Medicare: Increasing Hospital-Physician Consolidation Highlights Need for Payment Reform
Published: 2015-12-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medicare expenditures for HOPD services have grown rapidly in recent years. Some policymakers have raised questions about whether this growth may be attributed to services that were typically performed in physician offices shifting to HOPDs. GAO was asked to examine trends in vertical consolidation and its effects on Medicare.
This report examines, for years 2007 through 2013, (1) trends in vertical consolidation between hospitals and physicians and (2) the extent to which higher levels of vertical consolidation were associated with more E/M office visits being performed in HOPDs. GAO analyzed, using various methods including regression analyses, the most recent available claims data from CMS and survey data from the American Hospital Association, in which hospitals report the types of financial arrangements they have with physicians.
section_title: What GAO Found
paragraphs: Vertical consolidation is a financial arrangement that occurs when a hospital acquires a physician practice and/or hires physicians to work as salaried employees. The number of vertically consolidated hospitals and physicians increased from 2007 through 2013. Specifically, the number of vertically consolidated hospitals increased from about 1,400 to 1,700, while the number of vertically consolidated physicians nearly doubled from about 96,000 to 182,000. This growth occurred across all regions and hospital sizes, but was more rapid in recent years. After hospitals and physicians vertically consolidate, services performed in physician offices, such as evaluation & management (E/M) office visits, can be classified as being performed in hospital outpatient departments (HOPD). Medicare often pays providers at a higher rate when the same service is performed in an HOPD rather than in a physician office. For example, in 2013, the total Medicare payment rate for a mid-level E/M office visit for an established patient was $51 higher when the service was performed in an HOPD instead of a physician office.
The percentage of E/M office visits—as well as the number of E/M office visits per beneficiary—performed in HOPDs, rather than in physician offices, was generally higher in counties with higher levels of vertical consolidation in 2007 through 2013. For example, the median percentage of E/M office visits performed in HOPDs in counties with the lowest levels of vertical consolidation was 4.1 percent in 2013. In contrast, this rate was 14.1 percent for counties with the highest levels of consolidation. GAO's findings suggest that Medicare will likely pay more than necessary for E/M office visits. Such excess payments are inconsistent with Medicare's role as an efficient purchaser of health care services. However, the Centers for Medicare & Medicaid Services (CMS)—the agency that is responsible for the Medicare program—lacks the statutory authority to equalize total payment rates between HOPDs and physician offices and achieve Medicare savings.
section_title: What GAO Recommends
paragraphs: In order to prevent the shift of services from lower paid settings to the higher paid HOPD setting from increasing costs for the Medicare program and beneficiaries, Congress should consider directing the Secretary of the Department of Health and Human Services (HHS) to equalize payment rates between settings for E/M office visits—and other services that the Secretary deems appropriate—and to return the associated savings to the Medicare program. HHS provided technical comments on a draft of this report, which GAO incorporated as appropriate.

section_title: Letter
paragraphs: Medicare expenditures for hospital outpatient department (HOPD)  services have grown rapidly, increasing from $22.4 billion to $36.3 billion  from 2007 through 2013, or about 8.3 percent annually. In comparison,  the national economy grew by an average annual rate of 2.4 percent, and  total Medicare Part B spending grew by an average annual rate of 5.8  percent over the same period. Some policymakers have raised questions  about whether or to what extent the growth in spending on services  performed in HOPDs may be attributed to services that were typically  performed in physician offices shifting to HOPDs. Such a shift could  undermine Medicare’s ability to be an efficient purchaser of health care  services, given that Medicare often pays providers at a higher rate— sometimes twice as much—when the same service is performed in an  HOPD rather than in a physician office.
This difference in Medicare payment rates, based on where a service is  performed, provides an incentive for hospitals to acquire physician  practices and/or hire physicians as salaried employees—financial  arrangements health care experts commonly refer to as vertical  consolidation. Other factors, such as new payment polices that reward  coordination, may also incent vertical consolidation. After hospitals and  physicians vertically consolidate, the same services that were once  reimbursed at a lower total payment rate can be classified as HOPD  services and reimbursed by Medicare at a higher total payment rate. For  one common type of service that can be performed in both physician  offices and HOPDs—evaluation & management (E/M) office visits— several organizations have estimated that equalizing payment rates  between physician offices and HOPDs would save Medicare billions of  dollars, with some estimates predicting savings of nearly $1 billion to $2  billion a year for the Medicare program and beneficiaries.
You asked us to examine trends in vertical consolidation and its effects  on Medicare. In this report, we examine, for years 2007 through 2013,  1.  trends in vertical consolidation between hospitals and physicians  2.  the extent to which higher levels of vertical consolidation were  associated with more E/M office visits being performed in HOPDs  instead of physician offices.
