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Affordable Care Act’s push to consolidate health care to curb costs may backfire

In the United States, physicians practice medicine in a variety of settings, ranging from small solo practices to large, multispecialty group practices consisting of hundreds or even thousands of practitioners.

The tradition of the solo practitioner is one that is immediately familiar to most people, in part because this is the typical depiction of physician practice in movies and television shows.

However, this model of practice is falling by the wayside, and physicians are increasingly more likely to practice in the setting of large group practices. In 2008, only 18% of family practice physicians were employed in a solo practice, compared with 44% in 1986. This trend is being further encouraged by the Affordable Care Act on the grounds that larger practices can help curb costs by leading to better outcomes.

But will this physician consolidation actually lead to lower health care costs? The answer to this question has important consequences. Consolidation among physician practices has typically occurred via mergers between large health care systems.

Proponents of these mergers typically argue that they benefit patients, in large part because of their ability to reduce costs.

Are these claims too good to be true?

Benefits of a larger practice

Larger practices can often offer many benefits for the physician, such as administrative support, interaction with colleagues and increased resources for professional development.

In addition, these large practices may benefit patients as well. Sometimes, bigger is indeed better, and large practices may be able to improve patient care and reduce costs by leveraging their size to implement large-scale measures aimed at quality improvement. For example, these groups may be able to more easily employ electronic medical record systems aimed at improving coordination of care, monitoring physician performance and reducing physician errors.

Indeed, these potential benefits form the rationale for many policies aimed at encouraging further consolidation among physicians.

For example, the Affordable Care Act encourages physicians to form large, multispecialty groups known as Accountable Care Organizations, in large part because of the belief that these organizations will be able to reduce costs by improving coordination of care.

However, a key question is whether these potential benefits may be outweighed by the potential disadvantages associated with large practices. Of crucial concern to antitrust authorities is that large practices may leverage their size to negotiate higher payments from insurers (and indirectly, patients), which could actually increase costs.

Simply put, a large practice is on much better ground than a solo practitioner to negotiate higher payments from a health insurers.

In a recent paper, we examined whether larger practices were associated with higher payments from private insurers in the case of orthopedic surgery and total knee arthroplasty, also known as “knee replacement.”

Knee-jerk reaction

As a first step, we characterized the degree to which the provision of total knee arthroplasties in a given area was dominated by a single orthopedic surgery group or a small number of groups. Total knee arthroplasty is a good surgery to study because it is a commonly performed procedure whose use nearly doubled from 1991 to 2010.

We then examined whether insurers paid higher prices for total knee arthroplasty in markets dominated by a single group or a small number of groups.

Of course, markets that are dominated by a small number of groups may be associated with many other factors that could drive higher insurer payments. To address this possibility, rather than comparing prices across markets, our approach examined how changes in market structure were associated with changes in total knee arthroplasty payments within a given market over time.

In other words, our approach followed individual markets and asked how the payments in those markets changed over time as the provision of total knee arthroplasty became more (or less) dominated by a small number of groups.

Consolidation leads to higher costs

Overall, our results showed that payments were higher in markets dominated by a small number of groups.

In particular, insurer payments for total knee arthroplasty were 7% higher in the markets where the provision of total knee arthroplasty were most dominated by small number of groups, compared with markets where the provision of total knee arthroplasty was more spread out across groups.

To put this in context, this 7% increase is almost as large as the overall long-term decline in total knee arthroplasty payments we observed during the time period we studied (2001-2010).

Policy implications

Our results have several important policy implications.

First, they argue for some skepticism in evaluating the potential benefits of mergers between physician groups, as well as hospitals and health care systems more broadly.

While proponents of these mergers typically cite many of the potential benefits –such as the benefits discussed above – our research also suggests that these potential benefits may be outweighed by the ability of large providers to leverage higher payments from health insurers.

Second, our results suggest that antitrust authorities should closely evaluate whether any potential mergers may result in insurers (and patients) paying higher prices for medical services. For example, antitrust authorities should carefully consider the economic impact of the recently announced merger between Fairview Health and the University of Minnesota’s health system.

At the end of the day, we are witnessing a large change in the way medical practice is being delivered, as the traditional model of solo practice gives way to a model in which physicians tend to practice in the context of larger organizations.

While the model has the ability to benefit patients and physicians, our study suggests that more work is also needed to understand its potential pitfalls.

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