Read attached case study and answer the questions thoughtfully

362 Cases

The Battle in Boise

One would not expect Idaho, a state with fewer than 2 million residents, to be highlighted nationally as an example of heightened conflict among physi- cians and hospitals. Nevertheless, competitive pressures and the trend of phy- sician employment have profoundly changed the state's healthcare market. In 2012 about half of the 1,400 doctors in southwestern Idaho were employed by the dominant St. Luke's Health System or its smaller competitor, Saint Alphonsus Health System.

St. Luke's is a regional health system consisting of seven medical cen- ters in southwestern Idaho. Its largest facility is a 399-bed hospital in Boise. The system has expanded in the recent past and controls hospitals in Twin Falls (228 beds), Jerome (25 beds), Ketchum (25 beds), and McCall (15 beds) (St. Luke's 2013). The system also has been aggressively preparing itself for the changes that will be instituted by the Affordable Care Act.

Saint Alphonsus, on the other hand, belongs to Trinity Health, a large national system of approximately 30 hospitals. Saint Alphonsus has two facili- ties in southwestern Idaho: the 381-bed Saint Alphonsus Regional Medical Center in Boise and a 152-bed hospital in Nampa (Trinity Health 2013).

By 2012, according to an article in the New York Times, many inde- pendent doctors were complaining that both hospitals in Boise, especially St. Luke's, had too much power and control over their medical practices (Cre- swell and Abelson 2012). The doctors accused St. Luke's of dictating which tests and procedures to perform, how much to charge, and which patients to admit. Independent specialists claimed that their referrals from the physicians employed by St. Luke's had dropped sharply and that patients frequently paid more for treatment at the hospital than they would pay at an independent physician's office.

At the same time, employed physicians voiced growing pressures to meet the financial goals the hospitals had set for them, which in the physicians' opinions often entailed unnecessary tests, procedures, and hospital admissions.

Although the two hospitals have competed for decades, their rivalry has intensified in the past few years. Saint Alphonsus, trying to slow St. Luke's perceived domination, even sought a court injunction to stop St. Luke's from buying physician practices. This legal maneuver claimed that St. Luke's market dominance allowed them to raise prices and to demand exclusive or preferential agreements with insurance companies. As an example, Saint Alphonsus claimed that the price of a colonoscopy had quadrupled and that St. Luke's charges for laboratory work were nearly three times the fees charged by others in the market. Saint Alphonsus argued that St. Luke's dominance was hurting Saint Alphonsus's business and creating steep declines in hospital admissions and referrals from physicians employed by St. Luke's.

Cases 363

St. Luke's justified its actions, saying it was positioning itself to better compete and improve its ability to coordinate patient care when it becomes an accountable care organization (AGO). ACOs require close coordination between hospitals and physicians and are predicted to cut healthcare costs by eliminating unneeded procedures and tests and keeping patients out of the hospital.

As a result, the Federal Trade Commission (FTC) and the Idaho attor- ney general began to investigate St. Luke's. Jeffrey Perry, an assistant director in the FTC's Bureau of Competition, was quoted in the New York Times: "We're seeing a lot more consolidation than we did 10 years ago. Historically, what we've seen with the consolidation in the health care industry is that prices go up, but quality does not improve" (Creswell and Abelson 2012).

The number of independent physicians in the United States is rap- idly decreasing. In 2000, 1 in every 20 physician specialists was a hospital employee. By 2012, 1 in 4 was employed and 40 percent of primary care physicians were hospital employees. By one estimate, Medicare is paying upward of a billion dollars more annually for the same services because hos- pitals can charge more when their doctors are employees. For instance, laser eye surgery can cost $738 when performed by a hospital-employed doctor, compared to $389 when done by an independent doctor. Likewise, an echo- cardiogram can cost $319 if done in a hospital versus $143 if performed in an independent doctor's office.

Employed physicians in Boise also stated that they were strongly encouraged to refer to other doctors working for their employer, even if those doctors were not the best choice of provider for their patients. (Hos- pitals employing physicians have financial incentives to retain referrals and admissions.) In Boise, doctors employed by St. Luke's were pressured to refer only within the St. Luke's system, according to Saint Alphonsus's complaint. Saint Alphonsus claimed a 90 percent drop in admissions to its hospitals by physicians employed by St. Luke's. The complaint also contended that inde- pendent doctors in a nearby community often sent patients 40 miles away for CT scans because of the much higher prices at St. Luke's.

Mr. Pate, St. Luke's CEO, stated in the New York Times that prices for some of their services had increased, but he justified the increase by suggest- ing that the services had been exceptionally underpriced. He believed that overall costs would decline at St. Luke's as a result of physician employment because St. Luke's would be better able to coordinate care, prevent expensive emergency department visits, and eliminate redundant tests. Nevertheless, many area physicians remained skeptical that patients would be better served, especially after the price increases.

Sources: Creswell and Abelson (2012); Jameson (2012).

364 Cases

Questions

1. The Affordable Care Act encourages vertical integration and consolidation to improve the coordination of care. However, too much consolidation can give one organization too much market power. What could be done to balance the need to coordinate care and maintain some level of competition?

2. What are the advantages to directing physician referrals within one system of care? Disadvantages?

3. Why could costs (or billings/charges) increase if services are performed within a hospital setting versus in an independent physician's office?

4. How could virtual integration be used to coordinate care without raising fixed costs?