Physician Practice Consolidation and Prices for Physician Services

Anecdotal reports suggest that the organization of physician practices markets in the U.S. has changed substantially over the last decade with a movement toward greater consolidation of practices.   Provisions of the Affordable Care Act, such as incentives for the creation of Accountable Care Organizations, will likely accelerate such changes.  Economic theory predicts that consolidation in physician markets increases the market power of physicians in negotiating prices, thereby increasing prices for their services.  Yet relatively little evidence exists on how physician organization affects health care markets and prices. 

In this paper, we study the relationship between physician market power and prices paid for physician services by private insurers paying doctors on a fee-for-service basis in the U.S. over the period 2001-2010. We create measures of physician practice concentration by specialty and county using Medicare claims data.  We use the tax identification numbers reported on the claims to identify physician practices.  We then track patient flows into practices in order to construct a county-level Hirschman-Herfindahl Index (HHI) measuring the average competitiveness of the physician practices located in the county.  We match this with county-level data on physician prices from the Truven Health MarketScan® Research Databases. These prices represent allowed fee-for-service payment amounts negotiated by insurers and physicians. 

We conduct panel data regression analyses to estimate the relationship between physician practice HHIs and prices, using different sources of variation to identify the effect.  Regressions include area and year fixed effects, and control for many potential confounders. We also estimate instrumental variables models, using states’ laws on enforcement of non-compete agreements as an instrument for practice concentration.  Relative to standards used by anti-trust authorities, we find high levels of concentration, especially in the most specialized clinical areas.  Results from our preferred models indicate that a move from one standard deviation below the mean concentration level to one standard deviation above increases prices for physician services by 2.9%.  We conclude that economists and policymakers will need to carefully monitor the evolution in the structure of health care markets moving forward.  In particular, it will be important to determine whether a move toward larger physician organizations produces enough benefits in the form of lower cost or higher quality care in the production of health care services to outweigh the costs in the form of higher prices.