To examine trends in vertical consolidation between hospitals and  physicians from 2007 through 2013, we analyzed data from the American  Hospital Association (AHA) Annual Survey Database,TM in which hospitals  report the types of financial arrangements they have with physicians and  the number of physicians in those relationships. We limited our analysis  to hospitals that served Medicare beneficiaries during this period, which  we identified using Medicare Provider Analysis and Review (MedPAR)  files. Additionally, based on a review of pertinent literature, we identified  and interviewed academic researchers and industry representatives  about the various types of hospital-physician relationships, possible data  sources to track vertical consolidation, and health care system policies  that could be driving consolidation.
To examine the extent to which higher levels of vertical consolidation  were associated with more E/M office visits being performed in HOPDs  instead of physician offices, we first examined trends in the setting where  E/M office visits were performed. Specifically, we analyzed Medicare fee- for-service (FFS) claims from the Medicare Part B Carrier and Outpatient  claim files from 2007 through 2013 to identify where E/M office visits were  performed. To determine the extent to which higher levels of vertical  consolidation were associated with more E/M office visits being  performed in HOPDs rather than physician offices, we conducted two  analyses. First, we ranked counties into quintiles based on the level of  2013 vertical consolidation in each county. Specifically, the counties in  the lowest quintile were considered to have low levels of vertical  consolidation, and the next four quintiles were considered to have  medium-low, medium, medium-high, and high levels of vertical  consolidation, respectively. Within each quintile, we then calculated a  number of statistics, such as the median percentage and number of E/M  office visits per beneficiary performed in HOPDs. For each quintile, we  also calculated descriptive statistics, such as the median risk score, to  determine whether counties with higher levels of vertical consolidation  had sicker or healthier beneficiaries. Second, in order to ensure that the  relationship between consolidation and where E/M office visits were  performed was not spurious, we estimated panel-data regression models.  Our models controlled for county characteristics, such as whether a  county is urban or rural, and for health care market characteristics, such  as the level of competition among hospitals and physicians.
Our analysis has some limitations. While the response rate for the AHA  Annual Survey DatabaseTM was generally high for each year—on  average, about 76 percent of all hospitals responded—and we made  efforts to identify potentially problematic responses, the data on vertical  consolidation was self-reported by hospitals. In addition, we were unable  to make our measure of vertical consolidation reflect the intensity of  vertical consolidation relationships—that is, the number of vertically  consolidated physicians per hospital—because of data limitations.
We took several steps to ensure that the data used to produce this report  were sufficiently reliable. Specifically, we assessed the reliability of the  Medicare claims data we used and the AHA Annual Survey DatabaseTM  by interviewing officials responsible for overseeing and collecting these  data, including officials from the Centers for Medicare & Medicaid  Services (CMS)—the agency that is responsible for the Medicare  program. We also reviewed relevant documentation and examined the  data for obvious errors, such as missing values and values outside of  expected ranges. We determined that the data were sufficiently reliable  for the purposes of this report. See appendix I for more information  regarding our scope and methodology.
We conducted this performance audit from February 2014 through  December 2015 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: E/M Office Visits and Other Services with Total Payment Rates that Vary Across Settings
paragraphs: E/M office visits are frequently performed services during which a  physician or other provider assesses a patient’s health and begins  managing his or her care. These services are predominantly performed  in two settings—physician offices and HOPDs. Medicare FFS paid for  approximately 250 million E/M office visits in 2013.
Under Medicare’s payment policy, Medicare’s total payment rate is higher  when an E/M office visit is provided in an HOPD rather than in a physician  office. When the service is provided in a physician office, Medicare  makes a single payment to the physician at Medicare’s physician fee  schedule non-facility rate. When the service is provided in an HOPD,  Medicare makes two payments—one payment at the physician fee  schedule facility rate and another payment to the hospital, typically at the  hospital outpatient prospective payment system (OPPS) rate. The total of  these two payment rates is higher than Medicare’s total payment rate  when the service is provided in a physician office. For example, in 2013,  the total Medicare payment rate for a mid-level E/M office visit for an  established patient—billed under Healthcare Common Procedure Coding  System (HCPCS) code 99213—was $51 higher when the service was  performed in an HOPD instead of a physician office (see table 1).
While CMS modified the manner in which Medicare pays for E/M office  visits after 2013, large differences in total payment rates continue to exist  for E/M office visits. Beginning in 2014, CMS made the OPPS payment  rate the same for all the HCPCS codes for E/M office visits. However, the  new uniform OPPS payment rate combined with the physician fee  schedule facility payment rate for E/M office visits provided in HOPDs  continues to exceed the payment rate for the same services performed in  physician offices. For example, in 2015, Medicare’s total payment rate for  E/M office visits ranged from $58 to $86 higher when performed in an  HOPD compared to a physician office, depending on the specific HCPCS  code billed.
