What's Behind the Surge of Healthcare Consolidations?

Last year, 95 American hospitals merged or were acquired -- a 40 percent increase from 2010. Over roughly the same period, the percentage of physician practices owned by hospitals doubled -- from about 30 percent to nearly 60 percent.

This rapid consolidation among U.S. healthcare providers is dizzying to behold, even for those who have spent careers in healthcare. Its effects are only starting to be felt, but could be profound.

A main reason for the trend is basic economics. Annual spending on healthcare has outpaced general inflation for many years now, but physician reimbursement has not kept pace, particularly from the public sector. Caught in the middle of this financial squeeze, healthcare providers have turned to mergers and acquisitions as a way to cut costs, eliminate waste, and generate new revenue.

Another explanation is the Affordable Care Act, which, although it did not cause the trend, has certainly accelerated it. The ACA brought millions more patients into doctors' offices by expanding insurance coverage, but neither the expanded Medicaid plans nor the health plans selected by consumers on the insurance exchanges reimburse physicians as much as the average commercial health plan outside of the exchanges.

But there is another way the ACA has accelerated the consolidation of healthcare providers that has received relatively little attention: its payment reforms.

Under the traditional "volume-based" fee-for-service model, doctors were paid set amounts for the different medical services they performed. This was believed to drive too much unnecessary care, however, and so new "value-based" reimbursement models were included in the ACA and are increasingly being implemented by private insurers.

These value-based reimbursement arrangements tie a portion of physicians' earnings to specific "quality of care" measures. (There are dozens of such quality measures, but examples include the percentage of patients with diabetes who maintain their recommended blood sugar levels, and the percentage of patients released from a hospital who are readmitted within 30 days for the same condition.)

What this means for doctors is that part of their compensation is now determined by what patients do after leaving their care, or by care that is provided to their patients by other doctors.

Physicians have reacted to this fundamental change in various ways. Many have chosen to take more "ownership" of their patients' care by joining together to form large, multidisciplinary group practices. Others have affiliated with hospitals or health systems, or have volunteered to participate with payers and other healthcare providers in risk-sharing arrangements -- including Accountable Care Organizations and patient-centered medical homes -- in which coordination among providers at different sites of care is incentivized by the payer.

For providers, an added benefit of these kinds of practice arrangements is that they help defray the cost of expensive investments in information technology needed to comply with value-based reimbursement, such as electronic medical record systems and sophisticated billing and reporting tools.

Other physicians, especially younger ones, have opted for the relative security and stability of becoming employees at a hospital or health system rather than setting up their own independent practice.

As a result of these trends, small, independent medical practices that once formed the foundation of American healthcare -- like the one my father, an ophthalmologist, owned -- are gradually disappearing.

Moreover, in large, institutional settings, where healthcare is gradually shifting, the way care is delivered is also undergoing a change. Physicians' treatment decisions are increasingly influenced, if not mandated, by disease-specific protocols, as health systems attempt to standardize care according to best practices described in the medical literature.

Although it is not yet clear how much longer this wave of consolidation among healthcare providers will continue -- one factor may be whether judges, regulators or policymakers express antitrust concerns -- it already has led to significant changes in the American healthcare system, the full effects of which may not be felt for some time.