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Physician Practice Vertical Integration Highest Among Specialties

Analysis  |  By John Commins  
   July 10, 2018

A new study examines vertical integration of physician practices from 2007-2017 and finds considerable variation among specialties, with oncology and cardiology leading the way.  

A new study this week in Health Affairs examined the consolidation of physician practices by hospitals over the past decade and found that rates of growth were highest among medical and surgical specialty practices and lowest among primary care practices.

Within the specialties, the study found considerable variation in the levels of vertical integration from 2007 through 2017, ranging from 4 percentage points in dermatology to 34 percentage points in cardiology and oncology.

Study lead author Sayeh S. Nikpay, an assistant professor of health policy at Vanderbilt University School of Medicine, spoke with HealthLeaders Media about the findings.

The following is an edited transcript.

HLM: What prompted this study?

Nikpay: I work with hospitals and how they interact with reimbursement mechanisms. I was noticing there was a lot of research on vertical integration, a lot of studies trying to quantify the effect of vertical integration on cost, quality, and access. But we really didn't know anything about the basic descriptive facts about vertical integration.

So this paper shows that this is happening systemwide, albeit more in some systems than others. It opens up a lot of questions about why.

HLM: What are the key takeaways from this study?

Nikpay: Vertical integration has been happening consistently over the past decade, and it's not just happening in specific specialties. It's happening everywhere. It's medical specialists, it's surgery, it's primary care. This is a trend that has been happening consistently.

Also, it's uncertain what vertical integration actually means. We observe clinics that are owned or affiliated with hospitals, but we don't know exactly what that means. That could mean something from tightly integrated like a Kaiser, where they are not just integrated financially. They have shared electronic medical records. They are organizationally integrated as well. Or it could be a short-term contract to fill under the provider idea of a hospital to meet a short-term need.

HLM: What explains the variations in which specialties are acquired by hospitals?

Nikpay: It could have to do with demand for specific types of services. Oncology, cardiology, these are some of the most pressing and difficult problems that patients face. So, there is a lot of demand for those services.

We can't address this in our study, but our results hint that reimbursements policy might matter. Before 2007 there were changes to the way in which oncology drugs were reimbursed. We went from being able to charge Medicare what you wanted to only being able to charge average sales price plus 6%, as part of the Medicare Modernization Act.

Later on, there were changes to cardiology reimbursement, but we don't specifically test whether those reimbursement mechanisms that targeted oncology and cardiology may have played a role in vertical integration.

HLM: Is there a common denominator in vertical integration?

Nikpay: The common denominator is that every specialty experienced some increase. We found that it ranges from an increase of four percentage points to 35 percentage points, and it's happening systemwide.

Besides the fact that it is happening across different specialties, there is this idea that vertical integration is happening in response to the Affordable Care Act and new payment models. But, we don't see jumps in vertical integration around the introduction of the ACA in 2010, nor do we see jumps in vertical integration in 2014, with the ramp up of the ACA through Medicaid expansion and the marketplaces coming on line.

"The common denominator is that every specialty experienced some increase."
—Sayeh S. Nikpay

So, our paper does not support the idea that vertical integration is a response to new payment models introduced under the ACA. This was a trend that was happening before the ACA was even passed. Now it is true that vertical integration makes it easier to deal with value-based payment reforms. However, whether that is a contributing factor, it's not a causal factor looking at it intertemporally.

HLM: Then, what is driving this vertical integration? 

Nikpay: The results show it's a bit of a puzzle. People are saying it's 340B that's causing all of these oncology clinics to vertically integrate. Well, maybe it's not just 340B because we're also seeing it in surgery, where 340B discounts wouldn't apply.

Or we're hearing new payment models are causing vertical integration. Well, our paper suggests maybe not because this already appeared to be happening before these new payment models were introduced.

The more nuanced story is that there is no one silver bullet that can explain this. It's not payment policy exactly. It's not these new delivery models. It's not just 340B. These might be contributing factors, but it’s a more complex picture that may represent an industrywide trend toward a new idea; a paradigm shift in the way we deliver medical care that has grown over time.

HLM: What other trends are you seeing?   

Nikpay: We can't say why, but one of the most striking findings is in general surgery. Surgeons, because of privileging, can operate in hospitals anyway, through the regular privileging system. But there could be cohort changes, and younger surgeons may be less likely to strike out on their own in private practice. They might want to be affiliated with a hospital so they can be part of the electronic health record, or not engage in the business of running a practice. Or, there have been changes to reimbursements for ambulatory surgical centers that could have made this less attractive to be in independent practice.

HLM: Given what you've seen with vertical integration in the past decade, what will the next decade look like?

Nikpay: I'll say two things. One, we are reaching a pretty high level of vertical integration in some of these specialties. You can't go up to 100%, given that there are some markets where it makes sense for practices to be community-oriented or unaffiliated. But at some point we are going to see these rates of vertical integration top out. Where that max out point is is not clear.

The other thing that matters is what is going to happen with the trajectory of healthcare policy. We've had eight years of operating in the ACA world. I'm sure that CEOs of hospitals have been operating under a certain set of assumptions and, given the surprising presidential election results, health policy has taken a different turn. The direction that it goes in will affect whether vertical integration is a good path forward or not.

HLM: Is vertical integration good or bad?  

Nikpay: That's hard to say, and the study doesn't get at who's right or wrong. There is an abundance of evidence showing that vertical integration is associated with higher spending and higher prices. That is empirically known. Whether or not those spending or cost increases are justified depends upon quality, and quality we haven't plunged the depths of that question.

It's difficult to assess quality with the type of administrative data that is available. We have CMS Hospital Compare. We have other structural measures of quality, but it is hard to see if this is affecting the patient experience with coordinated care. It's even difficult to conceptualize care coordination. Until we have more targeted studies on quality, we can't do that cost-benefit analysis.  

HLM: Anything else?

Nikpay: I've seen anecdotally the idea that hospitals are "gobbling up" oncology practices, and that's a little hyperbolic. It's more like it's systemwide and more hospitals are integrating with one or two oncology clinics rather than a core group of hospitals are gobbling up many practices. There are some outliers around the average, but massive consolidation is probably not correct.

“There is an abundance of evidence showing that vertical integration is associated with higher spending and higher prices. That is empirically known.”

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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