Editorial: Will vertical integration actually lower healthcare costs?
The hospital systems buying physician practices say vertical integration will facilitate care coordination and lower costs.
Where's the evidence?
If consolidation immediately lowered costs, hospital groups wouldn't be fighting so hard to fend off the CMS' proposal to install site-neutral payments for tests and procedures done in outpatient settings. While the rates at hospital-acquired physician practices have been cut, they still get higher fees than practices that remain under physician compensation rules.
Moreover, the upward arc of physician compensation, the largest expense in any practice, hasn't moderated with the growth of hospital-employed physicians. Contrary to the fears of many physicians caught up in the consolidation wave, hospital administrators continue to grant most specialties pay hikes that outpace inflation by a healthy margin.
Modern Healthcare's Physician Compensation Database, which tracks average salaries based on a survey of a dozen compensation consulting firms and organizations, shows the average pay for 22 specialties, including the relatively low-paying fields of family practice, pediatrics and internal medicine, rose 10.8% between 2012 and 2017. Average physician pay now stands at $386,000 a year, up 10.9% from $348,000 in 2012.
In percentage terms, that pay hike is 4 percentage points more than the national inflation rate over the same period. In other words, despite consolidation, doctors in recent years have consistently pulled down steady, inflation-adjusted pay increases—something that has eluded most American workers.
The money isn't being spread around evenly. Radiologists, anesthesiologists and non-invasive cardiologists have seen slight pay declines (after adjusting for inflation). Internal medicine docs and psychiatrists, on the other hand, have seen better-than-average pay hikes, a good thing since that better pay promotes primary care and behavioral health.
But some of the biggest pay increases have gone to in-hospital specialties—ER docs and hospitalists. High-paying proceduralists like invasive cardiologists, orthopedic surgeons, oncologists and dermatologists have also seen better-than-average increases.
The acquiring systems say it will take time before we begin to see the cost-reduction benefits of vertical integration. Organizations must implement structural changes to accommodate new functions like care coordination.
They also must adopt new attitudes to enable payer-provider collaboration. It takes time, they say, to create a culture that encourages once-independent physicians to become the team players and team leaders needed to deliver higher quality, standardized care.
These changes do require substantial investment, especially in doc-friendly health information technology. Electronic health record systems must be unified; data must be aggregated from multiple providers in ambulatory and post-acute settings; and hospital systems must be able to perform the data analytics that enable care coordination.
It adds up to a daunting agenda for streamlining and innovation, especially in health IT. In fact, the broad scope of that agenda is one of the primary drivers of hospital-physician consolidation. Few independent physician practices can access the capital needed to make these investments.
There is a vision for hospital systems on this journey, though it's rarely expressed. The goal is to become an integrated delivery system, like Kaiser Permanente or Geisinger, that can be centrally managed with a fixed budget. It's a compelling vision and one worth pursuing.
But the centrifugal forces that could disrupt those plans are gathering speed. Outside capital is being poured into stand-alone imaging and procedure centers, storefront and workplace clinics, and concierge-style primary-care practices. Their business models depend on the eventual disaggregation of healthcare delivery.
Systems can't afford to ignore those threats. The time to generate value from the past decade's physician practice acquisition binge is growing shorter.
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