HCM 4050 Module 3 Supply-Side Paper Example

New Owners, Same Doctors, Higher Prices: Private Equity, Consolidation and the Supply of Physician Services

Student Name

B.S. in Healthcare Management, Thomas Edison State University

HCM-4050: The Financing and Economics of Healthcare Delivery

Mentor Name

Month Day, Year

New Owners, Same Doctors, Higher Prices: Private Equity, Consolidation and the Supply of Physician Services

In the spring, the 16-physician anesthesia group that has staffed the operating rooms at a composite 300-bed community hospital in Mercer County, New Jersey, for twenty years sold its practice to a physician management company backed by a private equity fund. The same anesthesiologists still work in the same rooms. Within months, however, the management company opened talks with the region's commercial insurers for higher rates and asked the hospital for a larger annual stipend to cover overnight call. The hospital's leaders want to understand what has changed and why. This paper explains the supply side of the market for physician services, examines what research shows about private equity and other forms of consolidation, considers the insurer side of the bargaining table, and recommends how the hospital should respond.

Anesthesia is a useful case because the product is hard to substitute. A surgeon cannot postpone a hip replacement while the hospital searches for a new anesthesia group, and recruiting sixteen anesthesiologists and their nurse anesthetists in a tight national labor market can take a year or more. The seller of a service with no ready substitute holds the stronger hand in any negotiation over its price, which is exactly what the management company understands.

The Supply of Physician Services

Physicians are unusual suppliers. Entry into the market is limited by long training, licensure and a fixed number of residency positions, so supply responds slowly to price. Patients rarely choose their anesthesiologist, and many specialties face patients who cannot shop on price at the point of care. Prices for physician services are largely set in negotiations between practices and insurers, with Medicare's fee schedule serving as a reference point. In that setting, a practice's bargaining power depends heavily on how hard it would be for an insurer to leave it out of its network. A group that staffs every operating room in a hospital is almost impossible to exclude, because the hospital's surgeons cannot operate without it.

That bargaining position is what investors buy. A management company that acquires several groups in one region gains even more bargaining strength, since it can negotiate for all of them at once. Economic theory predicts that greater concentration on the supply side will raise prices unless the merged firm also becomes more efficient by a larger amount.

What the Evidence Shows About Private Equity

La Forgia et al. (2022) examined commercial claims for anesthesia services at hospital outpatient departments and surgery centers that contracted with physician management companies. Compared with facilities that did not, prices rose by 16.5% after the contract began. When the management company had private equity backing, which was true for half of those in the sample, prices rose by 26.0%, against 12.9% for management companies without such investment. The authors found no evidence that anesthesia practitioners were moved out of insurers' networks as a pressure tactic, which suggests the increases came through negotiation rather than surprise billing.

Private equity changes more than price. Singh et al. (2022) compared 578 dermatology, gastroenterology and ophthalmology practices acquired by private equity firms with 2,874 similar practices that were not. After acquisition, the charge per claim rose by about 20% and the allowed amount, the price insurers actually paid, rose by 11%. Acquired practices also saw about 26% more unique patients, driven by a 38% increase in new patient visits, and billed a larger share of established patient visits at the longer, higher-paid level. Patients' risk scores did not change, suggesting that sicker patients did not explain the extra billing.

Private Equity Is One Form of a Wider Trend

Investor ownership is not the only way physician supply has consolidated. Capps et al. (2018) studied hospital acquisitions of physician practices between 2007 and 2013 and found that, once a hospital bought a practice, what insurers paid for that practice's services climbed by 14.1% on average. Close to half of that rise traced to payment rules under which the same visit earns a facility fee once the practice belongs to a hospital, and increases were larger where the acquiring hospital already had a large share of its inpatient market. For the Mercer County hospital, this is an uncomfortable point: its own past acquisitions of primary care and cardiology practices may have raised prices in the same way it now objects to in the anesthesia market.

The Insurer Side of the Table

Prices are set by bargaining, so the insurers' market matters too. Dafny et al. (2012) used a national insurer merger to study how concentration among insurers affected employers. They estimated that rising local concentration from 1998 to 2006 raised large-group premiums by about seven percentage points by 2007, and found evidence that more concentrated insurers used their power to hold down physicians' employment and earnings relative to other health workers. Consolidation on one side of the market can therefore prompt consolidation on the other, as physician groups seek size to bargain with large insurers. Employers and patients pay for the result when both sides grow stronger and prices rise.

Recommendations for the Hospital

The hospital has more options than it may think. First, it should treat the anesthesia contract as a strategic supply decision, not a routine renewal. It can model the cost of employing its own anesthesiologists and nurse anesthetists, which would give it a credible alternative in negotiations. Second, it should insist that any stipend increase be tied to measurable service obligations, such as staffed rooms by 7:00 a.m., on-time starts and overnight coverage response times, and that the contract give it audit rights over billing levels. Third, it should share its concerns with the large employers in its market, who bear the higher commercial prices and are in a position to press insurers and legislators. Finally, it should look honestly at its own practice acquisitions and the facility fees they generate, because its credibility with insurers and employers depends on not doing what it criticizes.

Conclusion

Physician supply is limited, bargaining power decides prices and consolidation on either side of the table tends to raise them. Evidence on private equity, hospital-owned practices and insurer mergers points the same way: when ownership concentrates, prices rise more than quality or efficiency can be shown to improve. A hospital that understands these supply-side forces can respond with alternatives, contract terms and allies rather than simply paying more.

References

Capps, C., Dranove, D., & Ody, C. (2018). The effect of hospital acquisitions of physician practices on prices and spending. Journal of Health Economics, 59, 139-152. https://doi.org/10.1016/j.jhealeco.2018.04.001

Dafny, L., Duggan, M., & Ramanarayanan, S. (2012). Paying a premium on your premium? Consolidation in the US health insurance industry. American Economic Review, 102(2), 1161-1185. https://doi.org/10.1257/aer.102.2.1161

La Forgia, A., Bond, A. M., Braun, R. T., Yao, L. Z., Kjaer, K., Zhang, M., & Casalino, L. P. (2022). Association of physician management companies and private equity investment with commercial health care prices paid to anesthesia practitioners. JAMA Internal Medicine, 182(4), 396-404. https://doi.org/10.1001/jamainternmed.2022.0004

Singh, Y., Song, Z., Polsky, D., Bruch, J. D., & Zhu, J. M. (2022). Association of private equity acquisition of physician practices with changes in health care spending and utilization. JAMA Health Forum, 3(9), Article e222886. https://doi.org/10.1001/jamahealthforum.2022.2886