Hospitals are going on a doctor-buying binge, and its likely to end badly

Hospital by Shutterstock

I have an Op Ed in today’s edition of The Wall Street Journal documenting the consolidation that is underway among individual providers, and the implications of this trend.

Doctor practices are being acquired at a rapid clip. While some physicians are choosing to sell their practices to integrated delivery systems that are provider led, the majority of doctors are selling their practices to hospitals.

This should have everyone concerned. For one thing, there’s ample evidence that provider productivity declines when doctors become salaried employees of hospitals.

Most hospitals, including public companies like HCA Holdings, Inc (NYSE:HCA) track productivity by borrowing from the RVU system that Medicare uses to set reimbursement rates. But this RVU system doesn’t measure productivity, just consumption of a doctor’s resources (time, effort) in performing given tasks. So it will understate the loss in productivity that occurs from these new arrangements.

But even by this suboptimal RVU-based measure, there are a number of well-done studies that all show that productivity declines, sometimes substantially. Private companies that purchase physician practices will concede they also impute productivity declines when they buy these assets – and bake these assumptions into the hurdle rate that they use when estimating what purchase price they’re willing to pay.

Why should all of this be a concern? Because the only way we are going to solve our long-term fiscal challenges when it comes to programs like Medicare and Medicaid is to improve productivity, so that we can get more healthcare for every dollar of GDP that we spend on it.

Under these terms, the last thing we want to do is adopt policy measures that lead to arrangements that will lower productivity. Yet that is exactly what we have done under the Affordable Care Act.

ObamaCare erects financial incentives to stimulate the creation of “Accountable Care Organizations” – which at their core are just integrated delivery networks that take capitated risk. The problem is that the financial incentives that ObamaCare allows are too meager to attract investment capital that could stand up these new endeavors. When it comes to new healthcare services ventures, the law punishes excess return on invested capital. Most of the venture capital that seeded new healthcare services ventures has dried up. The bulk of the money entering the space is from buyout shops looking to consolidate existing players.

The result is predictable. The only entities pursuing this sort of integration are the entrenched players. And it’s mostly the hospitals that are playing. Not because they necessarily want to run ACOs, but because they want to consolidate local physicians to secure monopoly-like positions that give them bargaining power. Studies show that this sort of market concentration leads to higher healthcare costs.

At the same time, ObamaCare increases the costs that a physician faces by continuing to run her own independent medical practice (with elements such as mandates to install costly electronic record keeping). The law also creates a reimbursement scheme that favors the hospitals still further, by allowing outpatient procedures to be better compensated when they are performed inside a hospital owned practice versus an independent physician’s office.

All of these elements have had the predictable effect of driving consolidation of medical practices around the hospitals. This is going to raise healthcare costs, and lower productivity across the medical marketplace.

The last time we tried this, providing tacit incentives for hospitals to roll up doctors in the 1990s, it ended badly. The hospitals and practice management companies that went on buying binges — scooping up independent medical practices — mostly failed. The doctors unwound the relationships, and went back to running their own offices.

The hospitals say that they learned from their past mistakes. This time it will be different. Hospitals argue that they are better equipped to manage doctors – and implement payment systems that give doctors’ incentives to maintain their prior levels of productivity. We shall see. Hospital executive teams are generally weak in many local communities, and physicians notoriously hard to manage.

If these new doctor-hospital marriages fail again, then this time around the doctors may not been able to go back to what they were doing. They will be financially stuck in these relationships. They will be unable to even raise the capital to re-start their own offices. They may have trouble getting bank loans.

The hospitals will simply sand down their reimbursement once these arrangements become unprofitable. Just watch what happens once Medicare ends the arbitrage between its outpatient (Part B) and inpatient (Part A) billing schemes.

The doctors will get squeezed but the real misfortunate will befall patients. We will increasingly be getting our medical care out of busy, hospital-run clinics. Our doctors will be salaried employees, more beholden to the rules that hospitals erect to manage their activities than the medical practices that they once owned.

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