The impact of vertical integration on physician behavior and healthcare delivery : evidence from gastroenterology practices

The U.S. healthcare system is undergoing a period of substantial change, with hospitals purchasing many physician practices (“vertical integration"). In theory, this vertical integration could improve quality by promoting care coordination, but could also worsen it by impacting the care delivery patterns. The evidence quantifying these effects is limited, because of the lack of understanding of how physicians' behaviors alter in response to the changes in financial ownership and incentive structures of the integrated organizations. We study the impact of vertical integration by examining Medicare patients treated by gastroenterologists, a specialty with a large outpatient volume, and a recent increase in vertical integration. Using a causal model and large-scale patient-level national panel data that includes 2.6 million patient visits across 5,488 physicians between 2008-2015, we examine changes in various measures of care delivery, including care processes, patient outcomes, operational efficiency, and spending. We find that physicians significantly alter their care process (e.g., in using anesthesia with deep sedation) after they vertically integrate, which in turn results in a substantial increase in patients' post-procedure complications. We further provide evidence that the financial incentive structure of the integrated practices is the main reason for the changes in physician behavior, since it discourages the integrated practices from allocating expensive resources to relatively unprofitable procedures. We also find that although integration improves operational efficiency (measured by physicians' throughput), it negatively affects quality and overall spending. Finally, to shed light on potential mechanisms through which policymakers can mitigate the negative consequences of vertical integration, we perform both mediation and cost-effectiveness analyses. Our results indicate that additional payment for encouraging the use of deep sedation, up to the price that is 150% of the current price for a colonoscopy alone, for providing deep sedation during colonoscopy, can be viewed as a cost-effective mechanism to prevent the vertical integration trends from degrading the quality of care