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Physician-Owned Specialty Hospitals: A problem or a solution?

For years, the government has threatened to shut down physician-owned specialty hospitals (hereafter referred to as "specialty hospitals"). The new health care reform legislation has taken a big step in that direction, mandating a moratorium on new specialty hospitals, and restrictions on the expansion of existing facilities.
The arguments against specialty hospitals, posited by academicians and the hospital trade associations, are:

1. They divert surgical procedures from community hospitals, draining funds needed to run emergency departments, burn units, and other unprofitable services.
2. They "cherry-pick" the healthiest patients, leaving sicker patients for community hospitals.
3. Driven by financial incentives, physician owners drive up utilization of expensive procedures and increase costs.¹

In fact, none of these arguments hold water, as we will demonstrate below.

Specialty hospitals create healthy competition, which helps to improve the accessibility, affordability, and quality of health care. Congress should act to increase, rather than limit, competition and patient choice in health care settings.

Do specialty hospitals drain profits from community hospitals?

Not according to the federal government. A study by the Medicare Payment Advisory Commission (MedPAC) indicated that the presence of specialty hospitals had no observable effect on the profit margins of community hospitals.²

This finding was corroborated by a 2009 study of several local markets in which specialty hospitals operate. The study's authors concluded:

"To date, the entry of specialty hospitals...has not had dramatic, adverse effects on the financial viability of general and safety net hospitals and their ability to provide care to financially vulnerable populations."³

Do specialty hospitals "cherry-pick" the healthiest, most profitable patients?

Evidence does exist that patients in specialty hospitals tend to be less severely ill.^2,4,5

This finding is hardly surprising. Because specialty hospitals, by definition, provide limited services, it makes sense to send at-risk patients to general hospitals where they have ready access to a broader array of services. Not every patient undergoing surgery requires access to the entire range of treatments offered at a general hospital.⁹

Higher severity in one setting does not necessarily lead to the conclusion that physicians are "cherry-picking" in order to enhance profitability. Indeed, in its study of specialty hospitals, CMS reported:

"...we did not see clear, consistent patterns of preference for referring to specialty hospitals among physician owners relative to their peers."⁵

Do specialty hospitals drive up utilization?

Critics argue that physician owners of specialty hospitals will perform a higher number of questionable procedures, driven by increased financial incentives. The evidence shows otherwise.

In their study of specialty cardiac hospitals, Stensland and Winter concluded:

"There was no increase in the proportion of surgeries performed on healthier patients."⁶

Woods, et al., studied ten orthopedic surgeons' volume before and after the opening of a specialty hospital in which they held an ownership interest, and found no significant change in the annual rate of surgical procedures.¹⁷ Interestingly, the authors did find a dramatic increase in the volume of health care services provided by competing full services hospitals. This further corroborates the argument that the presence of specialty hospitals precipitates a competitive response from general hospitals.⁷

It appears clear that specialty hospitals have a salutary effect on their competitors, inducing greater attention to operational efficiency and responsiveness to physicians and patients.⁷

Benefits of Specialty Hospitals

High quality care

Numerous studies have demonstrated the availability of high quality care at specialty hospitals. Researchers have reported a 50% lower risk of adverse outcomes in hospitals specializing in joint replacement.⁸

Hagen, et al., reported that higher levels of orthopedic specialization correlated with lower risk of adverse outcomes.¹⁸

Greenwald, et al., reported lower risk-adjusted 30-day mortality rates at specialty hospitals.⁴

High patient satisfaction

Patients report very high patient satisfaction with specialty hospitals, citing private rooms, quiet environment, accommodations for family members, and nurse specialization and attentiveness as contributing to their recovery.^4,5,9

Consumer Reports also reported high patient satisfaction with specialty hospitals. In its most recent ranking, specialty hospitals ranked #1 in 19 of the 30 states in which they operate. Twenty states do not have specialty hospitals.¹⁰

Improved cost efficiency

It has been demonstrated that increased specialization in acute care hospitals reduces cost per admission.⁹ Additionally, Kumar, et al., found that specialty hospitals are significantly more efficient than general hospitals.¹¹

Schneider, et al., concluded that the presence of specialty hospitals raised the bar for all hospitals within a given region, encouraging greater efficiency overall.⁹
In a separate report, Schneider found that specialty hospitals result in an average savings of 4.6% per discharge as compared to non-specialty hospitals, a savings of $734 per patient.¹⁶

Conclusion: Specialty hospitals are a solution, not a problem

President Obama has stated that one objective of healthcare reform is to improve competition and choice in health care insurance.¹⁴
This principle is unfortunately not applied in the area of physican-owned hospitals. The new health care law will stifle competition that has been shown to improve quality. We encourage Congress to repeal the ban on new physician-owned specialty hospitals.