Study: Hospital Ownership of Physician Practices Leads to Higher Prices

A new study has painted a mixed, although somewhat negative, picture of vertical integration from the perspective of the privately insured.

Professors from Stanford (Calif.) University led the study, which is published in Health Affairs. They investigated vertical integration's effect on hospital prices, admissions and spending for privately insured patients. The study was designed to fill a gap, as the professors said there has been little research on the consequences of vertical integration in healthcare.

Study authors found that vertical integration — in its tightest form of hospitals owning physician practices — appears to lead to statistically and economically significant increases in hospital prices and spending. This is consistent with the hypothesis that vertical integration increases hospitals' market power.

But the professors said "the consequences of looser forms of vertical integration were more benign and potentially socially beneficial," according to the study. These include closed physician-hospital organizations, open physician-hospital organizations and independent practice associations. Increases in these forms of integration did not appear to increase prices or spending significantly and may even decrease hospital admission rates.

Here are some key findings from the study:

• In 2001, fully integrated organizations had a smaller market share (23 percent) than all organizations using any of the three contractual forms (36 percent). However, this relationship flipped by 2007, when the market share of fully integrated organizations was nearly 36 percent and the share of organizations using the other three forms had fallen to 23 percent.

• Fully integrated organizations — hospitals that owned physician practices — were linked to increases in hospital prices. Study authors found a one-standard-deviation increase in the market share of hospitals that own physician practices was associated with significant increases in prices and spending of 2 to 3 percent. There was no systematic or significant effect on prices of the three forms of contractual integration.

• As for volume, study authors linked an increase in the market share of hospitals with physician-hospital organizations to a small but statistically significant decrease in volume. The other forms of vertical integration also had small negative associations with volume, but none were statistically significant. Further, effects on volume associated with these types of integration were so small that they did not generate a significant reduction in hospital spending.

To calculate county price, volume and spending indices for hospital services, study authors used data from Truven Analytics MarketScan for approximately 2.1 million hospital claims from people enrolled in a fee-for-service health plan in the period 2001–07.

They also used information from The American Hospital Association Annual Survey to divide vertically integrated hospitals into the following four groups: fully integrated organizations, closed physician-hospital organizations, open physician-hospital organizations and independent practice associations. Fully integrated organizations are the most tightly vertically integrated, as it is the only one of the four forms in which the hospital owns the physician practice.

The researchers concluded their study by urging more investigation and research on the benefits or harms of vertical integration, especially since they did not examine the effects these models have on the quality of care or patient outcomes.

More Articles on Hospitals and Physician Alignment:
9 Drivers of High Healthcare Costs in the U.S.
Hospital Consolidation Pushed Prices 8% Higher Yearly, Insurers Say
An Argument for Hospital-Physician Consolidation: Costs Could be Worth It


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