How Health-Care Reform Could Hurt Doctor-Owned Hospitals

Buried in the 850-page House health-reform draft is a provision that could in effect ban further construction of doctor-owned, for-profit specialty hospitals and prohibit existing ones from expanding. (The provision would prevent new facilities from receiving any Medicare payments and would limit changes to current facilities.) Senators Charles Grassley and Max Baucus, who lead the body's powerful Finance Committee, have been vocal critics of the doctor-owned specialty-hospital model and the industry expects similar language to be included in any upcoming Senate health-reform bill as well. Doctor-owned specialty hospitals would "wither on the vine," says Molly Sandvig, executive director of the industry lobbying group Physician Hospitals of America. "Any business that can't grow or adjust to the market won't be around too long."

Specialty hospitals that focus on providing care for children or cancer patients have long existed, but the target of the House legislation is something else entirely - for-profit health-care facilities owned by doctors that perform some of the most lucrative medical procedures in fields like orthopedics and cardiology. There are now some 220 such facilities operating mostly in the South and Midwest - up from 110 in 2001 - generating some $40 billion in annual revenue. According to Sandvig, more than 80 additional facilities are currently under development. (Read "Starting Health-Care Reform in the ER.")

While these places are known as specialty hospitals, most do not resemble acute-care, all-purpose community health-care institutions. For one thing, they tend to sell themselves on the promise of comfort, if not luxury, with at least a few offering wine with gourmet meals and on-campus hotels for friends and family. More importantly, about half don't have any kind of emergency department and of those that do, more than half have only one bed available, according to a 2008 report from the inspector general of the Department of Health and Human Services. Even more troubling to critics is the fact that, despite being physician-owned, only about 30% have a doctor on site at all times, and about two-thirds actually tell staff to call 911 in case of an emergency, according to the same report.

This has created a dangerous situation, according to critics. The inspector general's report came about after a 44-year-old spinal-surgery patient at a doctor-owned specialty hospital in Texas - the state with the highest number of such facilities - developed breathing problems and died, despite being taken by ambulance to a larger community hospital. The staff had called 911 after noticing the man's respiratory function was poor, but there was no doctor present to help. And just last month, a female patient at the physician-owned Colorado Orthopaedic and Surgical Hospital died after she became unresponsive following surgery and was transferred to a community hospital. The facility has suspended all outpatient surgeries and the state health department has ordered the hospital to change its protocol in order to have a board-certified emergency doctor on site at all times.

As disturbing as those incidents are, the more widespread concern about the newfangled hospitals is money. Although there is not ample hard data yet available to prove that specialty hospitals take a large bite out of community hospitals' bottom lines, a quick scan of the list of the common procedures performed at the highly focused institutions suggests just that. Orthopedic and cardiac care bring in some of the highest margin reimbursements from insurers, money community hospitals use to cover the cost of low-margin or money-losing services like burn units, neonatal care and treating the uninsured. When healthier, fully insured patients migrate away from community hospitals to specialty facilities, their reimbursements go with them. Overall profit margins at specialty hospitals, sometimes as high as 30%, dwarf those of community hospitals. Plus, specialty hospitals don't typically treat many Medicaid patients, which bring in some of the lowest reimbursements available.

See TIME's health and medicine covers.

See how to prevent illness at any age.

"When these specialty hospitals come in, they take out the better reimbursed cases, the easier ones with less complications, and they're able to benefit financially by skimming the cream," says Rick Pollack, executive vice president of the American Hospital Association.

Perhaps an even more pressing problem in the context of health reform is the risk of overutilization of services. According to a 2006 report from the federal Medicare Payment Advisory Commission, just the presence of a doctor-owned heart hospital in a community increases the rate of cardiac surgery by 6% among Medicare beneficiaries. The upshot, according to a House staffer involved in health reform, is that "people are getting things they probably don't need." Plus, says the staffer, "the community hospitals go to war, bulk up their own specialty centers and all of a sudden you see these ads around town that 'You should get your heart checked.'" (Read "How Not to Get Sick.")

For their part, doctor-owned specialty hospitals say they're providing more access to better quality care - and in some respects, this may be true. Patient satisfaction rates at such facilities are generally high and it's logical that a facility dedicated to just one or a few specialties could operate more efficiently. "Rather than compete in the marketplace they want to legislate us out of business," says Dr. John Harvey, president and CEO of the Oklahoma Heart Hospital.

But it's the built-in conflict of interest that causes some patient advocates to bristle. In effect, they contend, doctors double dip - earning money from procedures as well as the overall operation of the hospital, of which they are shareholders. That provides plenty of incentive for physicians, who typically also work part-time at the local community nonprofit hospital, to recommend their easy-to-treat patients go across town to have procedures done at the private hospital where the doctors are investors. The House bill would address this issue by closing a loophole that has allowed doctors to send patients to hospitals they had a stake in, so long as that hospital served a rural population, or the stake was in a "whole hospital," not just a wing or department; the Congressional Budget Office predicts closing this loophole would mean fewer overall procedures, saving $1 billion in Medicare costs over ten years.

The controversy over physician-owned hospitals isn't actually new. Representative Pete Stark, a Democrat from California, began a crusade against doctor conflicts of interest more than two decades ago, and successfully got legislation passed in 1989 that prohibited doctors from, among other things, having a financial stake in labs that performed tests for their patients. The Stark Law, as it became known, has been strengthened over the years to include more facilities and apply to Medicare and Medicaid payments. But the loophole allowing for doctor-owned specialty hospitals has remained open despite repeated attempts to close it. Now that the country is grappling with how to reform the entire health-care system, Congress has another chance to decide whether the costs of this kind of proprietary specialized care are simply too high to bear.