Vertical Integration and Optimal Reimbursement Policy

27 Pages Posted: 29 Aug 2011

See all articles by Chris Afendulis

Chris Afendulis

Harvard University - Department of Health Care Policy

Daniel P. Kessler

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: August 2011

Abstract

Health care providers may vertically integrate not only to facilitate coordination of care, but also for strategic reasons that may not be in patients' best interests. Optimal Medicare reimbursement policy depends upon the extent to which each of these explanations is correct. To investigate, we compare the consequences of the 1997 adoption of prospective payment for skilled nursing facilities (SNF PPS) in geographic areas with high versus low levels of hospital/SNF integration. We find that SNF PPS decreased spending more in high integration areas, with no measurable consequences for patient health outcomes. Our findings suggest that subjecting integrated providers to higher-powered reimbursement incentives, i.e., less cost-sharing, may enhance medical productivity. More generally, we conclude that it may be efficient for purchasers of health services (and other services subject to agency problems) to consider the organizational form of their suppliers when choosing a reimbursement mechanism.

Suggested Citation

Afendulis, Chris and Kessler, Daniel Philip, Vertical Integration and Optimal Reimbursement Policy (August 2011). NBER Working Paper No. w17316. Available at SSRN: https://ssrn.com/abstract=1918646

Chris Afendulis (Contact Author)

Harvard University - Department of Health Care Policy ( email )

180 Longwood Avenue
Boston, MA 02115
United States

Daniel Philip Kessler

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4492 (Phone)
650-725-6152 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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