When people think of Medicare, they usually think of the government health insurance program for seniors over age 65. They may even recall that the program also extends to the disabled who are under 65. Few, though, see it as a program that big business and their D.C. lobbyists can use to drive smaller competitors out of business.
But that’s a perspective shared by many individuals who work in physician-owned specialty hospitals (PSHs). For years the “Big Hospital Lobby” waged war on physician-owned specialty hospitals, trying to drive the latter out of business by making it illegal for them to treat Medicare patients, a major revenue source.
With the March 2010 passage of the Patient Protection and Affordable Care Act (a.k.a. “ObamaCare”), the Big Hospital Lobby finally succeeded. ObamaCare prevents any physician-owned specialty hospitals built after 2010 from treating Medicare patients. Additionally, those PSHs already in existence will no longer be able to expand unless they jump through nearly insurmountable regulatory hoops.
By limiting the access that physician-owned specialty hospitals have to Medicare, the big hospitals, which are often bureaucratic, have protected themselves from smaller, quicker competition. In so doing, they have choked off a major source of efficiency and innovation in the health care system and limited patients’ options.
ObamaCare all but guarantees that no new physician-owned specialty hospitals will be built.
The physician-owned specialty hospitals that have emerged since the early 1990s tend to specialize in one of three areas: cardiac surgery, orthopedic surgery, and general surgery. Cardiac surgery is, of course, surgery on the heart, such as bypass surgery or angioplasty. Orthopedic surgery targets conditions of the musculoskeletal system and includes surgeries such as hip and knee replacements, spine fusion, and carpal tunnel surgery. General surgery is a specialty that deals with everything between the neck and the waist, with the exception of the cardio-vascular system. (Some general surgeons are qualified to perform vascular surgery and occasionally do so. Otherwise, vascular surgery is performed by vascular surgeons.) It includes many types of cancer, colorectal, and trauma surgeries.
Physicians who want to start a PSH usually join together as a group, putting up their own money. Often the physician group will partner with a private firm that specializes in opening PSHs. In that case, the physicians and the private firm will each get an ownership share of the PSH. Each individual physician receives an ownership share based on how much he or she invested in the PSH. Most physicians who invest in a PSH have ownership shares of about 2%, although some shares are as high as 15%, according to 2005 government statistics. At the end of the year, each physician-owner gets a percentage of the PSH profits based on his ownership share.
Regina Herzlinger (at left), a business professor at Harvard who has studied medical specialization in depth, argues that PSHs should be allowed to become the wave of the future in health care. Many businesses have become specialized, focusing on a few tasks and contracting out other services when needed. This enables them to do a few things well, providing better quality and lower prices for consumers.
Herzlinger laments the fact that there are so few PSHs:
These results are unfortunate: Specialized healthcare facilities, partially owned by entrepreneurial physicians, represent the best hope for a higher-quality and higher-productivity healthcare system. The specialization integrates care that consumers must now struggle to obtain from a system organized by separate providers. Along the way, it reduces costs. And ownership provides an important additional incentive for physicians to provide the best value for the money. (Regina E. Herzlinger, “Specialization and Its Discontents: The Pernicious Impact of Regulations Against Specialization and Physicians Ownership on the US Healthcare System,” Circulation, 2004, Vol. 109, No. 20, pp. 2376-8.)
The hospitals that most Americans are accustomed to are what are most appropriately called “general hospitals.” They are often large institutions and highly bureaucratic. They tend to practice many types of medicine under one roof, including primary care, emergency care, many types of surgery, radiation treatment, imaging services, laboratory services, psychiatry, physical therapy, palliative care, diabetes management, maternity care, etc.
Thanks to ObamaCare, patients will have little opportunity to choose between physician-owned speciality hospitals (PSHs) and general hospitals. Here’s why: to receive payments from Medicare for treating Medicare patients, a hospital must have a “Medicare provider number.” ObamaCare prevents any hospital in which physicians are part owners from receiving a Medicare provider number after December 31, 2010. Physician-owned specialty hospitals treat many Medicare patients since the elderly are disproportionately the ones receiving cardiac, orthopedic, and cancer surgery. This means that PSHs receive a large portion of their revenue from Medicare. Obviously, physicians won’t start new PSHs if a major source of revenue is no longer available.
The new restrictions all but end a major source of innovation in the health care system
When businesses face new competition—as general hospitals faced from PSHs—they have two basic recourses. They can find ways to lower their costs and improve their products, thereby preventing their competitors from drawing away customers. Or they can ask politicians to pass laws and regulations that will drive their competition out of business. Since Medicare is such a large portion of all medical payments, the second recourse is the preferred option for those already established in the business of health care. ObamaCare was the culmination of a decade-long effort by the Big Hospital Lobby—represented by the American Hospital Association and the Federation of American Hospitals—to use Medicare to stop PSHs.
Of course, companies will almost never admit that they are using government to drive their competition out of business. The resulting negative press could undermine the effort. Rather, they dress it up in the rhetoric of the “noble purpose.” As one supporter of PSHs put it, the Big Hospital Lobby “hides behind their community mission” in order to “stifle competition.” (Mark Sherman, “Medicare bill clamps down on physician-owned specialty hospitals," Associated Press, November 26, 2003.)
