Owning the Agent

<h3>Abstract</h3> The organizational structure of US health care markets has changed dramatically in recent years, with almost half of physicians now employed by hospitals. This trend toward increasing vertical alignment between physicians and hospitals may alter physician behavior relative to physicians who remain in independent or group practices. We examine the effects of such vertical alignment using an instrumental variable strategy and a clinical context that facilitates well-defined episodes of care to capture the effects of integration beyond a single hospital or physician visit. When physicians treat patients in hospitals where they are integrated, we find an increase in total episode spending of around 5%, mainly driven by the administrative substitution of office visits with outpatient visits and associated site-of-care payment differentials. We also estimate a large and statistically significant reduction in overall service counts and claims within an episode, with some evidence of an increase in the intensity of services provided. Ultimately, acquiring hospitals capture more revenue following a physician practice acquisition; yet, the smaller overall bundle of care generates no net savings to Medicare due in part to higher intensity of services and site-based payment rules favorable to hospitals.