The Unintended Consequences of Physician-Hospital Integration

New payment models hold care providers accountable for the full spectrum of patient care.

Hospitals have been rapidly taking over physician practices in recent years, which could ultimately be responsible for changes in health care spending through increasing prices or use of profitable hospital-based services.

Trend analysts speculate that as health care providers position themselves to meet the challenges of new payment models that hold them accountable for the full spectrum of patient care, this trend will accelerate. If this proves true, the consequences could lead to physician-hospital integration becoming even more important to understand.

A new study by researchers at Harvard Medical School’s Department of Health Care Policy has determined that this type of provider consolidation has led to higher prices with no evidence of offsetting reduction in the use of care.

Findings indicate that integration between physicians and hospitals allows them to bargain better with insurers, particularly for the cost of outpatient care, but this integration has not led to more efficient care.

“Payment reform is critically important to achieving a high-performing health system, but the price increases we found do suggest a potential unintended consequence,” said senior study author J. Michael McWilliams, associate professor of health care policy and medicine at HMS and practicing general internist at Brigham and Women’s Hospital.

Researchers performing the study using data from Medicare claims to measure when a practice was purchased by a hospital system. They then determined the difference in spending and prices before and after integration for a cohort of more than 7 million patients with commercial insurance.

The amount of physicians employed by hospitals or working for practices owned by hospitals increased dramatically between 2008 and 2012, with an increase of 5.2 percentage points among markets at the 75^th percentile of changes in physician-hospital integration.

Meanwhile, an increase in physician-hospital integration of this significance was associated with a 3.1 percentage point increase in annual outpatient spending. Price increases were largely responsible for the increase in spending.

Changes in the use of outpatient care were insignificant. This is the first study to examine the association between hospital-physician integration and prices for outpatient care.

Consolidation may seem to be a viable option in light of the alternative payment models that emphasize coordinated care, because integrated physicians and hospitals have the potential to cooperate to streamline processes and align patient care, providing higher quality care to patients, and cutting expenses at the same time.

However, taking this route may also increase the organization’s market power, allowing it to enlist higher prices from insurers.

Scientists’ findings indicate that policymakers will need to grapple with how reforms affect provider market power, with no change in the use of health care services and a $75 per patient increase in annual outpatient spending.

“At this moment of great change in health care systems, it is crucial to measure and manage the impact of consolidation on prices so we don’t inadvertently end up spending more on health care at a time when we’re trying to go in the other direction,” said lead author Hannah Neprash, a doctoral candidate in the Harvard Program in Health Policy.

McWilliams reported that in earlier research of his, the ownership of physician practices by hospitals was not necessary for alternative payment models such as accountable care organizations to achieve cost savings.

“We have known for some time that financial integration has not led to clinical integration under fee-for-service incentives. It is possible that may change under new payment models, but the benefits of financial integration between physicians and hospitals have certainly not manifested yet,” he said.