Free-Market Philosophy Doesn't Always Work for Health Care

By Steven Pearlstein
Wednesday, June 8, 2005

As the head of Medicare and Medicaid, Mark McClellan may be the most powerful man anywhere, in control of about 7 percent of the U.S. economy. And today was to be the deadline for him to rule on one of the most heavily lobbied issues of the past year: whether to lift an 18-month moratorium on creating new physician-owned specialty hospitals.

It's all very technical and bureaucratic, to be sure. But in deciding the issue, McClellan is being asked to choose between two competing and fundamentally irreconcilable models for the U.S. health care system.

One model would rely even more on competition among self-interested providers for the business of increasingly empowered consumers to restrain prices, assure quality and spur innovation. That, after all, is how it works in nearly every other industry.

The other model is based on the premise that competition in health care will always be highly imperfect, and that too much competition will have socially unacceptable consequences. This model envisions even more government regulation and stronger management by public and private health plans.

In a decision that seems only fitting for a Harvard-trained physician and MIT-trained economist, McClellan has decided to kick the can down the road, extending the moratorium until year-end.

There are about 130 physician-owned specialty hospitals, most of them focused on heart, orthopedic or other types of surgery. There is some evidence that by doing large numbers of the same kinds of operations, the tightly focused hospitals lower costs, improve medical outcomes and deliver more patient satisfaction. And, in theory, giving doctors a stake in the enterprise not only gives them greater control over their professional lives, but also offers extra incentive to innovate and improve service.

General hospitals, by contrast, see the move toward specialty hospitals as nothing more than cream-skimming by self-dealing doctors that will put community hospitals into an economic death spiral. They argue that doctors referring patients to hospitals they own is an unacceptable conflict of interest. And by siphoning off the most profitable patients in the most profitable parts of medicine, the specialists rob general hospitals of the scale, scope and profit they need to operate unprofitable departments such as burn units and emergency rooms 24/7.

In truth, the arguments tend to jumble different issues that need to be pulled apart.

While specialized, high-volume units are probably a better way to provide some health services, they don't need to be owned by physicians. There are plenty of other sources of investment capital. And the experience with doctor-owned labs and MRI machines suggests that physician ownership of surgical hospitals will inflate total health care spending by increasing the number of unnecessary operations.

At the same time, community hospitals are probably right that specialty hospitals cream-skim the most profitable business. But the larger question is why the system doesn't allow hospitals to price their services so that "hard" cases are just as profitable as "easy" ones and emergency rooms enjoy the same operating margins as cardiac units. Eliminating cross-subsidization within hospitals would significantly reduce the amount of "cream" available for "skimming."

McClellan hopes that by adjusting and refining Medicare reimbursement rates for different categories of services, and allowing general hospitals to offer "gains-sharing" payments to doctors that could substitute for ownership of their departments, he can level the playing field enough to diffuse the specialty hospital issue. Like many conservatives, he looks to specialty hospitals, consumer-driven health savings accounts and new reimbursement schemes that pay doctors and hospitals for the quality rather than the quantity of care they provide to push the U.S. health care system toward the market model.

McClellan's crusade is likely to fail, however, if he doesn't resolve a fundamental question about the proper role of doctors in the health care system.

When they are vilifying insurers and managed-care companies, physicians like to present themselves as Dr. Welby -- selfless professionals whose medical judgments would never, ever be colored by their financial interests. But in lining up behind physician ownership of specialty hospitals, the doctors essentially acknowledge that they are just like the rest of us, their behavior swayed by even modest financial incentives.

You can't have it both ways. And the way the people would have it is to pay their doctors well, put them in the central decision-making role in the health care system -- and then demand that they give up the right to invest in MRI machines or specialty hospitals or get incentive payments from drug companies.

For most Americans, providing health care ought to be different from selling soap; they won't tolerate doctors acting like commissioned salesmen and investment bankers. And if that means having less market competition and more regulation in the health care system, it seems to be a trade-off they're willing to make.

Steven Pearlstein will host an online discussion at 11 a.m. today athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.


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