Working Paper: NBER ID: w28305
Authors: David M. Cutler; Leemore Dafny; David C. Grabowski; Steven Lee; Christopher Ody
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: vertical integration; healthcare providers; self-referrals; downstream competition; skilled nursing facilities
JEL Codes: I18; L22; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased profitability of patients (L21) | Increased likelihood of hospitals self-referring those patients to their own SNFs (I11) |
| Increased likelihood of hospitals self-referring those patients to their own SNFs (I11) | No significant changes in clinical outcomes or post-discharge spending (H51) |
| Self-referrals (L84) | Weakened competition among independent SNFs (L19) |
| Divestment of integrated SNFs (L33) | Less likelihood of exit of independent rivals (L19) |
| Reimbursement reform (I18) | Additional earnings for SNFs per self-referral (J32) |
| Increased profit margins from self-referrals (D26) | Potential negative implications for competition and consumer welfare (L49) |