Physician-Owned Hospitals Forced To Plead Their Case

The Affordable Care Act stunts the growth of these institutions, but will quality of care and competition suffer as a result?

The Affordable Care Act prohibits construction of new doctor-owned hospitals if those institutions want to accept Medicare or Medicaid patients, because government officials worry that the doctors’ financial interests in such institutions encourages more tests and procedures.

In the meantime, though, physician-owned hospitals, which, for the most part, specialize in heart and orthopedic surgeries, are winners in health reform provisions that reward hospitals for quality. Nine of the ten hospitals getting the largest bonuses are owned by physicians.

Typical scenario

Jaan Sidorov, MD, a consultant and member of Managed Care’s editorial advisory board, says that for the most part clinician executives at health plans don’t like doctor-owned hospitals. “The typical scenario is that Acme Managed Care Insurance has, say, two hospitals in a region and along comes a third, a specialty hospital devoted to high-volume and high-margin cases that can really hurt a medical loss ratio,” says Sidorov. “Even though the third hospital typically promises to do the same cases for a lower DRG — competition is theoretically good — versus the two other competitors, what they lose in payment is made up by internal efficiencies and more patient throughput. Plus they create their own preference-sensitive demand. The latter is the problem.”

R. Blake Curd, MD

“If you have one hospital in town and that’s the only place people can get care, it’s pretty easy for that institution to drive the purchase price,“ says R. Blake Curd, MD, of Physician Hospitals of America.

As might be expected, R. Blake Curd, MD, the vice president of Physician Hospitals of America, doesn’t agree, saying that doctor-owned hospitals increase competition, and that competition is good. “We certainly throw another variable into the mix,” says Curd. “If you have one hospital in town and that’s the only place people can get care, it’s pretty easy for that institution to drive the purchase price. That’s basic economics. If you have only one provider, what choice do you have? In every study that I have seen, physician-owned hospitals in their marketplace are either the number one hospital in that market, or certainly within the top three.”

Insurers should not be overly concerned that doctor-owned hospitals might charge higher rates based on performance, says Curd. “In general, the payers sets the rates and then in most instances you either accept them or you don’t get access to their patient population.”

But Richard G. Stefanacci, DO, MBA, associate professor of health policy at the University of the Sciences in Philadelphia and member of Managed Care’s editorial advisory board, says that “the concern for managed care and Medicare is the ability for self-referrals and increased costs associated with that behavior.”

Nevertheless, Curd views the ACA’s restrictions on doctor-owned hospitals as undermining competition. “In many markets the health care system doesn’t change because it’s monopolized by these monolithic health care institutions that have been around for a long time. The not-for-profits frequently don’t change the way they do business until they’re forced to by some kind of competition.”

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