A Health-Care Loophole; Specialty Hospitals Tilt Playing Field

Article excerpt


Those of us who long have promoted the virtues of free-market-oriented health policy share two overriding principles. First, the market is the mechanism to best meet the needs of the consumer. Second, the market is best served by allowing free and fair competition.

These principles apply particularly to hospitals. Throughout the country, full-service community hospitals compete based upon services and quality. In addition, a hospital-led initiative soon will empower consumers to go to a Web site to compare hospitals based upon how well they measure up using key quality indicators.

However, there is a disturbing trend taking place on the hospital landscape - one in which the claim of competition is used to mask anticompetitive behavior. More precisely, it is being used not to compete, but to control which patients go to which facilities.

In recent years, new so-called specialty hospitals are proliferating across the country. These facilities typically limit their care to just one type of service - such as cardiac or orthopedic care - that promises a high profit margin while avoiding essential but break-even or money-losing services, such as "24/7" emergency rooms, intensive-care units and burn units that are offered routinely by full-service community hospitals.

These specialty hospitals claim to offer competition to full-service community hospitals. Upon closer examination, their business is based almost exclusively upon their ability to use a legal loophole to control the flow of patients. Specifically, this loophole allows specialty hospitals to cherry-pick only the most profitable, least expensive patients, leaving high-cost patients, people on Medicaid and the uninsured to be cared for by community hospitals.

Under this loophole, builders of specialty hospitals offer "sweetheart deal" ownership interests to referring physicians at bargain-basement rates not made available to the average investor. These arrangements tilt the competitive playing field by providing physician-owners with a strong monetary incentive to refer carefully selected patients to the facilities in which the physicians have ownership interests.

These incentives create conflicts of interest. Laws on the books prevent physicians from referring patients to labs, diagnostic or imaging centers, or hospitals of which they are owners. However, Congress provided an exception to allow physicians to have ownership interests in whole hospitals, because, the thinking went, no specific referral would economically advantage any individual physician. …