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Health Affairs: Provider Consolidation Not Directly Associated with Payment Reform

February 8, 2017
by Rajiv Leventhal
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Although the prevailing wisdom is that payment reform will accelerate provider consolidation, new research published in Health Affairs finds minimal evidence that consolidation has been associated with accountable care organization (ACO) penetration.

Harvard researchers noted that the common thought is that payment reform will accelerate consolidation, especially between physicians and hospitals and among physician groups, as providers position themselves to bear financial risk for the full continuum of patient care. As such, drawing on data from a number of sources from 2008 onward, the researchers examined the relationship between Medicare’s ACO programs and provider consolidation.

What the researchers found was that consolidation was under way in the period 2008 to 2010, before the Affordable Care Act (ACA) established the ACO programs. “While the number of hospital mergers and the size of specialty-oriented physician groups increased after the ACA was passed, we found minimal evidence that consolidation was associated with ACO penetration at the market level or with physicians’ participation in ACOs within markets. We conclude that payment reform has been associated with little acceleration in consolidation in addition to trends already under way, but there is evidence of potential defensive consolidation in response to new payment models.”

The research, published in the February issue of Health Affairs, noted, “Although designed to remedy the incentives of fee-for-service payment systems, payment models that delegate financial risk to providers for the full continuum of patients’ care have triggered concerns that providers will consolidate in response. Consolidation may lead to higher prices (or budgets) negotiated with commercial insurers. Thus, while ACOs may reduce spending in the Medicare population, provider consolidation associated with them may increase spending for the commercially insured.”

They continued, “Provider consolidation generally takes one of two forms: horizontal integration (two hospitals merge) or vertical integration (a hospital system purchases a physician group). However, both may be involved in a merger or acquisition (a merger of two health systems). The association between horizontal consolidation and higher prices has been well documented in hospital markets, and to a lesser extent in physician markets. Mounting evidence suggests that financial integration between physicians and hospitals also leads to higher prices and spending.”

The researchers noted that reasons for consolidation include: allowing providers to negotiate higher rates from commercial insurers, boosting the number of referrals or admissions, amassing sufficient capital to invest in lucrative services, pooling their malpractice risk, competing for physician labor, reconfiguring their capacity in response to technological changes that shift care settings, or lowering costs (for example, of information technology) through economies of scale. Hospitals and physicians may also consolidate to take advantage of Medicare payment rules that favor providing services in hospital outpatient departments instead of physician offices, they said.

For the study, researchers examined the relationship between Medicare ACO program participation and multiple measures of horizontal and vertical consolidation over time, from before to after the passage of the ACA in 2010. In two complementary analyses, they compared consolidation over time between markets with more versus less ACO contracting in 2014 and within markets between physicians who had entered an ACO contract by 2014 and those who had not.

The study results showed that Markets with greater 2014 ACO participation did not experience differential changes in physician-hospital integration, physician group size, physician market concentration, hospital market concentration or, importantly, commercial healthcare prices from 2008 to 2013.

The report noted, “We found that physicians who entered a Medicare ACO program between 2012 and 2014 showed no differential increase in integration with hospitals or rates of acquisition from the pre to the post period, compared with other physicians in the same market. Physician groups that entered an ACO program did exhibit significantly greater growth in size than other practices in their market. This differential increase in group size among ACO participants was driven largely by the addition of specialists—not primary care physicians—to practices that were already specialty oriented, which suggests that they did not grow in order to become ACOs. For a specialty-oriented group to position itself to enter an ACO contract, one would expect it to reorient itself toward primary care. Similarly, we found no evidence that greater integration of primary care physicians with hospitals from the pre to the post period was related to ACO participation.”

They also found an overall increase in hospital mergers after the ACA without changes in hospital market concentration related to ACO penetration, and a significant inverse relationship between hospital market concentration in the pre period and the extent of subsequent ACO contracting. “These findings suggest that new payment models may have triggered some consolidation as a defensive reaction to the threat these models could pose, rather than as a way to achieve efficiencies in response to the new incentives.”

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