Hospital Ownership of Physicians Drives Up Costs

New research published in the JAMA Internal Medicine journal supports, with rigorous data analysis, the notion that hospital ownership of medical practices drives up costs:

Among the 240 Metropolitan Statistical Areas, physician-hospital integration increased from 2008 to 2012 by a mean of 3.3 percentage points, with considerable variation in increases across MSAs. For our study sample of 7,391,335 nonelderly enrollees, an increase in physician-hospital integration equivalent to the 75th percentile of changes experienced by MSAs was associated with a mean increase of $75 per enrollee in annual outpatient spending from 2008 to 2012, a 3.1% increase relative to mean outpatient spending in 2012). This increase in outpatient spending was driven almost entirely by price increases because associated changes in utilization were minimal (corresponding change in price-standardized spending, $14). Changes in physician-hospital integration were not associated with significant changes in inpatient spending ($22 per enrollee) or utilization ($10 per enrollee).

(Note: I have edited out the measures of statistical significance from the abstract, for ease of reading.)

$75 per enrollee is not a huge increase, but it certainly supports the thesis that hospital acquisition of physician practices does not lead to reduced total cost of care, even if the hospital does not influence the physicians to fill the hospital’s beds. This is an important topic, because providers are re-organizing themselves to take advantage of new forms of reimbursement, in which they bear financial risk.

What is also interesting is that this research studied the non-elderly population, which suggests that private insurers struggle to prevent hospitals from arbitraging the fee schedules. Medicare permits hospital-owned facilities to charge more for the same outpatient procedures than if they are done in doctors’ offices. Congress and President Obama have taken a small step to prevent this overcharging, but much more can be done. Private insurers should be able to better control this, because they are not subject to hospital lobbying like politicians are.

Overall, I join critics, like Dr. Zeke Emanuel, who are skeptical of developments such as Accountable Care Organizations (ACOs), and other government-driven alternatives to Fee-For-Service, which motivate providers to consolidate. Five years into the Affordable Care Act, prices for hospital inpatient and outpatient services have been rising significantly versus other prices, including health prices, and we are not seeing this turn around.

John R. Graham is a former Senior Fellow at the Independent Institute.
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