Is Physician Integration Driving Up the Cost of Care?

Few physician executives believe costs go down when healthcare systems acquire physician practices. We asked doctors with divergent views to explain their positions.

What happens to healthcare costs when a physicians practice is sold to a hospital system?

The American College of Physician Executives last week released the results of its recent poll in which it asked its members about the effect on the cost of care when a health system buys a physician practice. Of the 469 respondents, 32% said care costs increase, while only 4.7% said costs go down. Sixteen percent said costs remain the same, 12% were unsure, and 34.8% said the question was not applicable to their organization.

With most healthcare institutions on a mission to drive down the cost of the care they provide, these poll results may be cause for concern among financial administrators.

Peter Angood, MD, and CEO of the ACPE, however, thinks the outlook may not be so dire. The higher costs may be due to the initial investment in the resources that are required to integrate a physician group with the larger health system rather than a long-term uptick, he says.

"I think as healthcare systems gain more focus on physician engagement and integration, the goal is to improve the overall continuum of care. If you are going to do that properly, it requires a lot more resources upfront, such as infrastructure investment in EHR and support personnel. What we may be seeing at this stage is more upfront investment than a sustained increase in cost, although it is going to take a bit of time to see that," Angood says.

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"The hope is that by doing these upfront investments, the cost of care along the continuum will not only plateau, but decrease," he adds.

T. Clifford Deveny, MD, senior vice president for physician services at Catholic Health Initiatives, an 80-hospital, $10.7 billion nonprofit health system based in Englewood, CO, agrees that there are some initial start-up costs involved when a hospital buys a medical group, but says that does not have to translate into higher care costs.

"There will be an investment in bringing in a physician practice with the EMR and integrating the practice into the system, but it is an individual choice by the health system as to whether it is going to pass that cost on to the community," Deveny says. "Most administrators aren't big fans of the cartel mentality of 'because we are bigger we deserve more pay.' Most systems are absorbing those costs."

Deveny believes physician integration can lower costs by centralizing back office functions, reducing the duplication of expensive medical tests, and producing economies of scale for supply purchasing.

"Our intent and our model are to integrate to lower the cost of care. When you integrate physicians, you can drive down supply chain costs and improve operations. Not only are you employing physicians to provide service, but you are using their skill sets in other ways. For example, we wouldn't have been able to reduce readmissions without having significant integration of physicians," he says.

Although Deveny sees physician integration as a way to bring healthcare costs down, he is in the clear minority compared with ACPE poll respondents, less than 5% of whom agree.

One respondent who believes the opposite is true is David B. McDermott, MD, medical director of inpatient and emergency services at Mayo Regional Hospital, a 25-bed critical access hospital in Dover-Foxcroft, Maine.

McDermott thinks there are a few factors contributing to the hike in costs when a hospital buys a physician practice, including stricter compliance requirements.  

"... [T]he practices now have to be compliant with hospital licensing standards which are, in most cases, more stringent than solo offices. More regulations translate to more staffing, which translates to increased costs," he says.

McDermott also points to an increased need for physician leadership within the health system as another reason for higher costs.

"The successful entities have to pay the physician leaders for their leadership time and talent and replace the lost clinical time that their management commitments require with additional clinical staff with their own attendant costs," he says. "Leadership time has clear costs, but is not directly associated with a reimbursement stream."

Additionally, reduced physician output can also play a part in higher costs, according to McDermott, who says doctors often suffer "the loss of productivity associated with EHR transition and that associated with feeling less pressure to produce to still be able to pay [their] bills."

Although McDermott sees physician integration as a driver of higher care costs, he sees the benefits, as well.

"I live and work in rural Maine. ... [A]bout 40% of our patients have Medicare and 30% [have] Medicaid. Another 10% don't have insurance… I think that the payer mix is not unique here and reflects much of rural America," he says. "If we did not have the high degree of integration we have in our community, we would have far fewer providers to see the residents of the region, and its health would suffer adversely."

Unlike Angood, however, McDermott isn't so optimistic that the upward cost trend he associates with physician integration is temporary.

"I think that some of these factors are here to stay," he says.