For the past four decades, there has been one dominant theme in healthcare delivery-system reform: Hospitals and physicians must transform themselves into comprehensive-care enterprises to be paid a population-based global budget.
In the vision of pioneering health policy researchers Paul Ellwood Jr. and Alain Enthoven, consumers should choose among multiple Kaiser-like entities competing based on premium (e.g., total cost of care).
When the National Academy of Social Insurance sought to examine whether market concentration in hospital or health insurance markets was driving up costs, we noted that a significant fraction of the major actors in most hospital markets were actually vertically linked integrated delivery networks (IDNs), not horizontal chains. We proposed studying IDN performance to determine whether we could find evidence that IDNs were achieving their hoped-for promise—better care at lower total cost.
What we found was, frankly, disappointing. We reviewed more than 30 years of academic literature on vertical integration and diversification in healthcare, and found virtually no measurable benefits—either to society or to the sponsoring healthcare enterprises themselves—of putting health insurance, hospitals and physician services under the same structure.
We also examined publicly available performance information on 15 nationally prominent IDNs and found no evidence of either lower cost or higher quality in the hospital systems they operated. This was not an easy analytic task. IDN disclosures to bondholders and the Internal Revenue Service were so opaque that we could not tell where they earned their profits, or even how much revenue they generated from their hospitals.
However, we found that IDNs' flagship hospitals, where significant financial and quality information was available, were more expensive than their direct in-market competitors, in cost per case and in total cost of care in the last two years of life. There was no apparent relationship between how concentrated the local hospital market was and the IDN's operating earnings. Further, the size of the IDN (measured either by hospital bed count or total revenue) did not correlate with profitability, challenging a key argument propounded by the hospital merger industry to justify consolidation. Neither scale nor scope economies could be detected.
On the role of “captive financing” in the IDN portfolio, we found that the flagship hospitals of IDNs with significant revenue at risk were 23% more expensive than their nearest in-market competitor, while the flagships of IDNs with no revenue at risk were 8% less expensive. This is the reverse of what we would have expected if having revenue at risk was supposed to lead to more efficient and lower-cost care.
Data limitations aside, we believe the reasons for this disappointing performance lie in the impossibility of straddling two worlds with diametrically opposed incentives: the fee-for-service world with its lucrative profits from imaging, outpatient surgery and high-end cancer treatment, and the global-budgeted world of “population health.” These split incentives magnify organizational risks, not reduce them. For this reason, we believe the current IDN financial disclosures are inadequate to enable bondholders to evaluate enterprise risk.
We think the best approach to learning more is voluntary disclosure by IDNs of more operating detail. If there is non-public information that validates organizing care in this way, it's long past time to see it. It should be possible from those disclosures to identify the amount and nature both of cross subsidies between IDN businesses and the operating contribution (or loss) generated by each. Physician and hospital compensation policies by the IDN's health plan subsidiaries should also be detailed.
Some of the nation's finest hospitals and clinical staffs can be found in our sample IDNs. This analysis is not intended to denigrate these fine institutions or their managements. Rather, we question the merits of the organizational model they collectively represent. After decades of strenuous policy advocacy, it is still not clear that, in the case of the IDN, the whole is greater than the sum of its parts, or that policymakers should be encouraging further IDN formation.
Read our study at www.nasi.org/research/2015/integrated-delivery-networks-search-benefits-market-effects and draw your own conclusions.