Do Medicare’s Facility Fees Incentivize Hospitals to Vertically Integrate with Oncologists?

Within the past decade, the U.S. healthcare market has undergone massive vertical integration, prompting economists to study the underlying causes and consequences of hospital-physician integration. This paper examines whether or not hospitals strategically choose to vertically integrate with clinical oncologists in order to capture facility fees, a commonly cited reason for increased consolidation in the healthcare market. To address this question, I match data on hospitals’ ownership of clinical oncologists with Medicare payment data disaggregated to the physician and specific service level. I leverage a 2014 policy change that drastically altered the payment structure of Medicare’s facility fees paid to hospitals for evaluation and management services—and yet, it did not alter the direct payments made to physicians. Contrary to popular belief, I find no evidence that the financial incentives of facility fees have an effect on the probability that a hospital and a clinical oncologist vertically integrate.

The full study is available in The Journal of Health Care Organization, Provision, and Financing.