Many other services, such as imaging and surgical services, are also  reimbursed at a higher rate by Medicare when performed in HOPDs  versus other settings. For example, Medicare’s total payment rate for  magnetic resonance imaging of the lumbar spine without dye (HCPCS  code 72148) was about $29 higher when performed in an HOPD  compared to a physician office in 2013. Furthermore, Medicare’s total  payment rate for cataract surgery (HCPCS code 66984) was about $760  higher when performed in an HOPD compared to an ambulatory surgical  center in 2013.
Some industry groups argue that higher payment rates for services  performed in HOPDs are justified because hospitals treat sicker patients,  incur higher costs due to the need to furnish emergency services, and  provide services that are unavailable elsewhere in the community for  vulnerable populations, such as those dually eligible for Medicare and  Medicaid. However, in separate reports, MedPAC and the Department of  Health and Human Services (HHS) Office of Inspector General have  recommended or suggested that Congress eliminate or reduce  differences in Medicare total payment rates across settings for various  services, including E/M office visits, imaging services, and surgical  services. To date, legislation fully addressing these recommendations  has not been enacted.
section_title: Billing Practices after Vertical Consolidation between Hospitals and Physicians
paragraphs: Recent research suggests that hospitals and physicians are increasingly  vertically consolidated, which allows services to shift from physician  offices to HOPDs. When hospitals and physicians vertically consolidate,  the hospital-owned practice must meet certain criteria to gain what is  known as provider-based status, which allows the hospital to bill the  HOPD rate, thereby increasing Medicare’s total payment rate for the  same service. For example, the physician practice and hospital must be  financially and clinically integrated. Further, although exceptions exist,  physician practices are generally required to be within 35 miles of the  hospital to gain provider-based status. If a practice meets these  conditions, Medicare’s total payment rate for the same service can be  substantially higher despite the fact that the practice’s location, the  physicians who practice there, and the beneficiaries served could be the  same as before consolidation occurred.
section_title: Data Indicate an Increase in Vertical Consolidation between Hospitals and Physicians from 2007 through 2013
paragraphs: Our analysis of AHA survey data shows that from 2007 through 2013, the  number of vertically consolidated hospitals increased by 21 percent.  Specifically, out of the approximately 4,700 surveyed hospitals included in  our study, 1,408 or 30 percent of the hospitals reported having a vertical  consolidation arrangement with physicians in 2007. This number  increased to 1,707 or 36 percent in 2013—an average annual increase of  3.3 percent (see fig. 1).
In addition, AHA survey data also show that the number of vertically  consolidated physicians nearly doubled between 2007 and 2013, with  faster growth toward the end of this time period. Specifically, the number  of these physicians increased from over 95,000 in 2007 to almost  182,000 in 2013—an average annual increase of 11.3 percent (see fig.  1). From 2010 to 2013, the number of vertically consolidated physicians  grew at an average annual rate of 13.9 percent, compared to a rate of 8.8  percent from 2007 to 2010.
Although the increase in the number of vertically consolidated physicians  occurred across a broad range of hospitals from 2007 through 2013,  relatively few hospitals accounted for a large number of these physicians.  AHA’s survey data show that the number of vertically consolidated  physicians increased across all regions of the country; in both urban and  rural areas; and among hospitals of different sizes. However, relatively  few hospitals accounted for a large number of vertically consolidated  physicians. For example, the 372 out of 1,707 vertically consolidated  hospitals that had more than 100 vertically consolidated physicians  accounted for 84 percent of all vertically consolidated physicians but only  22 percent of vertically consolidated hospitals in 2013 (see fig. 2).
Researchers and industry representatives whom we interviewed offered  numerous potential explanations for the recent increases in vertical  consolidation. Some stated that the trend could partially be explained by  higher Medicare payment rates for services performed in HOPDs  compared to other settings, the desire among some hospitals to gain  market share, and changes in health care payment and delivery systems.  For example, accountable care organizations, bundled payment models,  and Medicare’s Hospital Readmissions Reduction Program—which  penalizes hospitals for high rates of readmissions—provide incentives to  vertically consolidate in order to improve care for beneficiaries, maximize  payments, and minimize penalties. Researchers and industry  representatives whom we interviewed also mentioned that the increasing  challenges associated with managing a private physician practice,  including financial and regulatory burdens, could also explain some of the  increase in vertical consolidation. Some of these researchers and  representatives added that hospitals and physicians may be vertically  consolidating to enhance care coordination and improve efficiency.
section_title: Vertical Consolidation Associated with Higher Utilization of Medicare E/M Office Visits in Hospital Outpatient Departments Percentage of Medicare E/M Office Visits Performed in HOPDs Higher in Counties with Higher Levels of Vertical Consolidation
paragraphs: The percentage of E/M office visits—as well as the number of E/M office  visits per beneficiary—performed in HOPDs, rather than physician offices,  was generally higher in counties with higher levels of vertical  consolidation in 2007 through 2013. The beneficiaries from counties with  relatively high levels of vertical consolidation were not sicker, on average,  than beneficiaries in counties with lower levels of consolidation.
