In the past 15 years, hospitals have pursued tighter integrative relationships with physicians, including direct employment of doctors. In 2003, approximately 29% of hospitals had at least some employed physicians, a number that rose to 42% by 2012. The share of US physician practices owned by hospitals rose from 14% in 2012 to 29% in 2016. Economists refer to these tighter relationships between hospitals and physicians as vertical integration, because they represent the decision of hospitals to exert increasing control over physicians as an essential input to inpatient care.
Experts offer multiple reasons for why hospitals and physicians might pursue closer contractual relationships. Physician integration could lead to efficiency gains by lowering transaction costs and improving efforts to manage and coordinate care. Some experts hypothesized that vertical integration is an unintended consequence of Medicare’s Accountable Care Organization (ACO) model, which promotes care coordination. However, a recent study found no association between local market ACO penetration and increased vertical integration.