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Health care providers may vertically integrate not only to facilitate coordination of care, but also for strategic reasons that may not be in patients' best interests. Optimal Medicare reimbursement policy depends upon the extent to which each of these explanations is correct. To investigate, the authors compare the consequences of the 1997 adoption of prospective payment for Skilled Nursing Facilities (SNF PPS) in geographic areas with high versus low levels of hospital/SNF integration. They find that SNF PPS decreased spending more in high integration areas, with no measurable consequences for patient health outcomes.
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