Study: Hospital-doctor hook-ups swell prices

May 12, 2014
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When hospitals acquire physician practices, they end up gaining market share, and as they gain market share, they charge higher prices.

That’s what researchers at Stanford University reported in an article in the latest issue of the Health Affairs journal.

I found the article, which does not specifically focus on Indiana or Indianapolis, relevant to the local health care scene. That’s because there has been a wave of physician employment by hospitals, which has contributed to some notably large pay packages for key physicians.

Among Indianapolis hospital systems, Franciscan St. Francis Health employs more than 200 doctors, Community Health Network employs more than 500 , St. Vicnent Health about 800 and Indiana University Health nearly 1,500.

The article found that hospitals with “fully integrated” or employed physicians, were able to raise hospital prices more than three times faster than those that merely had contracts with independent physicians.

The study was based on private health insurance claims data from 2001 to 2007, a period that roughly coincided with a doubling of physician employment by hospitals. And that employment trend has only picked up more steam since then.

Obamacare is likely to push hospital employment of physicians even further.

The study did find some evidence to support the usual rationale for hospital-doctor hookups: that they will allow for greater coordination of patient care, which will keep patients healthier and out of the hospital. The Stanford researchers found that fully integrated hospital systems did reduce patient volumes at the hospital—but not significantly more than other kinds of hospital systems.

“The message from the study confirms that when doctors and hospitals merge, it may not be in consumers’ best interest,” Daniel Kessler, a law and health policy professor at Stanford, who was one of the co-authors of the study, told Kaiser Health News.

It’s worth pointing out that from 2001 to 2007, hospitals were not trying—to the extent they are now—to use physician integration as a way to reduce spending. So it’s possible the results of the recent wave of hospital-physician integration will lead to different results this time.

There is a bit of evidence here in Indianapolis that hospital systems are using employment of physicians to achieve savings for Medicare and private health insurers under so-called “accountable care" contracts.

Other hospital systems are pushing bundled payments—especially for joint replacement surgeries—and say employing physicians is the only way to do so without running afoul of federal anti-kickback statutes that limit physician referrals to health care entities in which they have a financial interest, unless the physicians are employed by that entity.

"Federal statutes have historically outlawed the level of collaboration necessary to establish an effective bundled payment program," IU Health spokesman Gene Ford told me in March.

But it’s also worth reminding ourselves of the millions of dollars in extra money that has been coming to hospitals merely because they declared their employed physicians’ offices to be part of the hospital.

And not only that. There are millions of dollars in downstream referrals that hospitals can capture by pressuring their employed physicians—verbally and, in some cases, with financial incentives—to limit their “leakage” of patients outside the hospital system.

The Stanford study shows that when hospitals have the market power to do so, they use it to increase prices. As large-scale business enterprises, they would be expected to do no less.

  • Health Care Pricing Tool
    Just look at any pricing tool provided by an insurance company. The tool will show the different pricing on procedures. One can look at services a square mile radius. The results are so surprising that some medical groups have tried to suppress these type of consumer tools.
    • Trying Harder?
      In healthcare, 2007 is a long time ago. Is it possible that the reason why hospitals employed physicians between 2001 and 2007 is different than the reason why hospitals employ physicians today? Back in 2001, hospitals seemed to employ physicians mainly to capture volume. Today, volume still plays a factor in employment, but hospitals are paying more attention to value (Quality / Cost). In the past, any physician that wanted to be employed would be picked up by somebody. We've seen recently that hospital systems have been willing to layoff employed physicians. I suspect value played a role somewhere in the decision making process. Also, payor networks today is a little different than 2007. Narrow networks are more tolerated than before. So, I would agree with your thoughts that hospitals may not have been trying to the extent they are now to reduce spending. Given this, I would argue that the author's conclusion (that it is not in the consumer's best interest when hospitals and physicians merge) is only applicable in 2007. I suspect we will see different patterns if the study was repeated using today's data.
      • layoffs?
        I guessed I missed it. What hospital has laid off one of their employed physicians? Was there a reason given? Is the value you mention a code word for competence or productivity?
      • Medical
        I thought hook ups happened on campus and bars.....
        I'm not sure downstream referrals are the main reason hospitals buy practices, especially specialty practices. Theoretical case in point- Cardiology Practice A builds cath center across the back parking lot of Northside Hospital V. CD Practice A gets $500/cardic cath in the this building. Hospital V buys CD Practice A and in the same building, same doctors starts billing $3000 same cardiac cath the following day. Its called buying billing margin, and hospitals charge a lot more than physician owned SS's. There was NOTHING in this transaction for the patient or whomever was paying the healthcare tab.
      • Docs improve hospital profits!
        I would argue that Mr Wall is right on target. Hospitals gain huge revenues from ancillary services. In fact, outpatient services usually are more profitable than inpatient services. Employed docs send patients to the hospital for labs, imaging, rehab etc... Hospital charge incredibly more and collect more than if the same patients would go to non hospital facilities. Hospitals in the Indy area profited in excess of $1billion dollars in 2012. This is exactly the peak of their hiring!
      • Hospital layoffs have occurred
        Since someone asked, Community Health Network just laid off its entire staff of neuropsychologists for cost reduction after having them on staff since the 1970's. These are the specialists who diagnose and treat cognitive disorders such as dementia, brain injury, stroke, etc. Most people don't realize their role until they are needed.
      • J.K. and J.M. are correct!
        I walked away from a hospital employed primary care contract when the hospital Medical Director told me I was too much of a patient advocate. What? The Medical Director, who hadn't practice medicine for ten years, told me the patients weren't my patients, they were the hospitals. My nurse, unknown to me, monitored my outpatient lab orders, imaging orders, physical therapy orders, and specialist referrals and reported any that went outside the hospital systems control. It didn't matter if my patient had a high deductible insurance and would have to pay the high priced bill for an MRI or lab vs. that of an independent, free standing facility that was much lower in cost and equal in quality. It didn't matter if our hospital system didn't have the best neurosurgeons or cardiologist, it was about maximizing hospital market share and revenue. It was and still is about the hospital's bottom line. Employed PCPs are employed by hospitals to direct the patients to the systems specialists and ancillary services. My contract was 90% productivity based and 10% based on if I was a good cheerleader, if you know what I mean. If you want to see true healthcare reform in Indianapolis, where every healthcare consumer (patient) benefits, have the State Legislators pass a law requiring every and all healthcare facilities to post their prices online, so healthcare consumers (patients) can shop for the most affordable care. You can have both affordable care and quality. Let's see what happens.

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