Specialty Hospitals

Washington Post business columnist Steven Pearlstein was online to discuss his latest column , which looks at doctor-owned specialty hospitals. He writes that the head of Medicare and Medicaid is being asked to choose between two competing and fundamentally irreconcilable models for the U.S. health care system.

A transcript follows.

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Norfolk, Virginia: "Since the national hospital supply and equipment buying groups have a special anti-trust exemption granted by congress which stifles innovation and true cost reduction, will these specialty hospitals just tow the line like their large hospital brethren who receive millions of dollars in payments (rebates)to agree to buy 90% or more of their products from vendors contracted by the buying groups?"

Steven Pearlstein: Personally, I don't have a clue. But your point is one of hundreds that could be raised about the lack of real competition in the health care field -- some of it for good reason and acceptable, but increasingly large portions that are not helpful. The FTC is really hot to break up some of the cozy arrangements in health care and have been doing a pretty good job at least as far as hospital mergers is concerned.

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Laurel: About the narrow issue of cream-skim and cross-subsidation.

It's an unfortunate fact of health economics that the people who need the most health care are also those with the least money. I've read that the most lucrative medical specialty is sports medicine. Simply because of the wealth of the patients. And that elective plastic surgery is so expensive because the surgeons do much of their work pro-bono on children born with birth defects.

Not many crack babies are born to wealthy parents.

Steven Pearlstein: The class aspect of medicine is one of the most under-covered and under-reported. And it has so many facets to it. One of the things I see is the rise of what I call credit card medicine among the most sought-after docs. They don't participate in any insurance plan, require you to pay by credit card when you leave the office and you can submit to your insurer whatever you want. Obviously, these plans attract people who are in open PPO plans and willing to pay the extra for going out of network. But I see signs in more and more doctors offices saying that they no longer are part of this or that network. And this will harden further the class structure of medical practice.

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Cubicle City, Washington, DC: You say that specialty hospitals don't NEED to be owned by doctors. So who's the Need Czar in Washington? Maybe Medicare and Medicaid shouldn't regulate this, but maybe we should have a Need Czar.

I don't work for the Specialty Hospitals ... but from what I know, physicians own on average about a one percent stake. Hardly enough to really drive a lot of costs.

Steven Pearlstein: I think that's rather narrow and literal reading of what I wrote. All I was saying was that need for capital is not a reason for allowing doctors to invest in specialty hospitals. Conflict of interest is a reason to prevent them. Now obviously you don't think the conflict big enough to worry about. So I guess you'd be one of those people who might say, okay, as long as its less than 5 percent. So the government would push through such a regulation, and immediately a cottage industry would grow up of how to get around that rule, by having your inlaws and your kids own 5 percent, etc. etc. Look, if it is so small as to be deminimis, then there is really no reason to do it. Doctors have plenty of other places to invest their money. If you're saying that having a stake in the operation changes attitude and behavior, then you are saying it changes attitude and behavior, and that's where the potential conflict of interest comes in. Can you imagine a shareholder doctor saying to a patient, "YOu know, I've really not liked the new crew of nurses they have over at Cuble City Heart Hospital these days. Let's do the operation at Fairfax." I don't think so.

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Minneapolis, Minnesota: How do you take the money out of a $1.6 trillion health care economy?

The hospital lobby has minimized competition for years by portraying potential competitors as profit-mongers. The result is a grossly expensive, inefficient, unresponsive hospital system filled with outdated facilities that often deliver poor quality and terrible customer service.

To improve quality and reduce cost, competition in the hospital market must be increased dramatically. This will not happen by increasing regulation and government control.

Steven Pearlstein: I want to be clear about this because I've already gotten some mail along the same lines. I am in favor of lots more competition in the hospital sector -- between general hospitals and between general hospitals and other models. And the constant whining by the general hospitals undermines their position. For example, they say they have no problem with specialty hospital competition, only the physician ownership. But I'd bet my bottom dollar if a chain of specialty heart hospitals figured out a way to pick off the best heart docs in a community and put them on a very generous salary, which is perfectly legal, and attract all their patients as well as other docs, then the community hospitals would be back in Washington using some other complaint to shut down the competition. That's the way the health care lobbying game works, unfortunately. But it doesn't mean we have to cave in every time.

