Oversimplification of economic forces can lead to erroneous predictions of market behavior. During the last three years, the mantra within our industry has been “(any) integration of healthcare players will lower healthcare costs and improve clinical and service outcomes.” In fact, we are now seeing the harm that can come from the wrong form of healthcare integration.
Several newspapers (AJC, July 7), consulting firms (personal communication with representatives at Deloitte) and professional societies (ACPE, July 10) are reporting that the craze for physicians to “integrate” with hospitals (typically defined as physicians directly employed by the hospital) is resulting in healthcare prices rising, and substantially so, without value added. This regrettable outcome could have been predicted, and indeed Dr. Michael Doherty, Chief of Staff for our Permanente Medical Group, did so in early 2011. Let’s consider the three ways that physicians, hospitals, and payors can integrate with one another, and the anticipated outcome of each alliance, based upon the interests of the parties involved (modified from Dr. Martin N Gilbert’s insight, June 2013):
#1 Physician & Hospital Integration, without Payor: it’s in both of their economic interests to maximize revenue from the payor(s), who in turn have no choice but to pass on those higher costs to the corporate or public employer. The physicians and hospital raise prices in the absence of local competition (all physician services and hospital beds are under one geographic, economically-integrated roof). Several examples of this phenomenon exist in Atlanta.
#2 Hospital & Payor Integration, without Physicians: when these two agents team up, unit prices can be driven down (lower prices for hospital beds and professional fees), but physician behavior is unaccounted for, allowing unwarranted high volume of services (overtreatment). One recent example of this type of integration is the Highmark acquisition in western Pennsylvania.
#3 Payor & Physician Integration, without Hospital: this form of integration has the most promise to lower costs and improve quality (both players are interested in reducing outpatient overtreatment and improving inpatient efficiencies). This is the KP Georgia model, whereas integrating the Hospital too is the KP California model.
We must create the type of healthcare integration that accounts for the varied economic interests of the various players, if we are to address America’s healthcare crisis in cost and quality. Only integration of payor and physicians, with or without the hospital, will lower costs and raise quality over time.