Wilmington Health is approached by a potential buyer about twice a year. Each time, the North Carolina-based independent physician group declines, according to CEO Jeff James.
Rapid rise in hospital-employed physicians increases costs
"What we can't understand is the value proposition for the physicians in the long run," James said. "If they buy us, it is going to add a bunch of overhead and increase the cost of care."
Wilmington stands out during a time of rapid consolidation in the healthcare industry, particularly among physician groups. Healthcare experts caution that healthcare costs will rise as more hospitals acquire physician groups.
From mid-2012 to mid-2016, the number of hospital-employed physicians hit about 155,000 in 2016, up 63% from 95,000 in 2012, according to new data released by the Physicians Advocacy Institute and analyzed by consultancy Avalere Health. Forty-two percent of physicians were employed by hospitals in July 2016, compared to just 1 in 4 physicians in July 2012.
Over the same period, the number of physician groups employed by hospitals grew by 36,000 practices—a 100% increase.
"I'm not sure if that brings pressure or opportunity," James said. "It should bring opportunity, but the sheer fact that there's not enough transparency in healthcare is a disservice to an organization like ours." Healthcare's opacity erodes competitive market forces, he added.
Independent practice owners argue that they are spending less time with patients to keep up with increased reporting requirements. New payment policies favor large health systems and stack the deck against independent physicians, said Robert Seligson, president of the Physicians Advocacy Institute and CEO of the North Carolina Medical Society. This has caused them to sell to a bigger system that handles all the administrative work. Or, they close altogether.
"There's the site-of-service differential, a multitude of regulations, stresses in dealing with electronic data," he said. "These are challenges for doctors and smaller practices."
On a regional level, more than half of all physicians in the Midwest are employed by hospitals while 44% in the Northeast are employed. Rates of employment are lowest in the South as well as Alaska and Hawaii, at 37% and 33%, respectively.
All regions saw an increase in hospital-owned practices each year, ranging from a total increase of 83% to 205% over the four-year span. These trends are particularly troubling because data show that hospital-employed physicians perform more services than their independent counterparts at higher costs, the study concluded.
Several factors are working against independent physicians. The 340B drug discounts are only available to safety-net hospitals but not to ACOs, James said. So, Wilmington is forced to send low-income, relatively unhealthy patients to higher-cost facilities because the practice wouldn't be able to shoulder the financial burden, he said.
Quality measures are often out of whack, James said, which is evidenced by a recent Modern Healthcare analysis of CMS' latest star-ratings formula that disproportionately rates specialty hospitals better than major teaching hospitals.
North Carolina's certificate of need law prohibits providers from acquiring, replacing or adding to their facilities and equipment, except in specified circumstances, without the prior approval of the Department of Health and Human Services.
"Independent physician practices need some malleability with some of the requirements," Seligson said. "By showing transparency and true cost, that will help level the playing field."
These factors will continue the consolidation trend, which will likely lead to higher healthcare costs, research shows.
When hospitals acquire physicians, referral patterns change, researchers found. Physicians are more likely to refer patients to higher-cost facilities within their employer's network, which potentially impedes competition from other hospitals, according to a recent paper co-authored by Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University. The share of spending associated with hospital-owned practices rose from 16.9% in 2007 to 26.5% in 2013.
"That is disturbing to me," he said. "For hospital acquisitions of physician practices, all evidence points to higher prices."
Earlier research conducted by Avalere found that increased physician employment by hospitals caused Medicare costs for four healthcare services to rise $3.1 billion between 2012 and 2015, with beneficiaries facing $411 million more in financial responsibility for these services than they would have if they were performed in independent physicians' offices.
A 2015 study co-authored by David Dranove, Northwestern University professor and co-director of Health Enterprise Management at the university's Kellogg School of Management, found that physician prices increase nearly 14% when a health system acquires a physician group.
About a quarter of the increase could be attributed to higher-rate facility and professional fees that were intended to help cover the overhead costs for services that can only be provided in hospitals, but are often misused. Hospital-employed physicians can get higher payment rates from payers and patients, both from the facility fees and from the greater leverage that hospitals have in negotiations with payers. Thus, the hospital can pay them more than they would earn in an independent practice.
Vertical acquisitions can deliver good outcomes at an effective cost, but they can also "allow hospitals to create contracts with doctors that effectively pay them for referrals," a 2014 study published in Health Affairs concluded.
"A lot of folks including me have thought that vertical integration can be a way to bend the cost curve," Dranove said. "I am disappointing that the evidence hasn't borne that out yet."
Send us a letter
Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.