I'll also tell you one reason that the regulations now tilt against competition is because of the outsized influence of small state Senators and Congressmen in the process. They live in communities where competition is probably not possible, because there isn't a big enough market for a large number of competitors. And to "protect" the local hospital or other provider, they've tilted the rules in favor of the incumbent.

In the case of specialty hospitals, the political lineup now is liberal Democrats, who are suspicious of markets generally, align with rural state Republicans in the anti-competition coalition.

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Houston, Texas: How, if at all, is the peer review quality process affected because the hospital has or is owned by physician investors? In my experience, negatively. How can the hospital and the investor physicians reasonably be expected to discipline a physician when he or she is an investor/owner and, perhaps, on the board of directors? It is not reasonable.

Steven Pearlstein: That's a great point. You can imagine a rule requiring owner-docs to be peer reviewed by outsiders. But you are right in pointing up that when you have physician ownership, it begins to unravel all sorts of professional arrangements that are not based on profit-maximizing behavior, but rather on communitarian concept. Take night and weekend coverage. IN a pure market, the strong docs could opt out of that, forcing the younger, weaker docs to take the burden. And, in some respect, that is what the specialty hospitals are about in some communities -- giving docs a chance to get out of being on duty at the community hospital. But if docs think of their activity more as a profession, they wouldn't exercise that kind of power. They'd be more into covering for each other and sharing and doing what's best for the community, which isn't always what's best for individual doctors.

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Dallas Texas: Mayo Clinic, Scott and White, Johns Hopkins, Ochsner, Cleveland Clinic, and many others are all hospitals that are the foundation of the American healthcare system. This the way it used to be, physicians controlling (owning) their local hospitals. Over the years large corporations, both non-profit (don't read not for money) and for profit corporations would have the American public believe that only they can best serve the public against the "greedy" physicians and deliver an acceptable hospital model. Specialization is also not a new conflict. Children's hospital, cancer treatment hospitals, psych hospitals, women's hospitals, etc. What is new is physicians cannot own them due to the possibility of a physician referring a patient and profiting from that referral. When a procedure is done, let's take a gall bladder removal, their are two fees that are paid, a professional fee (to the doc) and a facility fee (to the hospital). Studies show that a physician owns about 3% of a hospital. The prof. fee is about $1200 and the facility fee is about $4000 (very rough numbers). Is it to be believed that a physician would be perfectly ethical for $1200 but if you kick in another $120 that he or she would cross the line. Every argument usually comes down to money. This argument is more about control and management. When you own something, then you have control. If you run it well with good outcomes, good customer service and financially responsible, you have a good business. If you don't, then you will fail. There are many challenges in the healthcare system. The physicians are the ones that can fix it. Only they can weigh costs vs outcomes.

Greg Weiss

Chairman USMD Hospital at Arlington

Steven Pearlstein: Greg, that's a very good and powerful and convincing comment. And I agree -- desire for docs to regain control over their professional lives, and over the health care system, drives the physician ownership as much or more than the chance to get even richer than they already are. But again, the world is flexible enough to allow creation of doctor controlled hospitals without doctor ownership and doctor profit. You seem to conveniently ignore the hard, irrefutable evidence that has been collected about physician behavior when they owned MRI or Cat Scan machines or labs. Oh, no, they said, why would a doc making $400,000 a year care about one more MRI in which the profit is maybe $200. Well, apparently a sufficient number did care to really drive up the utilization rates.

Look, medicine is already full of built-in conflicts of interest that can't be avoided. If I go to a gall bladder surgeon with a set of symptoms and he says that I need an operation, he self-refers me to himself to perform the operation. Obviously I could go to someone else. But in practice, I don't. There is no away around that conflict. But I don't think we need to go the next step and layer on an ownership component. And for the same reason, we need to police the relationship between the docs and the drug companies in terms of their research money and product endorsements.

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Brookfield, WI: CMS has indicated that it plans to "overhaul" the DRG payment system to hospitals, and MedPAC is looking at changes in the way hospitals get paid as well. Both are trying to level the playing field between the "different" types of hospitals.

Insomuch that the current methodology of establishing reimbursements and setting rates has evolved over the past 20 years, basically since the implementation of DRGs, are there any estimates and how long it will take to find a meaningful solution?

