Filling the bucket in vertically integrated medical practices

Idaho Flaneuse raised a good point in yesterday’s post regarding models of medical care and the economics of referral.

I wonder how this will work with the consolidation of doctor’s practices. Here in Boise most of the primary care practices have been bought by the hospitals here. I don’t have personal experience, but I think that some of the specialist practices have also been purchased by the hospitals. Seems likely to me that the doctor will send you to the hospital that owns them rather than the one that is rated the best. Will this leave the patient fighting to go to the better rated hospital or bearing a larger burden of cost if they don’t?

This is one of the big problems with system and delivery reform. The business model requires a lot more regional coordination without ownership barriers.

Hospitals buy up provider practices for a few reasons. Before last year’s budget bill, one of the big reasons was to transform outpatient centers into off-campus hospital facilities that could charge a much higher Medicare rate. That revenue hack is gone for new acquisitions. The other two reasons are prestige of the hospital now being able to offer a high profile program and referral patterns.

A physician who is either on their own or working for a non-hospital owned group with no strategic relationships with a hospital will often have admitting privileges to multiple hospital groups if they live in the core or mid-ring of suburbs in a metro area. Multiple privileges allows the provider to treat patients with a variety of insurances. St. Thomas might not take Mayhew but North General does. North General does not take Aetna but St. Thomas’s does and has a regional destination program for Aetna covered lives. St. Thomas and North General both accept Blue Cross. That is common in a network driven world. So if the provider has privileges at both St. Thomas and North General, she can treat patients who are covered by Mayhew Insurance, Aetna and Blue Cross. Her Mayhew patients go to North General when they need surgery, her Aetna patients go to St. Thomas, and her Blue Cross patients go where the doc thinks they’ll get the best care for that particular problem or the first operating room slot opens up.

Now if North General buys the practice where that physician works, she’ll still have privileges at St. Thomas but her salary is determined partially by the success of North General. There will either be hard incentives and guidelines that all possible patients are to be kept within the vertically integrated medical center or bonus structures that strongly encourage that. The hospital group is buying the provider’s referral pattern. In this scenario, if the physician responds to their incentives, she’ll pick up a lot of new Mayhew covered people, lose a lot of Aetna covered patients and see noise in her Blue Cross covered panel.

If a patient gets into a vertically integrated silo, it is tough to get out even without considering insurance. The medical records are in one spot, the doctor who is treating a condition is in one spot with a relationship already established, the supporting services are lined up, and if there is a need for follow-up service the appointment is set up for a visit to the vertically integrated physical therapy center or blood lab or MRI center. It is a very smooth workflow where (if done well) there are very few obvious off-ramps to take the patient’s medical dollars outside of the vertically integrated business model. The money stays in the bucket and the vertically integrated provider system has dozens of analysts figuring out ways to keep even more money in the bucket.

If the system is large enough, the patient can benefit from facility level specialization as North General might be the hip place for the Greater Shelbyville Medical Group while South Memorial Hospital is the cardiology hospital for the group. But there is no guarantee that a vertically integrated business unit is either big enough or good enough to generate quality returns due to specialization.

This is problematic. And the incentives can get even more problematic when we throw an integrated insurance company into the mix. They might only offer coverage at owned facilities (the Kaiser model) or they might have a tiered network where care provided at owned facilities has a better deductible/out of pocket maximum than care at other in-network facilities (most other payer-provider systems’ lower priced plans). The goal of the design is to keep as much money in the combined entity’s bucket. Hopefully the vertical integration of the healthcare provision and finance entity leads to internally coherent incentives to reduce wasteful care and to think longer term for better quality. Hopefully, it leads to better care coordination, hopefully it leads to better outcomes at better prices. Hopefully it does lots of wonderful things. And in some systems, it does. But the incentive is to keep the patient in-house and thus the money in-house as often as possible even if there is a better locally viable alternative.