Decrease in Independent Physicians Leads to Higher Costs and Less Competition


Earlier this year, the American Medical Association (AMA) reported that in 2020, physician-owned medical practices are no longer in the majority. For the first time in American health care, over half of all U.S. physicians work for a hospital or health system. According to another study by Avalere, the data is even more grim: only three of 10 physicians practice in independent medical practices.

Not only are physicians consolidating, but hospitals are consolidating as well. The most recent data shows that 72% of hospitals are affiliated with a larger health care system.

Why should Americans care whether doctors own their practice or work for some larger hospital system? And abstracted further, why should Americans care whether the hospitals remain independent or consolidate into a larger system?

While consolidation generally leads to increased revenue for the associated hospitals and doctors, patients suffer in terms of cost. As hospital acquisitions and mergers rise throughout our health care system, there is less room for competition, which drives up costs in both out of pocket prices and premiums for the American patient.

According to the Kaiser Family Foundation, 2020’s average annual cost of health insurance was $21,342 for a family (increased from 2019). The median U.S. household income for 2020 was $67,521 (decreased from 2019). With inflation on the rise and a greater share of income going to health insurance, the cost of health care is a top issue for Americans.

One lawsuit between Sutter Health, a large hospital chain in Sacramento, and the California Attorney General exemplifies the danger of monopolized hospital systems. The case argued that Sutter used their market share to artificially inflate costs, withhold pricing information, and defraud Medicare. In the settlement, Sutter agreed to pay $575 million and end the predatory behavior.

If hospital mergers and physician acquisitions drive up health care prices, should consolidation simply be outlawed through antitrust laws? In July of 2020, President Biden issued an executive order calling on the Federal Trade Commission to enforce existing antitrust laws on hospital merges.

Unfortunately, such a top-down approach is insufficient to solving the root of the problem.

Hospitals, which often depend on the downstream revenue of their affiliated physicians’ references, will find other ways to make ends meet such as increased costs in emergency services or elective surgeries. And as long as working as a private practice physician is increasingly unprofitable, limiting how many physician practices a hospital is able to acquire could force many doctors out of the industry entirely and discourage future generations from working in the medical industry.

Instead, public policy should be aimed at decreasing the costs of running both hospitals and private practices, with special attention given to the excessive administrative costs. Surprisingly (or perhaps of no surprise at all to those who regularly deal with insurance companies) approximately 25 – 30 percent of a practice’s revenue goes to the billing departments.

Medical billing is an arcane and intentionally complicated language, and providers increasingly depend on employing more medical coders to get properly paid by insurance companies. The medical codes are hyper-specific, with different insurance companies interpreting the same code differently. Sometimes the same service has multiple different codes. Sometimes a one number difference in the code could be the difference between $10 and $1,000.

To mitigate the risks of incorrect billing, sometimes providers will overcharge for services (e.g. $20 for a single Tylenol) or charge for ridiculous services such as allowing skin to skin contact after a mother gives birth.

Furthermore, if you wanted to personally verify that the correct medical codes were used on your itemized bill, unless you work in the insurance or medical industry, regular citizens can only make six searches a day in the database.

As always, transparency is a powerful tool in driving down costs.

Standardizing the medical code system could significantly reduce the need for medical billers. And American patients should not only receive itemized receipts of what was purchased (much like how you receive a receipt at the grocery store) but also have full access to the standardized medical codes.

Shining a light on shrouded costs will disincentivize hospitals from consolidating, encourage doctors to continue in private practice, and empower the American people.

McKenzie Richards is a health care program associate at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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