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Vertical Integration in the Health Care Market

Paper Session

Sunday, Jan. 7, 2018 1:00 PM - 3:00 PM

Pennsylvania Convention Center, 104-A
Hosted By: American Economic Association
  • Chair: Haizhen Lin, Indiana University

What Came First – Loyalty or Integration? A Look at the Motivation for Hospital-physician Alignment

Haizhen Lin
,
Indiana University and NBER
Ian McCarthy
,
Emory University and NBER
Michael Richards
,
Vanderbilt University

Abstract

Spurred by a variety of policy changes and market forces, relationships between physicians and hospitals are increasingly important for physician and hospital reimbursement, pricing, and quality. The nature of these relationships, however, is not well understood. At one extreme, physician practices or groups may be formally acquired by a hospital or hospital system. Indeed, recent years have seen a new wave of this form of hospital-physician alignment in the U.S., with the fraction of physicians owned by hospital systems increasing from 7% in 2009 to 25% in 2015 (Richards et al., 2016). At the other extreme, physicians may remain fully independent but nonetheless choose to operate almost exclusively with a given hospital. We refer to this latter relationship as “physician loyalty” and the former relationship as integration. We refer to each of these terms collectively as “alignment.”

Subsidizing Consolidation? Unintended Consequences of a Federal Drug Discount Program

Sunita Desai
,
New York University
J. Michael McWilliams
,
Harvard University

Abstract

We study hospital response to the 340B Drug Discount program, a federal policy that entitles almost 45% of hospitals to discounts of between 20% to 50% on drugs, including specialty drugs that are administered through infusion or injection (e.g., chemotherapy agents). The drug discounts provide 340B hospitals a competitive advantage in outpatient drug administration and drug-intensive specialties. We examine hospital response to these profit incentives along several dimensions of policy interest: hospital-physician consolidation, drug provision, and provision of uncompensated care. Our primary empirical strategy is a fuzzy regression discontinuity design that exploits a cutoff for hospital eligibility into the program to identify exogenous variation in hospitals' 340B participation. Using a novel empirical measure of hospital-physician consolidation, we find that the program causes hospital-physician consolidation in certain drug-intensive specialties such as oncology. We also find evidence of increased drug spending per patient in certain drug-intensive specialties.

The Price Effects of Supplier Consolidation in a Regulated Market: Prescription Drug-based Cancer Care

Rena Conti
,
University of Chicago

Abstract

I examine the impact of oncology practice consolidation on the prices of outpatient prescription drug-based cancer treatment paid by commercial insurers and patients in 2009-2013. I used Health Care Cost Institute (HCCI) claims to identify cancer cases and inflation-adjusted treatment prices and IMS Health SK&A provider survey to measure horizontal and vertical consolidation. I linked HCCI claims to SK&A using a geographically defined market to account for secular levels and trends in insurer bargaining power. Fixed effects were estimated using GLM to quantify changes in price among markets with increasing concentration using markets exhibiting no change in consolidation as a control group. Average horizontal consolidation across markets declined slightly, from 31 percent in 2009 to 24 percent in 2013; while vertical consolidation doubled, from 16 percent in 2009 to 32 percent in 2013. Between 2009 and 2013, within market horizontal consolidation experienced no change while vertical consolidation increased on average 12 percent. There was no direct impact of consolidation on prices paid. A 10 percent increase in vertical consolidation within markets was associated with a statistically significant 1-4 percent one-year lagged net increase in outpatient prescription-drug based cancer treatment prices paid by patients, not insurers. However, the real inflation-adjusted effects of vertical consolidation amount to an $20 increase in annual patient payments for outpatient cancer care. Results are robust to numerous sensitivity checks. Results are weakly consistent with hypothesized foreclosure effects from vertical consolidation (post-Chicago school). Whether and how increased payment associated with provider consolidation alters patient demand for cancer care is an important unanswered question. Stakeholder concerns regarding the unintended consequences of outpatient cancer provider consolidation may be warranted.
Discussant(s)
Seth Richards-Shubik
,
Leigh University
Michael Richards
,
Vanderbilt University
Abby Alpert
,
University of Pennsylvania
JEL Classifications
  • I0 - General
  • L2 - Firm Objectives, Organization, and Behavior