The Big Hospital Lobby advanced two main arguments to make its case that PSHs endangered public welfare. First, the Lobby claimed that physician ownership of a hospital was a “conflict of interest.” A physician who profited from his ownership of a hospital might refer a patient for surgery, even if the patient didn’t need surgery. This would result in not only unnecessary surgeries, but an increase in the total number of surgeries. That would increase costs for Medicare and, ultimately, the taxpayer.
Second, the Lobby argued that physician owners would “cherry pick” their patients, referring relatively healthier patients and those with more generous insurance plans to their PSHs. Both result in higher profits. That would leave general hospitals in an even worse financial condition since they would be stuck with the sicker and thus more costly patients and the ones with low-paying insurance like Medicaid or no insurance at all.
In short, PSHs should be stopped because they harmed both patients and the public. Ironically, PSHs had emerged only because Congress had already cut physicians’ investment opportunities.
The Rise of Physician-Owned Specialty Hospitals
While there are many factors that led to the rise of PSHs, three seem to be key. The first was the growing authority of hospital administrators. During the 1980s and 1990s, hospitals consolidated, leading to more authority for hospital administrators and reduced autonomy for physicians. By and large an independent-minded lot, physicians have desired greater control over their practice, something they can achieve when they are part owners of a hospital.
Another factor was the implementation of new price control systems that Medicare established in the 1980s and 1990s for paying hospitals and physicians. These systems overpay for some types of medical procedures while underpaying for others. Cardiac and orthopedic care are areas where Medicare appears to overpay. One pair of scholars argues that the rise of PSHs is a “market signal” that Medicare is overpaying for certain types of medical procedures. (Jack Hadley and Stephen Zuckerman, “Physician-Owned Specialty Hospitals: A Market Signal For Medicare Payment Revisions,” Health Affairs, October 25, 2005) Nevertheless, the introduction of Medicare’s price control system inadvertently resulted in new financial opportunities for physicians.
At one time the health care system was teeming with such opportunities for physicians, but Congress circumscribed many of them with laws passed in 1989 and 1993. In the late 1980s controversy erupted over “physician self-referral,” the practice of a physician referring a patient to a medical facility of which the physician is part owner. Around the country, physicians were investing in clinical laboratories and imaging centers. The debate centered on the ethics and costs of such arrangements. Some theorized that physician-investors would have an incentive to refer patients for unnecessary tests. That would, in turn, result in greater costs for both private insurance and government health care programs. Research conducted at the time, including two studies by the Government Accountability Office, found that physicians who were owners of medical facilities referred patients to those facilities for tests at a higher rate than did non-owners.
ObamaCare prevents any hospital in which physicians are part owners from receiving a Medicare provider number after December 31, 2010.
Congress soon took an interest in clamping down on physician self-referral, since more medical tests meant higher costs for programs like Medicare. The main politician in this effort was Representative Fortney “Pete” Stark (D-CA). In 1972, Stark successfully ran for the House of Representatives from Oakland, California. By the time physician self-referral became an issue in the late 1980s, Stark chaired the Health subcommittee of the Ways and Means Committee, despite having no background in the health care field.
Maybe Stark was chosen because of his empathy for patients. Writing in the L. A. Times, Dr. Jane M. Orient noted that Stark (pictured below) once “explained to an audience of managed-care administrators, patients either consider themselves ‘invincible’ when feeling well or they are ‘absolutely irrational, brain dead, sniveling, begging, and fantasizing ills and pains.’”
Or maybe it was his sympathetic ear for physicians. Referring to physician complaints about low Medicare reimbursement, he replied, “Last time I looked in my district, I didn’t see any Porsche dealers going out of business because the doctors are all going broke.” This was the man that Congress tasked with protecting patients from physicians who owned medical facilities.
Whose interest was really being served by restricting the ability of physicians to own medical facilities? “There’s been no patient uproar over this stuff. Self-referral is a political issue, not a quality or cost issue,” said Angus Everton, general counsel for the Medical and Chirurgical Faculty of Maryland. In fact, the research conducted on the issue seemed to focus exclusively on the rate at which patients were referred to these facilities, not whether patients were harmed or had complaints. Indeed, patients didn’t seem to be complaining much at all.
The people who did bellow were the ones competing against physician-owned laboratories and imaging services. The American Clinical Laboratory Association, the American Society for Clinical Laboratory Science, and the American Society of Clinical Pathologists supported Stark’s efforts. It was a case of established businesses using government to drive out the upstart competition.
There were surely other ways of dealing with physician self-referral than banning physician ownership of laboratories and imaging centers. Requiring physicians to disclose their ownership interest to patients and giving Medicare and Medicaid patients a financial incentive to think twice about whether they needed a particular test would have been worth a try.
But that wouldn’t have pleased the groups representing non-physician-owned services since the physician-owned competition would still be in the marketplace. Further, it would have been unacceptable to a politician like Stark who is so much better suited to make decisions about health care than sniveling patients and greedy physicians. So, backed by industry groups, he succeeded in passing what became known as the “Stark Laws.” The first part, passed in 1989, banned Medicare from paying for any laboratory services that were the result of physician self-referral. The second part, passed in 1993, extended the ban to other types of services, including imaging and radiology services, physical therapy services, and durable medical equipment and supplies. It also applied the ban to the other major federal health care program, Medicaid.
