Vertical Integration: Hospital Ownership Of Physician Practices Is Associated With Higher Prices

[eridani]

--And Spending

http://content.healthaffairs.org/content/33/5/756.abstract

The share of US physician practices owned by hospitals more than doubled from 2002 to 2008. This trend toward vertical integration between hospitals and physicians means that more producers of complementary services that were once independent are now either commonly owned or related by contract.

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Our study had two key findings. First, in its tightest form, vertical integration appears to lead to statistically and economically significant increases in hospital prices and spending. This is consistent with the hypothesis that vertical integration increases hospitals’ market power. We found that a one-standard-deviation increase in the market share of hospitals that own physician practices was associated with significant increases in prices and spending of 2–3 percent. In comparison, a one-standard-deviation increase in the hospital Hirschman-Herfindahl index increased prices and spending by 4–6 percent.

Second, the consequences of looser forms of vertical integration were more benign and potentially socially beneficial. Increases in these forms of integration did not appear to increase prices or spending significantly and may even decrease hospital admission rates. This finding is consistent with the hypothesis that vertical integration can improve the coordination of care.

However, the effects on volume associated with these types of integration were small — so small that they did not generate a significant reduction in hospital spending. In addition, although our estimates of the effect of contractual integration on price were statistically indistinguishable from zero, the imprecision of our estimates limited our ability to confidently assess their true impact.

Comment by Don McCanne of PNHP: An intent of the Affordable Care Act was to reduce health care spending through the establishment of more efficient integrated health systems, operating as accountable care organizations. The ultimate integration is for hospitals to assume ownership of physician practices. This study demonstrates that this form of vertical integration does not reduce prices and spending but rather increases them, likely through the anti-competitive effects of such consolidation. Looser forms of vertical integration (contracts rather than ownership) also failed to achieve a reduction in hospital spending.

One important aspect of this study that will likely escape the attention of the policy community is that they used data from Truven Analytics MarketScan - a data base of claims filed by privately insured people who obtained insurance through a participating employer. Thus the ineffectiveness in recovering through lower prices the efficiencies of the consolidated systems represents a failure of the private insurance industry, whether functioning as insurers or as administrators for self-insured employers.

So maybe vertically integrated systems, in which the hospitals own physician practices, have the market clout to prevent efficiency savings from being passed on to the purchasers of health care, but if we had a single payer financing system, our public stewards would ensure that we paid the right amount through administered pricing rather than being victim to unfairly leveraged market negotiations. We need to replace marketplace oligopolies with our own public monopsony - an improved Medicare for all.