Our analysis of AHA and Medicare claims data shows that the percentage  of E/M office visits performed in HOPDs was generally higher in counties  with higher levels of vertical consolidation in 2013. Specifically, after  dividing counties into five equal groups based on their 2013 level of  consolidation, we found that the median percentage of E/M office visits  performed in HOPDs in the group of counties with the lowest levels of  vertical consolidation was 4.1 percent. In contrast, this rate was 14.1  percent for the counties with the highest levels of consolidation (see fig.  3).
For years 2007 to 2012, the percentage of E/M office visits performed in  HOPDs was also generally higher in counties with higher levels of vertical  consolidation, though the association was weaker compared to 2013. For  example, the median percentage of E/M office visits performed in HOPDs  in the group of counties with the lowest level of vertical consolidation was  3.9 percent in 2007, compared to a median of 7.3 percent in the counties  with the highest levels of consolidation.
As part of our analysis, we also calculated the number of E/M office visits  in each county on a per beneficiary basis. We found that the number of  E/M office visits performed in HOPDs per 100 Medicare beneficiaries was  also generally higher in counties with higher levels of vertical  consolidation each year from 2007 through 2013. For example, in 2013  the number of E/M office visits performed in HOPDs per 100 beneficiaries  was 26 for the counties with low levels of vertical consolidation, whereas  the number was substantially higher—82 services per 100 beneficiaries— in counties with the highest level of vertical consolidation. We found  similar correlations in 2007 through 2012. (See app. III for additional  analyses of the number of E/M office visits performed in HOPDs in  counties with different levels of vertical consolidation from 2007 through  2013.)
The association we found between higher levels of vertical consolidation  and higher utilization of E/M office visits in HOPDs remained even after  controlling for differences in county-level characteristics and other market  factors that could affect the setting in which E/M office visits are  performed. Specifically, we developed a regression model that controlled  for county characteristics that do not change over relatively short periods  of time, such as whether a county is urban or rural, and county  characteristics that could change over time, such as the level of  competition among hospitals and physicians within counties. Our  regression model’s results were similar to our initial results: the level of  vertical consolidation in a county was significantly and positively  associated with a higher number and percentage of E/M office visits  performed in HOPDs—that is, as vertical consolidation increased in a  given county, the number and percentage of E/M office visits performed in  HOPDs in that county also tended to be higher. (See app. I and app. II for  more information on our regression model and results.)
subsections: section_title: Medicare Beneficiaries in Counties with Higher Levels of Vertical Consolidation Were Not Sicker Than Those in Counties with Lower Levels of Consolidation
paragraphs: Beneficiaries from counties with higher levels of vertical consolidation  were not sicker, on average, than beneficiaries from counties with lower  levels of consolidation. Specifically, beneficiaries from counties with  higher levels of vertical consolidation tended to have either similar or  slightly lower median risk scores, death rates, rates of end-stage renal  disease, and rates of disability compared to those from counties with  lower levels of consolidation (see table 2). Further, counties with higher  levels of consolidation had a lower percentage of beneficiaries dually  eligible for Medicaid, who tend to be sicker and have higher Medicare  spending than Medicare beneficiaries who are not dually eligible for  Medicaid. This suggests that areas with higher E/M office visit utilization  in HOPDs are not composed of sicker than average beneficiaries.
As we previously stated, the extent of vertical consolidation grew from  2007 through 2013. Coinciding with that growth, we found that E/M office  visits were performed more frequently in the higher paid HOPD setting in  counties with higher levels of vertical consolidation. Such excess  payments are inconsistent with Medicare’s role as an efficient purchaser  of health care services. According to CMS, the agency does not have the  statutory authority to equalize total payment rates between HOPDs and  physician offices. Further, CMS lacks the authority to return the  associated savings to the Medicare program. Therefore, absent  legislative intervention, the Medicare program will likely pay more than  necessary for E/M office visits.
section_title: Conclusions
paragraphs: From 2007 through 2013, the number of vertically consolidated  physicians nearly doubled, with faster growth in more recent years.  Regardless of what has driven hospitals and physicians to vertically  consolidate, paying substantially more for the same service when  performed in an HOPD rather than a physician office provides an  incentive to shift services that were once performed in physician offices to  HOPDs after consolidation has occurred. Our findings suggest that  providers responded to this financial incentive: E/M office visits were  more frequently performed in HOPDs in counties with higher levels of  vertical consolidation. We found this association in both our analysis of  E/M office visit utilization in counties with varying levels of vertical  consolidation and in our regression analyses. Further, our analysis of  2013 health status data suggests that beneficiaries from counties with  higher levels of vertical consolidation, where we found more E/M office  visits performed in HOPDs, were not sicker, on average, than  beneficiaries who lived in counties with lower levels of consolidation,  where we found fewer E/M office visits performed in HOPDs.
