Why Do Medical Services Provided by Ambulatory Care Practices Owned by Hospitals or Health Systems Cost More?

By James E. Lewis, Ph.D.

National news outlets recently have carried stories about unanticipated increases in the cost of medical services in ambulatory care settings owned and operated by hospitals and health systems rather than by physicians or physician groups. These reports revealed the increases in cost without offering much in the way of explanation or understanding. Although most hospitals have long experience with outpatient clinics and emergency rooms, “patient-centered care” in its current sense is a “disruptive technology” for them.

Explanatory studies might be forthcoming in a year or two. The Agency for Healthcare Research and Quality (AHRQ) issued a funding opportunity announcement on December 19, 2012, “Estimating the Costs of Supporting Primary Care Practice Transformation.” The announcement begins: “Revitalizing the Nation’s primary care system is foundational to achieving high-quality, accessible, efficient health care for all Americans.” It goes on to note that AHRQ and others have supported research on the success of improving quality outcomes in primary care practices and critical analyses of how best to implement and sustain primary care practice change. But there has been little study of the costs of primary care transformation. Although the announcement appears to be neutral with respect to the ownership of “transformed” primary care organizations, there is a strong suggestion that AHRQ perceives them to be owned by physicians and physician groups rather than by hospitals and health systems.

While we await future studies, is it possible to explain these cost increases or to make educated guesses, at least, based on work in other fields?

Take, for example, the concept of industry cost structures: Organizations with high-cost structures encounter great difficulty when they try to manage disruptive technologies that require lower-cost structures to meet the needs of new customers. Patient-centered ambulatory care in physician-run organizations is a disruptive technology for hospitals and health systems due to their dense hierarchical organizational structures, overhead costs, and market orientation to procedure-oriented physicians and health insurance payers. Putting a physician in the CEO slot doesn’t automatically make the organization “physician-run.”

A solution to this problem is to put (or leave) the disruptive technology in the hands of a different or new entity. Perhaps partially owned by a high-cost organization, the new entity is physician-run, independent, and can use its own resources. Ultimately, it can leverage values and processes/culture to build a profitable business in the markets it understands—patients and referring physicians—and can quickly offer the market changes in medical practice driven by technology and/or medical science.

Other possible explanations might include:

  • Some analysts and government officials have suggested that there may be Electronic Health Record (EHR) systems at fault, possibly as a result of design flaws or inadvertent (or intentional) misuse. Thus, EHRs, along with billing for professional services based on the hospital medical record, might partially explain increases in ambulatory care costs. Physicians’ rounding notes, even those entered in handheld devices, can be incomplete if and when they are turned over to practice-based billing personnel who don’t use them as cues to review the actual medical records. Ergo, private practice physicians potentially are less likely than a hospital or health system to submit a claim for every billable service at the highest possible reimbursement level.
  • Hospital managers’ mental models (and regulatory requirements) of facilities and organizational structures/staffing lead non-executive decision makers in positions of authority and bound by institutional values and processes to develop wrong-sized and overstaffed ambulatory care facilities that raise costs and contribute little or nothing to the quality or quantity of patient care that is delivered.
  • Hospital (often union) work rules may set daily and/or hourly patient throughput limits. Throughput expansion is discouraged by non-executive decision makers unless additional facility and staff resources can be made available, thus raising costs. Physician-run medical practices are managed so as to maximize throughput and minimize downtime, thus reducing the average costs per patient.
  • Billing offices may give priority to processing high-dollar claims while low-dollar claims languish, often generated by primary care and other non-procedural specialties.  Of course, there are no commensurate cost reductions: Someone still has to see the patients, order laboratory tests and radiology studies, and make referrals to procedural specialists and sub-specialists.
  • Compared to physicians working in their own practice or in a group, hospital, or health system, employed physicians usually negotiate shorter work weeks while maintaining or improving their compensation. They might have work ethics not in keeping with their employer’s high expectations.  When employed physicians work 20 fewer hours a week for the same compensation they received when working 60 or more, more MDs/DOs will be required in order to deliver the same amount of patient care. Costs can only go up.

There are more factors that could explain higher costs of ambulatory care in hospital and health system owned and operated systems. Like those described above, none contribute to improved patient care.

Lewis James—James E. Lewis, Ph.D., is an independent consultant to departments and schools of medicine, teaching hospitals, cardiovascular and cancer research and clinical programs, medical professional associations, disease oriented foundations, consulting firms, pharmaceutical companies, components of the National Institutes of Health, the Centers for Communicable Diseases, and the predecessors of the Center for Medicare and Medicaid Services. Previously he served as Deputy Dean for Operations and Vice President for Academic Administration, The Mount Sinai School of Medicine and Medical Center, New York City, where his academic title was Professor of Medicine and Health Policy; and Senior Executive Officer, Department of Medicine, University of Alabama at Birmingham, where his academic titles were Professor of Medicine and Adjunct Professor of Sociology. He can be reached at hrdg@earthlink.net.

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