Health Insurance Health Reform Managed Care Physician Compensation Supply of Medical Services

Why providers love ACOs

The good thing about the systems not being highly integrated and coordinated is that premiums are lower. Why are those hospitals and physicians [integrating]?  It wasn’t for increased coordination of care, disease management, blah, blah, blah—that was not the primary reason. They wanted more money and market share.

  • A Fresno, California medical group physician

Using examples from the California market, Berenson, Ginsburg and Kemper (2010) detail how accountable care organizations (ACOs) may be used by providers to drive up prices.  California is an interesting market to study for ACOs as they have a number of their prototypes: multispecialty group practices and large independent practices associations (IPAs).

ACOs require industry consolidation and California has many recent examples of this type of provider consolidation.  “Sutter Health and Catholic Healthcare West have been especially active in acquiring other California hospitals.”  As the scale of their operations has increased, Sutter Health has began to negotiate hospital prices as a single hospital chain rather than as separate hospitals.  Thus the provider chain has vastly increased the reimbursement levels they receive from insurers.  This strategy was so successful, that hospitals in the University of California system now also negotiate as a single entity rather than as separate hospital units.  Additionally, as the provider market has consolidated, capacity has decreased.  Inpatient acute care hospital beds decreased 17% between 1999 and 2007 (from 2.2/1000 to 1.9 per 1000).  Hospital bed scarcity has also decreased the health plan’s leverage to demand price reductions.

Physicians have also been consolidating.  Two IPAs in the Bay Area–Brown and Toland and Hill Physicians–have thousands of physicians so most plans cannot due without them.  In addition, physicians have begun to partner with hospitals.  Although in California it is illegal for hospitals to employ physicians directly, many have established medical foundations that employ the physicians and thus the hospitals can skirt around the law.  For instance, the Palo Alto Medical Foundation (PAMF) is associated with Sutter Health.

Consumers have also sided with providers in most cases and have allowed them to drive up prices in California.  For instance, California consumers demand a broad choice of provider, even those in HMOs.  Thus, most health plan provider networks are very broad.  “A Fresno benefit manager’s analysis found that physician overlap in two prominent health plan networks was 97–98 percent.”  Additionally, consumers often want to have the superstar, “must have” hospitals in their plans. For instance, Cedars-Sinai Medical Center in Los Angeles carries a lot of market clout.  Cedars-Sinai is one of the few hospitals not engaged in the consolidation binge.  Why?  One respondent from the article stated that Cedars’s approach was the following:

A respondent from another area hospital suggested that Cedars can say “Screw it; we have a strong marketing arm and the [movie] actors, let’s grow on campus and they will come to us.” As a result, according to another respondent, “Cedars has the highest rates in the world…. The hospitals down the street have no market power. They have to fight for every penny.”

Kaiser Permanente does exert some moderating force however. If providers begin to charge prices that are too high, health insurance premiums will rise and many will switch to Kaiser.

ACOs may improve coordination of care. The concentration of market power in the hands of a few super-providers, however, may drive up healthcare costs for consumers in both private and public healthcare plans.

Addendum (19 Oct 2010): In response to this article, the American Hospital Association commissioned Compass Lexecon to evaluate this publication.  The resulting report is available here.


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