While vertical consolidation has potential benefits, we found that the rise  in vertical consolidation exacerbates a financial vulnerability in Medicare’s  payment policy: Medicare pays different rates for the same service,  depending on where the service is performed. Although Medicare aims to  be an efficient purchaser of health care services, CMS has stated that the  agency currently lacks the authority to equalize payment rates between  settings. Further, CMS lacks the authority to return the associated  savings to the Medicare program. Until the disparity in payment rates for  E/M office visits is addressed, Medicare could be expending more  resources than is necessary.
section_title: Matter for Congressional Consideration
paragraphs: In order to prevent the shift of services from physician offices to HOPDs  from increasing costs for the Medicare program and beneficiaries,  Congress should consider directing the Secretary of HHS to equalize  payment rates between settings for E/M office visits—and other services  that the Secretary deems appropriate—and to return the associated  savings to the Medicare program.
section_title: Agency and Third- Party Comments and Our Evaluation
paragraphs: HHS provided technical comments on a draft of this report, which we  incorporated where appropriate. In addition, we provided two  organizations—the American Medical Association and AHA—the  opportunity to review our draft because these organizations represent the  types of providers and care settings that were the main focus of our  report. The American Medical Association had no comments. AHA did not  comment on the main finding of our report—that higher levels of vertical  consolidation were associated with more E/M office visits being  performed in HOPDs instead of physician offices. Further, AHA noted  several reasons why, in their opinion, a service performed in an HOPD  should receive a higher Medicare reimbursement compared to when the  same service is performed in other settings. AHA did comment on two  specific aspects of our report—our characterization of beneficiary health  status and reasons why vertical consolidation occurs. A summary of  these comments and our response are below.
AHA gave several reasons why a service performed in an HOPD should  receive a higher Medicare reimbursement compared to when the same  service is performed in other settings, such as physician offices. For  example, AHA commented that HOPD payment rates are based on  audited cost reports and should not be based on physician payment  rates. We acknowledge that it might be inappropriate to equalize the total  Medicare payment rate for all services. However, Medicare aims to be a  prudent purchaser of health care services, and that goal is not achieved if  Medicare’s total payment rate for certain services—such as E/M office  visits—is substantially higher simply because hospitals have acquired  physician practices. Other entities such as MedPAC have also suggested  that Medicare base its payments for services on the lowest cost, clinically  appropriate setting.
AHA stated that it disagreed with what it interpreted our report to show— that overall, patients treated at HOPDs are not sicker than those treated  at physician offices. Our report does not make such an assertion, but  does include our finding that beneficiaries residing in counties with higher  levels of vertical consolidation were not sicker, on average, than  beneficiaries residing in counties with lower levels of consolidation. Given  that counties with higher levels of vertical consolidation had more E/M  office visits performed in HOPDs, our evidence suggests that areas with  higher E/M office visit utilization in HOPDs were not composed of sicker  than average beneficiaries.
AHA commented that vertical integration—what our report terms vertical  consolidation—is an essential ingredient for successful implementation of  the Patient Protection and Affordable Care Act and that we failed to  adequately account for reasons other than payment differentials that drive  vertical consolidation. Our report notes multiple reasons, identified by the  researchers and industry experts we interviewed, as to why hospitals and  physicians might vertically consolidate. These potential reasons include  certain payment and delivery changes associated with the Patient  Protection and Affordable Care Act. While we identified multiple factors  that may be contributing to increases in vertical consolidation, a full  analysis of the causes or the appropriateness of vertical consolidation  between hospitals and physicians was outside the scope of our work.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of HHS, and the CMS administrator. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: This appendix describes the scope and methodology used to examine our  two objectives: (1) trends in vertical consolidation between physicians and  hospitals from 2007 through 2013 and (2) the extent to which higher  levels of vertical consolidation were associated with more evaluation &  management (E/M) office visits being performed in hospital outpatient  departments (HOPD) instead of physician offices from 2007 through  2013.
subsections: section_title: Examining Trends in Vertical Consolidation between Hospitals and Physicians
paragraphs: To examine trends in vertical consolidation between hospitals and  physicians, we used survey data from the American Hospital Association  (AHA) Annual Survey Database,TM in which hospitals report what types of  relationships they have with physicians and the number of physicians in  those relationships, and Medicare Provider Analysis and Review  (MedPAR) files, which contain information on Medicare inpatient  discharges for short-term acute care hospitals, from 2007 through 2013.  First, we used MedPAR data to identify hospitals that served at least one  Medicare beneficiary from 2007 through 2013. We then took that list of  hospitals—which are identified using their Centers for Medicare &  Medicaid Services Certification Number—and, using the AHA Annual  Survey Database,TM determined whether each hospital was vertically  consolidated with physicians in each year from 2007 through 2013.  Similar to previous research on vertical consolidation, we considered a  hospital to be vertically consolidated if it had one of three types of  relationships with physicians—an integrated salary, foundation, or equity  model. (See table 3 for a description of these three arrangements.)
