Hospital Consolidation and Pricing

Research has made it clear that much of the continuing rise in health care spending is due to hospital market power and price increases.  A new brief from the actuarial firm of Alvarez and Marsal details the ongoing threat to cost containment from another hospital driven trend–the acquisition of physician practices and other outpatient services.   (Alvarez & Marsal Brief)  Hospital profit margins historically have been higher for outpatient services than inpatient ones in regard to commercial health plans, but the opposite has been true for Medicare payments.  The acquisition of physician practices gives hospitals the opportunity to change this situation, in an era where inpatient reimbursement is squeezed, primarily because for unknown reasons CMS pays hospitals more for the same service in an outpatient setting than they pay free-standing physician practices.  MedPAC has practically begged CMS to change this practice and pay the same across all settings.

As an example of how different the reimbursement can be, evaluation and management office visits are paid at about 80% more in a hospital outpatient setting than under the physician fee schedule.  Similarly same day surgery in a hospital outpatient department is paid at about 75% more than at a freestanding ambulatory surgery center.  The payment disparity is even worse for imaging, where hospital outpatient reimbursement averages 141% more.  When you look at these numbers you understand why hospitals are so eager to acquire and employ physicians.  Once the doctor is part of the system, their compensation can also be tailored to encourage utilization and to ensure that all referrals stay in the system.  Even the AMA has expressed concern about the increased employment of physicians by hospitals, deeming the conflict of interest with the patients’ best interest inevitable.  And the obvious effect of hospitals’ higher prices in the private sector is to raise the cost of private health insurance.