Employed for Higher Pay? How Medicare Facility Fees Affect Hospital Employment of Physicians

Hospitals employ an increasing number of physicians and bill for a growing share of outpatient procedures, part of a vertical integration trend. Exploiting a change in the methodology used by Medicare to calibrate payments for medical procedures, we find this trend is at least partially driven by payer reimbursement rules. Our estimates suggest that the change in Medicare’s methodology explains 20 percent of the increase in physician employment and 35 percent of the increase in hospital-billed outpatient procedures between 2009 and 2013. We conclude that at least some of the recent vertical integration trend has been motivated by reimbursement rules.