Health Policy$ense

The Way Forward for Integrated Care

What We've Learned from Horizontal and Vertical Integration of Physicians

As health care reform rolls out, there is a growing focus on restructuring the health service delivery system in the hope of improving health care quality and "bending the cost curve." A key part of this focus has been on physician organization and, in particular, moving toward large, multispecialty physician groups or hospital-physician systems that can provide integrated, coordinated patient care (e.g., through "Accountable Care Organizations"). In a recent chapter in Advances in Health Care Management's Annual Review of Health Care Management, however, we and our co-author Jeff Goldsmith find that there is little evidence for the superiority of these integrated models in terms of patient care quality or cost-savings, and that the trends toward physician consolidation has been much less dramatic than is often thought.


Lawton Burns & Aditi Sen

Using data from a variety of sources, we find there are two separate phenomena at work in physician organization. At one end of the spectrum (bottom tail of the size distribution of physician groups), the majority of physicians continue to practice in small groups, although there has been some movement from really small practices (one to three or four physicians) to slightly larger groups (five to nine physicians). Still, nearly two-thirds of office-based physicians continue to practice in solo settings, two-person partnerships, and small (usually single specialty) groups with five or fewer physicians. At the other end of the spectrum (upper tail of the distribution), however, is a smaller number of very large and rapidly growing multispecialty physician groups, which are often owned by hospitals, health plans, private equity firms, or other non-physician sponsors. These two stories of what is happening in the distribution of physician group size are described as "a tale of two tails." Despite the relative stability in the distribution of practice sizes, the upper tail accounts for an increasing percentage of practicing physicians and the most rapid growth in total physicians and physician visit volumes.

Key integration forms
There are two key forms of integration in physician markets. Horizontal integration occurs when individual physicians join group practices or existing groups merge with each other. There are numerous theoretical reasons to expect that this type of integration might lead to improved quality and cost savings, including enhanced operating efficiency and economies of scale. When groups consist of physicians across multiple specialties, there also may be gains from economies of scope, including improved coordination and quality of patient care, in-house or within network referrals, and capture of high-revenue services such as outpatient surgeries and imaging services. We find some evidence that group practices are more productive than solo practices in terms of number of patient visits or gross revenues per physician, though scale economies appear to be reached quickly — at around 10 or so physicians in a group. Beyond this, monitoring, coordination, and creating a cohesive culture become challenging. Scope economies do not appear to exist or are, at best, weak.

The data show that hospital-physician integration is on the rise, but not as fast and nowhere near the levels that analysts propose.

The authors also consider the evidence supporting vertical integration, when physicians align with non-physician partners such as hospitals, universities/medical schools, and health plans. Again, there are many theoretical rationales underpinning these relationships, including lowered transaction costs and improved efforts to monitor, manage, and coordinate patient care, increased network size and geographic coverage to handle risk contracting, and market power over buyers and suppliers. In addition, these relationships may help physicians stabilize their incomes, manage malpractice, and improve the predictability of their caseload. Because of the supposed advantages, and based on numerous media reports of physician hiring, many analysts assert that physician employment levels have reached as high as 50-60 percent of all doctors.

Questions about effectiveness
The data show that hospital-physician integration is on the rise, but not as fast and nowhere near the levels that analysts propose. The percentage of physicians employed by hospitals has increased from 11% in 2000 to nearly 15% in 2008. There are also major questions about the effectiveness of the physician employment model, as it has led to financial losses approaching $200,000 per year per physician, double the losses incurred during the early period of integration in the 1990s. There is similarly no evidence of improved quality following integration. Finally, there is evidence that economic integration between physicians and hospitals does not automatically lead to functioning clinical integration and that, even after integration, a lack of alignment between physicians and hospitals threatens the success of these models.

Another form of vertical integration is between providers and health insurance plans. There are several well-known examples of these systems, including Kaiser Health Plan and other major integrated systems (e.g., Mayo Clinic, Cleveland Clinic). The success of these integrated systems can be attributed to a number of features, in particular a notably physician-driven system, unified clinical and administrative cultures, a long history with sufficient time to develop this culture, and strong economic interdependence among their three arms (the physicians, the hospital, and the health plan). Despite the success of these models, they have had difficulty expanding beyond their core markets due to physician resistance, difficulty ramping up enrollment, and employers' preference to contract with one plan rather than offer a menu of options.

Areas of renewed focus
With the implementation of the Affordable Care Act, there is a renewed focus on horizontal and vertical integration of physicians. Insurers have purchased medical groups in efforts to cut costs by managing patient care and physician networks more tightly. There is also a movement towards "virtual integration" which allows a physician to remain independent but exploit some of the advantages of group practice, including centralized administration, risk spreading, and leverage with health plans. Though the mass of physicians remain organized into small, independent, and fragmented group practices, there is clearly flux in the physician market with growth in the number of large groups and increasing physician employment by hospitals.

There is no evidence to suggest how each tail will fare competitively going forward, but past experience suggests that achieving widespread cost savings and quality improvements through restructuring the delivery system alone will be challenging. To be most effective going forward, policymakers ought to revisit the evidence on integrated systems and consider how they may be implemented and targeted (e.g., to populations who really benefit from coordinated care, such as those with chronic diseases).