Steven Pearlstein: Obviously, Brookfield is someone who knows the intricacies of the cream-skimming dilemma. Getting the prices right will never, ever be perfect, but I think you are right: it will take several years at a minimum to reduce the significant mispricing that now has hospitals losing lots of money in the ER but making it up in the cardiac unit.

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Kansas City, MO: Mr. Pearlstein: Question: How did you come up with the 130 physician-owned specialty hospital number?

Out of that 130, how many are truly owned by physicians. How many are joint ventures with hospital and physicians, how many are a hybrid of some other type of venture capital organization?

Steven Pearlstein: Don't know those facts, but the basic number came from a special commission empaneled by Congress to study the issue, I believe. It is in all the congressional testimony on the issue, and seems to be the one thing all sides agree on.

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Rockville, Md.: Why do you think doctors are doing this? Do you understand the need to make up for health insurance industry's self-imposed determination of reimbursement?

Steven Pearlstein: I am sorry that doctors have had to suffer a reduction in their income as a result of managed care and pressure from government and private insurers. But I don't know why docs feel that they have a right never to suffer a reduction in what is the highest income levels for doctors in the world. There are some good reasons for that, including private assumption of the cost of training for many years. But by the time you get to the age of 50, most of that is more than made up for. So I'm having a hard time crying a lot of tears for docs at a time when health care costs are skyrocketing and really squeezing the standard of living of many, many ordinary Americans.

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Rockville, Md.: Why do you think more and more doctors are refusing to sign contracts with the health insurers? Maybe they cannot meet their overhead and are exhausted after seeing 40 patients in the office and unable to give them quality time.

Steven Pearlstein: Well, then they shouldn't do it. But your question, like the previous question, assumes that they are entitled to a certain income level that is built into their cost structure. It is NOT true that the reimbursement rates don't cover the other costs of running a medical office. It may be true that some reimbursement rates would squeeze doctors take home pay.

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Dallas: If they didn't think the nurses, or equipment, food or anything else, they could terminate them. That is the whole point of them owning the hospital. Now they have nothing to say about anything. Talk to physicians in hospitals on how things are run.

Steven Pearlstein: Look, that is just not true. Docs certainly have less power in how hospitals are run, but that is coming down from having absolute 100 percent power. They are still very powerful, and well run hospitals know they need to keep the docs on the team, and make sure they are happy, or they will go elsewhere. Once again, the problem here is that docs would like to return to the world where they were complete dictators of the system. That is no longer acceptable, affordable, desireable (and please don't give me that malarkey about doctors and their patients deciding, as if patients really have an ability to challenge their doctors recommendations). So docs are less happy and less rich than they used to be. Get over it. The golden days are over. Now what I've suggested is that docs should remain in the main and most powerful actors in the system, in their offices and in the hospitals where they practice. But in order to retain that role, there is a tradeoff: invest your money somewhere else.

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Gaithersburg, MD: Your statement that

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

Is unfortunately all too true. The question that you do not ask is to what extent do we want emergency medical care and intensive care to be available to all. If the answer is only to the extent that individuals can afford the care, then there are no problems allowing medical care to proceed in a relatively free market. If the answer is to the fullest extent necessary to protect all life regardless of the ability to pay, then there is a serious problem of how to pay for this unfunded mandate. This question of how do pay for the unfunded mandate is implicitly, though no directly addressed in your article.

How can this issue be addressed is the proper question? Until it is the community hospitals are right, they are being skimmed of profit centers to fund non-profit centers. Emergency rooms in public hospitals have the worst problems as they are pretty much forced to accept all patients. Private hospitals have much less of a problem and shift their unfunded patients to public hospitals as soon as possible. This one minor reason ambulances call ahead to private hospitals when bringing non-critical patients.

My question is when will we as a nation decide to address this "culture of life" question? How should unfunded (uninsured) medical services be paid for and should they be mandated?

Steven Pearlstein: That's the 64,000 question. And the Bush administration has done nothing about this pressing social, moral and economic issue. Here in the Washington area, caring for the uninsured adds about 7 percent to the cost of private insurance, and probably accounts for 10-20 percent of the cost of state and local government. So that kind of cost shift is intolerable. As I've written in other columns, I'm for a universal mandate, requiring all companies to offer all employees a catastrophic health insurance plan for themselves and their family, with companies paying at least half the bill.

