Vertical Integration and Screening

 

Cutler et al have published a new paper that adds to the catalog of reasons why firms might vertically integrate. They examine Skilled Nursing Facilities (SNFs) owned by hospitals. SNFs make referrals to hospitals for their residents who develop medical issues. But some referrals are more lucrative than others. The SNF has private information about which referrals will earn the hospital more profit. An unaffiliated SNF will capture none of this, but a vertically integrated SNF/hospital can profit by screening in the more lucrative patients and screening out the less lucrative patients.