About 20 years ago several left-of-center think tanks and advocacy organizations decided your doctor should not work on his or her own. The theory went something like this: independent doctors are too isolated. Patients don’t know what they need; and the medical records in physician offices are isolated silos of information that are rarely shared with all your other doctors. Thus, care is not coordinated among all your medical providers.
Many advocates thought that vertically integrated insurers, that also owned the hospitals that employed physicians, would be better equipped to coordinate patient care. There were some examples of this. Kaiser Permanente in the Pacific Northwest has done a decent job. Geisinger Health is another example of an integrated health system that is well respected.
Manufacturing industries throughout the world boosted quality and lowered costs by vertically integrating all stages of production. There was just one problem with this theory. Hospitals and insurance companies were not competing with price, quality, and other amenities. As John Goodman wrote nearly 20 years ago, “There is no systematic reward for excellence and no penalty for mediocrity.” As a result, excellence tends to be the result of the energy and enthusiasm of a few individuals, who usually receive no financial reward for their efforts.” That explains Kaiser Permanente and Geisinger, but competition is what encourages price and quality competition in most other industries. There is none of that in health care. Health care is not a competitive market. In health care, the result of vertical integration and consolidation is regional cartels.
Health care is not competitive because patients do not act like consumers. Patients pay only about11% of medical bills out of pocket. That means they only care about the price 11% as much as they would if paying the entire bill. Long before a patient enters their doctor’s office, a third-party payer has already decided what it will pay for and how much it will pay. There is not one price but many different prices depending on who the payers are. The same hospital can have different prices for the same service. Hospitals can even have different prices for the same service depending on whether the service was done in the hospital or performed in an ambulatory surgery center (ASC). ASC are cheaper but there is no real logic why that is the case. Home Depot, Lowes, Costco, and Sam’s Club are all big box retailers. They do not build smaller stores near their large stores and offer discounted services for the same products.
Many left-of-center advocacy organizations thought vertical integration was the key to boosting efficiency and reducing the silos where health information is retained apart from other health information. The notion made no sense at the time. Why would health care providers act more like competitors by integrating services? They didn’t. Rather, firms use vertical integration to capture more referrals. Nowadays, instead of checking around for the best price when your doctor orders a lab test, diagnostic scan, or other service you are stuck getting it done at the hospital where your doctor works or arguing why you want to have it done elsewhere. Indeed, many hospital contracts with health insurers forbid giving enrollees a financial incentive to seek care elsewhere.
Over the years my doctors have been good at helping me save money when they realize I’m price sensitive. Physicians who work for large organizations have less leeway when their practice of medicine is controlled by a hospital system and they are graded on referrals. Nowadays about 75% of physicians are employees rather than independent practice. Your doctor didn’t need a boss, but federal regulations and Obamacare were responsible for driving more doctors into the arms of hospitals. The results are often higher prices.