Vertical Integration of Hospitals and Physicians: Economic Theory and Empirical Evidence on Spending and Quality

Abstract

Hospital-physician vertical integration is on the rise. While increased efficiencies may be possible, emerging research raises concerns about anticompetitive behavior, spending increases, and uncertain effects on quality. In this review, we bring together several of the key theories of vertical integration that exist in the neoclassical and institutional economics literatures and apply these theories to the hospital-physician relationship. We also conduct a literature review of the effects of vertical integration on prices, spending, and quality in the growing body of evidence ( n = 15) to evaluate which of these frameworks have the strongest empirical support. We find some support for vertical foreclosure as a framework for explaining the observed results. We suggest a conceptual model and identify directions for future research. Based on our analysis, we conclude that vertical integration poses a threat to the affordability of health services and merits special attention from policymakers and antitrust authorities.

Patient care effectiveness and financial outcomes of hospital physician contracting emphasis

“…On the negative side, TCE highlights that in settings where there are transaction specific assets, which hold high value, organizations are financially better off relying on hierarchical governance structures (e.g., McIvor, 2009;Rindfleisch & Heide, 1997). Finally, employed physicians benefit hospitals by increasing the number of referrals, which then improves the utilization of ancillary services and stabilizes the flow of patients in the hospital health system (Post et al, 2018). Further, due to recent regulatory changes in the healthcare industry, the costs and risks associated with physician contracting have also been altered, suggesting a movement away from contracting.…”

“…We define PCE as the ratio of payments made by hospitals to physicians on contract relative to their total employmentrelated payments. As such, extant literature on hospital-physician integration has commonly evaluated hospital decisions from the lens of transaction costs (Post, Buchmueller, & Ryan, 2018). To derive our conceptual framework, we build on transaction costs economics (TCE) (Williamson, 1981) and the professional services operations (PSO) literature (e.g., Heineke, 1995).…”

The Effect of Hospital‐Physician Integration on Operational Performance: Evaluating Physician Employment for Cardiovascular Services

“…Therefore, the hospital's service area in which physician employment is evaluated may provide more nuanced insights. This may partially explain the mixed results reported in the literature on the hospital‐related performance effects of physician employment (Scott et al., ; Young, Nyaga, & Zepeda, ; Post, Buchmueller, & Ryan, ; Abdulsalam et al., ). In our investigation, we assessed physician employment at the level of a specific hospital's clinical service area, in this case cardiovascular care, and examined the performance effects based on conformance quality for cardiovascular care.…”

“…However, the actual performance effects of such arrangements are by no means well established. The few studies that have examined physician employment and hospital performance have produced mixed results especially with regard to quality of care (Post, Buchmueller, & Ryan, ). Nevertheless, our review of the literature suggests a positive‐to‐neutral effect of physician employment on quality of care, which we believe is likely to be particularly detectable when examined at the level of the hospital's clinical service area.…”

Well‐Balanced or too Matchy–Matchy? The Controversy over Matching in Difference‐in‐Differences

“…). Within commercial insurance, provider consolidation (Post, Buchmueller, and Ryan ) and experiments with reference pricing (Robinson and Brown ) are having potentially profound effects on health care prices.…”