Tighter margins and the need for more resources are driving independent physician practices under the ownership of hospitals and health systems, a trend known as vertical integration. Proponents say these bigger organizations allow smaller providers to compete more in highly concentrated markets and improve care coordination and quality. But studies from the past few years say the opposite, that vertical integration increases pricing without improving quality and harms competition.

Recently, researchers at Harvard University and University College London took a stance on this debate, saying in their own study that vertical integration leads to higher costs and worse health outcomes primarily because of improperly aligned financial incentives.

Entitled The Impact of Vertical Integration on Physician Behavior and Healthcare Delivery: Evidence from Gastroenterology Practices, the study was published in August and based on data from Medicare patients treated by gastroenterologists.

While vertically-integrated providers made adjustments to their care practices that increased throughput, they also raised reimbursement per procedure. The authors say this is because, under the current system, Medicare reimburses the same procedure at different rates depending on the setting. For example, for colonoscopies, these physicians saw $127 more per procedure compared to independent ones, a 48% difference in overall spending per procedure.

Additionally, post-op complications in patients rose substantially, including bleeding, cardiac, and nonserious GI symptoms. This was at least partially due to a reduction in the use of deep sedation because hospitals generally do not deploy expensive anesthesiologists in these low-reimbursable exams, said Soroush Saghafian, an associate professor of public policy at the Harvard Kennedy School.

“We provide evidence that the financial incentive structure of the integrated practices is the main reason for the changes in physician behavior since it discourages the integrated practices from allocating expensive resources to relatively unprofitable procedures,” she said in a statement.

Other studies have recorded similar spikes in average physician prices in these situations. In 2017, scientists at the Medica Research Institute reported that vertical integration led to prices at acquired clinic systems increasing 32% to 47% higher than what would be expected if they were not acquired.

In a 2021 op-ed, M. Susan Ridgely, an adjunct senior health policy researcher at the RAND Corporation and co-director of the RAND Center of Excellence on Health System Performance, said that changes in referral patterns over three years for just five common imaging and lab procedures triggered an increase in Medicare spending of $73.1 million.

Additionally, there was substantial variation, with some affiliated physician organizations performing better than unaffiliated ones and some not. She said more research on this is required, along with the development of strategies for clinical integration and standardization for better performance in these situations.

“More attention could be paid by health system executives to shortening the trajectory for care redesign and clinical integration: paying attention not only to the mechanics of care delivery, but also to governance, culture, and staff empowerment. At the same time, policymakers could better enable change,” she said.

Saghafian says that based on their findings, policymakers should pay more for services to correct the incentive system currently in place. “This additional expense would result in improvements to both patient well-being and the volume of patients cared for, and therefore would provide notable savings in the long term.”

For their inquiry, Saghafian and her colleagues used a causal model and large-scale patient-level national panel data that includes 2.6 million patient visits across 5,488 physicians.

The findings were published in the INFORMS journal, Management Science.