The Extinction of Private Practices Is Resulting In Rising Health Care Costs

As the health care sector wrestles with an epidemic of consolidation dominated by hospitals (and their parent companies), and large medical groups backed by billion dollar private equity firms, one concern remains paramount—without robust competition, prices for consumers will continue to rise.  Even health care, which is resistant to most free market principles, is experiencing rampant inflation fueled by a shrinking number of regional players.  With less competition, these big healthcare groups are able to negotiate higher rates with insurance companies resulting in higher costs without additional value.

Private Practices Cannot Compete

At the heart of the matter is a business environment that is strangling small and mid-size provider operations.  These behemoth groups and hospitals are able to negotiate significant rates with the insurance companies that are sometimes 3-4x the amount that are available to smaller and mid-size provider teams.  This results in an unprecedented and unfair advantage that places extreme pressure on the smaller provider teams to keep their doors open while still implementing costly mandated programs like Electronic Health Records. The federal government is applying pressure in the form of regulatory compliance and evolving payment models that has led to massive consolidation in the form of acquiring practices in a misguided effort to optimize efficiency, but the mounting wave of consolidation is fueling price spikes in regions across the nation.

Affects of Health Care Consolidation

This consolidation is affecting Americans in a number of ways.  Many young physicians are joining organizations as employees, stifling an entrepreneurial spirit that had been strong in the medical community in years past.  Loss of competition is also diminishing care quality. Despite protestations that larger organizations can apply more diverse resources to improve patient outcomes, there is scant to no evidence that is occurring. In fact, one study by the Robert Wood Johnson Foundation found that hospital consolidation actually reduced care quality by limiting referrals to more qualified physicians outside of the organization.  From 2012 to 2015, the number of physician practices that hospitals employed rose 86 percent. Currently, one in four medical practices is now owned by a hospital, with 38 percent of U.S. physicians working as hospital employees.

Private Practice Acquisitions and Price Hikes

The resulting price increase that occurs following a wholesale purchase of practices in a market can be significant. Some studies indicate that the price hike ranges from 5 to 20 percent. Hospital chains often attribute these hikes to the initial costs of integration like EHR compliance or discrepancies in online pricing tables.  However, there is considerable evidence that these price increases are real and substantial. Northern California, which has experienced a surge in practice acquisition in recent years, exhibits a marked difference in prices for many common services between independent and hospital-owned practices.  While the median price for a routine vaginal delivery among independent physicians was $2,408, the cost was much higher for the same service by larger groups Stanford ($5,238), Sutter Health ($6,452) or UC San Francisco ($8,049).

How to Prevent the Affects of Health Care Consolidation

Many analysts recommend various strategies for improving competition in regional markets. Price transparency is often touted as a means of fostering competition, but many consumers misinterpret prices, often equating higher prices with higher care quality.  Furthermore, health care consumers appear less concerned with pricing due to insulation provided by insurance.

What may be more effective is re-engineering insurance networks so that prices are more visible to consumers. Narrower networks that include more patient cost-sharing but a lower front-end cost would encourage more consumers to shop for providers that are cost effective.  Various tiers of narrower plans would dovetail with the current independent health insurance exchanges.  Lastly, law makers should consider utilizing the same powers they are afforded in the general markets, where mergers that may lead to monopolies in certain markets should not be permitted.

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