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

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. (JEL G34, I11, I13, J14, L14, L22)