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  • 2020
  • Working Paper

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

By: David Cutler, Leemore S. Dafny, David Grabowski, Steven S. Lee and Christopher Ody
  • Format:Print
  • | Language:English
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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.

Keywords

Antitrust; Health Care and Treatment; Vertical Integration; Organizational Structure; Competition; Health Industry; United States

Citation

Cutler, David, Leemore S. Dafny, David Grabowski, Steven S. Lee, and Christopher Ody. "Vertical Integration of Healthcare Providers Increases Self-Referrals and Can Reduce Downstream Competition: The Case of Hospital-Owned Skilled Nursing Facilities." NBER Working Paper Series, No. 28305, December 2020.
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About The Author

Leemore S. Dafny

General Management
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  • Do Policies to Increase Access to Treatment for Opioid Use Disorder Work? By: Eric Barrette, Leemore S. Dafny and Karen Shen
  • Falling Insulin Prices—What Just Happened? By: Leemore S. Dafny
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