The Effect of Physician-Hospital Affiliations on Hospital Prices in California

The 1990s saw considerable integration of hospitals and physician practices, as well as some dissolution of integrated entitites. Using data from California, we investigate whether such vertically integration activity affected prices charged to managed care payers. We find that hospitals that form highly integrated structures generally reduced prices. Hospitals did not change prices upon dissolution, however. The only possible evidence of price increases occurred among the four rural hospitals in our sample. Overall, our findings are inconsistent with established economic explanations for vertical integration, and are also inconsistent with the empirical work of Cuellar and Gertler [2002], who find systematic evidence that hospitals increased their prices after vertically integrating with physicians.