Vertical Healthcare Consolidation Is Increasing Costs and Compromising Patient Outcomes

The trend of hospitals acquiring or merging with physician practices—known as vertical integration—has gained momentum over recent years, driven by the promise of improved efficiency and coordinated care. Proponents argue that when physicians work directly for hospitals instead of operating independently, the healthcare system benefits from economies of scale and better information sharing, ultimately leading to higher quality patient care. In the United States, this shift has accelerated dramatically, with the number of physicians transitioning from independent practices to hospital employment doubling within the past decade.

However, a recent study conducted by a team of researchers—including Harvard Kennedy School Associate Professor Soroush Saghafian—raises concerns about the unintended consequences of this trend. Their findings suggest that vertical integration may be leading to suboptimal care practices that negatively affect patient health outcomes while simultaneously inflating healthcare costs. The core issue, they argue, lies within the current financial reimbursement structures that incentivize behaviors that are not always aligned with patient well-being. Addressing these financial distortions could be crucial in mitigating the adverse effects associated with healthcare consolidation.

The study focused specifically on colonoscopies performed by gastroenterologists within the Medicare fee-for-service program. Researchers analyzed millions of randomly selected doctor-patient interactions spanning from 2008 to 2015, covering diverse geographic areas and including both physicians working in vertically integrated hospitals and those in independent practices. This comprehensive approach allowed for a detailed comparison of practices and outcomes across different healthcare settings.

“Analyzing more than 2.6 million patient visits, we found that physicians significantly alter their care process after they vertically integrate,” Saghafian explained. “What is more, this results in a substantial increase in patients’ post-procedure complications. Using our findings, we offer some levers for policymakers to mitigate these consequences of vertical integration—a fast-growing trend in the healthcare sector.”

Impacts of Vertical Integration on Medical Practice and Patient Outcomes

The study revealed that when independent physicians joined hospital systems, they changed their clinical practices. For example, they tended to reduce the use of deep sedation during colonoscopies—by about 3.7 patients per 100 procedures—yet, this adjustment was associated with a rise in adverse post-procedure complications. Specifically, patients under integrated physicians’ care experienced higher rates of serious issues such as bleeding (3.8 per 1,000 colonoscopies) and less severe but still concerning symptoms like cardiac or gastrointestinal discomfort (5.0 and 3.3 per 1,000 colonoscopies, respectively).

A key factor identified was the reduction in deep sedation, which partly explains the increase in complications. This change was primarily driven by hospitals no longer allocating expensive anesthesiologists to procedures that are less profitable for them, leading to cost-cutting measures that inadvertently compromised patient safety.

In addition to altering care practices, vertical integration also increased the volume of patients physicians could treat and boosted reimbursements per procedure. Integrated doctors received approximately $127 more per colonoscopy—about 48% higher—compared to their independent counterparts. This fee differential aligns with existing reimbursement disparities, such as the average Medicare payment of $917 for hospital outpatient procedures versus $413 for similar services in physician offices. Critics argue these financial incentives encourage hospitals to pursue integration to maximize revenue, but until now, there was limited evidence on how this affects actual care quality.

Interestingly, the study suggests that adjusting payment policies—such as offering higher reimbursements for procedures involving deeper sedation—could counterintuitively improve patient outcomes and increase overall procedure volumes. Such targeted financial incentives could also lead to long-term savings by reducing complications and unnecessary readmissions.

The researchers emphasize that simply relying on financial incentives to steer physician behavior is insufficient. They recommend comprehensive oversight strategies, including monitoring post-integration practices and aligning financial rewards with quality care metrics. Given the rapid pace of healthcare consolidation, the study urges policymakers to act swiftly and decisively to prevent potential deterioration in patient health and rising costs.

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