When hospitals acquire physician practices—ostensibly to create accountable care organizations that better coordinate care and eliminate waste and redundancies—the cost of care goes up, not down, researchers find. But that's not the last word.
One of the most ferocious debates in the healthcare sector is whether or not provider consolidation leads to higher or lower costs.
After years of speaking with very smart people on both sides of the issue, I can unequivocally say: Maybe.
Consider the study published this week in the Journal of the American Medical Association. Researchers at the University of California, Berkeley, found that when hospitals acquire physician practices—ostensibly to create accountable care organizations that better coordinate care and eliminate wasted and redundancies – the cost of care goes up, not down.
"This is about the total cost of care. This is about consolidation," says study lead author James Robinson, professor and head of health policy and management at UC Berkeley's School of Public Health.
"The ideal of the ACO movement is that consolidation is a way to get to coordination and coordination is a way to get to cost moderation. What we find here is that consolidation is not necessary nor sufficient to get to that cost moderation endpoint, and it can go in the opposite direction."
Robinson's team analyzed 2009–2012 data on 158 major medical groups and 4.5 million patients in California. Groups were divided into three categories: owned by physicians, owned by a local hospital or hospital system, or owned by a large hospital system in multiple markets.
Cost Measures
The cost measures included physician visits, inpatient hospital admissions, outpatient surgery and diagnostic procedures, drugs, and all other forms of medical care, according to UC Berkeley.
Controlling for the mix of severely ill patients and cost geography, per-patient expenditures were 19.8% higher for physician groups in multi-hospital systems compared with physician-owned organizations. At groups owned by local hospitals, per-patient costs ran 10.3% higher compared with physician-owned groups.
"It's not that hospitals are getting together and raising their prices," Robinson says. "This is hospitals acquiring medical groups and then total costs go up, physician costs, hospital costs, drug costs. That says they are not raising prices directly, but rather that hospitals are big organizations. They have a lot of overhead and layers of complexity. They have ambulatory services centers they want to keep full. They have imaging equipment they want to use. And when they own a physician group they probably—not in writing but implicitly—say 'you shall use our hospital and our imaging equipment,' and that is expensive."
Robinson also sees the consolidation as a variant of the rich-get-richer syndrome.
"It is particularly expensive if the entity that purchased the medical group happens to be the consolidated high-priced facilities, and the reason there is good suspicion to think they are is because those are the people with the balance sheets to buy medical groups," he says.
"That is the dilemma in the hospital consolidation. The expensive hospital buys the cheap hospital and turns it into an expensive hospital. The most expensive hospitals are buying the medical groups and they channel those admissions to that hospital."
AHIP Weighs In
There is no greater champion of the consolidation-means-higher-costs argument than America's Health Insurance Plans, and they applauded Robinson's study.
"Once again, the rhetoric of provider and hospital consolidation adding greater efficiency to the health system does not match the reality," AHIP spokeswoman Clare Krusing said in an email exchange. "For patients in highly consolidated markets, they are facing higher costs without any indication of an improvement in the quality of care."
The American Hospital Association takes a different view. They believe that many studies, including Robinson's, which show higher costs related to consolidation are based on flawed, skewed, or obsolete data.
"The researchers analyzed data from 2009–12. Even in California the market has moved so far and so fast that this study is a little out of date and a little out of touch," says Melinda Hatton, AHA general counsel.
Hatton notes, for example, the launching last month of Anthem Blue Cross Vivity, a conglomeration of seven health systems in the Los Angeles area that are forming an integrated care network to compete with Kaiser Permanente.
"Vivity show you that hospitals, whether they are in California or other markets, recognize that particularly for outpatient services they have to be cost competitive or they are not going to be sustainable," Hatton says.
Why Acquisitions Happen
There are a number of reasons why hospitals acquire medical practices beyond improving leverage with payers, Hatton says.
"You cannot make cost and quality goals set both by the government and the private sector unless you are able to work with physicians in a way that affiliations short of mergers and acquisitions don't allow you to work with them that way," she says.
"Part of it is the regulatory barriers. Whether you are talking about Stark or anti-kickback or civil monetary penalties, our whole regulatory structure is based on an outdated 20th-century model that no one believes is the way to improve cost and quality in the healthcare system."
"Unless you are tightly aligned with your physicians, you are going to sustain increasingly large readmissions penalties, you are going to see penalties under hospital acquired conditions increase. More importantly, consumers at every level are looking for those kinds of entities in the healthcare field that can actually provide a continuum of care and not just episodic care that leaves the consumers having to try to navigate a healthcare system by themselves."
Retail Medicine
In an era of high-deductible health plans, with consumers fronting more of the cost, Hatton says, hospital outpatient services have to be cost competitive with upstart retailers such as Walgreens and CVS Health (formerly CVS Caremark). However, she concedes that hospitals likely will never be able to match prices with retail medicine.
"There are requirements that hospitals have for their physician practices that outpatient ambulatory centers don't have," she says. "But you have to think about the quality implications and the patient safety implications. The safer the environment, the more it's going to cost, but it has to be a competitive price or consumers are going to take their chances with a place that doesn't have to meet those requirements. Everybody recognizes that."
I have no reason to doubt that Robinson's study is an accurate reflection of his findings. It also passes the common sense test, and Hatton's concessions on the higher costs of hospital outpatient services, however justified those costs may be, validate Robinson's findings.
However, Hatton is also correct. A lot has changed in healthcare delivery in less than two years. Since the passage of the Patient Protection and Affordable Care Act, the big driver has been the dramatic rise of the high-deductible health plans. Their growth forces patients to become smarter healthcare consumers.
In a new era of price transparency, hospitals can pitch the quality argument when explaining to consumers why their services cost more. But as the big box retailers have shown us, you have to be in the ballpark.
John Commins is the news editor for HealthLeaders.