Industrialization of medicine: Coming soon to a practice like yours!

July 1, 2011

Arguing that a relentlessly rising volume of care driven by our discounted fee-for-service payment system is exacerbating both cost inflation and suboptimal care, the Centers for Medicare and Medicaid Services has decided to adopt value-based purchasing.

How did we get into this situation?

I have pointed out on these pages a number of times that the United States expends up to 100% more than other industrialized nations for healthcare but is ranked only 37th in healthcare performance by the World Health Organization.1 Despite spending more than 17% of our GDP on healthcare, Americans receive about half of the recommended preventive care.2 Conversely, while Medicare spending patterns vary substantially among regions, higher spending is not associated with better outcomes, higher patient satisfaction, or improved access to care.3 Worse, preventable errors add billions to our collective healthcare bill.4

The very best performing hospitals, those in the top 10%, will be eligible for extra compensation from the pool of dollars withheld from the lower performing hospitals.6 Conversely, hospitals with higher-than-average 30-day readmission rates for diagnoses such as heart failure and pneumonia will face up to 1% penalties starting in 2013, ramping up to 3% in 2015. To meet these tough targets, hospitals will need to strictly control physician practice. In fact, an astonishing 50% of all physician practices are now owned by hospitals or integrated delivery systems and the number of physicians employed by hospitals has increased 75% since 2000.7

But this strategy is not without risk for hospitals. On average, they lose about $200,000 per year per doctor over the first 3 years of physician employment.7 However, hospitals appear more than willing to accept such losses in return for better control of patient access and referrals as well as physician performance. Moreover, if accountable care organizations begin to dominate the market and hospital revenues and expenses span both ambulatory and inpatient environments, the incentive to acquire even marginally performing physician practices will accelerate. Conversely, increasingly complex VBP, bundled charges, and capitated payment models will make it harder and harder for smaller physician practices to operate at a profit independent of large organizations.