Integration and Task Allocation: Evidence from Patient Care

We develop a formal model to show how integration solves task allocation problems between organizations and test the predictions of the model, using a large and rich patient-level dataset on hospital discharges to nursing homes and home health care. As predicted by the theory, we find that vertical integration allows hospitals to shift patient recovery tasks downstream to lower cost delivery systems by discharging patients earlier and in poorer health, and integration leads to greater post-hospitalization service intensity. While integration facilitates a shift in the allocation of tasks, health outcomes are no worse when patients receive care from an integrated provider. The evidence suggests that by improving the allocation of tasks, integration solves coordination problems that arise in market exchange.