Vertical Integration, Joint Contracting Increased Physician Prices

Vertical integration and joint contracting between physicians and health systems led to increases in physician prices, with the size of the increases correlating with the health system’s size, according to a Health Affairs study sent to journalists.

Joint contracting in the form of clinically integrated networks between hospitals and physicians is becoming more common in the healthcare industry. Vertical integration can potentially improve care coordination, reduce the duplication of services, and decrease prices for physician services, but concerns about these mergers remain.

Vertical integration may lead to newly integrated physicians redirecting referrals to their affiliated hospitals, which could foreclose rivals. In addition, physicians might leverage enhanced market power to raise prices. Joint contracting between physicians and hospitals may also reduce horizontal physician competition.

In an assessment of four data sets detailing how vertical integration and joint contracting impact outpatient commercial physician prices in Massachusetts, the researchers found the agreements can increase prices. 

The study included data from the Massachusetts Provider Database from 2013, 2015, and 2017; Massachusetts hospital reports from 2013, 2015, and 2017; 2013 to 2017 commercial paid medical claims data from the Massachusetts All-Payer Claims Database; and information from the Massachusetts Health Policy Commission’s Registered Provider Organization database.

The study sample included nearly 57,000 physicians—34 percent were primary care physicians, 62.6 percent were specialists, and 3.4 percent were hospitalists.

The percentage of independent primary care physicians declined from 42 percent in 2013 to 31.5 percent in 2017. The percentage of physicians who were vertically integrated or joint contracting with a small or medium health system increased from 19.5 percent to 32.8 percent. Integrations with large health systems fell from 38.5 percent to 35.7 percent.

Specialists saw similar trends but were more likely to be vertically integrated or joint contracting.

In 2017, there was significant geographic variation in vertical integration and joint contracting, researchers found. Massachusetts hospital services areas (HSAs) are contained within three hospital referral regions (HRRs). In the Boston HRR, 35.8 percent of physicians were vertically integrated with a large system, while 84.8 percent were in the Springfield HRR and 74.7 percent were in the Worcester HRR.

Throughout the study period, the overall geographic variation increased by 13.6 percent.

Vertical integration and joint contracting with a small health system did not significantly impact prices, with primary care physician prices rising 2.1 percent and specialist prices increasing by 0.7 percent.

Meanwhile, integrating with medium and large health systems led to substantial price increases. Vertical integration with a medium health system increased primary care physician prices by 7.7 percent and specialist prices by 2.4 percent.

Large system integrations led to price increases of 12 percent for primary care physicians and 6 percent for specialists. The integration with the largest health system boosted prices by 15 percent for primary care physicians and 7 percent for specialists, the study found.

In addition, specialists that integrated or were joint contracting with the largest health system saw a $136 increase in facility fees within one week after the provision of patient services. However, this was the only impact researchers found on facility fees, contrasting past studies that found substantial increases in facility fees following hospital acquisitions of physician practices.

“Our finding of higher physician prices with vertical integration could result in higher or lower spending—the latter if integrated systems can coordinate and manage care to reduce quantities provided or channel patients to lower-cost sites of care,” the study stated.

As vertical integration and joint contracting continues in the industry, researchers recommended that federal policymakers take steps to mitigate price changes. Greater antitrust enforcement, increased oversight of commercial insurance contracts, and laws that promote competition may help limit healthcare price growth.

State policymakers may also help curb rising prices. For example, Massachusetts established the Massachusetts Health Policy Commission, which can conduct cost and market impact reviews of proposed mergers between physician practices and health systems.