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Vertical Integration and Optimal Reimbursement Policy

  • Christopher Afendulis
  • Daniel Kessler
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    Health care providers may vertically integrate not only to facilitate coordination of care, but also for strategic reasons that may not be in patients' best interests. Optimal Medicare reimbursement policy depends upon the extent to which each of these explanations is correct. To investigate, we compare the consequences of the 1997 adoption of prospective payment for skilled nursing facilities (SNF PPS) in geographic areas with high versus low levels of hospital/SNF integration. We find that SNF PPS decreased spending more in high integration areas, with no measurable consequences for patient health outcomes. Our findings suggest that subjecting integrated providers to higher-powered reimbursement incentives, i.e., less cost-sharing, may enhance medical productivity. More generally, we conclude that it may be efficient for purchasers of health services (and other services subject to agency problems) to consider the organizational form of their suppliers when choosing a reimbursement mechanism.

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    File URL: http://www.nber.org/papers/w17316.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17316.

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    Date of creation: Aug 2011
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    Publication status: published as Afendulis, Christopher C., and Daniel P. Kessler. “Vertical Integration and Optimal Reimibursement Policy,” International Journal of Health Care Finance and Economics 11:3 (September 2011) 165-179.
    Handle: RePEc:nbr:nberwo:17316
    Note: HC IO LE
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    Web page: http://www.nber.org
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    1. Robinson, James C, 1996. "Administered Pricing and Vertical Integration in the Hospital Industry," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 357-78, April.
    2. B. Douglas Bernheim & Michael D. Whinston, 1996. "Exclusive Dealing," NBER Working Papers 5666, National Bureau of Economic Research, Inc.
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    4. Newhouse, Joseph P. & Byrne, Daniel J., 1988. "Did Medicare's Prospective Payment System cause length of stay to fall?," Journal of Health Economics, Elsevier, vol. 7(4), pages 413-416, December.
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    6. Cutler, David M, 1995. "The Incidence of Adverse Medical Outcomes under Prospective Payment," Econometrica, Econometric Society, vol. 63(1), pages 29-50, January.
    7. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
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    9. Ellis, Randall P. & McGuire, Thomas G., 1990. "Optimal payment systems for health services," Journal of Health Economics, Elsevier, vol. 9(4), pages 375-396, December.
    10. Christopher C. Afendulis & Daniel P. Kessler, 2007. "Tradeoffs from Integrating Diagnosis and Treatment in Markets for Health Care," American Economic Review, American Economic Association, vol. 97(3), pages 1013-1020, June.
    11. Dwayne Banks & Elliott Parker & Jeanne Wendel, 2001. "Strategic interaction among hospitals and nursing facilities: the efficiency effects of payment systems and vertical integration," Health Economics, John Wiley & Sons, Ltd., vol. 10(2), pages 119-134.
    12. R. Konetzka & Edward Norton & Sally Stearns, 2006. "Medicare payment changes and nursing home quality: effects on long-stay residents," International Journal of Health Care Finance and Economics, Springer, vol. 6(3), pages 173-189, September.
    13. Mark V. Pauly, 1979. "The Ethics and Economics of Kickbacks and Fee Splitting," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 344-352, Spring.
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