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Vertical Integration in Healthcare Sector Innovating Referral Patterns

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Vertical integration of healthcare, or hospitals and health systems directly owning physician practices, is becoming increasingly common. However, according to two recent reports, this method of merger and acquisition results in higher healthcare costs and inappropriate treatment.

Vertical integration has a number of advantages, according to provider organizations, including increased performance, better care delivery, and a simpler payment process. However, a new report published in Health Affairs found that after vertical integration, patient referrals increased, resulting in millions more in Medicare spending.

According to lead author Christopher M. Whaley, a policy analyst in healthcare at RAND Corporation, and colleagues, the monthly number of diagnostic imaging tests per 1,000 attributed beneficiaries conducted in a hospital setting increased by 26.3 per 1,000. Meanwhile, the number of procedures conducted outside of a hospital declined by 24.8 per 1,000.

After vertical integration, referrals for laboratory testing followed a similar pattern, with hospital-based tests rising 44.5 per 1,000 attributed beneficiaries and non-hospital-based tests declining 36.0 per 1,000.

After vertical integration, Medicare payment grew as a result of more hospital-based facilities. The total reimbursement for imaging tests increased by $6.38, while laboratory tests increased by $0.57. The high-volume existence of these services resulted in a combined $73.1 million increase in Medicare spending for all ten imaging and laboratory testing services analyzed over the four-year period, despite small improvements in reimbursement.

Since imaging and laboratory testing facilities are standardized across diagnostic providers, Whaley and colleagues say it’s difficult to link higher spending with a higher quality of treatment. They write in the report, “The increased reimbursement is instead a result of preexisting Medicare payment rates that reimburse hospitals more for these services than rival providers (for example, stand-alone imaging centers and freestanding diagnostic laboratory companies).”

“Hospitals and health systems have a vested financial interest in capturing physician referral trends, especially those of their own employees. However, these benefits and downstream results cannot always be in the best interests of patients,” they add later.

The research joins an increasing body of evidence linking higher healthcare costs to industry consolidation, including a widely cited study by health economist Michael Chernew and colleagues that looked at the costs of lower-limb MRI scans after consolidation.

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Mark Ott

Mark is a graduate in sciences that are instrumental using an MBA in operations. He's also worked as a research partner for five decades, accompanying medical investigation. As a youth, he donated medical information to neighborhood college journals. His passion is researching and composing medical stories. He knows his stuff, and viewers love his sensible insights.

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