How physician-owned hospitals are making teaching hospitals pay

I always believed that, if we could harness the entrepreneurial spirit of the American physician, we could be capable of great things. Physician decisions drive much of what is good and bad about our health care system. Their pens are the biggest driver of cost and their vigilance is the most significant driver of quality. It is a shame that physician-owned hospitals are accelerating the creation of a two-tier system by cherry-picking healthy, well-insured patients.

There are overwhelming monetary incentives for physician-owned hospitals to market to the healthiest and wealthiest, who seek a narrow list of procedural interventions. But then those physicians are rewarded with value-based payments for high satisfaction scores and low readmission rates as mandated by the Affordable Care Act.

What happens to the rest of the patients—the ones with one if not several chronic conditions and minimal if any insurance?

They find their way to teaching hospitals, which treat a disproportionate number of “dual eligibles” (seniors so poor they need both Medicare and Medicaid support), the disabled, and nonwhite patients. Teaching hospitals can quickly become underfunded and over-stretched, offering opportunities for physician-owned hospitals in the market to deliver better quality, albeit more expensive, health care to those who have the ability to choose. In spite of that, many teaching hospitals deliver excellent service and care.

In a May 14 Wall Street Journal article, Alicia Mundy wrote, “Doctor-owned hospitals are largely privately held, so it’s difficult to know their profit margins, despite the law’s growth restrictions. According to the American Hospital Directory, a private firm that provides data about some 6,000 U.S. hospitals, many physician-owned hospitals have enjoyed 20 to 35 percent profit margins in recent years.”

American community hospitals’ margins averaged 7 percent in 2010 and those of teaching hospitals are lower yet, at 5 to 6 percent. “In 2011, the first year ACA restrictions were in effect, more than half of the 30 largest doctor-owned hospitals showed operating margins that either matched or surpassed 2010 figures, and some had operating margins of more than 40 percent,” Mundy noted.

You can argue that we have had a two-tier system for a long time.

“Are you having trouble finding a doctor who will see you? If not, give it another year and a half. A doctor shortage is on its way,” writes John C. Goodman.

When demand is high, doctors tend to see those patients who have the best insurance coverage. In a study of dermatologists in 12 metropolitan areas, half of dermatologist respondents offered appointments for Botox injections with a wait time of 8 days. This is in stark comparison to previous work that showed wait times of 26 days for evaluation of a skin cancer (a changing mole) in these same communities.

A New York Times reporter interviewed practitioners and revealed, “For patients in need of services covered by Medicare, the typical wait to see a doctor was two or three weeks, and the appointments were made by answering machine. However, for Botox and other treatments not covered by Medicare (and for which patients pay the market price out of pocket), appointments to see those same doctors were often available on the same day, and they were made by live receptionists.”

Sounds like the same situations patients encounter in physician-owned and for-profit hospitals.

The tragedy is that most docs in physician-owned hospitals are delivering a level of service and quality that they could not muster in other settings. It is a testimony to the physicians, nurses, and staff at teaching hospitals that, in spite of the financial challenges facing their organizations, they respond so impressively to situations like the Boston Marathon bombings or the shooting in Arizona that injured Congresswoman Gabrielle Giffords; while purposely blind to the insurance status, color, or ethnicity of their patients.

I don’t think the architects of the Affordable Care Act envisioned their legacy to be one in which only the very affluent have prompt access to the kind of high-quality health care that historically has been available to the vast majority of Americans, while the rest endure long waits for appointments, poor quality, and rationing.

Joanne Conroy is chief health care officer, Association of American Medical Colleges.  She blogs at Wing of Zock and can be reached on Twitter @joanneconroymd.

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  • Greg Dursteler

    The problems you identify seem to be extrinsic to the phenomenon of physician owned hospitals, and are primary driven by the underlying economics of our system. I think physician owned hospitals are unfairly scapegoated.

    • Mengles

      Seems to be quite a bit of jealousy on Dr. Conroy’s part with her statement of: “But then those physicians are rewarded with value-based payments for high satisfaction scores and low readmission rates as mandated by the Affordable Care Act.”

      • Guest

        Yep. They beat her at her own game.

        • Dana

          Government- and academic thinktank-spawned incentives often have perverse consequences.

          There’s an apocryphal tale that relates how, in the former Soviet Union, managers of glass plants were at one time rewarded according to the tons of sheet glass produced. Not surprisingly, most plants produced sheet glass so thick that it was nearly opaque. The rules were changed so that they were instead rewarded according to the square meters of glass produced. Under the new rules, firms produced glass so thin that it was easily broken.

          You always get what you incentivize, but what you’ve actually incentivized might in reality be not the thing you THOUGHT you were incentivizing.

          The ACA is going to get exactly what they’ve incentivized; it’s just that what they’ve incentivized has little to do with improved quality of healthcare for previously under-served Americans.

