"The same procedure can carry a facility fee in a hospital-owned setting that it would not carry in an independent office, and that differential is not incidental to these acquisitions. It is a central reason the ownership of a practice can change a patient’s bill without changing the care."
The American healthcare landscape is undergoing a profound transformation, driven by a wave of consolidation that is fundamentally altering how medical services are delivered and how much they cost. From physician practices to pharmacies, large health systems and corporate entities are acquiring smaller independent entities, a trend known as vertical integration. While these mergers and acquisitions often fly under the radar of regulatory scrutiny due to their size, their cumulative effect is a predictable and often significant increase in patient bills, even when the medical care itself remains unchanged. This phenomenon is not a billing error but a direct consequence of where a procedure is performed and who owns the facility, dictating the final price tag for patients.
The impact of this integration is starkly illustrated by the experience of an Ohio woman, identified as Anne Hug, a radiology professor. Scheduled for a minor gynecological procedure – polyp removal – she was informed just a day before her appointment that her doctor could no longer perform it in his office. The practice had been acquired by a hospital system the previous year, and the new ownership mandated that such procedures must be conducted at a freestanding surgery center owned by the same system. This shift in venue dramatically altered her estimated cost, which ballooned from approximately $3,000 to nearly $6,000.
This is not an isolated incident but a predictable outcome of "site-of-service billing," a mechanism where the same medical service incurs different charges based on the location of delivery. Hug’s situation highlights how hospital-owned facilities can impose facility fees that independent physician offices typically do not. The American College of Obstetricians and Gynecologists considers polyp removal appropriate for an office setting, utilizing local anesthesia. Hug’s initial referral, however, would have placed her in a hospital operating room with an anesthesiologist, at an estimated cost of $18,000 – a stark contrast to the eventual, albeit higher than initially quoted, fee. She eventually found an obstetrician willing to perform the procedure in-office, opting against the sedation she had been scheduled for, with the procedure itself taking only a few minutes. The financial differential introduced by the change in ownership and location was substantial, demonstrating that the ownership of a practice can directly impact a patient’s financial burden without altering the nature of the medical care received.
The sheer scale of this consolidation is often underestimated because it occurs incrementally, one practice at a time. Over the past decade, the number of physicians employed by hospitals has more than doubled. Current data indicates that approximately 82% of U.S. physicians are now employed by hospitals, other corporate entities like insurers, or private equity firms, rather than operating in independent private practice. This shift represents a fundamental restructuring of the physician workforce and the healthcare delivery system.
A significant factor contributing to the invisibility of these deals is the current regulatory framework. Under the Hart-Scott-Rodino Act, mergers and acquisitions are only subject to mandatory review if they exceed an annually adjusted dollar threshold, which currently stands at $133.9 million. While large hospital and insurer mergers often clear this hurdle, the vast majority of physician practice acquisitions fall below this threshold. Research by Yale economist Zack Cooper and his colleagues, who examined over 275 hospital acquisitions of physician practices, found that more than 99% of these transactions were below the reporting threshold. Cooper has aptly described the cumulative effect of these small, unreviewed deals as "death by a thousand paper cuts," asserting that current antitrust laws are "not fit for purpose at this point" to address this trend effectively.
Federal enforcers acknowledge this regulatory gap. The Federal Trade Commission (FTC) has taken action against healthcare mergers, but its efforts are often reactive, relying on complaints and news reports to identify smaller, potentially problematic deals. The Bureau of Competition director, Daniel Guarnera, has stated that healthcare competition is a top priority, yet the agency’s ability to proactively intervene in the market is limited by the reporting thresholds. The Department of Justice has also pursued cases, though primarily targeting hospital-insurer contracts rather than the mergers themselves.
While the concept of vertical integration, where a single entity controls multiple stages of the healthcare supply chain, is not inherently negative, and some integrated systems like Kaiser Permanente have a long-standing positive reputation, studies reveal concerning trends when it comes to hospital acquisitions of physician groups. For instance, research by Harvard University on hospital purchases of gastroenterology groups found that these acquisitions led to a decline in quality of care while simultaneously increasing prices and complication rates for procedures like colonoscopies. The primary improvement observed in these cases was in "operational throughput," a financial metric rather than a clinical outcome, suggesting a prioritization of revenue generation over patient well-being.
