Medical Monopoly: Could Too Much Collaboration in Health Care Yield Higher Prices?

Since the passage of the Affordable Care Act, Accountable Care Organizations (ACOs) have exploded onto the healthcare market. Over 200 of them have formed since 2011, now covering over 18 million people across the country. Furthermore, the federal government has spent tremendous resources on ACO-related grant programs like the Pioneer ACO program and the Health Care Innovation Awards to see how ACOs can be used to reform the inefficient and expensive fee-for-service payment model in healthcare.

An ACO involves hospitals, physicians, and other providers coming together to provide care. These groups unite under a single payment structure. To ease sharing of data between providers, many hospitals have opted to bring everyone into one system. Hospitals accomplish this by buying, or contracting with physician practices. This process, known as vertical integration, aims to reduce inefficiencies associated with practicing medicine.

There is evidence that integrated ACOs can achieve more efficient outcomes through standardized processes. But a new study suggests that hospitals that practice tight integration may achieve more than just efficiency.

In their article, “Vertical Integration: Hospital Ownership Of Physician Practices Is Associated With Higher Prices And Spending,” Laurence Baker and colleagues take a look at claims data in the private market. The study examines the effects of vertical integration on healthcare prices, admissions, and spending. Previous research suggests that health systems can use vertical integration to increase market share and improve bargaining power. The data in this study predates the rapid growth of ACOs, but the authors note that many ACOs use a vertical integration model to achieve efficiency. As such, the implications of their study mirror the model of ACOs.

The study uses commercial claims data from 2001-2007 to construct price indices built from county level data of the privately insured. The indices measure cost per admission, number of admissions, and spending per enrollee. The team then used American Hospital Association data to group the hospitals in the study by the amount of integration into the system. The tightest form of integration is total ownership of practices by the hospital, termed full vertical integration. The researchers categorized other looser arrangements into similar groups. Some examples of looser integration include: exclusive contracts, voluntary sign-up, and independent practice relationships.

The researchers analyzed price indices within each group to compare the effect of integration on pricing, spending, and volume. The effects were then broken down by group. The study also computed a Herfindahl-Hirschman index (HHI) for each hospital. This measures the size of each hospital relative to the other hospitals in the industry, with a higher HHI suggesting that there is less competition in the market. Researchers were able to use these HHI figures to analyze the effects of hospital integration, relative to the size and competitiveness of the market.

Baker and colleagues found that full vertical integration enlarged hospital prices and spending. Further, the increases from full integration mirror the effects suggested by the hospital’s HHI. This suggests that hospitals may have the ability to increase prices and total spending by growing in size and reducing competition. However, they found that looser forms of vertical integration did not see these effects on price and spending.

The researchers were able to use a hospital’s HHI to gain further insights. For hospital systems practicing full integration, a one-standard-deviation increase in market share correlated with approximately a three percent increase in prices and 2.5 percent increase in total spending. These figures show that many of the patterns we see for prices and spending are magnified by a hospital’s HHI. This suggests that a great deal of the effects could be tied to a hospital’s ability to reduce competition in the market and increase its bargaining power. Most of these price increases would fall on the insurers in the form of higher fees for services. Some of these costs may also trickle down to consumers in the form of higher insurance premiums.

The research shows that all forms of vertical integration were also associated with slight reductions in patient admissions to the hospital, although this was only statistically significant for voluntary sign-up arrangements. This suggests that looser forms of ACO integration can achieve similar benefits to an integrated system. But, these less integrated systems can achieve these benefits without significant cost increases.

It is clear that as ACOs continue to gain popularity, they will become a major model of healthcare in the United States. Cooperation between hospitals and physicians could make both more efficient at providing care for patients. But if these relationships become too tight, the efficiency could come at a high price. These conclusions give policymakers some insight as they decide how they want to reform healthcare. With this information, policymakers can create policies that promote better and more efficient outcomes for patients.

Article Source: Baker et al., “Vertical Integration: Hospital Ownership Of Physician Practices Is Associated With Higher Prices And Spending,” Health Affairs, (May 2014) 33:5756–763.

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