The passage of the Stark laws didn’t mean that physicians stopped being independent-minded or entrepreneurial. The new restrictions only meant that laboratories and imaging centers became less attractive options for their efforts. Instead, physicians began focusing on PSHs because of a loophole in the Stark Laws known as the “whole hospital exception.” This loophole allowed physicians who were part owners of a whole hospital to self-refer Medicare patients to that hospital. The theory behind this exception was that since hospitals were usually so big, the ownership share that any physician was likely to have would be tiny. With a tiny ownership share, “the financial incentive to self-refer would be insignificant.” (David Schactman in Health Affairs, May/June 2005) As Charles Kahn, president of the Federation of American Hospitals, would later complain, “Today’s physician-owned model was virtually unknown then. Lawmakers could not anticipate that this exception would spur the proliferation of [PSHs.]”
The first time that general hospitals actively tried to quash PSHs occurred in Ohio in 1997. Two years earlier, the state legislature had begun undoing the “certificate-of-need” law, a law that requires a hospital to get the approval of state authorities before it can open its doors. Without the certificate-of-need law, it was much easier to start a PSH in Ohio. By 1997, cardiac surgeons in Dayton were partnering with MedCath, a company that specialized in developing PSHs, to open the Dayton Heart Hospital. This caused great consternation among the general hospital community. Paul Lee, a hospital lobbyist in the state capitol of Columbus said that PSHs threatened “the viability of our not-for profit health care system in Ohio. Almost every hospital, and I’ve talked to dozens, is concerned about this issue.” (Crain’s Cleveland Business, December 1997)
By late 1997, the Ohio Hospital Association (OHA), which represented over 180 general hospitals, was calling on the state legislature to impose a two-year moratorium on new hospital construction in the state. But the OHA faced opposition from both the Ohio Medical Association, which represented Ohio physicians, and health insurance companies. The insurance companies saw physician-owned specialty hospitals as a way to lower the price that they paid for health care. Furthermore, the state legislature seemed to be in no mood to revisit the issue of the certificate-of-need law, having worked to repeal it just two years earlier. This time, the general hospitals were unsuccessful in shutting down the competition. [Photo below: Physicians at Dayton Heart Hospital].
David vs. Goliath
This was only the opening skirmish in long war that would soon play out on the national stage. The organizations representing general hospitals would spend vast sums over the better part of decade on research, public relations, and lobbying with the goal of shutting down PSHs. There were many times when they appeared on the verge of delivering a crushing defeat, only to see the groups representing PSHs narrowly escape.
Unfortunately, a relatively small group like PSHs can seldom resist an immensely powerful political force. General hospitals finally succeeded in landing what may have been the fatal blow against PSHs on March 21, 2010 when ObamaCare became law.
In retrospect, it’s amazing that PSHs successfully resisted as long as they did. After all, the American Hospital Association and Federation of American Hospitals are behemoths. According to the website Opensecrets.org, the Federation of American Hospitals spent about $23.6 million on lobbying Congress and almost $1.6 million on campaign contributions from 2001-2010. During that same period, the American Hospital Association spent just over $159 million lobbying Congress and $8 million on campaign contributions. By comparison, the lobbying organization for PSHs, Physician Hospitals of America, spent $1.8 million on lobbying and $851,9000 on campaign contributions. MedCath spent $2.7 million and $149,134, respectively, on those items. In money terms, the organizations fighting for PSHs were outgunned.
The American Hospital Association and the Federation of American Hospitals’ biggest source of power is the number of potential voters they represent. According to the Bureau of Labor Statistics, general hospitals employ over 5.6 million people in the U.S., an average of nearly 112,000 voters per state and 12,800 per Congressional district. When the Big Hospital Lobby speaks, senators and representatives usually listen.
In 2000 Rep. Stark was already signaling that he was eager to fight on behalf of the Big Hospital Lobby. In July, he sent a letter to the Office of the Inspector General at the Department of Health and Human Services asking for an investigation of some of the PSHs that were owned by MedCath. The following year he partnered with Representative Jerry Kleczka (D-WI) [at left] in authoring a bill that would put limits on PSHs. The House of Representatives, though, was controlled by Republicans and Stark was a Democrat. “This is going to be a delicate political strategy,” he said of getting his bill passed into law. “My chances as a member of the minority are very slim unless the American Hospital Association takes it on as its cause.”
In 2002 the American Hospital Association put together a task force on PSHs after hearing complaints from many of their members around the country. The policy director at the American Hospital Association, Ellen Pryga, complained, “This is not a level playing field for hospitals.”
She had a point. Nearly all general hospitals have emergency rooms, and under federal law hospitals with emergency rooms must treat all patients regardless of ability to pay. That means those hospitals must treat patients who are either indigent or are on Medicaid and, because of Medicaid’s low reimbursement rates, can’t find physicians elsewhere to treat them. Many PSHs did not have emergency rooms and so did not have to treat such patients.
