Rise in Hospital Employment of Physicians: What’s Good is Bad, What’s Bad is Good

In the plus ça change, plus c’est la meme chose department, I read Jay Hancock‘s recent piece on Kaiser Health News reviewing a Health Affairs paper about health system hiring of physicians and acquiring physician practices flying below the antitrust radar but nevertheless concentrating the supply of physicians in various markets nationwide and increasing the market power of the health systems as a result. Since each physician practice acquisition, each hiring of a physician fresh out of school, doesn’t trigger antitrust review on its own, the broad shift has essentially gone unreviewed.

[H]ospitals owned 26 percent of physician practices in 2015, nearly double the portion from 2012. They employed 38 percent of all physicians in 2015, up from 26 percent three years earlier.

[O]nly 15 percent of the growth by the largest physician groups from 2007 to 2013 came from acquisitions of 11 doctors or more.

About half the growth of the big practices involved acquisitions of 10 or fewer doctors at a time. About a third of the growth came not from mergers but from hiring doctors out of medical school or other sources.

Yes, there are more physicians employed by health systems than there used to be, there are more physician practices that have been acquired by health systems, but looking at this just from an antitrust, market power, pricing perspective is taking too narrow a view. We need to step back and ask some fundamental questions:

• Why has there been this shift to physician employment?
• Is hospital/health system employment of physicians inherently bad?
• Would antitrust regulation of aggregation of providers prevent some ill that exists and that may be growing in our current system?
• What are the other possible outcomes? Other possible structures?

To quote the poet: What’s good is bad, what’s bad is good. Historically, medicine has been practiced by small, independent physician practices. Over the past 50 years there have been a variety of forces influencing the shift in the landscape.

Managed care’s rise in the 70s, including physician-employing pioneering HMOs, disrupted the previously dominant position of physicians in the health care ecosystem and the 20th century practice of health insurance companies paying physicians on the “usual, customary and reasonable” basis.

IPAs and PPMCs in the go-go ’80s and ’90s took two different paths to try to improve physicians’ lots in the face of the rise of health care purchasers’ power, in part by increasing market power of small practices while permitting them to retain a measure of autonomy. PHOs brought the hospitals into the mix as well. All in all, the health insurance companies were faced with formidable negotiating adversaries, even as activities of IPAs and PHOs had to be structured to work around antitrust concerns (witness the “messenger model”).

Antitrust law is a blunt instrument, and is a reasonable instrument to be using only if we believe that unfettered competition is the best way forward. However, the health care marketplace is so phenomenally regulated in so many different ways and is so messed up as a market for so many different reasons (e.g., the purchaser is not the consumer, there are great knowledge asymmetries, etc.). As a result, a pure free market seems an impossibility.

In the ’90s, the Clinton health reform efforts coalesced around Alain Enthoven’s concept of “managed competition,” which sought to rationalize the positive aspects of all that had gone before and create a new utopian ideal of providers, payers and intermediaries. (Worth a read because despite some of the quaintness we see when looking back at a 25-year-old cutting-edge document it’s still, well, cutting-edge.)

We all know what happened there.

Under the ACA (for as long as we have the ACA to kick around), the value-based payment, pay-for-performance framework (percolating since the ’90s), together with increasing regulation and decreasing ability of small practices to continue to go it alone and generational differences in work/life balance priorities, has motivated an acceleration in the sea change in structure of the US provider landscape (e.g., the ACO), prompting consolidation — and physician employment — in an effort to improve provider organization positioning in order to succeed under the new rules. Pushing the Triple Aim — i.e.,  incentivizing reduced costs and improved quality and population health — has an effect on rational economic actors, and part of that effect is vertical integration.

The question of the moment is whether these rational economic actors have got it right. Will vertical integration necessarily reduce costs and improve quality sufficiently, under the often-shifting public and private sector payor metrics, so as to improve providers’ bottom lines? The goalposts keep moving, so the organization and reorganization of the healthcare-industrial complex will remain as dynamic as it has been.

The restructuring of healthcare provider relationships is the product of many long-term trends, including legislative and marketplace trends, and it does not have to result in pricing abuses due to the market power of certain provider organizations. Payor organizations have consolidated as well and are flexing their market place muscles (for example, consider the recently-announced Anthem policy on hospital outpatient radiology).

One of the paper’s authors, Christopher Ody, seems to be seeking greater state and federal antitrust enforcement. In my view, antitrust regulation alone is not going to address any pricing inequities that may arise as the healthcare marketplace continues to be buffeted by myriad other forms of regulation. Pushing the balloon in on one side always leads to its bulging out unpredictably somewhere on the other side.

Physician employment has been increasing over time, since the passage of the HMO Act and even before. While recent legislative and market forces may have led to an increase in the rate of consolidation, that’s not necessarily a bad thing.

So where do we go from here? Well, as they say in the trade, it’s a developing story. As always, we need to navigate a path between the ideal and the politically feasible, and beware of lightning that might strike.

David Harlow
The Harlow Group LLC
Health Care Law and Consulting

Image credit: Xavier Badosa via Flickr CC