• Integration nation

    Two trends in vertical integration. Neither is an obvious step in the right direction on cost and quality.

    Some hospital networks also become insurers, By Roni Caryn Rabin (WaPo, 8/25/12):

    North Shore-LIJ Health System, with 16 hospitals and more than 300 outpatient centers in Long Island and New York City, is laying the groundwork to be an insurer, as well as a provider of health care. […]

    Hospitals from Colorado to Virginia are exploring similar strategies spurred by rising costs and incentives in the health law. An estimated 20 percent of networks market an insurance product, including MedStar Health, serving the Washington-Baltimore region with Georgetown University Hospital and eight other facilities.

    Another 20 percent are exploring doing so, according to a survey last year of 100 hospital leaders by the Advisory Board Co., a research firm. […]

    Of course, Americans rebelled against an earlier iteration of this model, known as managed care, when insurers ran the show. […]

    The transition is complex and fraught with risk for hospitals, experts say. Insurance is a different business from health care and requires its own mind-set and skills. Hospitals will have to change the way they are run and radically alter the way they take care of patients, possibly taking on powerful interests — such as doctors.

    To become licensed as an insurer, a health system also needs to have millions of dollars in capital reserves and must run a regulatory gantlet to prove it has an adequate provider network and can deliver required benefits. And a hospital system cannot dip into the health plan’s reserves to fund new services.

    Same Doctor Visit, Double the Cost, by Anna Mathews (WSJ, 8/26/12)

    Dr. Hubbard was caught up in a structural shift that is sweeping through health care in the U.S.—hospitals are increasingly acquiring private physician practices.

    Hospitals say the acquisitions will make health care more efficient. But the phenomenon, in some cases, also is having another effect: higher prices.

    As physicians are subsumed into hospital systems, they can get paid for services at the systems’ rates, which are typically more generous than what insurers pay independent doctors. What’s more, some services that physicians previously performed at independent facilities, such as imaging scans, may start to be billed as hospital outpatient procedures, sometimes more than doubling the cost. […]

    Major health insurers say a growing number of rate increases are tied to physician-practice acquisitions. The elevated prices also affect employers, many of which pay for their workers’ coverage. A federal watchdog agency said doctor tie-ups are likely resulting in higher Medicare spending as well, because the program pays more for some services performed in a hospital facility.

    With private insurers, hospital systems with strong market heft can often negotiate higher rates for physician services than independent doctors get. The differential varies widely, anywhere from 5% or less to between 30% and 40%, industry officials say.

    The bounce can be far greater: Blue Shield of California said that after one group of physicians based in Burlingame, Calif., came under the umbrella of thepowerfulSutter Healthsystem in 2010, its rates for services increased about 140%. The insurer said it saw a jump of approximately 95% after a Santa Monica, Calif., group became part of the UCLA Health System in January 2011.


    • So hospitals are trying to defy the universal principle of “no free lunch”.

      Well, not exactly, but indivdual citizens, through taxes and premiums, seem to be willing to pay for hospitals increased profitability (ie lower marginal costs and higher prices).


      On the other hand:

      Attention all independent physicians and physician groups, not to mention free standing facilities (i.e. non-hospital based imaging providers, etc.). You have a practice worth X. That practice is worth cX to some hospital, where c is a postive real number greater than 1. Therefore you have a chance to earn what is essentially a risk free profit by selling your practice to them for X(p(c-1) + 1), where p is some number greater than 0 and less than or equal to one. As long as you value the non-pecuniary aspects of your practice less than pX(c-1), what are you waiting for?

    • Isn’t provider consolidation (into ACO’s) an intended consequence of the ACA? Eg a feature, not a bug.

      Since everyone knows that greater provider consolidation is strongly associated with higher prices, which cost containment measures were built into the legislation to reduce costs in a manner equal or greater to the price increases driven by greater provider consolidation?

      If the real world was a neoclassical computation exercise this would end in monopoly vs monopsony but I think we’ll see alternatives to this model emerge long before we arrive at this endpoint.

      “Now provisions of the ACA are encouraging further consolidation of hospitals and physicians, and the final antitrust review regulations from the Department of Justice and the Federal Trade Commission have eliminated the proposed mandatory review of certain prospective ACOs.

      It will take some time to see what types of ACOs are allowed to form and how they will affect the competitive structure within their markets. It is clear, however, that the ongoing consolidation of local hospital markets is already frustrating the efforts of employers and private insurers to moderate the growth of health care costs. While the use of administered pricing systems largely insulates public payers from the effects of provider market power, the higher reimbursement rates that dominant providers can extract from private payers during rate negotiations put significant upward pressure on private premiums.

      In response, employers and other purchasers of private coverage have begun demonstrating a new willingness to accept limits on their health plan’s provider network, and private insurers are developing new products using tiered networks that exclude or disadvantage providers judged to not deliver value commensurate with their higher prices.”