United States: Healthcare Costs Can Rise When Hospitals Acquire Medical Groups

Last Updated: April 17 2015
Article by Bill Brause

The Affordable Care Act (ACA) has triggered a wave of medical group mergers and acquisitions, as providers look for ways to succeed in a rapidly changing marketplace. The transactions are supposed to help contain costs as well as improve care, but regulators, researchers and the courts say that deals between medical groups and hospitals can instead increase healthcare costs.  

ACA is driving consolidation

Although medical group mergers are not a new phenomenon, the current consolidation is different because it is being driven by a huge ACA-related shift in how providers get paid. This shift―from a payment model based on volume to one based on quality of care―is a main component of healthcare reform.

Unlike the traditional fee-for-service structure, the new quality-based model rewards providers for keeping patients healthy in a cost-effective way. It's a data-driven new approach that requires a higher level of organization and service integration, as well as electronic health record technology. Meeting these requirements can be costly and complicated, so providers are joining forces and merging to better implement the necessary changes. 

Deal activity has slowed from the initial post-ACA boom but is still strong. According to industry analysts Irving Levin and Associates, there were 57 medical group M&A deals in 2014―12% lower than the 65 reported in 2013 and well below the peak of 115 recorded in 2011, but still a historically robust number. The deals include physician-hospital mergers and mergers between medical groups.  

A 2014 survey, of more than 20,000 physicians nationwide, by recruiting firm Merritt Hawkins found that 30.5% of physicians are now employed by a hospital and 22.4% are employed by a medical group. Another 34.6% are in private practice and 12.5% are otherwise employed. In addition, 50% work in groups of 11 or more.

Court rules against merger

Mergers are supposed to improve care and generate operational efficiencies that will help contain healthcare spending.  However, opponents of the deals contend that hospital acquisitions of medical groups can raise healthcare costs, and a recent court decision supports this view.  

In early February, a federal appeals court affirmed a lower court's 2014 ruling that ordered St. Luke's Health System in Idaho to unwind its 2012 acquisition of Saltzer Medical Group, the state's largest independent physician group. The case, which was filed by the Federal Trade Commission (FTC) and another local hospital, is the first lawsuit to challenge a hospital acquisition of a medical group.  

Opponents say that hospital-medical group deals ultimately raise costs for consumers because they give hospitals more bargaining leverage against insurers, and because physicians that work for a hospital are more likely to automatically refer patients there. Hospitals also bill for services performed in their physicians' offices at the hospital facility rate, which is higher than the rate an independent physician can charge for the same service.

In the St. Luke's case, the FTC successfully argued that the merger violated antitrust laws and would raise healthcare prices. The court did not dispute St. Luke's claim that the combination would improve care, but said that the hospital and the physicians could collaborate to share information and improve care without a merger. (Accountable care organizations and regional collaboratives are some of the alternate ways in which providers can work together without merging.)

In the future, prospective deal partners will need to carefully consider the antitrust implications of their transactions. The closely watched St. Luke's case could have an impact on hospital-physician mergers nationwide. During the appeals process, the attorneys general of 16 states (including California) filed a friend-of-the-court brief stating that hospital acquisitions of medical groups had raised healthcare prices in their states.

Study says mergers increase healthcare costs

A recent study published in the Oct. 22/29, 2014, issue of the Journal of the American Medical Association also points to higher costs from hospital-physician mergers. The researchers, led by UC Berkeley health policy professor James C. Robinson, compared the total cost of care for 4.5 million patients treated by hospital-owned and independent physician groups between 2009 and 2012.

The study found that after adjusting for patient severity and other factors, the cost per patient for care provided by local hospital-owned physician groups was 10.3% higher than for care provided by physician-owned groups. Care from groups owned by multihospital systems cost 19.8% more than care from physician-owned groups. Of the 158 total groups in the study, 75% were physician-owned, 12% were owned by local hospitals and 13% were owned by multihospital systems.

Consolidation likely to continue

Although regulators are looking more closely at mergers' potential effect on local markets, the "bigger is better" trend shows little sign of ending any time soon. As healthcare reform continues to change the industry, providers will likely keep joining forces to succeed in the new value-based environment.  The transactions can lead to a better quality of care for patients. However, they may not have the intended effect initially sought—cost containment of healthcare spending.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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