Provider consolidation in California is associated with a 7% to 12% increase in exchange premiums, according to new research from the University of California, Berkeley, and the RAND Corporation.
The study, published in this month's issue of Health Affairs, dives into the often-overlooked impact of hospital-owned physician practices. Across California, 40% of physician practices were owned by hospitals in 2016, up from 25% in 2010. That shift has led to a significant increase in healthcare costs, raising new questions about the consequences of the industry’s rapid, ongoing consolidation.
For example, in a highly consolidated market where 55% of physician practices were owned by a hospital, the average monthly exchange premium for a 41-year-old increased from $375 to $419 in 2017.
"It may or may not be better quality, but basically, the insurance companies and people that pay for it are forced to pay these higher prices because of the market power that these hospitals obtain by buying physician practices," lead author Richard M. Scheffler, Ph.D., distinguished professor of health economics and public policy and director of the Nicholas C. Petris Center on Health Care Markets and Consumer Welfare at the University of California, Berkeley, told FierceHealthcare.
While the industry's horizontal concentration, spurred by high-profile megamergers and new deals forged between insurers and providers, has been the subject of sustained scrutiny, experts have increasingly raised concerns about vertical consolidation. Megadeals on the scale of the CVS-Aetna merger have drawn fire from consumer advocates and state regulators, but questions about the potential for longer-term scale and efficiency gains have generally kept regulators at bay.
Vertical consolidation on the provider side, where hospitals buy up individual and group physician practices in a region, changes the cost calculus significantly, according to the study. That shift increases the cost of both primary and specialist care, which drives up premiums.
Vertical consolidation can be pernicious because it often goes unnoticed, according to Scheffler.
“Most of this kind of consolidation is not big, billion-dollar deals—it’s buying up small physician practices one at a time," he told FierceHealthcare. "It doesn’t make the radar screen when a hospital wants to buy a practice of 10 doctors. But when you add those up at the end of the day, 40% of the doctors in California, and close to 50% of the doctors in the U.S., their practices are owned by the hospitals, and that changes the whole dynamic in the healthcare system.”
Regulators and policymakers will likely find the links between vertical concentration and physician costs especially interesting, as they point to a strong statistical correlation that the study did not find present when it looked at horizontal care. The study found that among specialists, virtual monopolies raised prices around 9% above the county-level sample mean during the study period. Among primary care practices, hospital-owned virtual monopolies in an area raised costs by 5%.
Once hospitals control enough physicians in parts of the market, the potential for anticompetitive activity rises. For example, the study suggests hospital systems that effectively corner the market on physicians from a specific practice area gain price control over that specialty and can simply raise prices using its increased market power.
Limiting competing hospitals’ access to patients presents a thornier issue, says Scheffler. Hospitals have an incentive to buy up physician practices in order to gain referrals, which in turn creates an environment in which hospitals engage in vertical consolidation in order to lock rival systems out of an area by increasing patient costs or otherwise reducing patients’ access to other hospitals.
Weighing those incentives for anticompetitive behavior against any potential gains in quality will require careful study by policymakers and regulators, the researchers warned.