Health Policy

Hospitals Must Give Up Power to Save Healthcare


(This is the sixth in a series of excerpts from Terry’s new book, Physician-Led Healthcare Reform: a New Approach to Medicare for All, published by the American Association for Physician Leadership.)

As hospital systems become larger and employ more physicians, healthcare prices will continue to rise and independent doctors will find it harder to remain independent. Hospitals will never fully embrace value-based care as long as it threatens their primary business model, which is to fill beds and generate outpatient revenues. To create a viable, sustainable healthcare system, the market power of hospitals must be eliminated.

Federal antitrust policy is not adequate to handle this task. Even if the Federal Trade Commission had more latitude to deal with mergers among not-for-profit entities, the industry is already so consolidated that the FTC would have to break up health systems involving thousands of hospitals. Such a gargantuan effort would be practically and legally unfeasible.

All-payer Systems

 The government could curtail health systems’ market power without breaking them up. For example, either states or the federal government could adopt “all-payer” models similar to those in Maryland and West Virginia. Under the Maryland model introduced 40 years ago, every insurer, including Medicare, Medicaid, and private health plans, pays uniform hospital rates negotiated between the state and the hospitals.

It would be difficult for other states to replicate this approach because commercial rates are now so much higher than Medicare and Medicaid rates, said Paul Ginsburg, chair of the medicine and public policy department of the University of Southern California and a fellow of the Brookings Institution, in 2016 testimony to the California Senate Committee on Health. A more feasible approach, he said, would be to emulate West Virginia, which sets only commercial insurance payments to hospitals. In either case, however, an all-payer system would eliminate the ability of dominant health systems to extract very high rates from private payers.

Before Maryland implemented its all-payer model in 1977, the average cost of a Maryland hospital admission was 26% above the national average. In 2007, the average cost per case was 2% below the national average. However, in 2000, after the state eliminated payment adjustments based on the volume of hospital admissions, those admissions began to increase rapidly.Consequently, in 2014, Maryland started setting a global annual budget for each hospital in the state. Hospitals bill payers per admission (for inpatient care) or per service (for outpatient care) but are now expected to raise or lower their prices to remain on budget.

In the first three years after this program was fully implemented, Maryland hospital spending rose only 1.4% annually, well below the CMS target of 3.6%. Acute care admissions and gross hospital spending fell 2.7% and 2.3%, respectively, between fiscal years 2015 and 2016. Moreover, quality improved: Maryland saw a 6.1% reduction in readmissions and a 43.3% drop in hospital-acquired conditions over the three-year period.

As might be expected, providers responded to global budgets by shifting more care to the ambulatory and post-acute care sectors. Consequently, non-hospital spending in Maryland grew by 4.2% in 2016, greatly exceeding the national rate of 1.9% and offsetting the decrease in hospital spending.

Renewed Interest in States

 A few decades ago, several other states used all-payer rate setting, but they all abandoned it for various reasons. Most of these laws fell prey to gaming by providers and to political infighting within the states.Today, however, other states are following the path blazed by Maryland. In 2019, for example, Washington enacted a law under which the state will contract with private insurers to offer low-cost, tightly regulated plans on its ACA exchange. These plans will pay hospitals no more than 160% of Medicare rates. While this is much higher than the law’s proponents had hoped for, it was the best they could do to get the program enacted.

It’s unlikely that most states will go in this direction; however, the federal government could adopt a national all-payer rate system. Early in the transition to Medicare for All, Congress could pass legislation requiring all private insurers and self-insured employers to pay the same rates to hospitals, with adjustments for charity care and rural needs. Such rates would have to be negotiated by the government, which would continue to pay current Medicare rates; current state Medicaid rates would also remain in place until Medicaid was folded into Medicare during the transition period. Eventually, after private insurance disappeared, hospitals would be paid at negotiated rates across the board.

