Health Systems Driving Prices Higher with Physician Group Purchases

Insurance premiums and outpatient prices spiked as California health systems have snatched up physician groups, new research shows.

In 41 highly concentrated California counties, the percentage of hospital-employed physicians increased from about 25% in 2010 to more than 40% in 2016, according to a new Health Affairs study.

Researchers estimated that the shift in ownership translated to a 12% increase in Affordable Care Act premiums, a 9% hike in specialist prices and 5% boost in primary care prices from 2013 to 2016.

“This is a ubiquitous trend in the U.S. and I can tell you that there is virtually no state with less than a quarter of physicians that have already been purchased by now,” said Richard Scheffler, a University of California at Berkeley professor and the study’s lead author. “The impact of these type of verticals is much more powerful when the hospital itself has a lot of market power and can jack up prices.”

The national share of hospital-employed physicians increased from 30% to 48% from 2010 to 2016, researchers found.

The reasoning behind such vertical integration is primarily twofold, Scheffler said. Health systems want to bolster their referral networks and send more patients to hospitals. They also benefit from charging facility fees, a higher rate that’s meant to account for a hospital’s overhead, he said.

Hospital executives argue that more control will produce more coordinated care, while economists contend that larger health systems raise prices as they gain more leverage with insurers. Critics also claim that price hikes dwarf any purported efficiencies of scale.

While there is a proposal to level reimbursement for outpatient services, it faces strong opposition from hospital lobbying groups and even if it’s implemented, there is still plenty of incentive to acquire physicians, policy experts said.

Health systems can limit competition and squeeze rivals as their market power grows, according to the study. For example, if a rival hospital loses access to the patients of an acquired primary care practice, they may have to close or raise prices.

Notably, the study’s measure of vertical integration — the percentage of physicians in practices owned by hospitals — is not codified in the Justice Department or Federal Trade Commission guidelines as the horizontal concentration threshold is. This is why up to this point regulators have challenged vertical integration on a horizontal market share basis. Health systems have also made small acquisitions in secondary markets that fell under regulators’ radar but add up over time.

“The problem is that they can’t make a simple ruling because they don’t have any vertical integration guidelines or even a good theory of verticals,” Scheffler said.

California was once known for a competitive healthcare landscape that produced fair prices, but consolidation was one of the factors that eroded that dynamic, according to a related study in the current Health Affairs issue.

The number of acute-care hospitals in California declined nearly 20% from 1995 to 2016 while the proportion of hospitals in health systems increased from 39% to almost 60%, per California’s Office of Statewide Health Planning and Development data.

Health systems realized that as they grew, they could demand that insurers include all of their hospitals, physician networks and related businesses in their contracts or else they would lose their business. This distorted markets by including hospitals that would otherwise be excluded because they had higher prices or lower quality.

Researchers analyzed the average price per admission from 1995 to 2016, adjusted for case-mix and the cost of labor and outpatient volume, for hospitals in the largest two California systems compared to all other California hospitals. While prices were about the same between the two groups in 1995, by 2016, the average adjusted price per admission for the two systems was almost $7,000 higher than in all other California hospitals.

“What happens is once health systems get all-or-nothing contracts, then they add in the physician groups and other businesses like home health,” said Glenn Melnick, a professor at the University of Southern California and lead author of the related study. “For these big systems that can be an $8 billion to $10 billion contract. Vertical integration gives them the power to exact higher prices.”

Even though patient volumes declined at California hospitals from 2002 to 2016, commercial health plans’ payments increased substantially, suggesting that market concentration drove higher prices, according to data that Melnick pulled from OSHPD.

Regulators need to closely watch hospitals’ acquisition of physician practices, particularly as economic and legal theories improve, experts said.

Washington state’s attorney general, for instance, filed a lawsuit against Franciscan Health System to unwind acquisitions of physician organizations that allegedly produced anticompetitive healthcare prices. A similar scenario played out in Idaho when St. Luke’s Health System tried acquired Saltzer Medical Group, which regulators concluded would give the system too much market power. The benefits of vertical integration could be achieved by contracting, where other hospitals could also work with the physicians, regulators found.

California Attorney General Xavier Becerra filed a lawsuit in March that is the culmination of a six-year investigation accusing Sutter Health, the largest provider in Northern California, of anticompetitive behavior that allegedly inflated healthcare prices.

Several bills are moving through the California Legislature. SB-932, similarly to AB-595, proposes that any merger or consolidation would need to be approved by the California Department of Managed Health Care following public hearings. It also seeks to prohibit hospitals from making anticompetitive demands when negotiating with payers. SB 538 aims to eliminate all-or-nothing contracting. Although that bill was unexpectedly shelved in June.

Meanwhile, the House Energy and Commerce Committee also seems to be taking a more critical look at provider consolidation.

Economists continue to talk about “broadening the regulatory telescope,” which is a hopeful sign, Melnick said. But if things don’t change, the consequences are dire, he said.

“If we can’t restore the competitive dynamic to markets, prices will continue to go up and up,” Melnick said.


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