This will be a multi-part series.
The days of independent community hospitals and small physician practices are just about over. Paul Starr’s famous book The Social Transformation of American Medicine tells the story of rise of a “sovereign” medical profession, consisting largely of entrepreneurs who owned their own individual or small group practices and made their living as independent business people. They were generally suspicious of alternative models such as large group practice and salaried employment. But recent decades have been marked by one overarching trend: the consolidation of the medical institution into fewer and fewer, larger and larger entities.[1] Horizontal consolidation means that similar institutions merge into chains. This has included not only hospitals but also nursing homes, dialysis clinics, and other kinds of facilities. Vertical consolidation means that various kinds of facilities are brought into the same firm, mostly meaning hospital chains buying physician practices, nursing homes and so on – which at the same time achieves horizontal consolidation.
Consolidation of hospitals, insurers and physician services goes back to at least the 1990s.[i] A common way of measuring market concentration in an industry is called the Herfindahl-Hirschman Index (HHI),[2] which can range from any arbitrarily low number up to 10,000, representing a monopoly by a single firm. An HHI of 2,500 or greater is considered highly concentrated. A report published in 2017 found that the mean HHI for hospitals and specialty physician groups (per metropolitan statistical area) increased by 5% from 2010 to 2016, and for primary care physician groups by almost 29%, in part because of vertical consolidation, i.e. hospitals buying physician practices.[ii] Large health insurers[iii] have also been buying physician practices as an investment, as have private equity firms[iv][v]. Private equity firms have no pretense to any mission other than making profit for their owners. Not surprisingly, they strategically purchase practices where they can gain market share and pricing power, and private equity acquisitions are associated with price increases and higher expenditures on medical services.[vi]
[1] Concentration of industries into fewer, larger firms is often called “integration,” but that has a different, specific meaning in Medicine. Integrated care refers to provision of behavioral health and other medical services in the same practice, which we’ll discuss later. To avoid confusion, I’ll stick with “consolidation” in the present context.
[2] Calculated by squaring the market share of each firm in a given area and then summing those values. It seems conceptually confusing but look at it this way. If one firm has a total monopoly, that’s 100% market share, and 1002=10,000, the highest possible HHI. If four firms each have 25%, that’s 25X25X4=2,500.
[i] . The industrial organization of health-care markets . J Econ Lit . 2015 ; 53 ( 2 ): 235 – 84
[ii] Brent D. Fulton. Health Care Market Concentration Trends In The United States: Evidence And Policy Responses. Health Affairs. 26(9) September 2017.
[iii] Reed Abelson. Corporate Giants Buy Up Primary Care Practices at Rapid Pace. The New York Times, May 8, 2023.
[iv] Jane M. Zhu, Lynn M. Hua, Daniel Polsky. Private Equity Acquisitions of Physician Medical Groups Across Specialties, 2013-2016. JAMA
[v] Praveen Suthrum. Physician practice consolidation: It’s only just begun. STAT News. Feb 27, 2020.
[vi] Richard M. Scheffler, Laura Alexander, Brent D. Fulton, and Ola A. Abdelhadi. Monetizing medicine: private equity and competition in physician practice markets. American Antitrust Institute, the Nicholas C. Petris Center on Health Care Markets and Consumer Welfare, University of California, Berkeley, and the Washington Center for Equitable Growth. July 2023. Available at https://www.antitrustinstitute.org/wp-content/uploads/2023/07/AAI-UCB-EG_Private-Equity-I-Physician-Practice-Report_FINAL.pdf [Accessed July 18, 2023]
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