Health Care Reform Driving Physicians Together

When the American Hospital Association recently reported that the number of physicians employed by hospitals rose 34% between 2000 and 2010, it was interesting but not exactly earth-shattering news.

In fact, the AHA report was just the latest to show a steady increase in hospital employment of physicians across the last decade. And while the growth rate is noteworthy, the total number of hospital-employed physicians — AHA placed it at about 25% of active physicians — still doesn’t seem that enormous.

But numbers like these, which measure across a long period and consider only the employment relationship, don’t necessarily show the true extent of changes under way in the physician marketplace.

Beyond actual data, there’s anecdotal evidence that employment growth is picking up, particularly as new challenges to physician economics collide with the imperatives of payment reform. Those forces also are leading to a rise in “clinical integration” networks, which allow physicians to remain independent but encourage them to collaborate on improving care quality and contracting with insurers.

Taken together, these trends indicate that the physician marketplace is shifting rapidly toward an environment more dominated by large health care provider networks. Whether this is a good thing or a bad thing depends on your perspective — many providers assert that increased collaboration is best for patients, but purchasers warn that consolidation could lead to higher overall health care costs.

Beyond the Survey Data

In the last two or three years, hospitals across the country have reported an explosion in physician employment, according to recent research by the Advisory Board Company. (The Advisory Board Company produces California Healthline for the California HealthCare Foundation.)

One Arizona health system, for example, went from 70 employed physicians in 2008 to 311 in 2011. Another, based in the Northeast, saw its network grow from 50 physicians to 800 across the same period. Even California, where physician employment is made more difficult by laws prohibiting the “corporate practice of medicine,” has seen growth in both the number of physicians employed by medical foundations and the number of medical foundations in existence.

Physicians themselves are driving much of this trend. Changes in provider demographics — younger physicians tend to prefer team-based practice environments — come as the costs of running a physician practice rise and reimbursement stagnates. The recent (and temporary) aversion of a 27.4% Medicare rate cut is just the latest example of the payment challenges making independent practice appear increasingly unsustainable.

Health reform is also a factor. Most physicians are still paid on a fee-for-service basis. But the shift toward value-based purchasing, bundled payments or accountable care-type contracts will require them to connect with a broader care network and make large investments in infrastructure that many cannot afford on their own.

As a result, “we are seeing more physicians approaching hospitals for employment — not the other way around,” AHA Senior Vice President John Combes told PricewaterhouseCoopers in a 2011 report. And when physicians come knocking, hospitals are answering the door, mindful that tightly aligning with physicians will be critical to their own success under new risk-based payment models.

Organizing the Independents

Declining reimbursement and the health reform law also are leading to increased integration among independent physicians who might not be interested in hospital employment. Largely without media attention, many independent practices are joining clinical integration networks, which bring physicians together around a common infrastructure for quality and cost improvement.

As originally defined by federal regulators in the 1990s, CI is a safe harbor from antitrust law that allows independent providers to contract jointly with private health insurers — something that would be considered collusion if not for physicians’ focus on quality and efficiency. Since then, CI has emerged as a leading strategy for hospitals and other groups looking to build physician networks that can evolve into accountable care organizations.

Unlike the trend toward hospitals’ increased employment of physicians, there are no published surveys to quantify the number of CI networks in existence. But based on anecdotal evidence from news reports and interviews the Advisory Board Company has conducted with providers, the number is growing rapidly, and CI programs are under development in hundreds of markets across the country.

CI programs vary in size, ranging from a few hundred physicians to several thousand. The CI network associated with Chicago-based Advocate Health, for example, includes nearly 4,000 physicians who negotiate jointly for contracts with several major payers, making the network a significant force within the local market. 

What’s the Impact on the Market?

Tighter integration among physicians could benefit patients by improving quality of care and controlling costs. For example, Advocate Health notes in its annual CI “Value Report,” “Advocate Physician Partners’ comprehensive Asthma Outcomes initiative resulted in an asthma control rate 38 percentage points better than the national averages, saving nearly $13 million in direct and indirect medical costs above national averages annually.”

At the same time, however, some CI networks have been able to command higher rates from payers; one network, for example, was able to secure a 20% to 30% rate increase for its physicians.

The networks are generally able to argue that the value they provide will outweigh the higher fees. Nevertheless, the trend raises some concern among purchasers and consumer representatives that larger physician organizations will be able to command higher rates on the basis of their size alone, raising overall costs.

The concern is particularly acute for networks of physicians employed by hospitals. While antitrust scrutiny of physician networks formed under the CI safe harbor is fairly high, industry experts caution that hospital employment of physicians, which is analyzed under a separate section of antitrust law, faces a lower bar.

A hospital “may be able to employ physicians and gain a market share in certain parts of the physician market that’s really quite large that would never be permitted” for a CI network, noted Larry Casalino, a professor at Weill Cornell Medical College, at a roundtable discussion on ACO antitrust policy hosted last year by the Federal Trade Commission. Nor does an employed network have to show that its physicians are working together to generate quality and efficiency gains, the standard to which CI networks are held.

That said, many hospitals are now beginning to actively focus on leveraging integration between employed physicians to improve patient outcomes, moving beyond just accumulating scale. What impact this effort will have on the market remains to be seen.

Here’s a look at what else is happening in health reform.

Eye on the Courts

  • With conservative justices holding a 5-4 majority in the U.S. Supreme Court, the Obama administration has taken steps to influence at least one of them to support its arguments during the court’s review of the federal health reform law later this month. In various court briefs, administration lawyers have cited opinions written by Justices Antonin Scalia and Anthony Kennedy and highlighted arguments made by one of Scalia’s favorite former clerks. The administration’s legal allies also have touted how a decision to uphold the overhaul could affect Chief Justice John Roberts‘ legacy (Haberkorn, Politico, 2/28).

On the Hill

  • House Ways and Means Committee Chair Dave Camp (R-Mich.) is asking the Obama administration to explain why its fiscal year 2013 budget proposal includes $111 billion more than last year for subsidies to help people purchase coverage through the exchanges created by the federal health reform law. In a letter to Treasury Secretary Timothy Geithner, Camp wrote, “This staggering increase in health insurance exchange subsidy spending cannot be explained by legislative changes or new economic assumptions, and therefore must reflect substantial changes in underlying assumptions regarding the program’s utilization and cost” (Baker, “Healthwatch,” The Hill, 3/2).
  • Republicans are testing new methods of attacking the overhaul, including using money from the reform law to pay for other legislation. For instance, to help offset the payroll tax extension, Republicans used $5 billion from the law’s prevention and public health fund (Ethridge, CQ Weekly, 3/5).
  • The conservative advocacy group Restore America’s Voice Foundation plans to spend between $50,000 and $100,000 weekly on nationwide TV ads to pressure Senate Republicans to schedule a vote to repeal the health reform law (Bolton, “Healthwatch,” The Hill, 3/6). The group also said it would launch an advertising campaign calling for Senate Minority Leader Mitch McConnell (R-Ky.) to resign if he does not prove he is serious about repealing the law (Pecquet/Bolton, “Healthwatch,” The Hill, 3/1).

In the States

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