Time to Consider a New Look at Physician Owned Hospitals to Increase Competition in Health Care

In most sectors of the economy, competition is regarded as the way to improve quality and efficiency, lower costs, and increase innovations. Whether competition effectively achieves these improvements in health care, particularly with respect to hospital services, which remains the largest sector of spending for health care, is open to debate. Also
debated, at least among some physicians, is whether functionally banning new physician-owned hospitals by prohibiting their participation in Medicare under the Affordable Care Act (ACA) was too blunt an instrument to correct a problem that could have been fixed with a more nuanced regulatory solution, needlessly limiting a potential source of competition for hospital services.

Looking to competition as a strategy to help slow spending means understanding the many barriers to competition that currently exist. Some come from the pervasive use of insurance or public programs that blunt the interest of patients from knowing or caring about the value of care provided to them. Insurance to protect patients from
costly low-frequency events is important. But insurance that covers low-cost expected care outside a managed care environment, for which neither the insurers nor the clinicians are at financial risk, means the users of the services and those providing the services have little interest in seeking value for the care provided.

Challenging Discussions

Discussions of adding value-based care to Medicare, which could have a similar result to increasing competition and expanding its applicability in Medicare, have also proven to be challenging. The latest estimates from the Department of Health and Human Services Health Care Payment Learning and Action Network indicate that 35.8% of health care payments are tied to value-based care. The Centers for Medicare & Medicaid Services (CMS) has introduced a series of value-based programs over the last decade, including several that attempted to establish a link between the quality of care provided by clinicians and facilities and the payments. These include the End-Stage Renal Disease Quality Incentive Program, the Hospital Value-Based Purchasing Program, the Hospital Readmissions Reduction Program, a value-based payment modifier program for physicians, a hospital-acquired conditions reduction program, as well as value-based programs for skilled nursing facilities and home health care.

The purpose of the various CMS value-based purchasing programs is to improve the quality, efficiency, safety, and the patient experience of Medicare beneficiaries. These efforts are designed to reduce adverse events, to promote adoption of evidence-based care standards and protocols, and to incentivize hospitals to improve the patient experience. They do this by withholding a percentage of Medicare payments (2% by law) and making an adjustment to the base amount of payment that reflects how well a hospital performs compared with other hospitals and how much they improve their own performance. In 2019, the CMS paid $1.9 billion, or 0.3% of 2019 Medicare expenditures, to about 55% of the hospitals through these payments.

Although there is no doubt that quality management programs play a critical regulatory role in creating a “performance floor” to produce a competitive environment and promote meaningful innovation in care delivery, other changes would also need to occur. Probably the most important change would be to introduce real choice into the system and empower consumers and clinicians with portability and interoperability of electronic health records and price transparency for shoppable services (preferably at the point of service), linked with meaningful quality performance information so that consumers and clinicians together can make choices that best meet their needs.

The fee-for-service payment model, which is still the dominant mode of reimbursement, penalizes physicians providing improved value of health care. In contrast, capitated systems reward improved value. To encourage a shift to value-based care, public payers could deploy policy levers such as automatic enrollment to migrate beneficiaries into risk-adjusted, capitated programs like Medicare Advantage.

Horizontal vs Vertical Mergers

The government, particularly agencies like the Federal Trade Commission (FTC), play an important role in challenging horizontal mergers and acquisitions, which occur between entities that operate in the same industry. This practice, frequently used by hospitals to gain greater market share and pricing power, provides few benefits to consumers and is more likely to result in higher prices.

Unlike horizontal mergers, vertical mergers, such as when hospitals acquire physician practices, may at least provide the opportunity for increased efficiency and lower-priced provision of services. Whether vertical mergers deliver on that potential—and how the efficiencies are distributed among producers, insurers, and consumers—will vary, but at least they have the potential for lower cost and more efficient care. Policy makers and Congress could assist the FTC in its competition mission by increasing funding and staffing for health care review and enforcement, specifically for increased scrutiny of hospital mergers.

Are physician-owned hospitals potentially a way to increase competition among providers of specialty services? To answer that question, it is important to remember why this practice was initially limited by the government, followed by the ACAmandated restrictions. These actions were motivated by concern that physicians practicing in their own specialty hospitals (primarily cardiac and orthopedic hospitals) were self-selecting the healthiest patients for their own hospitals and sending the more medically complex patients to their corporate hospital competitors.

Some data support this concern, whereas other analyses have found quality benefits of hospitals that focus on specialty care—sometimes referred to as a “focused factory” approach, exemplified by the Shouldice Hospital in Thornhill, Ontario, Canada (which specializes in hernia repair). Rather than banning a potential source of competition, which might result in lower prices for insurers and public programs, a more effective solution would be to refine the diagnosis-related group categories in ways that better differentiate patients by the severity and complexity of their illness.

It is not clear how different the resultant spending would have been for specialty services if the government had pursued a more competition-oriented fix rather than the ACA’s moratorium on physician-owned hospitals. It is just one more instance where the government has relied on regulation as opposed to giving competition a chance.

Author Affiliations: Project HOPE, Bethesda, Maryland (Wilensky); Kenan-Flagler Business School, University of North Carolina, Chapel Hill (Miller).
Corresponding Author: Gail Wilensky, PhD, Project HOPE, 7500 Old Georgetown Rd, Ste 600, Bethesda, MD 20814 ([email protected])

Conflict of Interest Disclosures: Dr Wilensky reported receiving personal fees from UnitedHealth Group; serving as a director for UnitedHealth Group, Quest Diagnostics, and ViewRay; receiving retainer payments and deferred stock or stock options from UnitedHealth Group, Quest Diagnostics, and ViewRay; and receiving payments from the UMWA Health and Retirement Fund for serving as a trustee. Dr Miller reported receiving personal fees from the Federal Trade Commission, the Centers for Medicare & Medicaid Services, and MedStar Georgetown University Hospital.

Note: Source references are available through embedded hyperlinks in the article text online.

Previous Publication: This article was previously published in JAMA Health Forum at jamahealthforum.com.

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Gail Wilensky, Ph.D.