As long as general hospitals had to take indigent and Medicare patients, perhaps it was only fair that PSHs be required to take some of those patients as well. But the Big Hospital Lobby wasn’t interested in creating a more level playing field. Rather, it wanted to drive the competition completely out of the game.
This became evident when the American Hospital Association task force issued its recommendations in late 2002. Chief among them was a proposal to change the Stark Laws so that physicians could no longer use the “whole hospital exception.” That would effectively prevent physicians from referring patients to hospitals they owned making it next to impossible for physicians to own hospitals.
The first major blow to physician-owned specialty hospitals came in November 2003 when Congress completed work on the Medicare Prescription Drug, Improvement, and Modernization Act. During the negotiations over the bill, Sen. John Breaux (D-LA) inserted an amendment that would have prevented physicians from referring Medicare or Medicaid patients to hospitals that they owned. Both the American Hospital Association and the Federation of American Hospitals lobbied hard for the amendment. The American Hospital Association flew 100 hospital administrators to Washington to meet with members of Congress and spent $100,000 on advertising. Reportedly, at one point the American Hospital Association threatened to withhold its endorsement of the bill if the amendment was not included.
In the end, Physician Hospitals of America and other groups lobbying on behalf of PSHs got lucky. They had a key ally in another Louisiana politician, Rep. W.J. “Billy” Tauzin (R-LA), who was chair of the Energy and Commerce Committee. Its members played a large role in drafting the Medicare Prescription Drug Act. Tauzin, who believed that the increased competition from physician-owned specialty hospitals was good for the health care system, managed to negotiate a compromise with Breaux. Beginning in 2004, physicians were forbidden from making new investments in PSHs for 18 months while the Center for Medicare and Medicaid Services (CMS) studied the effect of PHSs on general hospitals. (Senators Grassley (R-IA) and Max Baucus (D-MT) would win another six month moratorium in 2006 while CMS developed a plan for dealing with PSHs.)
The Big Hospital Lobby “hides behind their community mission” in order to “stifle competition."
Yet it seemed analogous to studying the effect a few drops of water would have on the Great Lakes. In 2003, there were over 4,800 general hospitals in the U.S. There were barely 100 specialty hospitals with another 26 under development, and of those, only about 70% were owned by physicians. Furthermore, 22 states had no PSHs, and another 18 had no more than two. The threat that PSHs posed to general hospitals seemed puny.
So what had the Big Hospital Lobby so worried? Why was making the destruction of PSHs such a priority? After all the noise that the Big Hospital Lobby had made about the issue, most general hospitals were aware of potential competition from PSHs—and if they weren’t, undoubtedly the American Hospital Association and Federation of American Hospitals could alert them. Being forewarned, surely general hospitals could prepare for new competition and find new strategies for dealing with it.
Unfortunately, general hospitals are rife with inefficiency. Consider:
- One academic study measured the efficiency of transferring patients between different units of a hospital by examining how the process was affected by administrative delays, unavailable beds, unavailable staff, the readiness of units to receive patients and breakdowns in communication. The process was over 87% inefficient. (Nursing Economics, July-August 2005 pp. 157-164)
- An article in Health Services Research found that hospital “outputs”—patient admissions, outpatient visits, surgeries, and births—could be increased 26% by eliminating inefficiency. (October 2008, Vol. 43, No. 5, Part II, pp. 1830-1848)
- Different hospital departments often do not relay information effectively to each other. One study in the Journal of Healthcare Management suggests that hospitals waste $12 billion annually on inefficient communication. (July-August 2010, Vol. 55, No. 4, pp. 419-431)
- A study examining “hospitalists”—physicians who focus solely on the management of hospital inpatients—found that hospitals that employ them could reduce the average patient length of stay by about 37% and average per admission costs by almost 24%. (Health Services Research, June 2003, Vol. 38, No. 3, pp. 905-918)
- Inefficiency affects patient mortality. An article in Health Economics found that a one-percentage point reduction in a hospital’s cost inefficiency was associated with one fewer death per 10,000 patient discharges.(2006, Vol. 15, No. 4, pp. 419-431)
With general hospitals rife with inefficiency, it’s not hard to see why they found PSHs so threatening. In the long run, plodding dinosaurs would be hard-pressed against smaller, quicker competitors. To survive, general hospitals would have to do more than merely adapt; they would have to endure an upheaval, drastically changing the way they operated. Better to stop the competition before it proliferated.
Friends in High Places
The hospital industry had already been through big changes during the decade of the 1990s. Financial pressures resulted in a wave of hospital mergers and consolidations. Hospital markets became more concentrated with more hospitals being owned by fewer companies. This resulted in the number of hospitals beds nationwide being reduced 72,000 between 1989-1999. (Hospital Statistics, 2001, Chicago: American Hospital Association.)
By having more market power, hospitals benefited by having stronger negotiating power with insurance companies. The prices hospitals charged increased, as prices often do when there is less competition. One study found that every 10% increase in market concentration among hospitals resulted in a 6.6% increase in hospital prices. (Cory Capps and David Dranove, “Hospital Consolidation And Negotiated PPO Prices,” Health Affairs, March/April 2004, Vol. 23, No. 2, pp. 175-181.)
By contrast, more competition results in lower prices, something that the people running general hospitals would be less than eager to embrace. And that’s exactly what they would get if PSHs proliferated. That prospect must have been alarming for the Big Hospital Lobby.
