Elsevier

Journal of Health Economics

Volume 50, December 2016, Pages 1-8
Journal of Health Economics

The effect of hospital/physician integration on hospital choice

https://doi.org/10.1016/j.jhealeco.2016.08.006Get rights and content

Abstract

In this paper, we estimate how hospital ownership of physicians' practices affects their patients' hospital choices. We match data on the hospital admissions of Medicare beneficiaries, including the identity of their physician, with data on the identity of the owner of their physician's practice. We find that a hospital's ownership of a physician dramatically increases the probability that the physician's patients will choose the owning hospital. We also find that patients are more likely to choose a high-cost, low-quality hospital when their physician is owned by that hospital.

Introduction

Over the past decade, hospitals and physicians have become more integrated due to increases in hospitals' ownership of physician practices (Baker et al., 2014). There is considerable debate over how integration has affected agency problems between physicians and their patients. Agency problems arise in this context because patients depend on their physician not only for health services but also for advice about the types of services that they need (Evans, 1974).

Integration is often hypothesized to increase the incentive physicians have to refer patients to the owning hospital (O'Malley et al., 2011). This can occur through the exercise of managerial control under an employment contract or financial rewards such as call pay, directorships, and ancillary service agreements (Burns et al., 2013). Optimists about integration think that this reduces agency problems. According to this reasoning, closer ties between physicians and hospitals improve coordination across care settings and reduce wasteful duplication of effort. Integration also facilitates the sharing of gains from increased efficiency, thereby encouraging greater uptake of integration's opportunities. This is one goal of Accountable Care Organizations, a new form of integration promoted by the Affordable Care Act.

Pessimists think that integration's impact on patient referrals increases agency problems. According to this reasoning, coordination of referrals allows physicians and hospitals to increase their market power, raise prices, and share the gains from doing so. Some pessimists also believe that integration allows hospitals to pay physicians covertly for referrals, which has the potential to allow physicians to profit from recommending care that is cost-ineffective or even medically unnecessary.

For this reason, how integration affects hospital choice is an important empirical issue. Yet, despite this, no previous work has identified how a hospital's ownership of a physician's practice affects her patients' hospital choices, or even whether it affects patients' hospital choices at all.

In this paper, we seek to fill this gap. We use 2009 data on the ownership status of the practices of approximately 400,000 physicians from SK&A (a subsidiary of IMS Health), matched with data on which hospitals own physician practices from the American Hospital Association (AHA). Together, these data identify which hospitals own physicians, and among those that do, the identity of the physicians that they own. We match these data to Medicare beneficiaries' hospital admissions by the National Provider Identifier (NPI) of the patient's physician. We estimate conditional logit models that specify the probability of a patient choosing a particular hospital as a function of characteristics of the hospital (including its size, for profit/nonprofit status, whether it owns physicians, and measures of its cost and quality of care), the physician (owned by some hospital and owned by the hospital of admission), and interactions between the two. The parameters of interest are the effect on hospital choice of a physician's ownership status, and the effects of interactions between a physician's ownership status and measures of the hospital's cost and quality of care.

Section snippets

Previous literature

Our paper contributes to three literatures: the effects of physicians' financial incentives on agency conflicts between physicians and patients, the effects of hospital–physician integration, and the effects of hospital and patient characteristics on hospital choice. It is most closely related to papers about financial incentives and physician agency such as Ho, Pakes, 2014, Iizuka, 2012, and Afendulis and Kessler (2007). Using hospital discharge data for managed care enrollees from California

Model

We model the utility of patient i living in zip code z from choosing hospital j (Yijz*) as a function of the attributes of j: the hospital's size, ownership, and teaching status (Wj); its quality, cost, and distance from patient i (Qj | Cj | Dijz = Xijz); its relationships with physicians, including patient i's physician (Vijz); and unobserved variation in the attributes of hospitals, which may interact with the characteristics of patient i (εijz). For ease of interpretation, we define higher

Data

We use data from five sources for 2009: SK&A, Medicare (Provider of Service, Inpatient, Carrier, and Denominator files), the AHA Survey, the Dartmouth Atlas, and Hospital Compare.

The SK&A data identify the owner(s) of the practices of 422,312 office-based (that is, excluding hospital-based) physicians, or approximately 75% of the population of active office-based physicians involved in patient care in the AMA Masterfile (National Center for Health Statistics, 2011). The SK&A data contain, for

Results

Table 1, Table 1 presents the distribution of admissions, by the ownership status of the patient's physician and the hospital of admission, defining the patient's physician in the three approaches discussed above (row percentages in the table are in parentheses; column percentages are brackets). The table shows that the three approaches result in similar (although not identical) distributions of admissions. Physicians of most patients admitted to the hospital are not owned, and most admissions

Conclusion

As medical care has grown more costly and complex, the value of coordination between physicians and other providers of health services such as hospitals has increased. In response, both public policy and private purchasers have created new incentives for hospital/physician integration. At least in part as a result of these incentives, such integration has increased dramatically.

But hospital/physician integration may have harmful as well as beneficial effects. One of the most obvious channels of

Acknowledgment

We would like to thank Aileen Devlin for exceptional research assistance. All errors are our own.

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    This is particularly timely, given the role of telemedicine and telehealth during the COVID-19 pandemic and its potential to remain a common mode of healthcare delivery. Most existing research has only examined the determinants of patient choices in the offline world, finding that patients make trade-offs between measured quality, price, and distance (Acton, 1975; Aoun, Matsuda, & Sekiyama, 2015; Avdic, Moscelli, Pilny, & Sriubaite, 2019; Baker, Bundorf, & Kessler, 2016; Beckert, 2018; Beckert, Christensen, & Collyer, 2012; Doyle Jr, Graves, Gruber, & Kleiner, 2015; Gutacker, Siciliani, Moscelli, & Gravelle, 2016; Jiang et al., 2020; McClellan, McNeil, & Newhouse, 1994; Nemet & Bailey, 2000). Second, our study advances the literature examining the impact of the Internet on reducing geographic barriers to economic activities (Cairncross, 1997; Fan et al., 2018; Hortaçsu et al., 2009; Lendle et al., 2016; Lieber & Syverson, 2012).

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