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

Abstract: Roughly one out of every six dollars in the U.S. economy flows to the health care sector -- a sector that is currently grappling with the causes and consequences of greater consolidation both horizontally and vertically. Despite much of the academic literature focusing on the effects of hospital mergers or system-joiners (i.e., horizontal integration), vertically integrated hospital-physician systems have become increasingly common. For example, recent research shows that health system ownership of physician practices in the U.S. more than tripled from 2009 to 2015 and now affects roughly a quarter of all physician practices. Motivated by these empirical trends, our focus in this paper concerns the effects of increased vertical integration between physicians and hospitals on hospital pricing and quality of care. We assemble a unique combination of data to investigate the effect of contemporary (2009-2015) vertical integration between hospitals and physicians on hospital pricing and performance across the U.S. Our estimation relies on both panel data methods as well as instrumental variable approaches, which comport well with the most closely related literature. Across our different identification strategies, we find a robust 3-7 percentage-point increase in hospital prices following vertical integration 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. Coupled with the existing literature, our findings encourage greater scrutiny of this industry trend in vertical integration by antitrust authorities.