But it needn’t have been worried. Its actions during the Medicare Prescription Drug Act had attracted the attention of Senators Grassley, a Republican, and Max Baucus, a Democrat (pictured at right). Both would soon become allies of the Big Hospital Lobby. Since both men were their parties' top senators on the Finance Committee, which has sole jurisdiction over Medicare in the Senate, the Big Hospital Lobby was assured that the chair of that powerful committee would be a friend for the foreseeable future.
The Big Hospital Lobby probably couldn’t have asked for better allies on the Finance Committee. Neither Grassley’s state of Iowa nor Baucus’ Montana had any physician-owned specialty hospitals. So, the only voting hospital workers in Iowa or Montana that Grassley or Baucus would ever hear from would be those who worked for general hospitals.
In 2005, Grassley and Baucus introduced the Hospital Fair Competition Act. It would have closed the whole hospital exception. The “bill would level the playing field between specialty hospitals and community hospitals by eliminating incentives in the payment system to cherry-pick the healthiest and most profitable patients,” the senators wrote in a letter urging their colleagues to support the bill. Although the bill never became law, Grassley and Baucus were clearly singing the Big Hospital Lobby’s tune.
Within a period of fourteen months, Grassley and Baucus scheduled two hearings before the Finance Committee on physician-owned specialty hospitals (PSHs). One of the subjects of the second hearing was an 88-year-old woman who had entered Physicians’ Hospital in Portland, a PSH, and died shortly after having back surgery. Physicians’ Hospital apparently did not have a physician on site during her crisis and had to call 911 for assistance. Grassley and Baucus had learned of this case a few months before the hearing and it prompted them to send a letter to the Office of the Inspector General at the Department of Health and Human Services requesting an investigation into the emergency procedures of PSHs. (A few months later, a similar case would occur at a PSH in West Texas.)
When the Office of the Inspector General released its report on PSHs emergency procedures in January 2008, Baucus and Grassley again sounded the alarm. “Specialty hospitals need to do a better job fulfilling the public expectations, and they most certainly need to do a better job protecting the safety of their patients,” said Baucus. Grassley warned, “This new report documents the significant and potentially life-threatening shortcomings of physician-owned specialty hospitals when it comes to emergency services.” But did it?
The report found that 55% of PSHs had an emergency department. Its most troubling finding was that about 7% were in violation of the Medicare regulations that a hospital have a nurse on site and a physician on call at all times. However, one thing was curiously absent from the report: any other deaths like the ones in Oregon and West Texas. Perhaps Grassley called the emergency services of PSHs “potentially life-threatening” because they had yet to live up to that "potential."
Many PSHs challenged the Inspector General report. The ones the report claimed were in violation of Medicare staffing regulations came “forward with documentation showing that they were properly staffed . . . during the times in question.” A spokesman for the Office of the Inspector General said that it stood by its report. The discrepancies were never resolved.
The Big Hospital Lobby heralded the report. “The report illustrates yet another reason why Congress needs to take action in the best interests of patients and ban physician self-referral to new limited-service hospitals they own and operate,” said American Hospital Association president Rick Pollack.
Cherry Picking and Avoiding Medicaid Patients?
One of the most serious criticisms of PSHs is that they “cherry pick” the most profitable patients and steer the less profitable ones to general hospitals. In its broadside against PSHs called “Self-Referral to Physician-owned Hospitals: What the Research Says,” the American Hospital Association points to two types of evidence to support this criticism.
The first is that PSHs treat fewer patients on Medicaid, the government health care program for the poor. Medicaid is notorious for having low reimbursement rates, and physicians with a single-minded focus on profits would want to avoid Medicaid patients. Evidence from two Medicare Payment Advisory Commission (MedPAC) reports and a GAO report shows that PSHs do treat fewer Medicaid patients when compared to general hospitals. It would seem that PSHs eschew Medicaid patients—but it only seems that way.
Medicaid patients do not need heart or orthopedic surgery in the same numbers that older patients do. Rather, Medicaid patients are often young, poor women who are pregnant and in need of obstetric services offered by general hospitals. PSHs don’t treat as many Medicaid patients because they specialize in services that Medicaid patients tend not to use.
Is physician ownership of a hospital a conflict of interest?
To be fair, it isn’t the specialization of PSHs that fully accounts for their lower rate of Medicaid patients. Both MedPAC and the GAO compared PSHs with “peer” hospitals that specialized in similar treatment areas and did find that PSHs treated lower rate of Medicaid patients, although the differences weren’t huge. MedPAC found that Medicaid patients accounted for 5% of revenues at physician-owned surgical and orthopedic hospitals and for 9% at the peer hospitals. For physician-owned cardiac hospitals, MedPAC found that Medicaid accounted for 3% of their patients and for 7% of peer hospitals. The numbers were similar in the GAO study, 3% versus 6%. Neither MedPAC nor the GAO stated explicitly that cherry picking caused the difference. MedPAC could only speculate that “specialty hospital decisions such as location, mission, emergency room capability, and physician financial incentives to avoid Medicaid patients may have contributed to the lower Medicaid shares at physician-owned hospitals.”
