Hospitals are gobbling up physician practices–and health care prices are rising as a result
The share of private physician practices acquired by a hospital rose nationally by 71.5% from 2008-2016, posing new challenges for antitrust regulators who don’t have the resources to block the thousands of deals that are occurring annually.
Physicians account for 15% of health spending and 3% of the US economy. However, over the last two decades, the physician industry has been reshaped by thousands of mergers where hospitals bought physician practices. Physician mergers are much more challenging for regulators to scrutinize because the physician industry is composed of tens of thousands of small physician practices.
Past research has shown that horizontal mergers of both hospitals and physician practices–when one hospital buys another or two physician practices merge–push up the price of care and lead to local job losses. Now, new research shows that vertical mergers between hospitals and physician practices are also driving up physician and hospital prices. Unfortunately, there has been virtually no antitrust enforcement against these mergers in the health sector at either the federal or state level.
Mergers of complements (providers who don’t compete with each other) are increasingly common in the US hospital sector. Examples include insurers buying physician practices and hospitals and health systems merging with nursing homes, home health agencies, and physician practices. This study looked specifically at hospitals that bought OB-GYN practices from 2008 to 2016 and studied how these mergers impacted prices for labor and delivery.
What We Learned
- Hospitals are buying private practices at a rapid pace. From 2008 to 2016, the share of physician practices owned by a hospital rose by 71.5%. By 2016, 47.2% of private practices were owned by a hospital.
- When hospitals buy private practices, hospital and physician prices go up. Two years after a hospital buys an OB-GYN practice, prices for labor and delivery are up by $475, an increase of 3.3%. Physician prices are up $502, an increase of 15.1%.
- Price increases after these mergers are driven by reduced competition. Prices for physicians who were already merged into a hospital at the time of a new merger increased by 9%. It’s unlikely that these practices had a sudden change in quality or bargaining ability just before the new practice was merged. Hospital price increases are larger in cases where the acquired physicians practiced at close rival hospitals prior to the merger.
- These mergers are challenging for regulators to observe. Estimated deal valuations of 99.9% of physician-hospital mergers observed by the researchers were below Hart–Scott–Rodino (HSR) merger reporting thresholds.
Takeaways for Policy
This research presents new evidence that vertical mergers have pushed up health care prices and harmed consumers by lessening competition. There’s little reason to believe this trend has or will reverse.
Unfortunately, antitrust enforcement against vertical mergers of physician practices is extremely challenging for regulators to address because the physician industry is composed of hundreds of thousands of small practices. Regulators simply don’t have the resources to block the thousands of the deals that occur annually.
Moving forward, policymakers should scrutinize physician/hospital mergers and end financial incentives that encourage these transactions. For example, Medicare should pay physicians the same rates whether or not they are employed by a hospital (e.g., site neutral billings). When mergers do occur, regulators at the FTC and other agencies should focus their attention on those with greater scope to reduce competition. States could also play an important role by requiring hospitals and physicians to provide evidence on the benefits of their transaction in order to merge.
The research presents strong evidence that vertical deals that have the potential to limit rival hospitals’ access to physicians can lead to larger price increases via foreclosure. Likewise, deals wherein one of the merging parties has outsized local market power generally lead to higher price increase. These are the types of mergers regulators should target.
Data
The authors combine novel provider- and market-level data with machine learning models to measure hospital-physician mergers. They paired that data with insurance claims for tens of millions of individuals with employer-sponsored health insurance provided by UnitedHealth.
Methodology
The authors looked at 276 hospital acquisitions of physician practices and compared the outcomes of merging and non-merging hospital and physician practices.
Related Work
Is There Too Little Antitrust Enforcement in the U.S. Hospital Sector? Zarek Brot, Zack Cooper, Stuart Craig, and Lev Klarnet, American Economic Review, 6(4): 526-42. 2024.
Who Pays for Rising Health Care Prices? Evidence from Hospital Mergers. Zarek Brot, Zack Cooper, Stuart Craig, Lev Clarnet, Ithai Lurie, and Corbin Miller. NBER Working Paper No. 32613. 2024.
The Price Ain’t Right? Hospital Prices and Health Care Spending in the United States. Zack Cooper, Stuart Craig, Martin Gaynor, and John Van Reenen. Quarterly Journal of Economics, 134(1): 51-107. 2019.