Vertical integration is shaping the future of U.S. health care

Examining Medicare data from 2013 to 2019, Whaley and his team focused on arthroscopies and colonoscopies, which are common among the Medicare population and are typically performed in hospital outpatient departments (HOPDs) and ambulatory surgery centers (ASCS). The researchers describe ASCs as “freestanding centers that are often independent from hospitals”; they are generally less costly and “have equivalent or higher-quality care” compared to HOPDs.

Importantly, the Medicare reimbursement rate for ASCs is significantly lower than it is for HOPDs. For a colonoscopy with a biopsy, for example, Medicare pays ASCs $805 while HOPDs are reimbursed $1,371 for the same procedure.

The researchers calculate that if all physicians in the U.S. were to fully integrate into larger health systems, it would lead to more than $315M in increased Medicare spending and more than $63M in increased costs for patients for these two procedures alone.

Additionally, physician-hospital integration and the resulting changes in referral patterns, may negatively impact access to care. When a patient is directed to a HOPD by an integrated physician’s office, they often have to travel further, bypassing nearby facilities that may be better-suited to their needs. “We call this being ‘rerouted back to the mothership,’” Whaley said. “This leads to longer travel times and potentially reduces access to care.”

Whaley and his team also examined the impact of consolidation on care quality and coordination. “Surprisingly, we did not find improvements,” he said. “In some cases, care quality and coordination actually worsened.”

The Quiet Turn to Market Consolidation 

Most studies to date have focused on mergers between hospitals and their impact on market consolidation. Whaley’s emphasis on the integration of physician offices into larger health systems highlights potential consolidation trends that may escape the attention of federal and state regulators.

“Unlike large hospital mergers that are single, noticeable events, vertical integration happens incrementally,” Whaley said. “A hospital might acquire one physician practice this year, another the next, and so on, resulting in significant consolidation over time through small, individual transactions.”

Whaley suggests that regulators should consider the cumulative impact of these smaller acquisitions. “While the first or second acquisition might fall outside regulatory scrutiny, reaching a certain threshold of consolidation could alter market dynamics significantly,” he said. “At that point, even smaller acquisitions might warrant more oversight.”