Vertical Integration in Healthcare Impacting Referral Patterns

Vertical integration in healthcare, or direct ownership of physician practices by hospitals and health systems, has become increasingly popular. But this type of merger and acquisition is leading to higher healthcare costs and inappropriate care, a pair of new studies reveal.

Provider organizations have touted the benefits of vertical integration, including greater efficiency, more care coordination, and simplification of the payment process. However, a study recently published in Health Affairs found that referrals to hospitals increased after vertical integration, resulting in millions more in Medicare spending.

For example, the monthly number of diagnostic imaging tests per 1,000 attributed beneficiaries performed in a hospital setting increased by 26.3 per 1,000, reports lead author Christopher M. Whaley, policy researcher in healthcare at RAND Corporation, and colleagues. Meanwhile, the number performed in a non-hospital setting decreased by 24.8 per 1,000.

Referrals for laboratory tests followed a similar trend, with hospital-based tests increasing 44.5 per 1,000 attributed beneficiaries and non-hospital-based tests decreasing by 36.0 per 1,000 after vertical integration.

With more hospital-based services, Medicare reimbursement increased after vertical integration. Specifically, average reimbursement rose by $6.38 for imaging tests and $0.57 for laboratory tests. While modest increases in reimbursement, the high-volume nature of these services translated to a combined $73.1 million more in Medicare spending for all ten imaging and laboratory testing services studied during the four-year period.

Whaley and colleagues say it is difficult to associate the increase in spending with better quality of care because of how standardized imaging and laboratory testing services are across diagnostic providers. “The increased payment is instead a reflection of preexisting Medicare payment rates that reimburse hospitals more for these services than they reimburse competing providers (for example, stand-alone imaging centers and freestanding diagnostic laboratory companies),” they write in the study.

“Hospitals and health systems have a strong financial interest in capturing the referral patterns of physicians, especially those they employ. These incentives and downstream outcomes can sometimes be at odds with patients’ best interests, however,” they add later.

The study is now part of a growing body of literature pointing to higher healthcare costs after industry consolidation, including a highly-cited analysis from health economist Michael Chernew and colleagues which studied the costs of lower-limb MRI scans after industry consolidation.

But vertical integration is doing a lot more harm than increasing costs, another study published in the latest edition of Health Affairs indicated.

The study led by Gary J. Young, director of the Center for Health Policy and Healthcare Research at Northeastern University, and colleagues found that hospital employment of physicians in Massachusetts was associated with inappropriate diagnostic care.

Using claims data from 2009 through 2016, Young et al. reveal inappropriate referrals for magnetic resonance imaging (MRI) for three common medical conditions: lower back pain, knee pain, and shoulder pain. For example, the odds of a patient receiving an inappropriate MRI referral increased by over 20 percent after a physician transitioned to hospital employment.

Most patients who received an MRI referral by an employed physician also got the service at the hospital where the physician was employed, the study shows.

The study cohort comprised 583 primary care physicians who transitioned to hospital employment during the study period compared to a comparison group of 3,102 physicians who were not employed by a hospital during that period.

The data indicates a pattern of low-value care after vertical integration, which is a major problem considering more than one-third of US physicians were employed by hospitals either directly or indirectly through hospital-owned practices by 2018.

Hospitals cannot pay physicians directly for referrals back to the facility under federal and state laws. However, internal policies can encourage physicians to keep patients “in-house” versus going to other providers.

The policies—and vertical integration, in general—can promote greater care coordination, which has been shown to have significant care quality improvements. But Young et al. hypothesize that the referral patterns are financially motivated by hospital policy considering non-hospital-employed physicians demonstrated different referral patterns.

“Imaging services have been estimated to account for more than 30 percent of hospitals’ profits, and MRI scans specifically constitute a large portion of the high-margin imaging services that hospitals deliver,” the study states. “At the same time, it is also possible that physicians, once embedded in a hospital environment through an employment arrangement, become more inclined to refer patients for MRI scans, including those that do not strictly meet appropriateness criteria, because their employment arrangement facilitates such referrals.”

Researchers from both studies suggest payment and regulatory mechanisms to minimize the harmful effects of vertical integration in healthcare. For example, they advise policymakers to enact more site-neutral payment policies to lower healthcare spending for hospital-based care.

Many provider groups have opposed the use of site-neutral payments, arguing that hospital-based settings treat sicker, poorer patients and are subject to stricter regulations. Therefore, hospital-based settings incur more costs compared to physician offices.

Industry consolidation, however, has become a persistent trend even in the face of a global health crisis.