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Vertical Integration and Cream Skimming of Profitable Referrals: The Case of Hospital-Owned Skilled Nursing Facilities

Author

Listed:
  • David Cutler
  • Leemore Dafny
  • David C. Grabowski
  • Steven Lee
  • Christopher Ody

Abstract

We examine whether vertical integration of hospitals and skilled nursing facilities (SNFs) could lessen competition by foreclosing rival SNFs' access to lucrative referrals. We find that it could: Among integrated providers, a 1 percent increase in SNF reimbursement for a given patient discharged from the upstream hospital increases the self-referral rate to the hospital's downstream SNF(s) by 1.8 percent. We find no evidence of offsetting benefits for patients and payers: These increased self-referrals have an imprecisely estimated zero effect on patient outcomes and Medicare spending.

Suggested Citation

  • David Cutler & Leemore Dafny & David C. Grabowski & Steven Lee & Christopher Ody, 2026. "Vertical Integration and Cream Skimming of Profitable Referrals: The Case of Hospital-Owned Skilled Nursing Facilities," American Economic Journal: Economic Policy, American Economic Association, vol. 18(2), pages 1-33, May.
    • Handle: RePEc:aea:aejpol:v:18:y:2026:i:2:p:1-33
    DOI: 10.1257/pol.20200892
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    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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