Behind Higher Physician Fees, a Big Problem Lurks

Joining forces with a like-minded, larger medical practice may afford economies of scale, but physicians should be aware that it could be at the expense of patients, who are becoming more cost-conscious.

Now that King v. Burwell is no longer a distraction and millions of Americans' healthcare subsidies are safe, hospital and health system leaders can spend their energy preparing for the inevitable shift toward value-based care and all that move entails, which has included the search for similar care partners willing to enter into a joint-venture with or outright acquire.

The trend of hospital consolidation and physician group acquisition isn't expected to slow down. In fact, healthcare leaders believe that consolidation, whether it is with hospitals, physicians, or post-acute care providers, is a means to impact the financial goals of hospitals and health systems.

According to this year's HealthLeaders Media Annual Industry Survey, respondents placed more importance on partnerships and alliances than investments in new care models and IT when evaluating how healthcare systems and hospitals would meet their financial targets over the next three years.

Nearly half, (44%) reported that physician-hospital alignment would have the biggest influence on financial targets, while 36% said it would rely on strategic partnerships with payers; 35% said strategic partnerships with providers would help them meet financial goals.

What those data points show is that healthcare executives realize that partnering for the future is almost a requirement, not a recommendation. In the race to grow larger in order to survive, however, special attention should be paid to the overall impact of that growth.

"In healthcare, as in many business scenarios, there is often strength [and leverage] in numbers," says Jim Stone, president of The Medicus Firm, a Dallas–based physician staffing and recruitment firm that also tracks physician trends.

Less Control
"Over the past few years, physicians have been increasingly acquired and hired by hospitals and health systems, and/or are merging with other groups to form larger entities. As part of a larger system, physicians may not feel as stressed about potentially being put out of business by increasing overhead, competition from larger systems, or decreasing reimbursements. However, as physicians become employees (vs. partner/owners), physicians do relinquish some control in exchange for perceived security," Stone says.

Some of the control that physicians may give up is negotiating with insurance companies. That's not necessarily a bad thing, negotiations with payers are typically headache inducers. But there is a downside (that has a short-term upside), but could have a long-term negative impact.

A study recently published in Health Affairs shows that market concentration among orthopedic groups is associated with higher physician fees for total knee replacements. That suggests that growing bigger may afford economies of scale, but at the expense of patients who are expected to become more cost conscious, says Eric Sun, MD, a practicing anesthesiologist and instructor of anesthesiology, pain, and perioperative medicine at the Stanford University School of Medicine who co-authored the study.

"Total knee replacements are a common procedure, and it's expensive," says Sun, explaining why the study focused on total knee replacements. "More physicians are practicing in larger groups. [They] may lower overall costs, but [they're] charging more money."

In the past, when patients were charged more, the extra cost largely went unnoticed because the patient's insurance company bore the brunt of the increase. Patients are more conscious of healthcare costs now that there is more cost-sharing, a trend that is also likely to continue.

Sun's study looked at two data sets to determine the relationship, if any, between consolidated markets and physician fees. First, researchers studied market concentration of orthopedic groups over time between 2001 and 2010; second, they looked at physician fees charged over the same period of time by examining administrative claims data for patients with private health insurance.

Researchers calculated the amount of consolidation annually for 311 U.S. counties using the Herfindahl-Hirschman Index, a well-researched and commonly accepted measure of market concentration.

ACOs Coordinate Care, and Higher Prices
The study found that as the orthopedic group market became more concentrated, through affiliation or acquisition, the fees physicians charged also went up, either by 3.86% or by 6.63%, depending on the amount of market concentration over time. Markets that had the most concentration growth over the time period had the biggest increase in physician fees—$168. In contrast, in markets where there was no significant concentration, physician fees for total knee replacement fell by $261 over the same time period.

"I hope what this paper brings forward is [discussion] of the costs and benefits of changes in physician structures the Affordable Care Act is trying to introduce," says Sun. "Accountable care organizations can coordinate care, but they can also coordinate things like higher prices."

The additional fees collected in consolidated markets could be a bridge for organizations to use as financial footing while transitioning to a value-based care model, but relying on that long-term is doomed to fail because patients are already shopping for hips and knees like consumers are shopping for cars. It's not a sophisticated market now, but it will be, and unless the quality is better, physicians will be forced to explain their higher prices or reduce them on demand.