Publication Date

April 2018


Damien Sheehan-Connor


Economics (ECON)


English (United States)


This thesis evaluates whether hospitals that are integrated with physician practices have lower or higher costs than hospitals that are not integrated, using a large sample of U.S. hospitals from 2000-2013. Some economic theories predict that vertical integration lowers costs and other theories predict higher costs. I therefore conduct an analysis to test these predictions in the context of hospital-physician integration. I use a variety of econometric methods, including regression analysis of cost functions using both Cobb-Douglas and translog specifications. I estimate fixed effects regressions to control for unobserved time-constant factors specific to individual hospitals. I also conduct matching analyses to account for potential endogeneity. The results demonstrate that hospital-physician integration is not associated with lower hospital costs. Instead, depending on the specification, the results show that integrated hospitals have costs that are higher than or equivalent to the costs of non-integrated hospitals. Analyses that include other types of vertical relationships also do not show any consistent effect of these organizational forms on hospital costs. In addition, I find no consistent effects of vertical integration or other organizational forms on the quality of hospital care. These findings suggest that any increases in costs that may stem from hospital-physician integration are not due to higher quality care. The findings also have potential implications for public policy. Although vertical integration is sometimes viewed as a way to stem rising healthcare costs, the evidence suggests that this may not be the case.



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