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Youngstown, OH: Are physicians finding a way around the potential for a prolonged moratorium by entering joint ventures with hospitals? Do such arrangements provide the same potential for abuse as do specialty hospitals?

Steven Pearlstein: If the purpose of a joint venture is to get the benefits of specialization and doctor control, I'm all for it. Obviously, shifting an entire department out of the hospital doesn't increase the level of competition. But it may have other benefits. Separately is the issue of who profits from the joint venture. If it were a non-profit but controlled by the docs, that might be a good arrangement.

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Chicago, IL: I'm wondering why you buy into the notion that health care should be largely insulated from the same economic forces that have made the U.S. economy arguably the most efficient, innovative and successful in the world?

Competition (and volume) produces superior care, as recent studies show. You rightly note that an end to cross-subsidization would be a good step, as would adjusting payment formulas to reflect patient severity. Why not make these changes and let competition provide the better level of health care than the current system?

Steven Pearlstein: Because I think that is a naive question. We in American have more market elements to our health care than anywhere else on the planet. We have the most expensive system, although not necessarily the most efficient or effective. And one reason is because there are other factors in health care that aren't present in other industries. That's why holding out the fantasy of a pure market is misguided. Could there be more market-like elements, like making patients pay higher co-pays and deductibles -- sure, that works for me. So do closed panels HMOs. So does having the government rating hospitals and docs for quality of outcomes. But as long as the radical right keeps pushing this notion that all it would take is to make health care like every other market, we won't get anywhere because the American people won't stand for it. We don't let people die because they don't have money, taxpayer pay half the total health care bill, we have small communities where competition is impossible, we have patients who are not cost-sensitive because of insurance, we have a crazy system for training doctors. And all those things require a hybrid system.

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Waynesboro, VA: Studies suggest that one-third of the medical care provided in the US is not beneficial and may even cause more harm than good. The financial incentive to perform unnecessary elective procedures is overwhelming. It's tome to admit that health care providers practice to maximize their income like everyone else, and that some regulation of this behavior for the public good is needed.

Steven Pearlstein: Right on.

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Danvers, MA: "For most Americans, providing health care ought to be different from selling soap"

Yes! And it would seem most Americans want to be made well when sick and to remain well when not. They're not interested in comparison shopping one high-margin remedy against another. Whether it's a high-margin heroic effort they need from the docs or a routine one, they just want to be made well. Seems to me you've wedged a nice wrench between the gears of competition.

Steven Pearlstein: Thanks.

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Bethesda, Md.: you say that competition is good. Yes, but not in health care. People would be much better off if the hospitals actually cooperated with each other. Duplication of services is very costly. This lack of cooperation leads to "business skimming". The health care industry has fostered this, take no responsibility in improving health care or its delivery and continue to make record profits while physicians and hospitals nickel and dime themselves to the point patients are being harmed

Steven Pearlstein: We have had some experience with the government using central planning in health care -- the certificate of need process that required approval to buy any machine or open a new wing. And I'm not sure it really worked better than a competitive model. The system is very susceptible to political influence. And without some competition, hospitals get very fat and flabby and justify every dollar of expenditure as the difference between life and death. The competition we have now is certainly not perfect, but I wouldn't want to give it up.

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Rockville, Md.: Again, you begin to make a good point and then blame the doctors. You did allude to the health care lobbyists. They help nothing. If physician organizations had that kind of money you can bet the congress would listen.

Steven Pearlstein: The AMA is one of the most effective and well funded lobby in Washington. Who are you kidding?

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Bethesda, Md.: Come on Steve. As doctors get older they should not have to take call. Would you like to be 60 and working past midnight????

We have instituted maximum work weeks for residents( who are learning from this that they do not need to work hard).

Steven Pearlstein: Sixty, probably not. But I'm 53, am somewhere near the top of my profession, and I work Thursday and Friday nights. And I make a hell of a lot less than a doctor.

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Annapolis, MD: If I could throw out a tidbit. The AMA annually actually controls the number of students allowed in med school. The reason for this is to make sure the market doesn't have too many physicians -- which would decrease their value (salaries). So it is a system that is carefully managed from the start to circumvent true competition.