The consolidation trend extends beyond physician practices to the pharmaceutical sector, profoundly impacting prescription costs. Nearly every major health insurer now owns a pharmacy benefit manager (PBM) and specialty pharmacy operations. Companies like CVS have acquired insurers such as Aetna, directing their members to their own specialty pharmacy, CVS Specialty, through their PBM, Caremark. Similarly, Cigna owns Express Scripts, the specialty pharmacy Accredo, and the prior authorization firm EviCore. UnitedHealth Group’s extensive portfolio includes Optum Rx, Optum Specialty Pharmacy, and Optum Infusion Pharmacy.
This integration means that patients who switch health insurance plans often face a mandatory switch in pharmacies. This can lead to different pricing for long-standing medications, or in some cases, complete unavailability. A poignant example is a Florida father whose family relies on three specialty drugs. His new insurer, unlike his previous one, did not count manufacturer copay assistance towards his $3,000 deductible. Consequently, the financial assistance went directly to the insurer, while his own out-of-pocket spending obligation remained unchanged, effectively meaning the insurer benefited from the assistance without passing the savings on to the patient.
In response to these issues, the FTC has been actively pursuing settlements with PBMs. The agency recently reached a settlement with Caremark, mandating greater transparency and enhanced choice for patients and pharmacies. This followed a similar agreement with Express Scripts earlier in the year, aimed at lowering drug costs for American patients. Negotiations are currently underway with Optum.
Navigating this complex and consolidating healthcare system requires patients to be proactive. Before scheduling any outpatient procedure, it is crucial to ask specific questions. Patients should inquire about the exact location where the procedure will be performed and whether that location bills a facility fee. Requesting an estimate in writing is essential. Federal law entitles uninsured and self-pay patients to a good-faith estimate, and insured patients are also encouraged to request one. If a procedure can appropriately be performed in a doctor’s office, patients should actively inquire about the availability of this less expensive option.
For individuals transitioning between insurance plans, it is vital to confirm by January whether current medications will remain covered, which pharmacy is designated, and how manufacturer copay assistance will be applied to deductibles. In some instances, cash-pay options for generic medications can be more cost-effective than utilizing insured pricing.
Policy interventions hold the potential to mitigate some of these adverse effects. Experts across the healthcare spectrum have long advocated for "site-neutral payment," a policy where the same medical service receives the same reimbursement regardless of the setting in which it is provided. The current administration has proposed extending site-neutral payments to certain Medicare services, and further recommendations from the FTC are under White House review. However, none of these proposals have yet been implemented. Until such policies take effect, patients must take the initiative to understand and question where their medical procedures are performed and what implications that location has for their healthcare costs.
Key Questions Answered
What is vertical integration?
Vertical integration occurs when a single company controls multiple stages of the healthcare supply chain. This can manifest as a hospital owning physician practices, an insurer owning a pharmacy benefit manager, or a PBM owning specialty pharmacies.
Why does the same procedure cost more in some locations?
Hospital-owned facilities can bill for a "facility fee" that independent physician offices typically do not charge. This additional fee contributes significantly to higher costs for identical medical services performed in different settings.
Are these mergers reviewed?
Most physician practice acquisitions fall below the federal reporting threshold of $133.9 million and therefore do not undergo antitrust review. This allows a large number of consolidation deals to occur without regulatory oversight.
Can I choose a cheaper setting?
Sometimes. Patients can ask if a procedure can be performed in a doctor’s office rather than a hospital-owned facility and if a facility fee applies. Requesting a written estimate beforehand is also crucial.
How does this affect prescriptions?
Insurers often require members to use pharmacies they own, which can alter medication prices, availability, and how manufacturer copay assistance is applied to deductibles.
Is integration always worse for patients?
Not universally. Some long-established integrated systems, like Kaiser Permanente, are well-regarded. However, studies of hospital acquisitions of physician groups have frequently found increased prices without commensurate improvements in patient outcomes.
Is anything being done?
The FTC has reached settlements with two major pharmacy benefit managers and is in negotiations with a third. Proposals for site-neutral payment policies are also advancing for certain Medicare services, aiming to standardize reimbursement across different care settings.
