Vertical Integration of Healthcare Providers Increases Self-Referrals and Can Reduce Downstream Competition: The Case of Hospital-Owned Skilled Nursing Facilities

45 Pages Posted: 7 Jan 2021 Last revised: 18 Nov 2021

See all articles by David M. Cutler

David M. Cutler

Harvard University

Leemore Dafny

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

David C. Grabowski

Harvard University - Department of Health Care Policy

Christopher Ody

Northwestern University

Date Written: December 2020

Abstract

The landscape of the U.S. healthcare industry is changing dramatically as healthcare providers expand both within and across markets. While federal antitrust agencies have mounted several challenges to same-market combinations, they have not challenged any non-horizontal affiliations – including vertical integration of providers along the value chain of production. The Clayton Act prohibits combinations that “substantially lessen” competition; few empirical studies have focused on whether this is the source of harm from vertical combinations. We examine whether hospitals that are vertically integrated with skilled nursing facilities (SNFs) lessen competition among SNFs by foreclosing rival SNFs from access to the most lucrative referrals. Exploiting a plausibly exogenous shock to Medicare reimbursement for SNFs, we find that a 1 percent increase in a patient’s expected profitability to a SNF increases the probability that a hospital self-refers that patient (i.e., to a co-owned SNF) by 2.5 percent. We find no evidence that increased self-referrals improve patient outcomes or change post-discharge Medicare spending. Additional analyses show that when integrated SNFs are divested by their parent hospitals, independent rivals are less likely to exit. Together, the results suggest vertical integration in this setting may reduce downstream competition without offsetting benefits to patients or payers.

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Suggested Citation

Cutler, David M. and Dafny, Leemore and Grabowski, David C. and Ody, Christopher, Vertical Integration of Healthcare Providers Increases Self-Referrals and Can Reduce Downstream Competition: The Case of Hospital-Owned Skilled Nursing Facilities (December 2020). NBER Working Paper No. w28305, Available at SSRN: https://ssrn.com/abstract=3759843 or http://dx.doi.org/10.2139/ssrn.3759843

Leemore Dafny

Harvard University - Business School (HBS) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Harvard University - Harvard Kennedy School (HKS) ( email )

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David C. Grabowski

Harvard University - Department of Health Care Policy ( email )

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Boston, MA 02115
United States

Christopher Ody

Northwestern University

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Evanston, IL 60208
United States

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