The Hidden Costs of Hospitals’ Buying Sprees - OZY | A Modern Media Company

The Hidden Costs of Hospitals’ Buying Sprees

The Hidden Costs of Hospitals’ Buying Sprees

By Melissa Pandika


Because a recent study suggests that consolidated medical care might not come cheap.

By Melissa Pandika

Whether we’re supersizing or buying in bulk, we usually assume that bigger is, if not better, at least more efficient. But the opposite seems to hold true when it comes to medical care. Industry consolidation is actually boosting medical costs, according to a study published last year in the Journal of the American Medical Association, and in a big way too: The study found that the per-patient cost of care in multihospital systems was


percent higher than in physician-owned groups

At a time when hospital systems have gone on buying sprees of medical groups and private practices, the finding resonates. Even the Affordable Care Act encourages consolidation. 

Mergers and acquisitions, the theory goes, improve care and streamline operations. So why don’t economies of scale seem to hold in healthcare? The study didn’t say, but its authors told OZY they suspect higher overhead costs and greater expectations of referrals — to pricey parent hospitals usually — are to blame.

To be sure, the JAMA study focuses on only HMO enrollees in California; the findings might not apply to other states or to patients with forms of insurance. And based on the current data, it’s not clear whether consolidation actually causes a rise in patient-care costs, Martin Gaynor, a professor of economics and health policy at Carnegie Mellon University, told OZY. But “the fact that they find this association is a cautionary note for these acquisitions,” he said.

Member physicians are often expected to refer patients to the parent hospital — which tends to charge higher fees.

Big bureaucracy is probably partly to blame, said James Robinson, a professor of health economics at UC Berkeley School of Public Health and the study’s co-author. “Every hospital is extremely regulated,” and member physicians are often expected to refer patients to the parent hospital — which tends to charge higher fees — for ambulatory surgery and diagnostic services, he said. Consolidation might also lower competition to keep prices low and quality high, Gaynor added. It’s possible, too, that costs are higher at behemoth hospital systems because they have more leverage to charge insurance companies higher rates, said Lawton Burns, a professor of health care management at the University of Pennsylvania’s Wharton School of Business.

What should we conclude? Robinson argues that since “hospitals are inherently expensive,” they shouldn’t be the center of health care delivery. If we’re looking for efficiency and affordability, we should look to physician-owned organizations instead, he said. Gaynor hopes to see more-innovative organizational schemes. “The goal of the Affordable Care Act is to provide a stimulus to come up with better ways of organizing and delivering care” — which doesn’t necessarily meaning consolidating it, he said.

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