Expert Q&A Part 2: Why the hospital consolidation trend is playing out differently in California

While insurance industry consolidation has been monopolizing the health headlines in recent months, the broader merger movement is happening throughout the health industry, from physician groups to hospital systems.

Our previous Q&A with health policy expert Paul Ginsburg, the Norman Topping Chair in Medicine and Public Policy at the University of California, and the director of public policy for USC’s Schaeffer Center, focused on consolidation in the insurance industry. In today’s post, Ginsburg explores the so-called “vertical mergers” between providers and health systems. California is one of just a handful of states that prohibits the direct employment of physicians by hospitals, a fact that is reshaping the post-reform landscape in distinct ways. (There are some exceptions, such as in teaching hospitals and rural community hospitals.)

The Affordable Care Act has driven the creation of more Accountable Care Organizations, or systems that integrate care for patients. Nationwide, that’s led to more mergers between hospitals and physician groups as they seek to provide better-coordinated patient care and take advantage of financial incentives. Despite California’s restrictions, there are more and more affiliations between doctors and hospitals, and experts predict we’ll see even more as health reform continues to play out. Still, since California has a tradition of strong physician leadership, more of these ACOs are sponsored by independent physician groups than any other state, according to this 2013 California Healthline piece. (For more on hospital-physician relationships nationwide, check out this Perspective piece in the New England Journal of Medicine).

Reporting on Health asked Ginsburg to discuss these trends in California distinctions and what it means for patient care in a post-reform world.

Q: In the era of electronic health records and better-coordinated care, does consolidation of hospitals and physician groups lead to increased efficiency?

A: It’s possible it might in the future. But there’s research looking at past mergers that hasn’t been encouraging. Through the Robert Wood Johnson Foundation, Martin Gaynor and Robert Town published a census of the literature. They concluded that mergers substantially raise prices and they couldn’t find an effect on cost and quality. That’s the past. Could the future be different? Now, with so much emphasis on care coordination, integration of care, and using IT, it’s possible. But today we’re seeing a different kind of merger where hospitals acquire physician practices or just employ physicians. (That’s in comparison to hospitals buying other hospitals). Economists call it “vertical integration.” We have very little research on such mergers’ implications for costs and quality, although it is pretty clear that such mergers do lead to higher prices.

Q: Isn’t such consolidation limited in California, though? Can hospitals employ physicians? Are there loopholes to this?

A: California is quite distinct and the practice is far less extensive in California than elsewhere. California has a longstanding prohibition on the corporate practice of medicine. What hospitals have done to get around this, often at great cost, is to create a foundation, which employs physicians. It’s an expensive process and there are restrictions; it’s not a simple workaround. Only larger hospitals are able to do this.

Q: Are there any alternative arrangements?

A:  Often there are alternatives to mergers. Hospitals or hospitals and physician groups can develop contractual relationships where they can work together without a merger, something that might be more effective.

Q:  Do you have any examples of this?

A: I was in San Diego for a site visit project. There are a couple independent hospitals there having financial stress. A number of people mentioned to me that the resolution won’t be a merger because it’s not feasible for them to be acquired. More likely, some relationship will be developed instead of a merger. In California, the large medical groups and independent practice associations are very viable independent of hospitals and are starting to partner with hospitals on ACOs. Physician groups like Healthcare Partners and Monarch Healthcare have a long history of taking financial risk for professional services and some are interested in broader risk.

Q: What does that mean for consumers?

A: This has potential upside for consumers if physician groups can do a better job coordinating care. These also have less risk for consumers as far as leading to price increases. (Note: A 2014 cost analysis found total spending per patient was about 10 percent higher for hospital-owned physician offices compared with doctor-owned organizations, according to the Los Angeles Times.)

Q: Is this larger role for physician groups distinct to California?

A:  It’s not unique to California, but California has a very significant number of large physician organizations. Wisconsin and Minnesota have large multi-specialty groups, as does Massachusetts. But most areas don’t have the potential for sophisticated and large physician groups to engage in coordinated care. In California, groups are working with hospitals. Even those physicians in hospital foundations are more independent because of the restrictions. As a result, California is an area where you might see the most promising relations for hospitals and physicians that don’t involve a merger.

Q: What do all of these developments mean in terms of access to care?

A: For people with private insurance, there usually aren’t access issues. Sometimes, mergers happen when hospitals are failing and they can be a way of keeping the facilities of a failing hospital open. I think there are access problems for low-income patients because there’s a strong incentive for hospitals to relocate with better payer mixes. When public policy makers squeeze down on Medicaid rates, they’re opening the possibility of more access problems. It’s difficult for hospitals to survive financially with low payments. That’s bigger than the merger issue. And sometimes the merger could be a threat to access if it’s going to rationalize closing a money-losing facility. But I’ve seen agreements where part of the merger approval is the hospital promising to keep facilities in a low-income area open.

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