Historically, physicians worked independently of—if in partnership with—hospitals. But increasingly, doctors are selling their practices to hospital systems, as well as private equity firms and insurance companies. What does it mean for patients and what they pay for healthcare when their doctors are employed by a hospital system?
The effects of hospital systems acquiring physician practices are hard to determine, because until now, there has been no comprehensive source of data about these mergers and the effects of integration on pricing can be hard to isolate. New research by Yale SOM economist Fiona Scott Morton tackles these challenges, determining the scale of hospital-physician mergers and examining their effects on pricing. In their study, Scott Morton and her co-authors—Yale economist Zack Cooper; Stuart V. Craig and Ashley T. Swanson of the University of Wisconsin–Madison; Aristotelis Epanomeritakis of Harvard University; Matthew Grennan of Emory University; and Joseph R. Martinez of the University of California, San Francisco—found that these integrations significantly increase prices for consumers, because competition decreases.
To Scott Morton, these findings are a wake-up call for regulators. “States haven’t been enforcing [antitrust laws] to the extent that they could,” she says. “I think there’s a lot of good that could be done with some incremental enforcement.”
Hey, I’m AInsights Ask me questions about the article and its underlying research. Let’s chat! Ask Insights powered by AI ...
Mergers between hospital systems and physicians in private practice are what antitrust experts call “mergers of complements” or “non-horizontal mergers.” These aren’t horizontal mergers, because doctors aren’t competing with hospitals, but they aren’t quite vertical either, because doctors aren’t suppliers to hospitals.
In general, scholars expect mergers of complements to have positive effects. Imagine, for example, a car maker decides it wants to own the software that will go into its vehicles. Rather than keeping its future design plans a secret from its software maker, “I can talk to them, and they can start thinking about what cool software could be used with my hardware. So we could do things together that we can’t do apart,” Scott Morton explains. Non-horizontal mergers can also reduce prices: “If I mark up my car and you mark up your software, then the [buyer] has two markups to pay, whereas if the hardware buys the software and makes a bundle, then they internalize that problem.”
But Scott Morton and her co-authors suspected healthcare might function differently. For example, there’s no reason to believe healthcare quality would improve after integration; after all, between navigating different insurance companies and referring patients to different specialists and hospitals, “doctors are rather good at providing care across corporate boundaries,” she says. And because healthcare is geographically constrained—patients don’t want to travel long distances to see a doctor—regional consolidation could increase prices.
To study hospital–physician mergers more closely, the researchers first had to contend with an informational challenge. “Everybody knew, anecdotally, that these transactions were happening and that there were a lot of them,” Scott Morton says, “but we just couldn’t measure them.” Hospital acquisitions of private practices are generally small enough transactions that hospitals aren’t required to report the purchases to regulators.
So, in the absence of a single comprehensive source of data, the team developed a workaround. Using administrative data from Medicare, hospital surveys, physician directories, and filings with the Securities and Exchange Commission, they trained a machine-learning algorithm to identify when a physician had moved from private practice to a hospital system. The researchers tested the algorithm’s results against verified data about mergers and found it achieved 97% accuracy.
You may say, the increase is only 3%. But this is 3% of a large hospital bill. And healthcare is already 19% of GDP. It’s giant.
When they set the algorithm loose on national data from 2008 to 2016, it identified a striking degree of integration—overall, the share of doctors employed by a hospital grew from 27.5% to 47.2% during that span.
To understand how this integration was affecting prices, the researchers looked at childbirths, which account for a large share of both commercial hospital admissions and healthcare spending. They gathered data on pricing—that is, how much doctors and hospitals were charging insurers—from a large private insurance company. Then the researchers looked at OB-GYNs who had integrated with a hospital system in 2013–2014, and compared the prices those doctors and hospitals charged two years before and two years after the merger. To ensure they were isolating the effects of integration, they also compared these doctors and hospitals to otherwise similar doctors and hospitals that had not integrated.
Both hospitals and doctors charged more after integration, the researchers discovered: hospital prices for labor and delivery increased by 3.3% ($475, on average), while physician prices increased by 15.1% ($502, on average).
These are “substantial price increases,” Scott Morton says. “You may say, it’s only 3%. But this is 3% of a large hospital bill. And healthcare is already 19% of GDP. It’s giant.”
And this uptick in price did not reflect an improvement in healthcare quality as far as the researchers can determine. After examining common measures of quality for childbirths, including hospital readmission and C-section rates, the researchers found no improvements in the years after integration.
Looking for more insights? Sign up to get our top stories by email. Email Thanks for signing up
As the researchers continued analyzing their results, they found statistical signs of three different anticompetitive mechanisms that explained the price increases they observed.
The first of these is called foreclosure. Before integration, an OB-GYN in solo practice might refer their patients to several hospitals in the area for labor and delivery. After integration, however, the doctor might feel pressured to steer their patients to deliver within their hospital system. “That’s foreclosing those doctors and patients from choosing between hospitals,” Scott Morton explains. This gives the hospital and the doctor more power in the market, and therefore the ability to raise prices.
The second is called recapture. If a physician in private practice is charging too much, an insurance company might refuse to include them in their network. “After the merger, tossing out the physician means tossing out the hospital,” she says. This might cause consumers to switch insurers so they can remain with their preferred doctor and hospital—“so a physician will recapture those people.” Once again, the doctor and the hospital can get away with raising prices.
The third mechanism is simply market concentration. Over time, if a hospital system acquires enough private practices, “there is a horizontal impact of these [non-horizontal] mergers,” Scott Morton explains. “If the hospital already owns a couple of obstetricians, and buys another group, then those obstetricians become horizontally joined….and we find prices go up for that reason.”
The researchers found further evidence of reduced competition when they looked at another group of doctors. Prices for doctors who had already integrated with a hospital system increased by 9% after the hospital acquired more doctors in their specialty. Nothing changed for these already-integrated doctors; they were the same doctors working at the same hospitals. The only plausible explanation for their ability to charge higher prices is a reduction in competition.
To Scott Morton, these results call for renewed attention from regulators. States could, for example, require medical organizations to submit information about their ownership and physician affiliates, which would make it far easier to track hospital-physician mergers. Regulators could also require a waiting period before such mergers, “so that the state can assess for itself whether that transaction would be harmful.” A small task force at the federal level could even advise state regulators in making these assessments.
And it’s important, she argues, to draw attention to the larger effects of small transactions in local markets: “States as well as citizens care a lot about having those prices be low and markets be efficient and working well.”