Physician-owned specialty hospitals: Lifting ban will lift quality of care

"Competition works." Those words uttered last year by William G. Plested, MD, then an AMA trustee and now AMA president, get at the crux of why the recent end of the federal moratorium on physician-owned specialty hospitals is good news for the health care system.

New specialty hospital development was essentially halted in December 2003. The first roadblock was a ban on physician Medicare referrals to specialty hospitals in which they have ownership interest. The second was a hold on Medicare provider numbers for these facilities. The AMA fought against these restrictions. In August, the final barrier fell.

Why is this good news? Specialty hospitals offer patients high-quality care and typically shorter lengths of stay. They also offer choice, and choice fuels innovation. This raises performance across the board and leads to a healthier marketplace.

Critics charge the opposite. They claim that these facilities hurt the system by siphoning off healthier patients, providing only money-making services and presenting doctors with a financial conflict of interest that is bad for patients who see no added health benefits. Meanwhile, they add, community hospitals suffer under the load of sicker patients and money-losing services, such as emergency and burn care.

Statistics and studies undermine these arguments.

First, patients do reap health benefits at specialty hospitals. Orthopedic and cardiac facilities offer lengths of stay 20% to 25% fewer days than community facilities, a 2006 Medicare Payment Advisory Commission report found. Plus, their risk-adjusted 30-day mortality rates were significantly lower than those for community hospitals, according to an article published in the January/February issue of the peer-reviewed policy journal Health Affairs. The authors based the article on findings of a study they conducted for the Centers for Medicare & Medicaid Services.

The studies found that specialty hospitals see patients who are less severely ill than their competitors, but not necessarily for every condition or across specialty type. The likely reason isn't a profit motive by physician owners but the facilities' specialized nature, wrote the authors of the Health Affairs article.

As for charges of conflict of interest, doctor owners favor their own hospitals for referrals, but they also send patients to competing community institutions. There is no evidence of inappropriate referrals by physician owners.

Besides, community hospitals' complaints don't hold water given the standards they have been known to apply to themselves. Some of them try to shut out specialty facilities by forging exclusive contracts with insurers, purchasing physician practices that feed patients to the community institution and including noncompete clauses in physician contracts.

Doctors' motivation for specialty hospital ownership is that it puts them in the driver's seat. A 2005 MedPAC report recognized that doctors create these facilities so that they can do their jobs better, with fewer scheduling uncertainties in a smaller-scale setting that appeals to and helps patients.

How are community hospitals faring in the face of increased competition? Just fine. The 2006 MedPAC report found that community hospital profit margins in areas with competing specialty hospitals were in line with national averages. Community facilities reacted to rivals by innovating -- expanding profitable business lines and creating centers of excellence.

The answer to community hospital losses on emergency and burn care isn't to stifle competition. It's to make sure that their payment for these services is as adequate as it is for their other services. The notion that specialty facilities aren't pulling their weight in terms of community health benefit is false. The Health Affairs authors concluded that because of the hefty taxes these institutions pay, they provide more of a benefit than their nonprofit counterparts.

Unfortunately, the end of the ban is not the end of the debate. Skeptics still exist.

And in Montana, where a state prohibition is still in effect, a challenge to the creation of a doctor-owned specialty hospital is pending in the state Supreme Court.

The results of specialty hospitals, however, will prove the critics wrong.