Vertical Integration: Hospital Ownership Of Physician Practices Is Associated With Higher Prices And Spending
By Laurence C. Baker, M. Kate Bundorf and Daniel P. Kessler
Health Affairs, May 2014
The share of US physician practices owned by hospitals more than doubled from 2002 to 2008. This trend toward vertical integration between hospitals and physicians means that more producers of complementary services that were once independent are now either commonly owned or related by contract.
Whether this trend has been good for consumers has been the subject of considerable debate. On the one hand, vertical integration has the potential to improve the quality and efficiency of care by reducing what are broadly described by economists as “transaction costs.” For example, closer ties between physicians and hospitals can improve communication across care settings and reduce wasteful duplication of diagnostic tests.
On the other hand, vertical integration may hurt consumers by allowing hospitals and physicians to raise prices. By employing or contracting with physicians, hospitals may increase their market power by amassing control over a larger bundle of services or by depriving their rivals of a source of or destination for referrals. In addition, vertical integration may increase physicians’ incentives to supply unnecessary treatments if such treatments are used as a vehicle to pay what are effectively kickbacks for inappropriate referrals.
Understanding how vertical integration of physicians and hospitals affects spending and the quality of care has become especially important in recent years. The Affordable Care Act creates incentives that are likely to intensify the historical trend toward vertical integration. The act rewards doctors and hospitals that join together in an accountable care organization (ACO) by making them eligible for cash bonuses from Medicare. In theory, ACOs affect only how providers relate to Medicare. However, most health policy analysts believe that in practice, these organizations will increase the extent to which doctors and hospitals bargain with private purchasers jointly instead of independently.
From the Discussion
Vertical integration can have both socially beneficial and socially harmful effects. There is almost universal agreement that greater coordination of care, especially between physicians and hospitals, would be in patients’ best interests. At the same time, health policy analysts have expressed the concern that integration can have unintended harmful consequences for consumers. According to economic theory, vertical integration has the potential to increase the market power of providers, especially hospitals, and to encourage physicians to supply inappropriate treatments by facilitating hospitals’ payments of kickbacks that would be illegal if they were made formally.
Our study had two key findings. First, in its tightest form, vertical integration appears to lead to statistically and economically significant increases in hospital prices and spending. This is consistent with the hypothesis that vertical integration increases hospitals’ market power. We found that a one-standard-deviation increase in the market share of hospitals that own physician practices was associated with significant increases in prices and spending of 2–3 percent. In comparison, a one-standard-deviation increase in the hospital Hirschman-Herfindahl index increased prices and spending by 4–6 percent.
Second, the consequences of looser forms of vertical integration were more benign and potentially socially beneficial. Increases in these forms of integration did not appear to increase prices or spending significantly and may even decrease hospital admission rates. This finding is consistent with the hypothesis that vertical integration can improve the coordination of care.
However, the effects on volume associated with these types of integration were small — so small that they did not generate a significant reduction in hospital spending. In addition, although our estimates of the effect of contractual integration on price were statistically indistinguishable from zero, the imprecision of our estimates limited our ability to confidently assess their true impact.
http://content.healthaffairs.org/content/33/5/756.abstract
Comment:
By Don McCanne, MD
An intent of the Affordable Care Act was to reduce health care spending through the establishment of more efficient integrated health systems, operating as accountable care organizations. The ultimate integration is for hospitals to assume ownership of physician practices. This study demonstrates that this form of vertical integration does not reduce prices and spending but rather increases them, likely through the anti-competitive effects of such consolidation. Looser forms of vertical integration (contracts rather than ownership) also failed to achieve a reduction in hospital spending.
One important aspect of this study that will likely escape the attention of the policy community is that they used data from Truven Analytics MarketScan – a data base of claims filed by privately insured people who obtained insurance through a participating employer. Thus the ineffectiveness in recovering through lower prices the efficiencies of the consolidated systems represents a failure of the private insurance industry, whether functioning as insurers or as administrators for self-insured employers.
So maybe vertically integrated systems, in which the hospitals own physician practices, have the market clout to prevent efficiency savings from being passed on to the purchasers of health care, but if we had a single payer financing system, our public stewards would ensure that we paid the right amount through administered pricing rather than being victim to unfairly leveraged market negotiations. We need to replace marketplace oligopolies with our own public monopsony – an improved Medicare for all.
