Specialty hospitals reveal the perversities of pseudo-markets
Do Specialty Hospitals Promote Price Competition?
By Robert A. Berenson, Gloria J. Bazzoli, Melanie Au
Center for Studying Health System Change
January 2006
In three Center for Studying Health System Change (HSC) sites with significant specialty hospital development-Indianapolis, Little Rock and Phoenix-recent site visits found that purchasers generally believe specialty hospitals are contributing to a medical arms race that is driving up costs without demonstrating clear quality advantages.
Price Competition
Although previous research indicates that purchasers believe specialty hospitals have lower unit costs, some believe that referring physicians, especially those with a financial interest in the specialty hospital, increase volume by inducing patient demand for elective procedures. The higher volume more than offsets the savings achieved from lower prices from competition, leading to increased aggregate costs. Health plans indicated they had few tools to restrain the induced utilization that physician ownership of specialty hospitals can engender.
Focused Factories or Risk Skimmers?
Some health plans and employers believe that physicians referred relatively easy cases to specialty hospitals and more complex patients to general hospitals, whether out of quality concerns or financial considerations.
Competitive Juices Flow
Although there was some evidence of increased price competition, respondents observed that the more important outcome was the perceived need for general hospitals to compete aggressively with the new physician-owned specialty hospitals by developing similar dedicated centers, as distinct hospitals-within-hospitals or freestanding facilities.
Thus, in the views of purchasers and other market observers, physician-owned specialty hospitals caused general hospital competitive juices to flow, but most of those juices flowed toward capacity expansion for lucrative services and enhanced specialty service branding and not necessarily toward improved quality and efficiency.
Policy Implications
Some assert that specialty hospitals represent desirable competition for general hospitals and, therefore, public policy should consistently foster competition provided by new market entrants, including specialty hospitals.
These commentators call for reliance on antitrust enforcement, resist expansion of CON (Certificate of Need) laws that would limit specialty hospitals and oppose general hospital efforts to restrict the hospital privileges of physicians with ownership interests in competing specialty hospitals.
Others believe that specialty hospitals add unneeded, expensive capacity to the health care system, make it more difficult for general community hospitals to cross subsidize the care provided to the uninsured and underinsured, and intensify the problems associated with physician self-referral for economic gain. These advocates would design public policy to discourage the development of new specialty hospitals.
It is striking that purchasers and their health plan agents, some of which themselves are for-profit, entrepreneurial ventures, who might be expected to favor increased hospital competition, generally do not view the development of specialty hospitals positively. They believe that specialty hospitals add to health care costs and have not demonstrated clear quality advantages. Further, purchasers are concerned about the opportunity for physician owners to induce demand through self-referral, to cherry pick among the patient population and to threaten community hospitals’ reliance on profitable services to make up for shortfalls in other areas. To some extent, purchasers seemed implicitly to accept general hospitals’ need for insured patients to subsidize care for the uninsured and underinsured, and profits from well-compensated services to support unprofitable services.
In most sectors of the economy, specialized producers foster market competition. In the airlines industry, for example, leaner point-to-point air carriers have forced aggressive price competition and dramatic changes in the traditional cost structure of the major airlines, for better or worse. In contrast, in the case of specialty hospitals, the ability of providers with market power to tie particular specialty service prices to other contracted services; the seeming acceptance by at least some purchasers that general hospitals have a legitimate need to cross subsidize services because of uncompensated care burdens; and the lack of useful measures by which purchasers can differentiate the quality and efficiency of cardiac, orthopedic and other specialty hospital services contribute to a very different result. The findings again confirm that even a competitive health care system does not function like most other sectors of the economy.
It is important to note that purchasers also have described a medical arms race focused on the promotion and marketing of specialty services involving general hospitals in areas where there is no specialty hospital competition.
Indeed, increased competition among local hospitals and between hospitals and physicians for profitable services, including cardiac, orthopedic and cancer care, has been observed across the 12 HSC sites. This service-line competition has involved new facilities and dedication of existing hospital space to profitable specialty services and is taking place whether or not there are specialty hospitals, suggesting that the policy focus on specialty hospitals per se might be somewhat misplaced.
Marked disparities in the relative profitability of certain services under both Medicare and private plan payment policies appear to be a major force driving competition for these profitable services. These pricing distortions are contributing to the current emphasis on specialty service differentiation and to escalating health care costs generally, with specialty hospitals being one prominent manifestation of such distortions.
Indeed, proponents of greater provider competition and proponents of greater regulation to restrict new specialty facilities agree that distorted pricing policies create an unlevel playing field and influence providers’ resource-allocation decisions for the worse. CMS has indicated that it will revise its payment systems for both inpatient and ambulatory services to reduce the artificial financial advantage that specialty hospitals currently enjoy because of the limited range of services they provide.
http://www.hschange.org/CONTENT/816/
Comment: By Don McCanne, M.D.
Most policy analysts concede that free, unfettered markets do not exist in health care, and, consequently, market competition cannot be relied on to bring us higher quality care at a lower cost. Specialty hospitals are an exception, the physician-investors would have us believe. By developing technologically-advanced, streamlined hospitals, these investors contend that they force the general hospitals in the community to compete by both improving the quality of the specialized services and by providing greater value through lower prices.
The proponents do have a reach to try to convince us. Duplicating services that already exist in the community is very expensive. We are not talking about the marginal costs of improving existing services, with a full support structure already in place. We are talking about beginning anew with incorporation costs, venture capitalist costs, architect and building contractor costs, the costs of construction, the costs of the most advanced and most expensive high-tech equipment, the costs of support services required, the costs of a new set of operating expenses, and, not the least, the costs of the return on investment.
The magic of the marketplace is supposed to reduce costs, but it is inconceivable that the investors could ever conjure up enough magic to meet these expenses while providing a nifty profit. While competitively-contracted prices may provide the appearance of lower costs, this report confirms that there is no magic. The per-unit cost might be slightly lower, but John Wennberg and his colleagues have demonstrated repeatedly that increased capacity for high-tech services drives up untilization and total costs, without a commensurate return in quality or outcomes. Specialty hospitals increase total health care costs and do so while placing a greater economic burden on our community hospitals.
If our teenage driver is in a major collision, we want a trauma center to be there, backed up by a full service hospital. If our granddaughter develops meningitis, we want facilities available with a pediatric intensivist and appropriate infectious disease support. If a respected and endeared community activist blows a berry aneurysm, we want the neurosurgical team available and accessible to save her brain and her life. We will always want a fully equipped and well staffed general hospital to be there for us whenever we need it.
A boutique specialty hospital surely would provide us with elegant surroundings, gourmet meals, high-tech equipment in the latest designer styles, and all of the other amenities that we should expect from an organization dedicated to Profits through Patient-Pleasing.
Is that really worth the trade-off? Do we want to cater to the wealthy who value such niceties for their elective surgeries? Or do we want to use those funds to support a strong health care infrastructure that would be there for all of us whenever we need it?
Private solutions inject into the process the type of thinking that brings us boutique hospitals. This is a public problem, and it requires a public solution. Single-payer national health insurance would provide a public funding structure that would ensure that our health care funds are spent on our health care.