Rising costs, low-value care linked to hospital-employed physicians, studies show

Healthcare costs and low-value care tend to increase when hospitals acquire physicians, new studies published in Health Affairs show.

The number of diagnostic and lab tests performed in hospitals versus unaffiliated facilities increased after doctors were acquired by hospitals, which inflated healthcare costs, according to an analysis of 30 million imaging procedures and 341 million lab tests billed to Medicare. While more tests could benefit patients, physicians employed by hospitals were more likely to order inappropriate magnetic resonance imaging tests, a companion analysis of the commercial claims associated with 583 primary-care doctors who transitioned from independent practice to hospital employment found.

“There has been a defining shift in the way healthcare services are organized and managed,” said Gary Young, the lead author of the value-oriented study and director of the Center for Health Policy and Healthcare Research at Northeastern University. “Vertical integration represents one of the most important changes in how healthcare services are delivered, and we need to pay attention to the implications.”

Fewer physicians wholly own their practice. Around 49% of doctors worked in a private practice in 2020, which marks a 5 percentage point drop from 2018, according to American Medical Association data. The share of physicians who practiced in groups owned by hospitals rose 16.2% from 2013 to 2016, the volume-oriented study found.

They are often lured by hospitals’ resources. Hospitals and health systems typically have more robust IT and data analysis tools, easing doctors’ administrative burden related to electronic health record, claims and quality management.

Vertical integration can facilitate more coordinated care and improve access, among other benefits. But it has also been linked to higher healthcare costs as referral patterns shift, and new evidence suggests that hospital acquisition of physicians could lead to more low-value care.

Young and his peers tracked primary-care doctors in Massachusetts who transitioned to hospital employment from 2009 to 2016. They determined whether care was inappropriate based on if there was an office visit or physical therapy session 12 months prior to the scan or if there was sufficient time between the diagnosis and scan to explore less expensive options like exercise and therapy. The researchers excluded patients with chronic conditions or “red-flag conditions” that could justify diagnostic imaging.

The odds of a patient receiving an inappropriate MRI scan for lower back, knee or shoulder pain increased by more than 20% after an independent primary-care doctor transitioned to hospital employment, researchers found. Most patients were referred to the hospital where the physician was employed.

“Physicians who are employed by hospitals may be facing certain subtle institutional pressures that lead them to modify their practice style that may lead to more expensive but not necessarily better care,” Young said. “If hospitals send their primary-care physicians reports of how much revenue they are generating for their hospital through downstream referrals and benchmark them with their peers, you don’t have to explicitly say ‘go out and generate more revenue.'”

Christopher Whaley, the other study’s lead author and a policy researcher at RAND Corp., and his colleagues studied Medicare claims data from 2013 to 2016 to identify referral pattern and cost trends after hospitals acquire doctors.

After vertical integration, the monthly number of diagnostic imaging tests per 1,000 beneficiaries performed in a hospital setting increased by 26.3 per 1,000, while the number performed in a nonhospital setting decreased by 24.8 per 1,000. Hospital-based laboratory tests increased by 44.5 per 1,000 beneficiaries and nonhospital-based laboratory tests decreased by 36 per 1,000.

The cost of each imaging and lab test, due to hospitals’ facility fees, rose 2% and 3.8% respectively, costing taxpayers a combined $73.1 million over that period.

“From a health system’s standpoint, the difference in payment for the exact same service in hospital versus nonhospital settings is in some sense an arbitrage opportunity,” Whaley said. “If you acquire doctors and move care from a hospital to nonhospital setting, it’s a way to increase payments.”

While hospitals claim that the quality of care is higher at their facilities, which justifies the cost increase, there is minimal difference in the quality of imaging and lab tests regardless of site of service, Whaley said. A hospital-employed radiologist will claim that their expertise or technology trumps unaffiliated facilities, but the data doesn’t clearly show that, he said.

The American Hospital Association is making similar claims amid a legal battle with HHS regarding its site-neutral payment policy, which seeks to level payments for evaluation and management services delivered at hospital-owned outpatient departments and independent physician clinics. It is also arguing that they have higher overhead related to more rigorous survey requirements, more stringent health and safety rules, staffing costs, etc.

The CMS estimated that it was paying $75 to $85 more for those services in hospital outpatient settings versus physician offices, even though the physical location nor patient acuity changed. Patients footed about 20% of that.

A panel of appellate judges ruled in July that HHS’ site-neutral payment policy for 2019 could go forward, overturning a lower court decision. Legal experts said they are preparing to take the case to the Supreme Court.

“There could be gains from this type of vertical consolidation,” said Whaley, noting the potential for more coordinated care. “If we had site-neutral payments, we could get those same efficiencies without an increase in cost.”

The Medicare Payment Advisory Commission has recommended narrowing the payment disparity for services delivered at hospitals versus unaffiliated facilities.

But generally, regulations and policy haven’t kept pace with the rate of hospitals’ physician acquisitions. Typically, hospitals incrementally build market share through smaller transactions, which requires more vigilant oversight than larger horizontal deals.

The Federal Trade Commission updated its vertical merger guidelines last year for the first time since 1984. But healthcare antitrust experts criticized the lack of detail on how the government will analyze deals between organizations across the delivery system, such as hospitals and physician groups.

While those experts thought the guidelines lacked the teeth to deter vertical consolidation, the FTC recently asked six health insurers for claims data as they study the impact of physician consolidation.

A bill was introduced in the Senate in February that would increase the FTC and Justice Department’s budget by $300 million each and bolster antitrust oversight. Meanwhile, states like California are proposing laws that would lower the transaction-value threshold that triggers an antitrust investigation.

But as of now, there isn’t much incentive for hospitals to change acquisition strategies or referral patterns, experts said.

“The evidence shows that doctors adopt a more aggressive practice style on referrals when employed by hospitals,” Young said, noting that vertical integration has also been correlated with higher prices. “Another body of literature demonstrates that hospital employment could be a driver of low-value care, which accounts for a significant percentage of healthcare costs.”