California Launches Probe Into Health System Consolidation

California Attorney General Kamala Harris (D) has launched a broad investigation into whether increasing consolidation among hospitals and physician groups is leading to higher health care costs, the Wall Street Journal reports.

Background

According to an estimate from the Advisory Board Company, nearly 25% of all specialty physicians who see patients at hospitals are employed by the hospitals, up from 5% in 2000. The Advisory Board Company produces California Healthline for the California HealthCare Foundation.

Meanwhile, 40% of primary care physicians who see patients at hospitals are employed by the hospitals, a rate that has doubled since 2000.

American Hospital Association General Counsel Melinda Hatton said that hospitals are merging and employing more physicians in an effort to increase efficiency and improve care quality, as federal regulators are pushing for more integrated care.

A 2010 study published in the journal Health Affairs found that health care consolidation in California led to "a definite shift in negotiating strength toward providers, resulting in higher payment rates in premiums."

However, an AHA-funded evaluation of the study concluded that the research was flawed because it relied on "anecdotal observations" and did not adequately look into factors such as consumer preference that might have contributed to variations in hospital reimbursement.

Regulation of Hospital, Physician Practice Deals

Generally, acquisitions of not-for-profit hospitals in California must be approved by the state attorney general's office, and if the deal is large enough, it must receive a federal antitrust examination.

However, hospital systems' acquisitions of physician groups, particularly smaller practices, might not require pre-review.

Although California law typically prohibits hospitals from directly employing practicing physicians, doctors can be employed by the systems' affiliated foundations.

Richard Feinstein -- director of the Federal Trade Commission's bureau of competition -- said the agency is closely monitoring hospitals' purchases of physician groups and mergers combining physician practices. FTC recently has filed several lawsuits to block hospital acquisitions.

Details of the California Investigation

California's investigation, which has been under way for several months, is focusing on whether consolidation deals have given health systems enough market power to increase prices in a way that violates antitrust laws, according to individuals familiar with the matter.

As part of the investigation, Harris has issued subpoenas to several large hospital systems in California, including:

• Cottage Health System in Santa Barbara;
• Dignity Health, based in San Francisco;
• Scripps Health in San Diego;
• Sharp HealthCare in San Diego; and
• Sutter Health in Northern California.

Large health insurers in the state also have received subpoenas, according to the sources (Mathews, Wall Street Journal, 9/13).