Physician group purchases drive up health system prices

Health systems have been snapping up physician groups, and the end result is higher prices—not just for specialist care and primary care, which went up 9 percent and 5 percent, respectively, but also for Affordable Care Act premiums, which rose 12 percent—all from 2013 to 2016.

That’s according to a new Health Affairs study of 41 “highly concentrated” California counties indicating that the percentage of hospital-employed physicians rose from about 25 percent in 2010 to more than 40 percent in 2016.

And with that shift in ownership came higher prices.

Related: UnitedHealth buying up doctors to defend against competition

“This is a ubiquitous trend in the U.S. and I can tell you that there is virtually no state less with less than a quarter of physicians that have already been purchased by now,” Richard Scheffler, University of California, Berkeley professor and the study’s lead author, says. “The impact of these type of verticals is much more powerful when the hospital itself has a lot of market power and can jack up prices.”

Nationally, researchers found that the share of hospital-employed physicians rose from 30 percent to 48 percent from 2010 to 2016.

According to Scheffler, there’s a two-pronged reason for all this vertical integration. Not only do health systems want to enlarge their referral network and send more patients to hospitals, they also make out by charging facility fees—higher rate meant to account for a hospital’s overhead.

Hospital execs claim that greater control means more coordinated care, while economists argue that health systems’ greater leverage with insurers leads to higher prices—and that drowns any advantage that might be conferred by economies of scale.

It’s also a means of giving a health system the upper hand in local competition; for instance, a hospital not in the system could lose access to the patients of an acquired primary care practice and that could either drive it to close or raise its own prices.

According to Modern Healthcare, “Notably, the study’s measure of vertical integration—the percentage of physicians in practices owned by hospitals—is not codified in the Department of Justice or Federal Trade Commission guidelines as the horizontal concentration threshold is. This is why up to this point regulators have challenged vertical integration on a horizontal market share basis. Health systems have also made small acquisitions in secondary markets that fell under regulators’ radar but add up over time.”

Hospitals with the clout to demand that insurers include all their various subsidiaries thus win inclusion for facilities or physicians who might otherwise be excluded on the basis of price or quality. And California has seen a decline in the number of acute hospitals and substantial increases in the proportion of hospitals in health systems as well as in prices.

In both Washington state and Idaho, there have been actions to thwart such a narrowing of competition, but according to Glenn Melnick, a professor at the University of Southern California and lead author of a related study, more needs to be done.  “If we can’t restore the competitive dynamic to markets, prices will continue to go up and up.”