Hospitals Acquiring Physicians is Increasing Medicare’s Costs

From 2004 through 2009, the volume of Medicare outpatient services per (FFS) beneficiary increased 23 percent. During the same period, Medicare inpatient discharge volume declined by about 4 percent. Jason Shafrin says hospital acquisition of physician practices is part of the reason:

Hospitals want to acquire physician practices for two reasons: first, it makes their patients more likely to use their hospital, and second, fees for visits to physicians in hospital-based facilities (consider outpatient) are more lucrative to visits in free-standing facilities. [According to MedPAC’s March 2011 report], “When patients visit a physician office that is part of a hospital’s outpatient department, Medicare pays a facility fee to the hospital and a reduced fee for the physician’s services. The combined fees paid for visits to hospital-based practices are often more than 50 percent greater than rates paid to freestanding practices.”

Comments (7)

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  1. Devon Herrick says:

    Lately hospitals have gone on a hiring frenzy acquiring physician practices. The reason often given is that hospitals want to affiliate with doctors as part of the process of creating accountable care organizations. However, I think Jason has identified the more likely reason.

  2. Ken says:

    Unintended consequences? Or do you think somebody intended for this to happen?

  3. Simon says:

    To maximize hospital revenue, hospital beds need to be occupied as much as possible. By picking up more practices within the area, hospitals have a greater chance of keeping beds full.

  4. Linda Gorman says:

    Control of primary care practices also ensures that patients needing high margin procedures get them done at a specific hospital.

    Data from Wisconsin suggest that integrated networks increase medical expenditures. The claim that coordinated care reduces medical expenditures is ripe for a Greg Scandlen myth busters post.

  5. Joe S. says:

    Ken, probably intended by the hospital industry, but unintended on Capitol Hill.

  6. Buster says:

    Linda, you make a good point. It makes sense that integrated networks would only reduce expenditures if they are owned by the insurers at risk for the cost of care.

  7. Dan says:

    Ken, This is definitely not an unintended consequence of meddlesome governmental bureaucrats. The government wants more tight control of physicians, and feel this can be accomplished by killing private practice medicine. The actions of our Federal government are purposefully corralling physicians into hospital employment or employment in Federally Qualified Health Clinics, where they get paid more for the same services. For example, in 2009, Medicare started cutting private practice cardiology payments for certain heart studies by 40%, while increasing reimbursement to hospitals by 5 percent. So the payment for the same service in a hospital setting is 45% higher than if done in a private office ( This is why there are no private practice cardiologists and few private practice primary care physicians in my state. I am surprised that this information has not found its way into more mainstream media.

    I predict that once private practice has been mostly eliminated, the government will begin to ratchet down the payments to hospitals and the federal health clinics as it turns payments into global budgets for accountable care organizations (ACOs), that will lead to rationing of health care, due to underpayment for services.