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Price Effects of Hospital Ownership of Physician Practices

By May 19, 2014Commentary

For a number of years hospitals have engaged in mergers and acquisitions with and of other hospitals, leading to an increase in concentration of supply in many markets, an increase which has been linked to higher hospital inpatient prices and more growth in overall health spending.  A study in Health Affairs finds that when hospitals buy physician practices, there is a similar effect.  (Health Affairs Article)   Hospitals have increasingly purchased physician practices in recent years.  The justification is a supposed improvement in the ability to coordinate care and greater efficiency.   The researchers used a commercial claims data base to identify pricing effects from the period 2001 to 2007 and used AHA and Medicare data to examine hospitals’ ownership of practices.  The researchers looked at both actual ownership as a method of vertical integration and contractual methods of creating integration.  Only the ownership form was found to have significant pricing effects.  In 2001, fully-integrated hospitals had a 23% market share, but by 2007 it was 36%, and it has undoubtedly climbed greatly since 2007.  Fully-integrated organizations resulted in prices that were 3.2% higher for each one standard deviation increase in the market share of these organizations.  This is not a trivial effect, particularly when combined with increases in hospital concentration in a market. And while the effect was smaller, these organizations also were associated with higher overall spending.  These fully integrated hospital/physician practice systems had a slight decrease in admissions, which might be related to the higher prices.  Since the looser, contractual forms of integration did not appear to have pernicious effects on pricing and spending, hospitals and doctors could be permitted to engage in these practices while outright ownership of physician practices could be banned.  Care coordination could also be accomplished just as well without ownership.  It has been common knowledge for years that hospitals employ doctors and buy physician groups because they believe it will increase market share and allow them to raise prices.  It is time to not only ban further purchases but to force divestiture and separation of these parts of the health system.

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