- The Washington Times - Wednesday, February 2, 2005

Those of us who long have promoted the virtues of free-market-oriented health policy share two overriding principles. First, the market is the mechanism to best meet the needs of the consumer. Second, the market is best served by allowing free and fair competition.

These principles apply particularly to hospitals. Throughout the country, full-service community hospitals compete based upon services and quality. In addition, a hospital-led initiative soon will empower consumers to go to a Web site to compare hospitals based upon how well they measure up using key quality indicators.

However, there is a disturbing trend taking place on the hospital landscape — one in which the claim of competition is used to mask anticompetitive behavior. More precisely, it is being used not to compete, but to control which patients go to which facilities.

In recent years, new so-called specialty hospitals are proliferating across the country. These facilities typically limit their care to just one type of service — such as cardiac or orthopedic care — that promises a high profit margin while avoiding essential but break-even or money-losing services, such as “24/7” emergency rooms, intensive-care units and burn units that are offered routinely by full-service community hospitals.

These specialty hospitals claim to offer competition to full-service community hospitals. Upon closer examination, their business is based almost exclusively upon their ability to use a legal loophole to control the flow of patients. Specifically, this loophole allows specialty hospitals to cherry-pick only the most profitable, least expensive patients, leaving high-cost patients, people on Medicaid and the uninsured to be cared for by community hospitals.

Under this loophole, builders of specialty hospitals offer “sweetheart deal” ownership interests to referring physicians at bargain-basement rates not made available to the average investor. These arrangements tilt the competitive playing field by providing physician-owners with a strong monetary incentive to refer carefully selected patients to the facilities in which the physicians have ownership interests.

These incentives create conflicts of interest. Laws on the books prevent physicians from referring patients to labs, diagnostic or imaging centers, or hospitals of which they are owners. However, Congress provided an exception to allow physicians to have ownership interests in whole hospitals, because, the thinking went, no specific referral would economically advantage any individual physician.

However, when these laws were written, lawmakers could not foresee the development of small, limited-service facilities, which are tantamount to hospital wards. Since then, clever developers have made a mockery of this exception and transformed it into a gaping loophole.

This is no mere exercise in semantics. The Government Accountability Office (GAO) and the Medicare Payment Advisory Commission (MedPAC) separately found that physician-owned limited-service facilities cherry-pick the highest-margin patients who require the least amount of intensive care, leaving the sickest, most expensive patients to be cared for by full-service community hospitals. GAO and MedPAC also found that these specialty hospitals treat far fewer lower-income people covered by Medicaid than do full-service community hospitals in the same market — 75 percent fewer for physician-owned heart hospitals and 94 percent fewer for orthopedic hospitals.

These findings should surprise no one. As MedPAC suggested, these patterns are consistent with behavior motivated more by monetary gain than by clinical considerations.

The real surprise, though, is intriguing MedPAC evidence indicating that the cost of care in these specialty hospitals, or “focused factories” as they like to call themselves, is higher than in competing full-service community hospitals. Moreover, there is no credible, independent evidence that specialty hospitals have better quality outcomes. After all, they use the same doctors, nurses, types of equipment and other inputs as community hospitals.

Advocates of physician-owned limited service facilities claim to support fair and open competition. It is an appealing mantra. However, beneath its surface, it is an utterly hollow one. No reasonable person would call this fair and open competition. A full-service community hospital that tried to buy admissions in this way would be outlawed.

Full-service community hospitals welcome competition so long as it is free from the physician ownership and self-referral that creates conflict of interest and an unfair competitive advantage. Free and fair competition benefits everyone, most of all patients, but unfair competition jeopardizes the ability of community hospitals to provide a broad range of essential services. Congress should close the loophole to ensure free and fair competition.

Charles N. Kahn III is president of the Federation of American Hospitals and former staff director of the House Ways and Means Committee’s Subcommittee on Health.

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