“The hospital industry didn’t like competition. Physicians were being competitive. So it got banned.”
Howdy folks. Today I’m joined by Brian Miller, our new visiting fellow at the Hoover Institution, to talk about the Affordable Care Act’s effective ban on new physician-owned hospitals.
Brian is an associate professor of medicine at Johns Hopkins, a MedPAC commissioner, and the vice chair of the North Carolina State Health Plan board. He’s a practicing hospitalist who has also done tours at CMS, the FTC, and the FDA.
The existing ban on physician-owned hospitals from billing Medicare patients
On this episode, Brian and I discuss the ban on new physician owned hospitals (POHs) that was put in place in the Affordable Care Act. Section 6001 of the ACA prevents new POHs from billing Medicare services. Why technically new POHs are allowed to open and charge commercial or non-Medicare patients, the lack of Medicare patients has effectively frozen new supply of physician-owned facilities.
Case in point: There were roughly 250 POHs operating when the ACA passed in 2010. There are still roughly 250 today.
What’s the case for the ban?
The ban was pushed by the hospital industry as a way to prevent competition for its services. The hospital industry’s argument went like this: physicians, if turned loose to own hospitals, physicians would cherry-pick the healthiest and best-insured patients, stand up boutique specialty facilities without emergency rooms or labor and delivery, and starve community hospitals of the volume that cross-subsidizes their unprofitable services.
Why it doesn’t hold up
Brian walks through the argument piece by piece, and very little of it survives contact with the data.
Cherry-picking is a risk-adjustment problem, not a business-model problem. If the patient mix at one facility is sicker, pay that facility more. Medicare does this constantly. We chose to ban a business model instead of fixing a payment formula.
Half of physician-owned hospitals were full-service community hospitals with emergency rooms, OB-GYN, general surgery, primary care, the works. The other half were specialty hospitals, and even there the cardiac POHs are operationally full-service (you can’t really cherry-pick when people walking into your ER are having a heart attack).
Specialization is a feature of competitive markets, not a flaw. And it’s allowed for everyone except physicians. Imagine if we didn’t let lawyers own their law firms. Or workers own parts of their own businesses.
Post-ACA POHs that opened without Medicare went bankrupt. A 2016 Health Affairs study tracked POHs that tried to operate after the ban. Only using commercial patients wasn’t enough. After all, Medicare patients are an enormous part of the market for medical care.
The cross-subsidy argument is, in Brian’s words, “absolute hogwash.” Running a business on the premise that one profitable line covers a permanently unprofitable line isn’t running a business, it’s running a fiefdom. Hospitals can and should make every line of service viable on its own. And if they can’t, allow competition elsewhere to provide the service.
Ultimately, the ban on new physician-owned hospitals is an anti-competitive measure that has further consolidated the market and driven up prices for everyone.
What Congress (or CMS) could do to fix it
Brian lays out a menu of policy fixes, ranked roughly from modest to ambitious:
CMS rule making to expand the existing “high Medicaid need” exception. Real but small, and reversible by the next administration.
A rural carve-out that would repeal the ban in geographies with a minimum drive time to the nearest hospital.
A joint-venture carve-out that would allow physician-owned specialty hospitals if they include a non-physician hospital partner.
A community-hospital carve-out that repeals the ban for physician-owned hospitals that meet the Medicare definition of a full-service hospital (24/7, ER, etc.).
A full repeal of Section 6001, optionally paired with a small Medicare rate haircut to address residual risk-adjustment concerns.
Stark Law reform in managed care settings. This would let physicians self-refer to their own facilities when there’s already utilization review and prior authorization to police induced demand.
The bipartisan case for allowing new physician-owned hospitals
The fun thing about this issue is that it scans differently to different audiences. To a market-oriented Republican it means more entry, more competition, lower prices, and more small-business formation. To a more progressive office, it’s that workers (the doctors, nurses, and pharmacists actually delivering the care) should be able to own a piece of the business.
The cost of inaction, meanwhile, has been a decade-plus of hospital consolidation. With ownership off the table, independent physicians have one realistic exit: sell their practices to the big hospitals. The hospital systems that lobbied to ban physician ownership are the same systems that have absorbed those practices and raised prices on the way.
Ultimately, this is yet another case of politicians trying to lower prices by centrally planning the market, but ultimately just artificially stifling supply that would otherwise be happily provided. The results are obvious.
What’s in the episode
[0:16] Introducing Brian Miller: New Hoover visiting fellow, associate professor at Johns Hopkins, MedPAC Commissioner, and NC State Health Plan vice chair
[2:40] What Section 6001 of the ACA actually does and why it ended up in the bill
[4:23] The cherry-picking argument and why risk adjustment is the right tool
[5:51] A tour of the physician-owned hospital market: community POHs vs. cardiac vs. orthopedic vs. general surgical specialty hospitals
[8:15] Why specialty hospitals deliver higher quality at lower cost
[10:05] What happened to the POHs that tried to operate without Medicare after the ban
[14:35] The market already segments, just not under physician ownership
[15:49] Why the cross-subsidy argument is “absolute hogwash”
[25:38] Policy menu: what CMS could do via rulemaking, and why it’s not enough
[27:14] Statutory options: rural carve-outs, joint ventures, community-hospital carve-outs, full repeal
[28:54] Stark Law reform in managed care settings
[32:01] Is this a partisan issue? (Less than you’d think…)
[34:11] How the ban accelerated hospital consolidation and the corporate employment of physicians
[37:30] What happens after repeal? Timelines, joint ventures, and why incumbents should welcome the competition
Send us your feedback or policy questions by emailing feedback [at] 584vetoes.com or finding me on Twitter @TomVChurch and Brian at @DrBrian4Health
