral regions, HRR) increased from 9% to 25%. We offer one of the first hospital-level longitudinal analyses in examining how hospital-physician integration impacts hospital prices and quality of care.

Theoretically speaking, hospital-physician integration might lead to lowered hospital prices and better quality of care due to efficiency gains from care coordination and transaction cost economies. However, integration might also increase hospital prices and decrease quality of care through channels such as (1) strengthened hospitals’ leverage when negotiating with insurers, (2) more hospital referrals, and (3) increased hospital exits. The limited existing empirical literature is also mixed (Cuellear and Gertler 2006; Ciliberto and Dranove 2006; Baker et al. 2014; Neprash et al. 2015; Capps, Dranove, and Ody 2016).

In this study, we construct a panel of all US general medical and surgical hospital from 2009 to 2015 using various data source. The SK&A physician database offers measures for hospital-physician integration, such as a dummy variable of being integrated and a continuous count of the number of integrated physicians in a given market. The Healthcare Cost Report Information System (HCRIS) data provides measures of hospital prices, which are calculated as inpatient revenue per discharges for non-Medicare patients, following Dafny (2009). The Hospital Compare database provides quality indicators, including readmission and mortality rates for heart attack, heart failure, and pneumonia. Finally, the American Hospital Association (AHA) data allows us to link the abovementioned data in addition to offering hospital characteristics controls.

Our baseline identification exploits within-hospital variation in hospital-physician integration. To address the concerns that hospital integration decisions could be related to unobservable factors that affect pricing and quality of care, we adopt an IV strategy by taking advantage of the fact that most hospital systems operate in multiple markets. We assume that unobservables are independent across markets. A hospital system’s decision to integrate with local physician practices in distinct geographic markets will be correlated due to common factors such as a system’s capability of negotiating during the process of integration. However, due to the independence assumption, a system’s decision in other markets should be uncorrelated with local market unobservables.

We find a robust 2.5-6.7 percentage-point increase in hospital prices following VI with local physician practices. There is little indication that hospital quality is commensurately higher, and all supplementary analyses point to stronger bargaining positions for hospitals when negotiating payment rates with insurers.