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Provider-level Consolidation Poses Same Risks as Major Health System Mergers

Healthcare consolidation has become one of the most noticeable trends of the post-reform period. A combination of poor economic growth, state budget pressures, and declining reimbursement has encouraged many health organizations to pursue mergers as a means to cut costs and expand their market presence. Much of the public scrutiny has focused on hospitals, health systems, and major insurers, but consolidation among private practices has grown as well over the past several years. From 2013 to 2015, a study found the mean and median physician practice group size grew from 3.8 and 8 to 4 and 10, respectively, while the percent of physicians in groups with more than 100 doctors increased from 29.6 to 35.1 percent. Evidence suggests that physician practice mergers and vertical integration with hospitals can potentially have the same anticompetitive effects as hospital-level agreements, but typically encounter fewer regulatory obstacles.

The lack of regulation and oversight is the subject of a recently published study appearing in Health Affairs. It found that about a fifth of the provider markets for a variety of medical specialties care fell under the FTC’s description of “highly concentrated.” According to the FTC’s official definition, highly concentrated markets “potentially raise significant competitive concerns and often warrant scrutiny.” However, due to the low overall value of each transaction, buying out small physician practices with fewer than 10 doctors rarely merits regulatory attention and anticompetitive effects can emerge over time.

Research has shown that the risks of highly concentrated provider markets are real and negatively affect consumers. A 2014 article in JAMA determined that hospital medical groups in California had greater costs than privately owned practices, ranging between 10 and 20 percent overall. Bigger health systems had larger per-patient Medicare spending, coming in at the higher end of the spectrum. Other studies have reached the same conclusion. Markets with fewer providers or those dominated by hospital-owned groups had both higher prices and greater rates of price increases over time.

Top 10 Largest Medical Groups

Medical Group Total Physicians Hospital/Network Parent Medicare Payments (2015) ($M)
 1.  The Permanente Medical Group  9,149  Kaiser Permanente  $45.6
 2.  Southern California Permanente Medical Group  8,627  Kaiser Permanente  $45.7
 3.  HealthCare Partners IPA  4,096  N/A  $253.9
 4.  Cleveland Clinic  3,817  Cleveland Clinic  $208.7
 5.  Mayo Clinic – Rochester  3,418  Mayo Clinic  $149.7
 6.  Northwell Health Physician Partners  3,253  Northwell Health  $356.3
 7.  University Of Pittsburgh Physicians  3,135  UPMC  $106.4
 8.  Massachusetts General Physicians Organization  3,051  Massachusetts General Hospital  $138.5
 9.  New York City Health & Hospital Corporation  2,899  NYCHHC  $128.1
 10.  Johns Hopkins University Health System  2,628  Johns Hopkins University Health System  $146.1

Source: Definitive Healthcare

Several mechanisms drive the price increases. Medicare formerly paid hospital-owned physicians more compared to independent practices, even for the same services performed at off-campus locations. This policy ended in 2017 with the introduction of site-neutral payments, but a series of exemptions dampened its overall effect on spending, limiting it to an estimated $1 to $2 billion in savings each year. Another is that buying practices increases geographic reach and market power, allowing hospitals or large physician groups to negotiate better rates with private insurers. In some cases, this can work against hospitals that contract with outside parties to provide service like anesthesiology and radiology. A practice that represents 50 percent of anesthesiologists in a hospital’s service area has a far better bargaining position than a single-provider office.

While it may lead to higher prices, it’s often advantageous for small physician practices to join hospitals or large medical groups for other reasons. Administrative tasks and reporting requirements have grown enormously in recent years, and some physicians welcome the opportunity to work for a hospital or other firm if it allows them more time with patients and reduces their non-clinical burden. They can also benefit from improved clinical infrastructure, such as a new EHR system. Hospitals stand to gain as well. It’s far easier to coordinate care with employed physicians than with third parties, and each new physician is likely to refer his existing patients to the parent hospital.

It’s unlikely that the trend of physician consolidation is going to slow down anytime soon. The FTC has not signaled that it will attempt to regulate smaller merger deals, and the commission is expected to focus its attention on major, high-value arrangements. Neither does it have the resources to do otherwise. For the moment, it seems that existing market forces will continue to determine physician practice merger patterns and costs.

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Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our databases include detailed information on inpatient and outpatient procedures at hospitals and clinics, including total charges, volume, and Medicare and commercial payments.

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