Daniel Kessler: The Anti-Competitive Risk of “Accountable Care”

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Fully integrated healthcare systems, in which hospitals own the doctor groups, are growing. But there’s a potential downside: higher prices. | Reuters/Stefan Wermuth

One of the biggest trends in healthcare reform is the rise of “integrated” or “accountable” care, in which primary doctors, specialists, and hospitals work together to address a patient’s needs.

The general idea, widely embraced by healthcare professionals, is that the best chance for improving overall health and reducing future outlays is to have all the providers involved with a patient pulling in the same direction. Under the traditional approach, each individual provider makes treatment decisions on her own, leading to wasteful duplication of effort and sometimes even patient harm. By contrast, organizing providers under one roof can improve communication and coordination, thereby saving money and improving patients’ experiences.

The market share of “fully integrated” healthcare systems, in which hospitals own the physician groups that refer patients to them, has more than doubled over the past decade.

The Affordable Care Act (ACA), also known as “Obamacare,” is accelerating the trend toward integration. Under the ACA, Medicare is signing contracts with accountable care organizations, or ACOs, which are networks of hospitals and doctors that earn more money if they keep costs down by keeping their patients healthier.

But Stanford University researchers at the Graduate School of Business and School of Medicine have documented a potential downside risk: reduced competition and higher prices.

A new paper by Laurence C. Baker, M. Kate Bundorf, and Daniel P. Kessler finds that prices are notably higher in communities dominated by fully integrated healthcare systems — specifically, systems in which hospitals own physician practices.

The Stanford researchers note that fully integrated health systems have a number of ways to potentially gain unfair advantage, and all of them are difficult to spot. Hospitals can write contracts that reward doctors who refer patients for treatment, essentially providing kickbacks. Hospitals can also use exclusive relationships to “lock up” a community’s doctors and squeeze out rival institutions. Physicians and hospitals can sometimes charge higher rates by bundling their services together.

To find out if the risks are real, the researchers analyzed some 2.1 million hospital insurance claims over a six-year period. They then mapped the prices in scores of counties against the degree of vertical integration among local hospitals and doctors in those counties.

The results: Areas with many fully integrated healthcare systems had hospital prices that were 3.2% higher and per-patient spending that was about 2% higher than areas with few integrated systems. They also found that some types of looser alliances — hospital/physician relationships short of ownership — yielded benefits. Increases in these forms of integration did not increase prices or spending, and in fact were associated with slightly lower hospital admission rates. That’s a good sign, indicating that doctors aren’t unnecessarily sending patients to the hospital just because they have some affiliation.

However, the effects on volume associated with looser integration were small — so small that they did not generate a reduction in hospital spending that was statistically significant. The bottom line, the researchers conclude, is that integrated networks of hospitals and doctors do indeed pose anti-competitive risks that undermine the goal of increasing the cost-effectiveness of healthcare delivery.

“Taken together, our results provide a mixed, although somewhat negative, picture of vertical integration from the perspective of the privately insured,” the researchers report.

The new paper reinforces and adds new texture to related findings by other healthcare researchers. An analysis last year found that the prices charged by hospital-owned physician practices in California were about 10% higher than prices charged by unaffiliated practices. The Stanford paper, by contrast, looks at the danger that hospitals are using their physician groups to increase bargaining power and charge more for their own services.

In an interview, Daniel P. Kessler cautioned that the researchers are not arguing against accountable care organizations.

“ACOs are by and large a good idea, but I would say there is a downside,” Kessler says. “What our paper and others have expressed is a concern that we need to pay more attention to the anti-competitive implications. We need to devote more resources to screening the good ACOs from the bad ACOs.”

Daniel Philip Kessler is a professor of political economy at Stanford GSB and a professor at Stanford School of Law. He is also a professor of health research and policy, by courtesy, at the Stanford School of Medicine and a senior fellow at the Hoover Institution.