To identify the number of vertically consolidated hospitals, we counted the  number of hospitals with any one of these three types of relationships. To  identify the number of vertically consolidated physicians, we implemented  edits to modify reported counts of vertically consolidated physicians that  we believed were likely duplicative and then summed the number of  physicians. We identified duplicative survey responses as those where  hospitals reported more than 10 vertically consolidated physicians and  also reported the same number of vertically consolidated physicians as  another hospital in the same hospital system. In such instances, we  assumed that the total number of vertically consolidated physicians  associated with a hospital system was reported multiple times by more  than one hospital.
Additionally, based on a review of pertinent literature, we identified and  interviewed industry representatives and academic researchers. To better  understand hospitals’ perspectives on vertical consolidation, we  interviewed officials from AHA. Similarly for physicians, we interviewed  the American Medical Association and Medical Group Management  Association. We also interviewed numerous academic researchers to  better understand issues such as the various types of hospital-physician  relationships, possible data sources to track vertical consolidation, and  health care system policies that could be driving consolidation.
section_title: Examining the Extent to Which Higher Levels of Vertical Consolidation Were Associated with More E/M Office Visits Being Performed in Hospital Outpatient Departments
subsections: section_title: Bivariate Analyses and Variable Construction
paragraphs: To attribute E/M office visits to a given county, we used the beneficiary  county of residence that was listed on the Carrier and Outpatient file  claims. To determine the total number of E/M office visits that were  performed in a given county, we combined the number of E/M office visits  from the Carrier file and the number of E/M office visits associated with  professional claims in the Medicare Outpatient file. To determine the  number of E/M office visits performed in HOPDs in a given county, we  summed the number of services billed in the Medicare Outpatient file,  including services provided by critical access hospitals. The number of  E/M office visits performed in physician offices was calculated by  subtracting the number of HOPD services from the total number of  services. To calculate the number of services per Medicare beneficiary in  a given county, we used the Medicare Denominator file to identify fee-for- service (FFS) beneficiaries.
To calculate the level of vertical consolidation in each county, we used  the AHA Annual Survey DatabaseTM and MedPAR claims. First, we  calculated the share of MedPAR services that were delivered by vertically  consolidated hospitals in each zip code in which a beneficiary received at  least one service. We then created a weighted average hospital level  vertical consolidation measure using all the zip codes a hospital served in  a year. Finally, we created a weighted average county level vertical  consolidation measure based on the hospitals that served each county.  To calculate control variables for our regression analyses, we used a  similar process. Specifically, we calculated variables for profit status,  public vs. private ownership, hospital size, teaching status, whether a  hospital belonged to a system, and Herfindahl-Hirschman Indexes (HHI)  for hospital and physician market concentration.
To determine how the level of vertical consolidation in a county was  associated with the setting in which E/M office visits were provided before  controlling for other factors, we conducted a bivariate analysis for every  year from 2007 through 2013. Specifically, we ranked counties into  quintiles based on the level of consolidation in each county in 2013. In the  bottom quintile were the 20 percent of counties with the lowest levels of  vertical consolidation; such counties were considered to have low levels  of vertical consolidation. In order, the next four quintiles were considered  to have medium-low, medium, medium-high, and high levels of vertical  consolidation. For 2007 through 2012, we used the same thresholds to  sort counties into the five levels of consolidation. Within each of the five  county groups for each year, we then calculated the 1) median and mean  percentage of E/M office visits that were performed in HOPDs and  physician offices and 2) the median and mean number of E/M office visits  per beneficiary performed in HOPDs, physician offices, and in total.
To determine whether counties with higher levels of vertical consolidation  had sicker or healthier beneficiaries, we calculated descriptive statistics  for beneficiaries who lived in a given county in 2013 using the Medicare  denominator file. Specifically, for each county, we calculated the mean  and median risk score, age, and the percentage of beneficiaries that died,  had end-stage renal disease, were disabled, and were dually eligible for  Medicare and Medicaid. Similar to the bivariate analysis described  above, we then we ranked counties into quintiles based on the level of  vertical consolidation in 2013. Within the quintiles, we calculated the  median and mean values for each of the variables.
section_title: Panel-Data Regression Model
paragraphs: We developed an econometric model to analyze the effect of vertical  consolidation on the setting where beneficiaries received E/M office visits  from 2007 through 2013. Specifically, we analyzed how the level of  vertical consolidation affected 1) the percentage of E/M office visits  performed in HOPDs, 2) the number of E/M office visits performed in  HOPDs per beneficiary, and 3) the total number of E/M office visits per  beneficiary. Our analysis used data for 3,121 U.S. counties from 2007  through 2013.
section_title: Dependent Variables
paragraphs: Yit=log (rit/(1−rit))
Where rit represents the proportion of E/M office visits that were  provided in an HOPD, and the i and t subscripts represent the county  and year, respectively. This formulation has the advantage of  allowing the dependent variable to range over all values for any value  of r between zero and one.