The second type of evidence used to support the claim of cherry picking is the illness severity of the patient. Critics maintain that PSHs admit fewer patients with multiple illnesses or, as the medical literature puts it, “comorbidities,” since such patients are more costly to treat. For example, critics charge that a physician-owned cardiac hospital will treat patients with coronary artery disease, but will try to refer patients that have not only coronary artery disease but also diabetes and hypertension to a general hospital.
Yet the evidence is in fact mixed. For example, in one report, MedPAC found that, on average, PSHs did treat more “low-severity” patients than did general hospitals. But in a later report MedPAC researchers looked for “an increase in the ratio of highly profitable surgeries to less profitable surgeries” in markets with PSHs on the assumption that such an increase “would indicate that financial incentives may have influenced at least some physicians’ behavior.” The report concluded that if “specialty hospitals are inducing market-wide shift in the ratio of low-severity to high-severity patients, the magnitude of the shift is too small to be detected with our test of statistical significance.”
Likewise, a CMS study yielded mixed results. When examining physician referral patterns it found that in some instances physician-owners referred more of their high-severity patients to their hospitals than did non-owners, but in other cases the non-owners referred more high-severity cases to the physician-owned specialty hospital. It also studied patients being transferred to and from PSHs and admitted to PSHs and general hospitals via emergency departments. In neither of those areas did CMS find a pattern of PSHs treating low-severity patients at an unusual rate versus the rate found in general hospitals. A Lewin Group study financed by MedCath found that PSHs treated a higher rate of high-severity patients.
Finally, both the CMS study and a study in Health Affairs compared the referral rates of physician owners with those of non-owner physicians who had admitting privileges to the PSHs. If financial incentives were driving cherry picking, then presumably physician owners would refer higher-severity patients to PSHs at a lower rate than non-owner physicians. The results showed no clear pattern. In some cases physician owners referred more high-severity patients to their PSHs than did non-owners, while in other cases the non-owners referred more high-severity patients to PSHs.
The reason the results on cherry picking are so inconclusive may be that physicians are actually referring their patients to the hospitals best suited to care for them. Studies suggest that general hospitals may be better suited to handle more complex patients. A physician-owned cardiac hospital will have the specialists to treat a patient with heart disease. But if that patient also has hypertension and diabetes, the general hospital will also have the specialists necessary to deal with complications that might arise from those comorbidities.
Further, PSHs may improve their ability to treat high-severity patients as time passes and physicians and nurses gain more experience. The Dayton Heart Hospital is a PSH that is partly owned by MedCath. Commenting on Dayton’s ability to treat many high-severity patients, CMS noted that because “Dayton Heart Hospital is the second oldest MedCath facility, it may be that, as a specialty facility matures, its service range and ability to treat more severe cases may expand.”
Conflict Of Interest?
Critics of PSHs charge that what is best for physician owners and what is best for their patients creates a conflict of interest. Even physicians disagree over this.
“I don’t think doctors should own hospitals. Period,” says. Dr. James Sisk, who practices internal medicine in Oklahoma City. “Obviously, it’s a conflict of interest.” Dr. Sisk worries that physicians are increasingly unable to make a living at what they should be doing, such as evaluating and managing the patient. He thinks that is why they increasingly turn to endeavors like owning hospitals. His concern, like that of many critics of PSHs, is that since physician owners share in the profit generated from surgeries, they have an incentive to perform surgery even when the patient may not really need it. “People are going to get surgery they don’t need,” he says.
But do physician owners face a financial incentive to refer patients for surgery that is greater than any other physician faces?
“Even the decision to do surgery, I make money off of that. Any surgery, anywhere, I get a fee for that whether I’m an owner or not,” counters Dr. David Holden of McBride Orthopedic Hospital, a physician-owned specialty hospital. “I could do unnecessary surgery from day one, if I was that type of person. Just scheduling surgery in the first place is a potential conflict of interest since I get paid for that.”
When a patient goes into the hospital for surgery, Medicare pays for a number of different services. First, Medicare Part A pays the hospital a fee to cover the costs associated with providing the operating room, nurses, etc. Then, Medicare Part B pays the physician a separate fee for performing the surgery. Since Medicare Part B pays every surgeon each time he or she performs a surgery, every surgeon has a potential conflict of interest. Thus, critics are wrong to argue that physician-owned hospitals create a conflict of interest between the physician and patient.
At worst, PSHs increase that conflict of interest, but by how much? One researcher points out that if a surgeon performs a bypass surgery, Medicare Part B pays him about $3,622. The hospital gets paid a much larger fee, and the profit on that fee might be as much as $12,000. A physician-owner will get a portion of that profit. However, since the average physician owner has about a 2% ownership share, the average physician owner “would only receive $240 in pre-tax profits, still a fraction of the $3,622 surgeon’s fee.” (Texas Public Policy Foundation, Center for Health Care Policy, May 2008)
It is the patient who should decide what type of hospital he or she should use since it is the patient who will be paying the personal cost if the decision is the wrong one.
Critics like the American Hospital Association might point to the research supposedly showing that PSHs increase the utilization of surgery as indirect proof that conflict of the interest is greater with physician owners. Yet the research doesn’t quite say what the American Hospital Association says it does.
