This Emerging Trend in Medicine Threatens to Drive up Costs to Patients

[Editor’s note: the following is a cross post by Dan Mangan that originally appeared on CNBC.com]:

The doctor might be the same, but her bill's going to be higher.

A strong trend of hospitals buying up physicians practices as well as hospital mergers is threatening to also drive up costs to patients -- at least in the short term.

A key factor in that consolidation trend is doctors now are willing to work for someone else to get rid of the hassle of paperwork, fighting with insurance companies, increased overhead costs, and other duties that keep them away from patients.

Getty Images.

"What you hear over and over again is: 'I just want to practice medicine,' " said Shane Jackson, president of physicians staffing service LocumTenens.com.

Jackson and others said the trend toward doctors working for hospitals is being fueled by middle-age and older doctors who like the idea of spending less time on non-medicine-related work, and younger doctors who "place a lot of value on work-life balance."

And all age groups are increasingly inclined to opt for a guaranteed salary from a hospital instead of fluctuating year-to-year profits from a private practice.

Research by LocumTenens' parent Jackson Healthcare found that the number of solo practitioners among doctors fell from 21 percent to 15 percent from 2012 until this year, while the number of hospital-employed doctors jumped from 20 percent to 26 percent.

"Doctors are asking us, 'Come run my practice, because we can't do it anymore,'" said Alan Miller, CEO of giant hospital chain operator Universal Health Services. "And now we've been investing in doctor's practices. We didn't do much of that before. This is not a great moneymaking business, but it could be."

Sean Benson, vice president of innovation at Wolters Kluwer Health, said his company is "seeing that as a major trend ... physicians either selling out their practices, or looking into the possibility of being acquired by a provider organization."

In a new report, Wolters Kluwer Health found that 34 percent of doctors said that over the next three to five years they would be "exploring different business models," which could include "mergers [or] becoming part of a hospital system."

The report was based on a survey by Ipsos in April of 300 physicians practicing in primary care, family medicine and internal medicine.

Threat to falling costs?

Benson said that doctors' growing inclination to consider selling their practices or merging with hospitals has gotten stronger at the same time that hospitals have become more aggressive at seeking such deals to expand business.

"It's cheaper to build that way," said Benson. But it's not necessarily cheaper for patients.

In June, PwC's Health Research Institute projected a "historic slowdown" in the growth of health-care spending in 2014, saying medical inflation was likely to rise just 6.5 percent over 2013's costs.

However, PwC cited two inflationary trends swimming against that current: the increasing costs of specialty drugs, and what was termed "industry consolidation."

"Over half of hospitals plan to acquire physicians practices in 2014," PwC noted. "Studies suggest that consolidation in concentrated markets can drive prices up as much as 20 percent."

The New York Times, in its July 16 headline announcing the merger of Mount Sinai Medical Center and Continuum Health Partners, warned that the creation of New York's largest private hospital system was "raising the specter of costlier care."

In Massachusetts—where its ongoing seven-year-old experiment with health-insurance reform foreshadowed Obamacare—regulatory changes have lead to almost one-third of acute care hospitals being involved in mergers, acquisitions or partnerships since 2007, and another 20 percent being currently involved in discussions to do so, according to PwC.

Massachusetts' experience with consolidation—which leaves just 9 percent of its hospitals entirely independent—raised "doubt about the long-term viability of stand-alone community hospitals in the U.S.," PwC said.

Dr. Napoleon Knight, a medical director at the Carle Foundation Hospital in Urbana, Ill., said his hospital's 2010 merger with the large Carle Physician Group was driven by the knowledge that the Affordable Care Act was coming, as were other regulatory changes that could affect health-care reimbursement rates and encourage "economies of scale."

Getty Images.

"We saw the landscape of health care changing," said Knight, whose hospital last fall also merged with another health-care system in Hoopeston, Ill.

Ceci Connolly, managing director of PwC Health Research Institute, said, "We do expect there to be some efficiencies that come out of consolidation" that could ultimately result in lower costs to patients.

"It's less clear how long it will take to deliver those efficiencies," Connolly said. "It certainly doesn't happen overnight."

And it might not happen soon enough for many patients as merger and acquisition activity continues apace.

"This trend is here, it's here to stay," said Dr. Peter Angood, CEO of the American College of Physician Executives.

"It's going to take another, I would say, three to five years, before we're really seeing the return on investments," said Angood, referring to both the hospital's outlays and ability to achieve cost savings.

"As health-care systems continue to look for ways to integrate physicians into their delivery models, there will be upfront costs incurred, and it should not be expected that the return on investment will be immediate."

ACPE in a recent poll of doctors found that 32 percent of them said that health-care costs "go up" when "a group or practice is bought by a hospital or health-care system." Just 5 percent said costs go down.

Besides upfront costs and the lag time in realizing cost savings from a deal, there are other factors at play, namely traditional reimbursement practices. Hospitals are able to charge Medicare a higher rate for some services that take place in a hospital setting compared with the rates doctors are able to charge in their independent practices.

That means the same procedure performed in an independent doctor's office on Wednesday might be charged to Medicare at a lower rate than for the same procedure in the same office after a hospital buys that doctors' practice Thursday.

The Medicare Payment Advisory Commission, when it released a report to Congress on the government health insurance program in June, noted that, "Medicare pays 141 percent more for one type of echocardiogram when done in a hospital outpatient department than when it is done in a freestanding physician's office."

"If Medicare pays a higher rate for a service in one setting over another, program spending increases and beneficiaries pay more in cost sharing without a corresponding increase in quality of care."

--

RELATED:

• Why biotech IPOs are suddenly hot
• Deadly epidemic: Prescription overdoses
• Obamacare: New opportunity for fraud?

©2013 CNBC LLC. All Rights Reserved.Dan Mangan.