Does Vertical Integration of Providers Affect Medicare Spending?

By May 16, 2017Commentary

Last week we reviewed a study debunking the notion that in-market hospital consolidation lowers costs of doing business and benefits consumers.  Today we look at another study published in the Journal of Health Economics which reviewed provider vertical consolidation, also claimed to have cost and coordination of care benefits.    (JHE Article)   Many hospitals have been voracious acquirers of physician practices, as well as labs, imaging facilities, home health care agencies, skilled nursing facilities and on and on.  Between 2007 and 2013 the percent of doctors employed by hospitals went from 16% to 29%.  The authors looked at the effect of the acquisition of 27 large medical practices by hospitals on Medicare utilization and spending.   And they find that in fact the physicians’ billing behavior changed following acquisition.  The percent of claims submitted for work in the acquiring hospital’s setting goes up by an average of 50%, accompanied by a 70% drop in claims for office-based services.  There are slight declines for work performed in other hospitals.  And of course, all this behavior change results in Medicare spending much more.  You may recall that CMS, in its infinite wisdom has and continues to pay more for the exact same service provided in a hospital setting compared to what it pays for the service in a physician’s office.  MedPAC and others have for years railed against the lunacy of the policy, which is a major economic reason for hospitals to acquire physician practices or employ doctors.

There is zero suggestion that Medicare sees any utilization or spending reduction through supposed “better care integration and coordination” or any other fictitious benefit of hospital ownership of physician practices or employment of doctors.  In fact, utilization and spending are higher following acquisition.  Here is a simple example.  In 2012 for a doctor office visit for an established patient CMS paid $68.97.  If the same visit occurred in a hospital outpatient department, CMS paid $124.40, and $75.13 went to the hospital.  So if you are a hospital, it makes total sense to buy a physician practice, call them an outpatient department and get that extra revenue.  If you are CMS the policy is just stupid.  If you are a Medicare beneficiary this is costing you more because you pay 20% of the cost of outpatient services.  If you are a taxpayer you should be outraged.  Once employed or owned, these physicians can also be required to use other hospital departments or facilities, further increasing hospital revenue.  It is a bad, bad system.  I am not shy about calling for radical changes.  Not only should all reimbursement be site-neutral, but hospitals should be forced to unwind all these practice acquisitions and banned from employing doctors or owning physician practices.  This would likely reduce costs and utilization of services and remove hospital pressures on doctors to practice medicine in a manner that may not be consistent with their patients best health and financial interests.

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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