Bigger Health Care Providers Mean Bigger Profits, but Not Always Better Care

In 2002, only 22 percent of private physician practices were owned by hospitals. Today, this number has climbed to more than 50 percent, and 75 percent of newly hired physicians are entering the workforce as hospital employees. As the physician population ages, the behaviors of young physicians will have long-term impact on the organization and norms of care delivery.

Amid declining reimbursements and a shift toward value-based payment models in which physicians are reimbursed for quality rather than quantity of services, health care providers are facing pressure to reduce costs and improve outcomes. An increasing number of physicians are selling their practices to hospitals, and hospitals are aggressively buying to remain competitive.

Two chief catalysts that are driving hospitals to purchase physician practices include the recent economic downturn and passage of the Patient Protection and Affordable Care Act (ACA).

In this economic environment, hospital survival is a matter of cost cutting and care organization. The ACA requires compliance with new quality regulations, including curbed readmission rates and a reduction in hospital-acquired infections, and facilities are compelled to spend money in efforts to meet those requirements. Hospitals are acquiring physician practices to increase scale for better negotiating positions with insurers, further penetration of local markets, the ability to integrate IT systems, and the improvement of purchasing power with suppliers.

Physicians are selling their practices to hospitals for greater access to capital and fewer administrative responsibilities amid reform, an improved work-life balance, and recruiting incentives by hospitals.

But when hospitals purchase physician practices instead of contracting with physicians, the results can be costly. A recent Health Affairs study gives authority to the issue: hospital ownership of physician practices increases hospitals’ pricing power, and prices rise for privately insured patients. A one-standard-deviation increase in market share can increase prices by 3 percent, and a one-standard deviation increase in hospital Herfindahl-Hirschman Index (a statistical measure of market concentration), can increase prices by 6 percent.

In central North Carolina, Duke University Health System has been aggressively converting nearby clinics into Duke-affiliated outpatient centers. State Attorney General Roy Cooper is examining whether antitrust laws or new legislation can be used to reduce growing hospital prices.

In January, a federal judge blocked a major purchase of Idaho’s largest physician practice by the state’s largest hospital system. In light of that case, the FTC has suggested it will show greater scrutiny of healthcare provider consolidations.

In theory, true integration of physician practices into hospital systems can provide substantial gains for both parties. By reducing barriers to patient information and care coordination, facilities can improve quality and generate cost-savings in the long-term. Truly integrated practices employ a well-managed infrastructure, aligned incentives, coordinated IT tools, and a culture of partnership and collaboration. But there is a great possibility that hospitals are primarily motivated by the prospect of greater bargaining power with insurers, and are not truly integrating.

State Attorneys General should renew a focus on anti-trust legislation to protect the strained wallets of healthcare consumers in states where transactions are occurring. In a time of seismic shifts in care delivery and payment mechanisms, we need to keep the patient at the center of health activity and ensure that transactions do not further burden consumers in an already expensive system.