Physician–Hospital Integration Tied to Higher Prices

Tara Haelle

October 20, 2015

Financial integration between hospitals and physicians leads to higher prices and spending for outpatient care, but not for inpatient care, according to a study published online October 19 in JAMA Internal Medicine.

"These findings are consistent, on average, with hospitals conferring their existing market power to newly employed physicians or acquired practices as the integrated organization negotiates prices for outpatient physician services but not with physician-hospital integration strengthening the organization's bargaining power in negotiating prices for inpatient hospital services," write Hannah T. Neprash, BA, and colleagues at Harvard Medical School's Department of Health Care Policy in Boston, Massachusetts.

"Differences in prices for office visits between independent physicians and physicians integrated with hospitals were larger and varied across [metropolitan statistical areas] substantially more in the commercially insured population than in the Medicare population," Neprash and colleagues continue. "These pricing patterns provide suggestive evidence that price increases associated with physician-hospital integration did not result solely from transmission of setting-related price differentials in the Medicare payment system but likely also resulted from the enhanced market power of the provider organizations."

The researchers analyzed the relationship between changes in spending in 240 (of a total 381) US metropolitan statistical areas and changes in physician–hospital integration in those areas between January 2008 and December 2012. They report their findings after accounting for various characteristics of patients, plans, and markets, including hospital, physician, and insurance market concentration within each statistical area. They also made adjustments for the local unemployment rate, the proportion of the population older than 65 years, and the proportion in poverty.

The researchers relied on the Truven Health MarketScan Commercial Database for their data, which included 7,391,335 nonelderly patients enrolled in preferred-provider organizations or point-of-service plans. They used Medicare claims data to assess physician–hospital integration based on the proportion of physicians in a metropolitan statistical area who used a hospital outpatient department billing code, indicating that the physician was employed at a hospital and/or that the practice was owned by the hospital. They calculated annual spending per enrollee for inpatient and outpatient services and assessed use with a "measure equal to the sum of annual service counts for each service, with each service count multiplied by the national mean of allowed charges for the service, and services defined by Current Procedural Terminology codes."

Separating measurements of spending and use allowed the researchers to determine how much price changes drove spending changes: a change in spending without a corresponding change in use would indicate a price change.

During the study period, physician–hospital integration increased an average 3.3 percentage points across the 240 areas, going from 18.0% to 21.3% (interquartile range, 0.8 - 5.2 percentage points). The researchers calculated the increase in physician–hospital integration equivalent to the 75th percentile of changes experienced by metropolitan statistical areas. That increase correlated with a 3.1% increase in mean spending for outpatient services compared with the average outpatient spending in 2012 ($75 per enrollee; 95% confidence interval [CI], $38 - $113; P < .001). Mean spending per enrollee in 2012 was $2407 for outpatient care and $872 for inpatient care. Use, measured as price-adjusted spending, however, did not significantly increase ($14 per enrollee; 95% CI, −$13 to $41; P = .32).

The researchers did not identify statistically significant increases in inpatient spending ($22 per enrollee; 95% CI, −$1 to $46; P = .06) or use ($10 per enrollee; 95% CI, −$12 to $31; P = .37).

Hospital ownership of physician practices has the potential to create cost savings and integrated, well-coordinated care, with greater shared resources and infrastructure and benefits for physicians such as more stable incomes, better work–life balance, lower malpractice insurance costs, and fewer practice management issues, note James D. Reschovsky, PhD, and Eugene Rich, MD, from the Mathematica Policy Research Health Division in Washington, DC, in an accompanying editorial. Yet this study reveals that greater efficiency did not result from hospital–physician integration.

Dr Reschovsky and Dr Rich discuss three possible contributors to the findings: hospital purchases of physician practice to maintain or grow market share, greater revenue generated from the physicians' services, and hospitals' greater bargaining power with insurers in price negotiations.

"Policy makers can influence the direction vertically integrated hospitals take in the future," Dr Reschovsky and Dr Rich write, although they note that "[r]olling back hospital consolidation or vertical integration owing to anticompetitive behavior is unlikely to be feasible or necessarily desirable."

The research was supported by the Robert Wood Johnson Foundation. One coauthor reported employment with Truven Health Analytics. The other authors and editorialists have disclosed no relevant financial relationships.

JAMA Intern Med. Published online October 19, 2015. Article abstract, Commentary extract

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