Hospitals buying up physician practices increases cost of care, new study finds

Stanford University researchers examined hospital claims for privately insured patients between 2001 and 2007 and found that what some health economists had warned does indeed seem to be true — hospital ownership of physician groups does seem to lead to more expensive care.

The argument against hospital ownership of physician practices, what is frequently termed vertical integration, is that it increases healthcare providers’ leverage in negotiations with payors and creates incentives for physicians to refer more patients to the hospital for care. However, hospitals counter that the employed physician model is often better for patients because it allows better coordination of care between the inpatient and outpatient setting and can lower costs by reducing preventable hospital stays and improving chronic conditions.

The Stanford researchers found some validity to both arguments. The researchers examined admissions to see if hospital ownership of physician practices led to increases in admissions through incentives to refer more patients to the hospital or if it led to decreases in admissions through better care coordination. They found the latter to be true, but only marginally so. As contractual integration increased, the frequency of hospital admissions decreased. “But this effect was relatively small,” they wrote.

What was much more evident from their analysis of the 2001-2007 hospital claims from Truven Analytics MarketScan was the correlation between strong contractual or ownership relationships between hospitals and physician practices and higher hospital prices and spending. As market share increased, so did prices. However, this was less pronounced when the agreements between the hospitals and the physician groups were looser.

“Taken together, our results provide a mixed, although somewhat negative, picture of vertical integration from the perspective of the privately insured,” the researchers concluded.

As vertical integration in healthcare delivery increases, the Federal Trade Commission (FTC) has become increasingly involved in examining these arrangements for violations of the Clayton Antitrust Act, which seeks to protect consumers from unfair pricing created by monopolies and near monopolies. Last month, the threat of an FTC denial stopped the merger of Beacon Health System and the South Bend Clinic physician group in Indiana. In addition, the Sixth U.S. Circuit Court of Appeals in Cincinnati also recently upheld the FTC’s ruling that a merger between ProMedica and St. Luke’s, a community hospital in Toledo, Ohio, was a violation of the Clayton Act.

The Stanford researchers' study appears in the latest issue of Health Affairs and may well be cited in future FTC cases as evidence in favor of breaking up hospital acquisitions of physician groups.