Industrial Organization Supply of Medical Services

‘Big is beautiful’ when it comes to physician practices?

A book by Robert Atkinson and Michael Lind argued that big businesses–rather than small businesses–are the drivers of the economy. That book had the catchy title “Big is Beautiful“. A related question in the area of health economics is whether larger physician practices do better than smaller physician practices. Perhaps large practices can benefit from more economies of scale (e.g., ability to more easily afford electronic health records, employ population health managers, take on more financial risk, disseminate the latest clinical guidelines) and economies of scope (e.g., multiple specialties can be housed in the same office). On the other hand, smaller practices may offer more personalized service, have less bureaucracy, and be more nimble.

A paper by Zhang et al. 2021 uses Medicare claims data to answer this question. While the paper does not definitively conclude whether or not larger primary care physician practices are ‘better’, these large practices do seem to be able to more easily reduce health care spending among their patients. The authors write:

We first document that primary care organizations have consolidated all over the United States between 2008 and 2014. We then show that regions that experienced greater consolidation are associated with greater decline in overall healthcare spending. Finally, in our primary exercise, we exploit transitions of patients across organizations that are driven by changes in the organizational affiliations of their primary care physicians to study the impact of organizational size on overall spending. Our preferred specification suggests that patients switching from small to large physician organizations reduce their overall healthcare spending by 16%, and that this reduction is primarily driven by a 13% reduction in primary care visits and 0.09 (21%) fewer inpatient admissions per year.

According to this paper, ‘big is beautiful’.

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