What Happens When a Hospital Buys a Nursing Home? An Examination of the Effects of Hospital Vertical Integration into Skilled Nursing Facilities on Hospital Operating Margin

Abstract

As value based payment mechnisms linking reimbursement to quality outcomes along the care continuum become more prevelant, hospital managers are focusing on ways to improve quality of care and cost of care metrics though the integration of providers along the care continuum. Hospital vertical integration into Skilled Nursing Facilities (SNFs) is one strategy adopted to develop more integrated systems which has the potential to enable hosptitals to perform better and manage the pressures of value based payment systems. The purpose of this paper is to examine the relationship between hospital vertical integration into SNFs and financial performance. Using Transaction Cost Economics as a theoretical framework, we use a longitudinal panel study design with hospital and year fixed effects to examine the relationship between hospital vertical integration into skilled nursing facilities and hospital financial performance, as measured by operating margin. Overall, we found very little evidence that there is a significant relationship between hospital vertical integration into SNFs and hospital financial performance. The findings of this study are important because they provide valuable insight into our understanding of the outcomes organizations may observe as a result of adopting a vertical integration into SNF strategy. In addition, it also suggests that hospital managers may be motivated by non-financial goals or objectives when choosing to adopt a vertical integration into SNF strategy.