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Special Report

Special Report

Hospital Ownership of Physician Groups Spurs Higher Costs

Scheck, Anne

doi: 10.1097/01.EEM.0000462397.51727.4c

    During the early days of his 30-year, multi-titled career in academic emergency medicine, Robert McNamara, MD, saw it coming. Contract management organizations had begun springing up, and members of his profession were joining in droves. He worked for a few, moonlighting on weekends. And he remembers wondering even then if this relatively new business model would threaten practice independence — the self-reliance, the autonomy, the challenge — that drew so many to the specialty.

    He's not wondering anymore. “What we have now are disillusioned physicians,” he said. Recent surveys confirm that disaffected view. And some studies show what appears to account for at least part of the underlying etiology: Increased costs follow in places where corporate and hospital-owned physician groups grow, with causation most commonly identified as “profit-driven productivity requirements,” as Dr. McNamara succinctly put it.

    Only a few years ago, a flurry of investigations began documenting this trend, showing rapid growth of hospital employment of physicians. Noting the sea change, health economist Robert Kocher, MD, looked at this acceleration of physician employment across hospital systems. The potential for hospitals to convert greater market power into higher prices and less competition was cited as a major concern. (N Engl J Med 2011;364[19]:1790.) This past spring, a study in Health Affairs demonstrated that this concern — higher costs — is just what appears to be happening. (2014:33[5]:756.)

    Dr. Kocher assessed the consequences of contractual or ownership relationships between hospitals and physician practices, often described as vertical integration, by using hospital-claim data on insured patients who weren't Medicare recipients. An increase in the market share of hospitals with the tightest vertically-integrated relationship with physicians was associated with higher hospital prices and spending, he found.

    Though the increase in contractual integration actually reduced the frequency of hospital admissions, the effect was found to be “relatively small,” meaning the findings provided “a mixed, although somewhat negative, picture of vertical integration from the perspective of the privately insured,” Dr. Kocher and his co-author, Nikhil Sahni, concluded.

    But will that change in the future as this new wave of medicine is modified and enhanced over time? “I suppose there might be some improvements in efficiency as physicians and hospitals get more used to working with each other in new ways,” said Laurence Baker, PhD, the lead investigator on the study. “This could reduce costs, but there are also offsetting reasons that costs might go up. For example, as we hypothesize in the article, more coordination between hospitals and physicians might promote increased use of services, which could be beneficial, but would not necessarily be.

    “My own personal guess is that the potential for cost reductions due to increased efficiency from experience over time is smaller than the potential for increased costs from other sources,” added Dr. Baker, a professor of health research and policy at Stanford University.

    In fact, this transformation — hospitals buying and consolidating medical groups and physician practices — has been backfiring, according to an article in the Journal of the American Medical Association. (2014;312[16]:1663.) Ironically, such trends were forecast to lower costs by connecting health care providers and the systems in which they serve more effectively, the study found. “This consolidation is meant to better coordinate care,” said the lead author, James Robinson, PhD, MPH, in a statement released when the study was published last year. Such combinations were presumed to afford “a stronger bargaining position with insurance plans,” said Dr. Robinson, a professor and the head of health policy and management at the University of California, Berkeley, School of Public Health.

    Dr. Robinson and his co-investigators found that hospital-owned physician organizations incurred expenditures per patient 10.3 percent higher than did physician-owned organizations. The findings were even worse for organizations owned by multihospital systems, which incurred expenditures 19.8 percent higher than physician-owned organizations. They studied 118 physician-owned groups (75%) that provided care for 3,065,551 patients, 19 (12%) that were hospital-owned, providing care for 728,608 patients, and 21 (13%) that were owned by multihospital systems and provided care for 693,254 patients. The physician-owned groups spent a mean of $3066 per patient, the hospital-owned physician groups had mean expenditures of $4312 per patient, and the multihospital physician groups had mean expenditures of $4776, according to the JAMA study.

    “These findings are in contrast to the hope and expectation that organizational consolidation of physicians with hospitals would result in greater coordination, and hence lower expenditures,” the authors noted.

    Why would costs shoot up by as much as 25 percent for patient care at some medical centers after hospital systems began buying physician groups? Because physician performance often is assessed by productivity factors such as the frequency of diagnostic testing and the rates of admission, scrutiny that leads to higher revenue for the hospitals, explained Dr. McNamara, a professor and the chair of emergency medicine at Temple University School of Medicine in Philadelphia. “I don't think there is any surprise in this,” he said.

    Unlike most other U.S. industries — and health care is increasingly called an industry — advances in new tools and technology have increased costs, not reduced them. The idea that the health system is broken isn't new, but the concept has received unprecedented attention, now that it is the single largest personal expense of most Americans, whether or not they're insured. One of the most widely used references on the issue, Health Care USA: Understanding Its Organization and Delivery, singles out emergency medicine as potentially costly but notes that inappropriate visits to emergency departments can be expected to persist until financial barriers for access to other kinds of care are removed. (Jones & Bartlett Learning, Boston: 2014.)

    Now in its eighth printing, the book has generated international interest for providing insight into the pitfalls of the American health care system. “Everyone wants to get a grasp on what we're doing wrong,” said Harry Sultz, DDS, MPH, the lead author. He added that the practice of medicine often seems largely a business operation aimed at making money. “Let's not kid ourselves about that,” said Dr. Sultz, a professor emeritus of social and preventative medicine of the School of Medicine and Biomedical Sciences at the State University of New York (SUNY) at Buffalo. “It's ‘do more to make more.’”

    And it is getting more pervasive as time rolls on, warned Dr. McNamara. “We're turning over our profession to people who are in it primarily for the money,” he said.

