Owning the Agent: Hospital Influence on Physician Behaviors

The organizational structure of U.S. health care has changed dramatically in recent years, with nearly half of physicians now employed by hospitals. This trend toward increasing vertical alignment between physicians and hospitals may alter physician behavior relative to physicians remaining in independent or group practices. We examine the effects of such vertical alignment using an instrumental variable strategy and a clinical context facilitating well-defined episodes of care. We find no significant or economically meaningful effect on total Medicare payments per episode, characterized by a large and statistically significant reduction in professional services claims, particularly among referrals to other non-integrated physicians. Acquiring hospitals ultimately capture more revenue following a physician practice acquisition; yet, the smaller overall bundle of care generates no net savings to Medicare due to location-based payment rules favorable to hospitals.