For our models analyzing the number of E/M office visits performed in  HOPDs per beneficiary and the total number of E/M office visits per  beneficiary, our dependent variables were the logarithm of the number  of services per beneficiary.
section_title: Explanatory Variables
paragraphs: Our key explanatory variable was the level of vertical consolidation.
Our hypothesis was that higher levels of vertical consolidation would  be associated with a higher percentage and number of E/M office  visits being performed in HOPDs.
Our model controlled for horizontal physician and horizontal hospital  concentration, using HHIs. We hypothesized that greater  concentration of market power among physicians would lead to E/M  office visits being provided in physician offices rather than HOPDs, all  else being equal. In contrast, we hypothesized that greater  concentration of market power among hospitals would lead to E/M  office visits being provided in HOPDs rather than physician offices, all  else being equal.
Our model included hospital characteristic variables to account for  possible differences in hospital size and institutional arrangements.  Specifically, our model included variables for the following hospital  characteristics: profit status, public vs. private ownership, hospital  size, teaching status, and whether a hospital belonged to a system.
Our model included time fixed effects (a dummy variable for each year  in the analysis). In addition, we included county fixed effects (a  dummy variable for each of the 3,121 counties in the analysis). These  county fixed effects assist in controlling for unobserved heterogeneity.
section_title: Model Specification
paragraphs: The regression analysis used a panel data model for 3,121 U.S. counties  for the years 2007 through 2013 as follows:
Yit is the dependent variable for county i in year t. For the model  analyzing the percentage of E/M office visits performed in HOPDs, the  dependent variable is the logit transformation of the percentage of  is the percentage of E/M office visits in an HOPD. For our models  analyzing the number of E/M office visits performed in HOPDs per  beneficiary and the total number of E/M office visits per beneficiary,  services in an HOPD setting—that is, Yit=log (rit/(1−rit)), where ri t,  Yit=log (sit), where sit, is the number of services per Medicare  beneficiary. c is a fixed effect or dummy variable for county i. fis a fixed effect or dummy variable for year t.  are the hospital-characteristic variables and market structure  variables, such as horizontal physician HHI, horizontal hospital HHI,  and vertical consolidation, associated with county i at time t, and α  are the parameters associated with each of these variables. εit are the error terms.
We used xtivreg2 in STATA to estimate our models. Our parameter  estimates are consistent given the assumptions of our model. Our  standard errors are robust to heteroskedasticity and clustering at the  county level.
The hospital characteristics, the horizontal hospital HHI, and the  vertical consolidation measures were calculated using MedPAR data,  while the dependent variable was calculated using Outpatient and  Carrier file data. This separation reduced the likelihood that these  market characteristics were correlated with unobserved determinants  of the setting where beneficiaries received E/M office visits. However,  the physician HHI measure was calculated using Carrier file data, so  we tested this variable for endogeneity.
section_title: Limitations
paragraphs: Our study has some limitations. While the response rate for the AHA  Annual Survey DatabaseTM was high for each year—about 76 percent— the data on vertical consolidation was self-reported by hospitals. In the  process of examining the AHA Annual Survey Database,TM we identified  responses that we believe were likely duplicative. However, our ability to  identify and fix duplicative responses is limited because we were not able  to directly contact survey respondents based on our data licensing  agreement. Second, because the AHA Annual Survey DatabaseTM does  not contain identifying information for vertically consolidated physicians,  we used hospital inpatient markets to proxy vertically consolidated  physician markets. Although this is a limitation, we conducted a sensitivity  analysis with HOPD markets, and our results held. Further, we believe  there are several reasons why vertically consolidated physician markets  should substantially overlap with hospital inpatient markets. For example,  physician practices generally must be located within 35 miles of its parent  hospital to bill as an HOPD, and many payment reforms—such as  accountable care organizations, bundled payments, and Medicare’s  Hospital Readmissions Reduction Program—reward hospitals for  managing their patients across inpatient and outpatient settings. Third,  vertically consolidated hospitals varied widely in terms of the number of  vertically consolidated physicians associated with them. While our  bivariate and regression analyses only consider a hospital vertically  consolidated if it has more than 10 vertically consolidated physicians, we  were unable to make our measure of vertical consolidation reflect the  intensity of vertical consolidation relationships—that is, the number of  vertically consolidated physicians per hospital—because of data  limitations. Finally, time lags may occur between vertical consolidation  and our measures of how often E/M office visits are performed in an  HOPD. A hospital can purchase physician practices and not convert them  to HOPDs immediately or ever. Consequently, these lags may be long  and variable, and we have no systematic data to measure the timing of  these possible effects.
