When Private Hospitals Cherry-Pick, Teaching Hospitals Pay the Price

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. (Resneck et al., Journal of American Academy of Dermatology, Volume 57, Issue 6, December 2007, Pages 985–989). 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, MD, is Chief Health Care Officer at the Association of American Medical Colleges. She blogs at Wing of Zock. Follow her on Twitter @joanneconroymd.

2 replies »

  1. I have to disagree with your conclusions about the data on profit margins. Sadly, it fits with much of the data that is thrown around about healthcare today. Computers allow us to produce large volumes of data, but simple answers are not easily drawn from raw data.

    Although some physician in hospitals may increase their margins thru payer selection, most of the difference is due to improved efficiency. I have worked in academic, private and physician owned hospitals. The level of efficiency in physician owned hospitals is orders of magnitude higher than other facilities. Most physician owners pay close attention to the cost–benefit comparison of everything they do. This goes all the way to surgeons knowing the cost of every suture the use. Often the hottest new thing touted by product reps offers little clinical benefit, at much higher costs. Physician owners are more likely to choose the product that is both clinically and cost effective. These cost savings are even more pronounced when it comes to expensive OR equipment. My experience in academic institutions is that every well-known surgeon demands having the exact equipment they want. This results in the hospital purchasing a plethora of similar equipment that do almost the exact same thing. In physician owned facilities, surgeons will make a group decision and purchase a single piece of equipment that works for all of them. Efficiency is even more pronounced in hospital staff productivity. In my experience, hospital staff are quite unresponsive to physician needs because their accountability runs through a bureaucracy of managers. In the physician owned hospital, staff work directly with the owners. This allows the owner physicians more control over both the efficiency and quality of patient care.

    Physician owned hospitals are a disruptive business model that threatens the traditional Hospital industry by being able to offer better care with greater efficiency. The American Hospital Association has recognized that most main stream hospitals cannot compete against this model and have spent vast amounts of money lobbying for litigation to restrict its growth. Interestingly, if you look at the data on healthcare costs, the curve began its up-slope in the mid 1960’s after the implementation of Medicare. Prior to this time, most hospitals were either physician owned or run by religious organizations. The beginning of Medicare ushered in the cozy relationship between the American Hospital Association and CMS, the dawn of lobbying for profits, and the beginning of the upward sloping cost curve.

    In conclusion, I have to argue that the conclusions drawn from your analysis of profit margin data are fallacious. Physician owned hospitals have higher profit margins due to efficiency. The Medicare patient satisfaction surveys indicate that patients also feel they provide a higher quality of care.

  2. 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