Steven Pearlstein: That's a very good point that I completely forgot about. They also decide how many will be allowed to train in each specialty.

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Reno, NV: You mention over and over the "experience with doctor owned labs and MRI machines increasing the number of unnecessary operations." Congress dealt with that issue and unwound the industry. Study after study, including those performed by Governmental agencies, i.e. GAO, CMS, DOJ/FTC, have shown that specialty hospitals do not cause harm to community hospitals. What further proof is needed?

Steven Pearlstein: I find it curious that if specialty hospitals aren't bad for community hospitals, why are community hospitals spending so much time and money fighting them. Do you think they don't rightly perceive their own self interest. Those studies are not convincing to me, frankly. They cream skim, pure and simple -- in fact, that is their very, stated purpose. The number of heart operations is relatively fixed, and if you are doing more, I am doing less. It is a zero sum game. Now maybe it is better for the system if these things are done in a specialty hospitals where doctors are more in charge. That's fine. But let's not kid ourselves that it will require further shrinkage of the community hospital.

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Dallas, Texas: Would any physician that you know do a unnecessary invasive procedure on a patient for $. It is very different than MRI/CT. By the way, we have lost money the 1st two years of operation. It is difficult (impossible)to convince individuals that it is about control rather than money. It really isn't much different than the Ambulatory Surgery Center model over the last 20 years. The hospitals were crying doom and gloom then. I know of no one that hasn't agreed that the surgery center model is good for everyone. I very much appreciate the discussion. Thank you

Steven Pearlstein: Its not impossible to convince me that its more about control than money. So let's find a mechanism so you can have your control without the money. Start a non-profit specialty hospital where the board is made up solely of doctors who practice at the hospital, and any "profit" that is made is directed toward free care. I like that model. How about you?

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Tulsa, Oklahoma: Steve, Thanks for taking my question. Your comments run counter to recent publications by CMS and others regarding physician owned hospitals and counter to articles printed by your own newspaper as it relates to competition. All reports to date have proven that physician referrals are not remarkably different to hospitals they own as opposed to referrals to community facilities. The other issue most recently reported by the CMS study was the community contribution made by specialty facilities against that of the community hospital. CMS stated that the community contribution by specialty facilities due their tax contributions etc. exceeded that of the non-profit community hospital. Further, if you go to www.guidestar.org and look at the federal 990s you will see the tremendous salaries being paid to these system administrators and the huge profit margins being taken in the name of "non-profit" healthcare. Studies already in press further justify the higher quality of care and lower infection rates of specialty facilities against that of the "big boxes." Competition is essential in every industry including the press. If your going to use your column as the "bully pulpit" lets get all the facts out not just the same rhetoric the AHA and FHA have paid people to believe.

Steven Pearlstein: Hey, I have read all the testimony from your organization. But don't expect me to put every argument of every side in a 800 word article. Not humanly possible, even by someone with an MD.

I've been in Washington a long time, and there are studies showing anything you want to prove, so please let's not get into the fact that the literature is unequivocal on these issues. It isn't. That the literature is sketchy and equivocal was the conclusion of the study panel.

You trotted out the standard talking point about how specialty hospitals give back as much to the community as community hospitals, when taxes and such are factored in. That may well be true. But I find it interesting that I never made that argument against specialty hospitals. It sounds like you are simply reading from the industry talking points, which have been repeated over and over again by those testifying on behalf of the specialty hospitals at congressional hearings.

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Tampa, FL: A comment, if you don't mind. Many of your readers seem to confuse economics with religion. Capitalism is not a religion. It is a mere economic system. As such, it cannot cure all societal ills. So just arguing for competition for its own sake is not rational economics. Denying economic reality, such as the link between physicians owning MRI/catscan clinics and prescribing unnecessary tests, goes against the fundamental nature of economic analysis. And as George Will once said in a rare moment of lucidity (the other being when he railed against the designated hitter rule), capitalism is a gov't program. It cannot exist without the gov't enforcing contracts and property rights. Since gov't is an absolute prerequisite to capitalism, gov't must have a fundamental role in the economy, including stepping in when competition fails.

Steven Pearlstein: What a good way to end our discussion today. It was a good one, very well informed and lively. Let's do another one next week. Thanks.

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