For example, in “Self-Referral to Physician-owned Hospitals: What the Research Says,” the American Hospital Association claims that the MedPAC studies found that PSHs “increase utilization” of surgery. That’s misleading. The first MedPAC study found no significant difference in utilization between PSHs and general hospitals. The second MedPAC report did find that areas with cardiac PSHs saw an increase in surgeries, but not areas with orthopedic or surgical PHSs. Other research also yields mixed results. Two recent articles by Jean Mitchell did find an increase in utilization due to PSHs. (Medical Care Research Review, August 2007, and Archives of Surgery, August 2010) But an article in Health Affairs (Jan/Feb 2006) and another in the Journal of Bone and Joint Surgery (June 2005) found no such increase.
Inconclusive research on utilization, though, hardly means that physicians who invest in hospitals are not motivated by money. Of course they are. Few people endure four years of medical school followed by a grueling residency to live the rest of their lives as monks. Nor would they invest substantial sums of money in a PSH without the hope of achieving long-term monetary reward.
Yet, if physicians were motivated primarily by money, there are more profitable careers, like ones on Wall Street or K Street, they could have pursued. Similarly, there are investments other than PSHs that are potentially more profitable. Like most people, physicians have multiple motivations for what they do, money being just one.
One of biggest motivations that drives people to become physicians is a desire to treat patients. That motivation plays a large role in physicians’ decisions to become owners of specialty hospitals. A Health Affairs article found that controlling the work environment, increasing efficiency, and improving quality were key reasons why physicians owned hospitals. MedPAC found that “the cardiologists and surgeons want to admit their patients, perform their procedures, and have their patients recover with minimal disruption. Physician control, they believe, makes this possible in ways community hospitals cannot match.” Physician-owners believed that being owners gave them more control over operating room schedules and staff and helped them avoid down time between surgeries.
Furthermore, a good physician should be able to make money by providing good care to his patients. Dr. Thomas Janssen said that while money was an issue when he and the eighteen other physicians decided to start McBride Hospital, it was more than just a matter of boosting their incomes.
“It was a factor,” he says. “We feel the success of this hospital is very dependent on the work we do here. We felt like there was a large amount of money being generated by our business and that we would much rather have control over that whether it’s in the form of investing it back in the hospital or back in ourselves.”
ObamaCare: Stifling Competition
From late 2007 to early 2009, the Big Hospital Lobby lost three more fights to stifle the competition—two efforts at reauthorizing the State Children’s Health Insurance Program and the passage of a “War Supplemental”—additional spending Congress needed to authorize for the wars in Iraq and Afghanistan. Each contained some type of restriction on PSHs. But in none of those instances was the Big Hospital Lobby’s support crucial to getting those bills passed. When some PSH supporters in Congress objected, the provisions limiting PSHs were jettisoned.
-Dr. Hooman Sedighi
But to pass ObamaCare, President Obama and Congressional Democrats would need most of the key health care players on board—physicians, nurses, pharmaceutical makers, medical equipment companies, the insurance industry, and, especially, hospitals. Without the support of groups like the American Hospital Association and the Federation of American Hospitals, passing ObamaCare would have been next to impossible, especially since funding some of the insurance subsidies in ObamaCare would require cuts in the hospital portion of Medicare. The American Hospital Association and the Federation of American Hospitals were not going to go along with that unless they got something in return, and that meant restrictions on PSHs.
After what was a long and arduous battle, President Obama signed the Patient Protection and Affordable Care Act into law in March, 2010. Under the new law, CMS could not grant any more Medicare provider numbers to PSHs after December 31, 2010. So, if a PSH hadn’t been constructed and gone through its inspection by that date, it would not be able to accept Medicare patients. That all but guarantees that no new physician-owned specialty hospitals will be built.
According to Physician Hospitals of America, 30 PSHs under construction were able to meet the December deadline while 44 did not. Physicians who invested in the hospitals that did not meet the deadline will likely have to sell their shares.
For those PSHs already in existence, the law created a series of bureaucratic hoops to jump through that makes expansion difficult. To expand a PSH, the owners must apply to the Department of Health and Human Services. They can do so only once every two years. They must then wait while members of the community provide input. Further, the PSH must be in a county where population growth is 150% of the population growth of the state in the last five years. Inpatient admissions to the PSH must be equal to or greater than the average of such admissions in all hospitals located in the county. The PSH’s bed occupancy rate must be greater than the state average. And it must be located in a state where hospital bed capacity is less than the national average. Once a PSH meets all of those conditions, it is prohibited from expanding more than 200%.
Those regulations mean that a PSH will expand in only the rarest of circumstances, and they apply even to expansions that were in progress when the law passed. It is not known how much money was lost due to expansions that were halted.
