Healthcare Business News

Reform Update: Physician practice acquisitions can drive up costs without price increases

By Melanie Evans
Posted: February 19, 2014 - 4:30 pm ET

New economic research and a recent antitrust case in Idaho suggest that deals among hospitals and physician practices have the potential to increase total healthcare costs, even if newly merged hospitals and doctors don't raise prices.

That's because deals may drive higher use of medical services or drive use of more costly services, such as those that are billed as hospital services rather than ambulatory, after a health system acquires a medical practice. That added use increases the total cost of care, potentially raising premiums.

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Policies under the Patient Protection and Affordable Care Act have encouraged efforts to eliminate unnecessary use of healthcare services and shift treatment, when possible, from high-cost hospitals to less expensive settings. Those policies have sparked deals across healthcare among hospitals, medical groups and insurers that executives say are necessary to coordinate care and curb use. But those deals have raised concerns that consolidation will give large health systems too much power to raise prices. In Boston, consolidation has prompted inquiries by the state attorney general and the Massachusetts Health Policy Commission.

Prices matter, of course. But so does utilization in healthcare's idiosyncratic market, said authors of the new economic research. The analysis (PDF), which looked at 40 million medical claims filed with Blue Cross and Blue Shield of Wisconsin, found that higher use of services accounted for half of a 10% increase in spending per person, or $83, over seven years for communities involved in a class action settlement with the Marshfield (Wis.) Clinic.

The 1997 lawsuit alleged that Marshfield Clinic and other defendants agreed to divvy up markets and limit competition. That created the potential for providers to raise prices and also increase use because of the healthcare marketplace's idiosyncrasies, such as insurance that largely shields patients' from the cost of care, and the prevalence of fee-for-service payments, under which providers earn more if they do more. Blue Cross Blue Shield of Wisconsin separately sued the Marshfield Clinic. A jury's verdict in favor of the Wisconsin Blues was largely overturned. What remained of the case returned to district court, where a judge found in favor of the clinic.

“The main implication of our findings is that, especially in cases where a service-intensive practice style is a part of the competitive strategy of a provider accused of illegal anticompetitive conduct, methods of damage estimation should not be based on price only, but rather should also consider whether increased quantities of services contributed to the monetary losses experienced by consumers and health insurers,” wrote authors R. Forrest McCluer of litigation consultancy Greylock McKinnon Associates and Martha Starr of American University. (The paper disclosed that McCluer worked with plaintiffs in the Marshfield lawsuits.)

The total cost of care—not just the price, but use of services—also factored in the recent antitrust case brought by the Federal Trade Commission against St. Luke's Health System in Boise, Idaho.

That case was one of the first to explicitly examine a deal's potential impact on the total cost of care, not just price, and is likely a sign of what future antitrust cases may hold, said David Dranove, an expert witness for the FTC on the case and professor of management and strategy at Northwestern University.

The case was decided against St. Luke's Health System, which was forced to abandon its acquisition of Saltzer Medical Group, based in Nampa, Idaho. Dranove said the case, in part, examined whether the acquisition would increase the total cost of care by shifting doctors' services from clinics to a high-cost hospital setting. Hospital prices may not increase after the deal, but hospital services may be used more frequently than before.

Some changes in the marketplace could help counter the potential leverage of consolidation, he said, such as high-deductible health plans that expose patients to more of the cost of care and payment models that replace financial incentives for volume with incentives for more efficient use.

But the success of new payment models, such as accountable care, will depend on whether those incentives are potent enough to override incentives for volume. Even then, market clout matters, Dranove said. “All of these things may help consumers, but none of these things make market power less important to the sellers.”

In other coordination news

Retail clinic operators are a potential wrinkle in the market as providers seek to consolidate and coordinate healthcare delivery though such Affordable Care Act-endorsed initiatives as accountable care. Health information technology could do much to overcome the potential fragmentation created by retail clinics by connecting them to patients' regular primary-care providers, but those connections are spotty even as ACOs and retail clinics proliferate, Modern Healthcare reported this week.

Follow Melanie Evans on Twitter: @MHmevans

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