The profitability of vertical mergers between hospitals and physician practices

We demonstrate that the existence of incentives for vertical mergers between hospitals and physician practices depends upon the relative degree of competitiveness of the two providers' markets. When the degree of competitiveness is comparable, a vertical merger enhances the bargaining position of both merging parties vis-à-vis insurers. In contrast, when one provider's market is much more competitive than the other a vertical merger may reduce the joint profits of the merged entity. Prohibiting the parties from offering their services in conjunction with outside independent entities may restore the profitability of the vertical merger even in this case.