    The trend of emergency physicians working for someone else has been building for years, Dr. McNamara said, and leaders in emergency medicine should have stepped up long ago to try to stop it. Instead, some became participants, forming contract management groups. Along with that went the ability for patient advocacy, he said. The involvement of officers or board members of the American College of Emergency Physicians (ACEP), in fact, was chronicled by Emergency Medicine News more than 20 years ago, in an issue devoted to contract management. (EMN 1993;15[5]:34.)

    Laura Gore, ACEP's director of public relations, issued a statement from the college in response to this historic perspective, noting that ACEP “is dedicated to protecting the interests of all emergency physicians, and we do our best to provide resources and guidance to help them navigate the challenges...,” it states. “ACEP has never endorsed any single type of practice arrangement....”

    Back in 2007, in a prescient observation, Elliott Fisher, MD, MPH, noted that most physicians were practicing in small groups, but that seemed likely to change with the rise of accountable care organizations. More “extended medical staffs” would be an outcome, posited Dr. Fisher, the director of the Dartmouth Institute for Health Policy and Clinical Practice at the Geisel School of Medicine at Dartmouth in Hanover, NH. Performance measures would pose perhaps the biggest problem, he surmised, and metrics on cost and quality of care could prove controversial, even politically charged, even if other barriers were surmounted. (Health Aff 2007;26[1]:w44.)


    The unfettered doctor-patient relationship, which has always been linked to high-quality delivery of care, requires significant physician time and effort into the practice, Dr. McNamara pointed out. Once considered sacred, this model now seems in steep decline, he said.

    Was it inevitable? This model isn't very appealing to many in the new generation of emergency physicians, he said, noting that the desire for a more satisfying work-life balance contributed to the transition by physicians from self-employment into salaried positions.

    But now the tradeoffs have proven disheartening to many, Dr. McNamara said. A Jackson Healthcare poll of physicians who left medicine indicates a reversal of reasons from bygone days. Forty years ago, doctors retired largely because of age, in some cases doing so only after age-related infirmity had interfered with the ability to practice. In part, this was because physicians could attenuate hours and participation, sustaining a career until they no longer wanted or felt able to continue. Currently, the top reasons for leaving practice are pressures associated with economic demand, health care reform, and burnout rather than traditional progression to retirement. (Physician Practice Trends, 2014;

    Dr. McNamara's own research demonstrates that self-determination and independent decision-making has been fading: Among more than 300 emergency physicians that he and co-investigators polled, nearly a fifth reported feeling a possible or real threat to their employment if they raised quality-of-care concerns. (J Emerg Med 2013;45[1]:111.) “I've personally spoken to doctors whose jobs were threatened if they didn't meet some quota,” Dr. McNamara said.

    RAND Corporation research showed that physicians experienced higher professional satisfaction when they perceived themselves or their practice as providing high-level quality care, and obstacles that lead to dissatisfaction often arose externally in unsupportive work environments like the ones to which Dr. McNamara referred. (“Factors Affecting Physician Professional Satisfaction and Their Implications for Patient Care, Health Systems, and Health Policy,” 2013;

    An apparent result is increasing career dissatisfaction, sometimes culminating in litigation against hospitals and medical centers by physicians who feel the sting of retaliation for resisting this kind corporate dominance, those interviewed for this article said. For the first time since the Equal Employment Opportunity Commission's inception, allegations of “retaliation” surpassed race discrimination as the most frequently filed charge, and they have continued to dominate those complaints. ( More than a third of the EEOC claims in the health care workforce are for “retaliation,” the EEOC found.

    A year ago, the U.S. Justice Department, in what is widely considered to be a seminal case, announced its intervention into lawsuits pending against the Health Management Associates (HMA) hospital chain, an action based on allegations of unnecessary inpatient admissions. (EMN 2014;36[3]:1; Anne Tompkins, the U.S. Attorney for the Western District of North Carolina, stated in a news release about the case that improper hospital admissions “cost the government millions of dollars in unnecessary fees and subject patients to excessive treatment and needless risk, driving up the cost of health care.” She added that the government will aggressively pursue providers who boost their profits at the expense of Medicare and other federal programs. (Federal Bureau of Investigation, Jan. 13, 2014;

    Better alternatives may come out of such court battles or from state lawmakers. A few states, such as California, bar direct employment of physicians by hospitals by prohibiting “corporations and other artificial legal entities” from having any professional rights or privileges. Nonetheless, it was an analysis of California medical centers and practices that served as the basis for Dr. Robinson's study in JAMA, and he confirmed that the law has been thoroughly circumvented by hospitals. “They create or purchase ‘medical foundations’ that contract on an exclusive basis with medical practices and groups,” which can have the same effect as owning them, he stated.

    This past year, the Federal Trade Commission took the issue to federal court, winning a victory in Idaho against a Boise-based hospital chain's acquisition of a large physician group. Such consolidation formed an unfair marketplace for other primary care providers, the FTC contended. (Wall Street Journal Law Blog, Jan. 24, 2014;

    And some physician groups are trying to regain the right to own their own facilities, which was dramatically curtailed after the concept was tarnished by self-referral revelations demonstrating conflict of interest. The Affordable Care Act further hampered hospital ownership by doctors, according to the advocacy group Physician Hospitals of America. Now the group is planning a conference to drum up efforts this year to amend the legislation. (

    So it may be emergency physicians who save themselves from further consolidation and ownership. In some places like New Jersey, physicians have done just that. It's stamina and motivation that have had the greatest impact at keeping hospital ownership of practices at bay. (Center for Studying Health System Change 2011;

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