New Study on Hospital/Physician Consolidation Impact on Health Care Costs

The Center for Studying Health System Change released its latest issue brief based on a series of site visits to 12 nationally representative metropolitan communities.  This issue brief focused on hospitals employing more and more physicians in hospital settings.

The brief notes:

“In a quest to gain market share, hospital employment of physicians has accelerated in recent years to shore up referral bases and capture admissions…While greater physician alignment with hospitals may improve quality through better clinical integration and care coordination, hospital employment of physicians does not guarantee clinical integration. The trend of hospital-employed physicians also may increase costs through higher hospital and physician commercial insurance payment rates and hospital pressure on employed physicians to order more expensive care. To date, hospitals’ primary motivation for employing physicians has been to gain market share, typically through lucrative service-line strategies encouraged by a fee-for-service payment system that rewards volume.”

The brief examines the impact of this trend on quality and costs.  The authors write about the impact on quality:

“Hospital employment of physicians theoretically can improve quality by encouraging better integration of care and communication among clinicians, but respondents indicated that clinical integration does not occur automatically once physicians become employees. Echoing the views of many hospital CMOs across the 12 markets, a Lansing respondent said, ‘Being able to bring all physicians together with a unified focus on quality, service and access is a challenge.’”

The brief notes that this integration may improve quality and help control costs in the long-term, but “they are more likely to increase costs in the short run.”  The authors write that the predominantly fee-for-service environment creates “incentives to increase the volume of services delivered…And, productivity-based compensation used by many hospitals for employed physicians reinforces these incentives. Numerous physician respondents noted that employed physicians face pressure from hospitals to order more expensive testing alternatives. In one market, at least two cardiologists declined hospital employment offers because they perceived the pressures to drive up volume were stronger than those in their mid-sized, independent cardiology group.”

The brief also notes: “Respondents in a few markets expressed concern that employment of some specialists, particularly those in geographic areas served by multiple hospital systems, contributes to higher costs because of artificially high compensation generated by bidding wars.”

The brief closes with the policy implications of this activity, noting:

“While the potential of hospital-employed physicians to improve quality and efficiency has received attention, the potential for higher costs has received less attention. The existing fee-for-service payment system that encourages hospital strategies to use employed physicians to increase referrals and admissions, coupled with the market power of hospitals to gain higher payment rates, risks overshadowing potential quality gains.”

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