The Impact of Vertical Integration on Physician Behavior and Healthcare Delivery: Evidence from Gastroenterology Practices

US healthcare is undergoing a period of substantial change, with many hospitals vertically integrating with physician practices. Such integration could improve quality by promoting care coordination, but could also worsen it by impacting care delivery. Evidence on how physicians alter their behavior from the changes in financial ownership and the incentive structures of the integrated organizations is scant. We examine Medicare patients treated by gastroenterologists, a specialty with a recent increase in vertical integration. Using a causal model and large-scale patient-level national panel data that include 2.6 million patient visits across 5,488 physicians, we examine changes in various measures of care delivery. We find that physicians significantly alter care processes (e.g., in using anesthesia with deep sedation) after they vertically integrate, and that patients' post-procedure complications increase substantially. We provide evidence that the financial incentive structure of the integrated practices is the main reason for the changes in physician behavior, since it discourages the integrated practices from allocating expensive resources to relatively unprofitable procedures. Although integration improves operational efficiency measured by physicians' throughput, it negatively affects quality and overall spending. We note some potential policy levers through which policymakers could mitigate the negative consequences of vertical integration.