by Joshua Freeman, M.D.

Two major trends now accelerating under the Affordable Care Act (ACA) are the increasing acquisition of physician practices by hospital systems and the emergence of accountable care organizations (ACOs). Both trends pose threats to patients’ access, costs, and quality of health care. 

These trends are examined in a recent series of articles, “Doctors Inc”, by Alan Bavley of the Kansas City Star. According to the American Hospital Association, the number of doctors on hospital payrolls nationwide has risen by one-third since 2000. This trend is driven by the “financial model”, which generates internal referrals, keeping patients within the system, as well as generating lucrative procedures. Physicians get a piece of the action; they get guaranteed salaries paid in part by the hospital or health system, which is getting downstream revenue for their referrals. Costs go way up with these integrated practices. Robert Zirkelbach, vice president of America’s Health Insurance Plans (AHIP), the insurance industry’s trade group, tells us that:  

When a hospital buys a practice, its rates will increase in the following year’s contract. Increases of 20, 30 or 40 percent are not uncommon. It’s not 3 or 4 percent, that is for sure. (1)  

Internal referrals within these integrated hospital systems are not always good for patients. Though it’s often fine to see doctors within the system, and this is usually strongly encouraged, discouraging patients from seeking outside referrals can also be hazardous to their health.

For some years we have seen a shift of health care services to outpatient locations, originally intended to save money. But that intent has been gamed by hospitals and physicians. So called “facility fees” have become a big driver of increased costs to patients and insurers, whether private or Medicare and Medicaid). They are additional fees charged by hospitals for services, especially procedures, performed in affiliated outpatient facilities.  In a hospital-affiliated clinic (which doesn’t have to be on the campus and can be in the same doctor’s office that used to be separate), there is a somewhat lower doctor's fee, but there is also a facility fee that, together with the doctor’s fee, is much higher in total than the original office-based reimbursement. Indeed, the facility fee can be far higher than the physician fee. Thus, the hospital makes money, and can share some of that with the physician, allowing the physician to make more money without the overhead and risk. Voilà! Physicians are incented to become employed by hospitals! (2,3)

The problem with all this is that costs to patients and families go up, especially when co-pays and co-insurances that come out of patients’ pockets, even when they are insured, go ever upward. 

As a major part of the ACA, accountable care organizations are intended to decrease the degree to which the delivery of health care is a series of episodic events paid for individually. Instead, ACOs take on an overall responsibility including inpatient, outpatient, and long-term care. The idea is that all levels would be coordinated to provide the best care at the most appropriate (inpatient, outpatient, long-term, home based) level.  In some settings, particularly for fully integrated plans (where the providers of care are also the insurers) such as Kaiser, this works relatively well.

It is still too early to assess whether ACOs will save anyone money. They are certainly enabling new consolidating arrangements among hospital systems, physician practices and insurers. But based on the gaming skills of all these parties, we can expect yet to be identified new impacts on patients that may not be good. For the system remains beholden to the “financial model” of hospital systems, physicians and other providers, and insurers. We have a mess of conflicting incentives where gain to one component (e.g., insurers) is a loss to another (e.g., providers) and that they then take actions that benefit them and the overall loser is the patient.

Is this what we want from health care reform? I hope not. This is not what our national health policy should be doing. A health system that does not permit gaming but straightforwardly pays for health care, and eliminates the profit motive, would solve these problems. The answer is to cover all Americans with a single payer system of national health insurance (Improved Medicare for All).  Some patients would then not be “more desirable” than others, and the not-for-profit, simplified single payer system would pay for the appropriate level of care for every patient.

It can be done. It is done in Canada. It is done in some fashion in every other developed country. If we decide that the health of our people is more important than the profit of the health care industry, we can do it also. 

Suggested Reading:

1. Bavley, A. Medicine goes corporate as more physicians join hospital payrolls. Kansas City Star,  December 28, 2013

2. Bavley, A. ‘Facility fees’ add billions to medical bills. Kansas City Star, December 29, 2013.

3. Rosenthal, E. The $2.7 trillion medical bill. New York Times, June 1, 2013

4. Bavley, A. Day 3: For young doctors, hospital paycheck trumps solo practice, Kansas City Star,  Dec 30, 2013


1,457 words to 942 words

One liner: Two trends in the Accountable Care Act (ACA) are driving up costs for patients—is this how it should be?

Abstract: Two trends that are gathering steam under the ACA are the increasing employment of physician practices by enlarging hospital systems and the emergence of accountable care organizations (ACOs). Each trend poses threats to patients’ access, costs and quality of care.  This blog shows some of the ways that hospitals, physicians, and insurers are gaming new reimbursement systems to their advantage. 

Tag lines: Accountable Care Act; Obamacare; access, costs and quality of health care; accountable care organizations; facility fees;