Hospital-Physician Integration and Hospital Ownership

51 Pages Posted: 18 Jun 2019

See all articles by Robert G. Hansen

Robert G. Hansen

Tuck School of Business at Dartmouth

Anant K. Sundaram

Tuck School of Business at Dartmouth

Date Written: April 9, 2019

Abstract

Employment of physicians by hospitals – typically referred to as vertical integration – has increased significantly. Received theories fail to explain a key fact: The extent of vertical integration in not-for-profit (NFP) hospitals is substantially higher than in for-profit (FP) hospitals. We develop a model in which vertical externalities in the joint provision of complementary health care services by independent hospitals and physicians cause total prices and cost to be higher, and quantity, quality and profits to be lower, relative to a vertically integrated organization. This establishes an incentive for hospitals to integrate. We show that these externalities impact NFP hospitals more than they do FPs, so that NFPs have stronger incentives to integrate. Using data on US hospitals from 2000-2015 and with controls for other covariates including state-level “corporate-practice-of-medicine” regulations, we find support for our predictions. Our model not only explains patterns of vertical integration observed in the US hospital industry, but also has surprising implications for the effects of such integration on hospital and physician prices, and hence, for antitrust policy and empirical studies of pricing.

Keywords: Vertical Integration, Cournot Effect, Hospitals, Non-Profit, For-Profit, Ownership Type, Hospital Performance, Hospital Quality, Strategic Substitutes/Complements

JEL Classification: L4, L10, L21, L33, L44, I11

Suggested Citation

Hansen, Robert G. and Sundaram, Anant K., Hospital-Physician Integration and Hospital Ownership (April 9, 2019). Available at SSRN: https://ssrn.com/abstract=3401559 or http://dx.doi.org/10.2139/ssrn.3401559

Robert G. Hansen (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646 2079 (Phone)
603-646-1308 (Fax)

Anant K. Sundaram

Tuck School of Business at Dartmouth ( email )

100 Tuck Hall
Hanover, NH 03755
United States
603-646-8248 (Phone)
603-646-1308 (Fax)

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