Physicians and other investors at the Indiana Orthopedic Hospital came close to losing $27 million invested in a new building housing three operating rooms. The building was only three-quarters of the way finished. “We spent a great deal of time looking at how to restructure it so we could stay within the law,” said Dr. John Dietz, an orthopedic surgeon and part owner. “We decided to create a new company through which we could own that building as an ambulatory surgery center.” The law does not apply to ambulatory surgery centers. (Video below: Dr. Dietz interviewed in December 2011)
The Global Rehab and Pine Creek Medical Center in Dallas had to cancel plans for an expansion and for a new 66-bed hospital in Ahwatukee, Arizona. But the physicians there were lucky—not more than $230,000 was lost on either of those since neither was beyond the planning stages. However a physician at the Center, Dr. Hooman Sedighi, said, “We are working at capacity, and if we want to add to capacity, this bill pretty much precludes that. The other thing is the potential job loss — the ones that are under construction or expanding, they would have been hiring additional staff and personnel.”
Politicians and interest groups ended up deciding what was best for patients.
The Big Hospital Lobby wasn’t too sympathetic. “They’ve known that this was in the Senate and House bill, and if they went into new construction they knew that they were taking a risk,” the American Hospital Association’s Pryga said.
Initially McBride Orthopedic Hospital was set to lose $167,000 that it had spent to initiate an expansion. (They are currently operating at 85% capacity.) But CEO Mark Galliart (pictured below) eventually found an interpretation of the new regulations that enabled McBride to go ahead with its project to build three new operating rooms. CMS wouldn’t permit a PSH to expand its number of beds under ObamaCare, but it did not put restrictions on how those beds were allocated. Galliart simply scuttled three acute-care beds and in their place will put the operating tables that will go in the three new operating rooms.
In an interview with The New Individualist Galliart pointed out that there may be an irony in the regulations for the Big Hospital Lobby.
One of the reasons they wanted this moratorium on growth for physician-owned hospitals was because the doctors [allegedly] cherry picked. Well, what do you think the doctors are going to do now that they can’t grow? Now they’ve pushed us to take the more profitable cases because we can’t grow. The only way we can continue to stay afloat is to do the more profitable cases . . . It just cracks me up. Now the hospitals are going to get what they said they didn’t want.
Worse, the new restrictions all but end a major source of innovation in the health care system. In other industries, as workers gain experience they often gain insight into how the industry can be improved. They come up with ideas about how to provide customers with better products and services at lower prices. Becoming an owner of a company gives them the opportunity to put those ideas into practice. So, for example, Henry Ford worked as an engineer at Westinghouse, which built steam engines, before staring the Ford Motor Company; Sam Walton worked at J.C. Penney long before he opened Wal-Mart; and Steve Jobs was an employee at Hewlett-Packard and Atari before he founded Apple Computers, just to name a few.
Likewise, as physicians gain experience in a hospital, they come up with ideas about how to create more effective patient care. That was a big motivation among the physicians who began McBride Orthopedic Hospital. It would have been difficult, if not impossible, for them to put their ideas into practice without becoming owners. The Stark Laws began the process of stifling that sort of innovation in health care and ObamaCare may have killed it entirely. Rep. Stark doesn’t think that matters. “These doctors are not entrepreneurs. They’re getting a kickback from referring patients. They make enough money,” he said. And, surely, he would know.
The Big Hospital Lobby claimed that it only wanted what was in the interest of the common good. “Eliminating physician self-referral will benefit both patients and communities,” said the American Hospital Association’s Matt Fenwick as ObamaCare neared passage. “[I]t saves taxpayers money, ends a serious conflict of interest and, above all, allows full-service community hospitals to provide vital care for all those in need.”
Yet with the exception of a few articles of research, the desires of patients were largely absent from the discussion. While that research did suggest that PSHs treat patients better, no one ever conducted an extensive examination into the issue. Most of the research examined how PSHs affected general hospitals. As is often the case when medicine meets politics, it was politicians and interest groups who ended up deciding what was best for patients.
“The physicians are the ones who decide where their patients go, not the patients,” said the American Hospital Association’s Pryga. “It’s not a matter of the patient’s choice, it’s a matter of the physician’s choice.”
Research suggests that isn’t true. As CMS found in its study, physician owners “are constrained in where they refer patients by several factors” including “patient preference.” Indeed, the prospect of being hospitalized is when patients are most likely to challenge their physicians by requesting a second opinion.
Ultimately, it is the patient who should decide what type of hospital he or she should use since it is the patient who will be paying the personal cost if the decision is the wrong one. The patient is the one who will endure an unpleasant recovery in the hospital, experience pain if there are surgical complications, suffer a readmission after being discharged, or, ultimately, die. Politicians, the Big Hospital Lobby, physicians, hospital administrators—none of them pay those costs. It is the patient who has the best incentive to make the right decision as to whether a PSH, or a general hospital, or some other surgical facility is the best place to have surgery.
Unfortunately, powerful political interests use Medicare in ways that limit the ability of patients to make the health care choices that best suit them. And that’s an Rx for an enduring and growing health care crisis.
> related sidebar: Achievement and Success: Behind the Scenes at a Physician-Owned Specialty Hospital
> related sidebar: Institutionalized Inefficiency: Behind the Scenes at a General Hospital
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The Inherent Individualism of Insurance by Stephen A. Moses
The Problem With Obamacare by David Hogberg
DAVID HOGBERG is a Washington-based correspondent for Investor's Business Daily and the author of an upcoming book on Medicare. He was formerly a senior fellow at the National Center for Public Policy Research, and a fellow at the Rio Grande Institute. You can follow David on Twitter at: @DavidHogberg