Integration and Task Allocation: Evidence from Patient Care

• Published date: 01 September 2013
• Date: 01 September 2013
• Author: Daniel Polsky,Evan Rawley,Guy David
• DOI: http://doi.org/10.1111/jems.12023

Integration and Task Allocation: Evidence from

Patient Care

GUY DAVID

The Wharton School University of Pennsylvania and NBER

202 Colonial Penn Center 3641 Locust Walk Philadelphia PA 19104-6218

gdavid2@wharton.upenn.edu

EVAN RAWLEY

Columbia Business School

Columbia University

Uris Hall, 3022 Broadway, Room 702, New York, NY, 10027-6902

erawley@columbia.edu

DANIEL POLSKY

University of Pennsylvania Blockley Hall

Room 1204, 423 Guardian Drive Philadelphia PA19104

Polsky@mail.upenn.edu

Using the universe of patient transitions from inpatient hospital care to skilled nursing facilities

and home health care in 2005, we show how integration eliminates task misallocation problems

between organizations. We find that vertical integration allows hospitals to shift patient recovery

tasks downstream to lower-cost organizations by discharging patients earlier (and in poorer

health) and increasing post-hospitalization service intensity. Although integration facilitates a

shift in the allocation of tasks and resources, health outcomes either improved or were unaffected

by integration on average. The evidence suggests that integration solves coordination problems

that arise in market exchange through improvements in the allocation of tasks across caresettings.

1. Introduction

This paper examines how integration solves task allocation problems between organi-

zations. In particular, we focus on timing problems in market exchange that arise from

the misallocation of tasks between two vertically distinct stages of production. Because

the seminal work of Masten et al. (1991) scholars have made great progress toward

understanding how timing problems in market exchange influence vertical integration.

For example, Nickerson and Silverman (2003) demonstrate that trucking firms verti-

cally integrate in the less-than-truckload (LTL) segment to avoid disruption of closely

coordinated breakbulk operations, and Forbes and Lederman (2009a,b) show how the

We are grateful to Iwan Barankay, Avi Dor, Silke Forbes, Vit Henisz, Mireille Jacobson, Raffaella Sadun,

Aly Shogan, Brian Silverman, Tim Simcoe, Pai-Ling Yin as well as participants at the 2010 Foundations

of Business Strategy Conference at Washington University, the Third Biennial Conference of the American

Society of Health Economists at Cornell University,the 2010 NYU Economics of Strategy Conference, the 2010

Institutions and Innovation Conference at Harvard Business School, the 2011 DRUID conference,the 2011 SRF

workshop in Annapolis, the Bowman Seminar at Wharton, the 2011 Academy of Management conference,

and the International Health Economics Association 8th WorldCongress in Toronto for helpful comments and

suggestions. Mike Punzalan and Jianing Yang providedexcellent research assistance. This work is supported

by NIH/NHLBI grant # R01 HL088586-01.

C2013 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume22, Number 3, Fall 2013, 617–639

618 Journal of Economics & Management Strategy

risk of cascading delays lead major airlines to own regional carriers that operate routes

originating or terminating at the majors’ hubs (or other cities that are important to

the majors’ network). We build on the idea that the timing of exchange influences

transactional efficiency, and thereby vertical integration. However, instead of study-

ing timing as an adaptation problem (Masten et al., 1991; Nickerson and Silverman,

2003; Forbes and Lederman, 2009a,b), we focus instead on timing issues stemming

from the misallocation of tasks to assets (or sites) that may arise under bilateral market

exchange.1

We test the idea that the misallocation of tasks across sites of production has

performance implications in the context of the patient care continuum, where patients

transition across organizational settings, from acute care facilities (hospitals) into post-

acute care (nursing homes and home health). The empirical application demonstrates

the role of task allocation in influencing the efficiency of transactions and firm bound-

ary decisions. Taking the sequence of clinical interventions (or tasks) along the care

continuum as fixed—patients need a well-defined set of clinical interventions to ad-

dress their health care needs—exchange is, therefore, characterized solely by the timing

of transitions across settings. Systematic variation in cost structures and reimburse-

ment rates between hospitals and post-acute care providers coupled with regulatory

restrictions on side-payments (which represent a strong form of contractual incom-

pleteness) ensures that tasks will not be efficiently assigned unless the hospital and

downstream providers are vertically integrated. However, integration costs are non-

trivial such that there is substantial heterogeneity in governance regimes: about one-

third of nursing homes and home health agencies (HHA) are vertically integrated into

hospitals.

One major advantage of our empirical design is that we can track patients across

organizations, which allows us to pinpoint how integration influences tasks on both

sides of the exchange relationship. The ability to observe the clinical procedures pa-

tients receive in post-acute care at a high-level of detail is particularly important to our

empirical assessment of patient health at the time of discharge. A second advantage of

our empirical approach is that health markets are distinct and heterogeneous, allowing

us to exploit exogenous variation in local market conditions as part of our empirical

strategy. In particular, we use other hospital’s vertical integration status in the same

geographic market as instrumental variable that is correlated with the costs and benefits

of integration, but uncorrelated with a focal hospital’s discharge decisions.

The evidence shows that, on average, vertical integration leads to shorter hospital

stays for patients discharged to post-acute care. We also find that patients received

higher intensity of care from vertically integrated home health providers. The results

support the central thesis of the paper: integration changes the allocation of tasks across

organizational settings to achieve efficiency. Notably, while we find striking differences

in the organization of services across sites, vertical integration does not lead to a decline

in patient health outcomes, suggesting that different allocations of tasks across sites

produces similar levels of care quality.

The results contribute to the literature on firm boundaries by demonstrating how

integration changes the allocation of tasks to assets and, thereby, mitigates inefficiencies

in market exchange that arise even in the absence of cascading organizational problems

1. We use the terms assets and sites interchangeably throughout this paper. In health care, as in most

service industries, tasks may be performed in multiple physical settings. These settings can be thought of as

assets or sites.