  • LeoHolmMD

    Great post. The ACA will generate scarcity of the “quality” hospitals, sending prices through the roof. Whoever has their name on this piece of legislation needs to have their nose rubbed in it. What a disaster.

  • Mengles

    “I don’t think the architects of the Affordable Care Act envisioned their legacy to be one in which only the very affluent have prompt access to the kind of high-quality health care that historically has been available to the vast majority of Americans, while the rest endure long waits for appointments, poor quality, and rationing.”
    Yes, those ever smart “architects” being Congress who know nothing about healthcare and how it’s run. It’s called unintended consequences, Dr. Conroy. Don’t whine and moan now about the results, esp. since now when your teaching hospitals will be evaluated on a pay for performance basis. Whether you like it or not, the ACA has accelerated even further concierge practices and physician-owned hospitals, which will flourish no matter how much you try to throw mud on their obvious successes. I suggest instead of making excuses for your teaching hospitals, that you try to improve them.

    • Guest

      “We have to pass the bill to find out what’s in it!” ~Nancy Pelosi
      And yet 52% of the population saw no possible downside to that.

    • Dr. Drake Ramoray

      Unintended to those who designed it perhaps. Obvious would be a better word for those who were against ACA. Those who were against it were well aware of what was going to happen, especially the quotation you provided. What’s to worry about, these ivory tower types can’t make their own practices work (if they actually still see patients) without facility fees, but damn if they can’t tell me how to do my job.

  • pmanner

    Sorry, but this phenomenon is hardly new, and has very little to do with who owns the hospital. It has nothing to do with whether the hospital is for-profit or non-profit, whether the dumping hospital is a chain or a stand-alone, or even whether the dumping hospital is “affiliated” with the teaching hospital.
    Here in Seattle, EVERY hospital and hospital system tries to dump their slow-pays, low-pays, and no-pays on the academic institution. I’ve been here for seven years, and I can say with confidence that I have never seen a referral from an external provider that wasn’t uninsured or on Medicaid.

    • Dana

      You’re right, it’s nothing new and it’s hardly restricted to for-profit or physician-owned hospitals.

      From the Chicago Sun-Times, August 28, 2008 [you have to look it up on the Wayback Machine, as the Sun-Times appears to have now deleted it]:

      “Sen. Barack Obama’s wife and three close advisers have been involved with a program at the University of Chicago Medical Center that steers patients who don’t have private insurance — primarily poor, black people — to other health care facilities.”

      And in June 2009: “U.S. Rep. Bobby Rush (D-IL) is calling on the House Committee on Oversight and Government Reform to investigate allegations that the University of Chicago Medical Center is practicing patient dumping, an illegal act where hospitals divert poor or uninsured patients to other hospitals.”

      It’s ideologically satisfying for some to demonize physician-owned hospitals, but they’re not the only ones doing this and they’re not what’s at the root of the problem. At the root of the problem are the perverse incentives caused by government regulations surrounding EMALTA, Medicare and Medicaid. I can’t see the ACA fixing any of this, either. It may actually make it worse.

  • Anthony D

    “A federal judge lifted a 33-year-old injunction barring public access to a confidential database of Medicare
    insurance claims, a decision that could lead to greater scrutiny of how physicians treat patients and charge for their services.”

    As a patient, I wouldn’t mind to see on how my older family members get billed from Medicare and how the physicians bill them for their services. That’s been a question many times in the past regrading my grandparents and how the services billing cycle occurs and how much are the docs billing them for!

  • PollyPocket

    You forgot one very VERY important point: regulation. A doctor I know is out of network with all insurance. He charges to specialist copay upfront and the negotiates payment with the patients themselves. He does bill insurance companies, and if he gets anything it is icing on the cake.

    A few weeks ago another phycisian told a patient with Medicaid he was the ONLY doctor who could help her. When she called, the office manager explained that he was out of network. She insisted on coming anyway. The billing staff has to pretend like she was never even on the schedule.

    For him to bill that one visit would make him subject to CMS, and their costly regulations and inspections. He imposes a new rule that Medicaid patients are no longer allowed to walk through the front door, because he would be out of business if he attempts to toe the line with CMS

  • Margalit Gur-Arie

    So let me understand this:
    Acquiring physician practices and forcing all employed physicians to refer to the hospital chain that employs them, is perfectly fine. Having independent physicians refer to hospitals they own themselves is not fine.
    Doctors making a profit from delivering care is not OK, but other people profiting from doctors’ care delivery is OK.
    Smaller, more specialized hospitals that deliver more value for the buck (according to Medicare) are not allowed to grow under ACA, because large bloated and inefficient hospitals with CEOs that make millions and millions of dollars should be protected from such unfair excellence.
    And by the way, many of these hospitals do take Medicare and some even take Medicaid. Do they cherry pick? Maybe. And maybe if we let them expand and grow, they won’t need to cherry pick.

    Frankly, I don’t understand why we allow non-physicians to own hospitals….

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