Abstract
The relationship between physicians and hospitals has dramatically changed over the last decade, with the employer–employee model supplanting the traditional model of private physicians with hospital admitting privileges. We examine the motivation for this form of vertical integration by considering physician–hospital alignment as a tool to increase bargaining power with private insurers. We find a positive and significant relationship between private insurance concentration on physician–hospital alignment, which is driven predominantly by for-profit hospitals.
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Notes
We consider vertical integration as the consolidation of physicians and hospitals, although other forms of vertical integration may also exist in healthcare provider markets. For example, Huckman (2006) examined hospital acquisitions of specialty cardiac services in New York State, therefore defining vertical integration as the consolidation of complementary hospital services rather than occurring between physicians and hospitals. Vertical integration is sometimes also defined as alignment between insurers and hospitals or insurers and physicians.
In related literature on physician–hospital markets, Lammers (2013) investigated the effect of physician–hospital alignment on technology adoption. Using state variation in corporate practice of medicine laws as an instrument for physician–hospital alignment, the author found that vertical integration has a significant positive effect on hospital adoption of electronic medical records and computerized provider order entry. Baker et al. (2014a) examined the effect of concentration in physician markets on physician prices; they found that larger physician practices lead to higher prices for physician services.
The AHA defines an equity model as, “allow[ing] established practitioners to become shareholders in a professional corporation in exchange for tangible and intangible assets of their existing practices.” In our analysis, we consider physician ownership as a form of an equity model.
In a healthcare context, this could derive from expanding the breadth of services or improving communication and perceived coordination with patients.
Ho and Lee (2017) and Gowrisankaran et al. (2015) consider a managed care setting in which the insurer’s threat point consists of their payoff when excluding the hospital from their network entirely; however, the same structure easily extends to less binary network decisions such as tiered networks and preferred provider organizations. As examined in Sorensen (2003), hospital bargaining with insurers persists even outside of a managed care setting.
It is nonetheless possible for insurance premiums to fall following a reduction in the number of insurers. The intuition for such a decrease in premiums is that, upon the removal an insurer from the market, the remaining insurers may have more to lose from excluding a given hospital from their network, and this effect may overpower the upward premium pressure due to reduced competition.
Gal-Or (1999) provides a detailed theoretical treatment of the incentives for physician–hospital alignment as a function of the competitive conditions in the physician and hospital markets; however, the role of insurance markets in that model is relatively limited.
The supplemental appendix is available at https://sites.google.com/site/mccarthyeconomics/event-calendar.
HHI values are calculated as of January 1st of each year. Private insurance markets are defined as the combination of HMO, PPO, and POS product markets.
The AMA reports adopt a different geographic coding system for some New England areas. These areas are excluded from our analysis as we cannot match geographic areas across datasets.
Since hospitals can report more than one category of alignment, we take the highest level reported for each hospital in our analysis.
The AHA defines the equity model as one that “allows established practitioners to become shareholders in a professional corporation in exchange for tangible and intangible assets of their existing practices.”
We consider standard errors clustered at the MSA level as this is the highest (least granular) level at which our variables are measured. For completeness, we also consider clustering at the hospital level to allow for correlation among hospitals over time.
In the supplemental appendix, we explicitly allow for misreported alignment using the monotone rank estimator. Results again suggest that our initial findings are robust to potentially mis-measured alignment.
For example, Dafny (2005) finds that for-profit hospitals are more likely to upcode patient diagnoses to offset revenue shortfalls following changes in Medicare reimbursement formulas.
Marsh-Dalton and Warren (2014) study California hospitals’ outsourcing decisions and find that for-profit hospitals are more likely to outsource their services than not-for-profit counterparts. Chang and Jacobson (2012) examine production responses to the unexpected California Seismic Retrofit mandate, again finding heterogeneous responses among for-profit and not-for-profit hospitals. And Duggan (2000) finds that the public hospital response to financial incentives is more distinct from that of private (for-profit and not-for-profit) hospitals due to the soft budget constraint unique to public hospitals. Huang et al. (2017) similarly find that the capital structure for not-for-profit hospitals is less responsive to state business taxes and bankruptcy costs relative to for-profit hospitals.
The merger was announced in July 2005 and finalized in late December of 2005. As such, plans operating under the PacifiCare name generally continued as such through the 2006 calendar year, and sometimes beyond.
We also considered the log number of firms in the MSA and the log number of employees per firm as additional instruments. Intuitively, since the majority of individuals receive insurance through their employers, the number of firms in the MSA and the number of employees per firm are appealing instruments as these variables naturally influence the private insurance market. Although focused on a different outcome, similar instruments have been adopted or proposed in several studies of insurance market concentration (Baker and Brown 1999; Town et al. 2007; Dranove et al. 2008; Brunt and Bowblis 2014). Including these instruments in addition to our measures of the UnitedHealth/PacifiCare merger does not qualitatively change our results.
Since this test was originally considered with continuous outcomes in mind, we base this test on a linear probability model with the binary “any integration” measure as our outcome of interest.
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Acknowledgements
We thank Jim Burgess, Alison Cuellar, Guy David, Avi Dor, Gautam Gowrisankaran, Eric Lammers, Jim Marton, and Bob Town for insightful comments and suggestions, as well as the participants at the 2015 American Health Economics Conference, the 2015 Southeastern Health Economics Study Group, and the 2016 Allied Social Science Associations Conference. This project was supported by Grant No. R00HS022431 from the Agency for Healthcare Research and Quality. The content is solely the responsibility of the authors and does not necessarily represent the official views of the Agency for Healthcare Research and Quality.
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McCarthy, I., Huang, S.S. Vertical Alignment Between Hospitals and Physicians as a Bargaining Response to Commercial Insurance Markets. Rev Ind Organ 53, 7–29 (2018). https://doi.org/10.1007/s11151-017-9609-5
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DOI: https://doi.org/10.1007/s11151-017-9609-5