Thursday, January 13, 2011

Lessons of History: Health Care Corporate Consolidation and Concentration

Those who do not learn from history are doomed to repeat it.

George Santayana, 1863-1952

Lesson One, In 1980, Arnold Relman’s oft-repeated article on the “Medical-Industrial Complex “ in the New England Journal of Medicine read as follows:

“The most important health-care development of the day is the recent, relatively unheralded rise of a huge new industry that supplies health-care services for profit. Proprietary hospitals and nursing homes, diagnostic laboratories, home-care and emergency-room services, hemodialysis, and a wide variety of other services produced a gross income to this industry last year of about $35 billion to $40 billion. This new ‘medical-industrial complex’ may be more efficient than its nonprofit competition, but it creates the problems of overuse and fragmentation of services, overemphasis on technology, and "cream-skimming," and it may also exercise undue influence on national health policy. In this medical market, physicians must act as discerning purchasing agents for their patients and therefore should have no conflicting financial interests. Closer attention from the public and the profession, and careful study, are necessary to ensure that the ‘medical-industrial complex’ puts the interests of the public before those of its stockholders.”

Lesson Two, 1n 1982, in his classic book The Social Transformation of American Medicine; Paul Starr wrote that five dimensions of corporate health care growth were evolving.

1. Change in type of ownership and control
(the shift from non-profit and governmental organizations to for-profit companies in health care);
2. Horizontal integration (The decline of freestanding institutions and the rise of multi-institutional systems, and the consequential shift in the locus of control from community boards regional and national health care corporations);
3. Diversification and corporate restructuring (the shift from single unit organizations operating in one market to polycorporate and conglomerate entities, often organized under holding companies, sometimes with non-profit and for-profit subsidiaries involved in a variety of health care markets);
4. Vertical integration (shift from single-layer-of-care organizations , such as acute level hospitals, to organizations that embrace the various phases of care, such as HMOs);
5. Industry concentration (the increasing concentration of ownership and control of health care services in regional markets and the nation as a whole).

Lesson Three, 1n 1982, in a Health Affairs article, “The Battle for Control of Health Care,” Victor Fuchs, a Stanford University health economics professor, gave three reasons why management was winning the battle for health care control.
1) Large organizations have access to capital which finances growth;
2) large organizations have more effective mechanisms for dealing with bureaucratic phenomena;
3) large organizations possess the true skills of management – organizing complex technology, maximizing the talents of specialists, and bringing together different people from different professions to deliver service as a team.

Lesson Four, In 1988, In Who Shall Care for the Sick? The Corporate Transformation of Medicine in Minnesota, I wrote.
“Other than capital, ability to cope with bureaucracies, and management skills, managers have another advantage – they are trained to think differently. As physicians, we are educated to concentrate on the individual transaction – the one-on-one encounter with a specific problem in a specific patient. For the most part, we do not stop to think how the impact of each transaction ripples through the system. The professional manager, on the other hand, is taught to think in terms of events as a process with a series of transactions. Each transaction has a cost and a profit- and each is to be minimized or maximized by a systematic, organized, and purposeful approach.”

I predicted large health care corporations would supplant individual physicians, and a physician shortage would ensue.

Lessons of History and the Present

The lessons of history are now culminating in a concentration-consolidation crescendo. Hospital mergers and acquisitions are at record levels; one-half of new physicians are rushing to become hospital employees; private practice is sharply declining; a growing doctor shortage of 50,000 is already upon us; and power is concentrating and consolidating in ever larger health systems, health plans, health corporations, and in government itself – the largest organization of them all.

President Obama's top health care aide Nancy-Ann DeParle, JD, and Ezekial Emanuel, MD, his chief advisor on health policy, wrote in the August 23, 2010 issue of the Annals of Internal Medicine that the new law is "likely to lead to the vertical organization of providers and accelerate physician employment by hospitals and aggregation into larger physician groups." These medical-industrial complex entities will go by various names - hospital corporations, accountable care organizations, medical homes, community health centers, coordinated care organizations, multispecialty clinics, and integrated or aligned health care systems.

Only history will tell if these concentrated and consolidated large organizations will correct the much maligned “fragmentation” of our health system, lower or raise prices, make care more efficient and better, or ease, intensify, or precipitate a physician access crisis. Only time will tell if these concentrations of power end in a government-run system offering universal coverage.


1. Relman, A.S., “The New Medical-Industrial Complex,” New England Journal of Medicine, 303:963-970, 1980.
2. Starr, Paul. The Social Transformation of American Medicine, Basic Books, Inc, 1982.
3. Fuchs, VR, “The Battle for Control of Health Care,” Health Affairs, 1:6-13, 1982.
4. Reece, RL, And Who Shall Care for the Sick? The Corporate Transformation of Medicine in Minnesota, Media Medicus, 1988
5. DeParle, NA, et al, “The Affordable Care Act and the Future of Clinical Medicine, “ Annals of Internal Medicine, August 23, 2010.
6. The Physicians Foundation and Merritt Hawkins, Health Reform and the Decline of Physician Private Practice, October, 2010.
7. Blumenthal, D., and Morone, J., The Heart of Power; Health and Politics in the Oval Office, University of California Press, 2009.

Richard L. Reece, MD. blogs at medinnovationblog and will soon have a website doctorreece,com. His recent books include Obama, Doctors, and Health Reform (IUniverse,com, 2009) and Innovation-Driven Care (Jones and Bartlett, 2007). He works with the Physicians Foundation, a 501C3 organization representing physicians in state medical societies.


Anonymous said...

How many of the changes are essentially crony capitalism, i.e., regulatory barriers that favor 'corporate medicine'?

Doctors want to provide better, comprehensive specialized care? Nope, specialty hospitals are outlawed, especially if they have physician investors.

Doctors want to new and better services? Nope, the CPT codes don't include them, so no pay.

Doctors want to give poor patients a break on payments? Nope, Medicare forces you to collect co-pays.

Doctors don't trust centralized (electronic) health records? Penalties follow if you don't meet all the criteria for 'meaningful use'.

The list of things the government forbids doctors to do goes on and on, each carving out ways that doctors might innovate and challenge the big players.

Richard L. Reece, MD said...

Beautifully said. You have hit multiple nails squarely on the head. It is hard to be innovative when you are shackled by rules, forbidden payment for change, and pushed into an electronic corner with no means of exit.