section_title: Data Reliability and Audit Standards
paragraphs: We took several steps to ensure that the data used to produce this report  were sufficiently reliable. Specifically, we assessed the reliability of the  Centers for Medicare & Medicaid Services data and the AHA Annual  Survey DatabaseTM we used by interviewing officials responsible for  overseeing these data sources. We also reviewed relevant  documentation and examined the data for obvious errors, such as  missing values and values outside of expected ranges. We determined  that the data were sufficiently reliable for the purposes of this report.
We conducted this performance audit from February 2014 through  December 2015 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: Full Regression Results
paragraphs: This appendix provides more detailed results for the models we used to  analyze the effect of vertical consolidation on the setting where  beneficiaries received E/M office visits from 2007 through 2013.
Counties with higher levels of vertical consolidation were significantly  more likely to have a higher proportion of their E/M office visits  performed in HOPDs. These counties also had a significantly higher  rate of utilization of E/M office visits in HOPDs. However, those same  counties also had a significantly lower rate of overall utilization of E/M  office visits, although the size of this negative association was  smaller. Specifically, all else being equal, our models predict that a  county with no vertical consolidation going to completely consolidated  would experience: an increase in the percent of E/M office visits performed in HOPDs  of 2.7 percentage points on average; an increase in the number of E/M office visits per beneficiary  being performed in HOPDs of approximately 30 percent on  average; and a decrease in the total number of E/M office visits per beneficiary  of less than 2 percent on average.
We used a set of medical service supply variables from the Area  Health Resource Files as instruments: the number of federal and non- federal active MDs as a percentage of the total population, total  hospital beds per capita, and whether the area was designated as a  health care professional shortage area for primary care physicians.
In our models of the percentage of E/M office visits performed in  HOPDs and total number of E/M office visits per beneficiary, the  C-test accepted the null hypothesis of exogeneity of the physician  horizontal Herfindahl-Hirschman Index (HHI) variable, and the  Hansen J-statistic accepted the null hypothesis that our  instruments were valid. The Sanderson-Windmeijer test also  supported our use of these instruments, by rejecting the null  hypothesis of weak instruments.
In our model of the number of E/M office visits performed in  HOPDs, the Hansen J-statistic accepted the null hypothesis that  our instruments were valid, and the Sanderson-Windmeijer test  rejected the null hypothesis of weak instruments. However, the C- test rejected the null hypothesis of exogeneity of the physician  horizontal HHI variable, so we report our instrumental variable  estimates for our log of utilization of E/M office visits performed in  HOPDs.
A full set of results is provided in table 4.
section_title: Appendix III: Evaluation & Management Office Visit Utilization by Level of Vertical Consolidation, 2007 through 2013
paragraphs: The percentage of E/M office visits—as well as the number of E/M office  visits per 100 beneficiaries—performed in HOPDs was generally higher in  counties with higher levels of vertical consolidation from 2007 through  2013 (see tables 5 - 11).
section_title: Appendix IV: Association between Vertical Consolidation and Overall Utilization of Evaluation & Management Office Visits across All Settings
paragraphs: To examine whether vertical consolidation affected total utilization, we  examined the association between vertical consolidation in a county and  the total number of evaluation & management (E/M) office visits per  beneficiary and found mixed results. Specifically, while counties with the  lowest level of vertical consolidation had higher total utilization of E/M  office visits compared to counties with the highest levels of vertical  consolidation, total utilization of E/M office visits neither increases nor  decreases consistently as the level of vertical consolidation increases in a  county in our bivariate analysis. For example, in 2013, the median  number of total E/M office visits per 100 beneficiaries decreased from 658  among the counties with the lowest levels of vertical consolidation to 580  among counties with a medium level of vertical consolidation; however,  among counties with high levels of vertical consolidation, the number  increased to 601. Furthermore, unlike our results examining the setting  in which E/M office visits were performed, our results changed when we  tested an alternative measure of vertical consolidation. For example,  using the alternative specification, the median number of total E/M office  visits per 100 beneficiaries in counties with the highest level of vertical  consolidation was at least 10 services per 100 beneficiaries higher than in  counties with the lowest level of consolidation in 4 out of 7 years from  2007 through 2013.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact above, Jessica Farb, Assistant Director; Todd  Anderson; Krister Friday; Michael Kendix; Richard Lipinski; Brian  O’Donnell; Dan Ries; Said Sariolghalam; Eric Wedum; and Jennifer  Whitworth made key contributions to this report.