Hospital-physician integration has surged in recent years. Integration may allow hospitals to share resources and management practices with their integrated physicians that increase the reported diagnostic severity of their patients. Greater diagnostic severity will increase practices' payment under risk-based arrangements. We offer the first analysis of whether hospital-physician integration affects providers' coding of patient severity. Using a two-way fixed effects model, an event study, and a stacked difference-in-differences analysis of 5 million patient-year observations from 2010 to 2015, we find that the integration of a patient's primary care doctor is associated with a robust 2%-4% increase in coded severity, the risk-score equivalent of aging a physician's patients by 4-8 months. This effect was not driven by physicians treating different patients nor by physicians seeing patients more often. Our evidence is consistent with the hypothesis that hospitals share organizational resources with acquired physician practices to increase the measured clinical severity of patients. Increases in the intensity of coding will improve vertically-integrated practices' performance in alternative payment models and pay-for-performance programs while raising overall health care spending.
Keywords: healthcare spending; hospitals; medicare; physicians; professional labor markets; vertical integration.
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