If the concept of a national all-payer system seems quixotic, no less an authority than Donald Berwick, MD, former acting administrator of CMS, recently proposed limiting hospital charges to 120% of Medicare rates across the board. “This is enough revenue to offset Medicaid underpayments and should provide appropriate pressure on hospitals to become more productive,” Berwick and Robert Kocher argued in a Health Affairs Blog post. The authors also recommended that future hospital price increases be limited to the annual increase in the consumer price index.7

Ginsburg supports the idea of unified administered pricing for hospitals. As quoted in my previous book, Rx For Health Care Reform, he noted that with universal coverage, states would no longer have to funnel money to inefficient hospitals to subsidize charity care. If all hospitals received the same risk-adjusted payments for the same procedures, he said, the inefficient ones would be likely to cut their costs or go out of business. On the other hand, he pointed out, the government would have to make allowances for special circumstances. For example, CMS would still have to subsidize teaching hospitals and trauma centers, he said.8

Hospitals must divest practices

Even under all-payer rate setting for hospitals, healthcare systems that employ a lot of physicians would still have bargaining power. To eliminate their ability to raise costs by negotiating higher rates for their employed physicians, the government could simply prohibit hospitals and other non-physician-owned entities from hiring doctors or owning their practices.

There are several good reasons for doing this. Besides raising costs, hospital employment of doctors can reduce the quality of care by forcing physicians to admit patients to lower-quality facilities. Hospital-owned practices have more preventable admissions than do physician-owned practices. In addition, burnout is more prevalent among employed physicians than among independent doctors because the former lament their loss of autonomy, notes Farzad Mostashari, CEO of Aledade and a former national coordinator of health IT.

The reluctance of healthcare systems to embrace value-based care must also be considered. Compared to independent practitioners, employed physicians have less incentive to restrain hospital utilization, so the divestment of owned practices would liberate physicians who are now “aligned” with hospital business strategies to pursue value-based care under a different set of financial incentives. Hospitals’ divestment of their practices is thus a cornerstone of the physician-led reform model I’m proposing.

Corporate Practice of Medicine Laws

Many states already have “corporate practice of medicine” laws that bar corporations from employing physicians. These statutes were enacted to avoid conflicts of interest between physicians’ duty to provide the best care for their patients and their employers’ dictates—exactly the kind of conflict in which many doctors find themselves today. Most states with such laws allow hospitals to hire doctors, however, since they’re also in the business of medicine.

The sole exception is California. That state’s corporate practice of medicine law prohibits any non-professional organization except for a public hospital, a narcotics treatment program, or a nonprofit medical research firm from directly employing physicians. Unfortunately, the California corporate practice of medicine law has not had the intended effect. Instead of hiring doctors, private hospitals and health systems simply lease their services from “foundations” that stand in for professional corporations.

The federal government could enact a stronger law that prohibits hospitals from directly or indirectly employing doctors. The statute should be written so that it also applies to insurance companies that employ doctors, such as United/Optum and Anthem. The venture capitalists that have recently been snapping up physician practices to turn them over for a profit should be forced to divest those practices as well.

It’s unclear how much it might cost the government to compensate insurers and private equity firms for divesting their practices. Optum’s recent $4.3 billion purchase of the giant DaVita Medical Group might be a marker for that expense; but however much it costs, corporations cannot be allowed to buy physician practices and use them for their own purposes. Healthcare is a public good, and its overriding goal must be to improve individual and population health.

Hospitals’ Objections

Hospitals would not have to be compensated for returning physicians to private practice. As noted earlier in this book, it’s unclear whether most hospitals would be worse off economically if their medical staffs were independent rather than employed. Considering the losses that hospitals incur on practice management, some hospitals would benefit financially from divesting their owned practices. The hospitals’ main concern, consultant Michael La Penna points out, would be to prevent competitors from controlling their referring doctors. If no health system could employ physicians, that wouldn’t be a problem.

Nevertheless, many hospitals would undoubtedly file lawsuits—or a class action suit—against the government. They might claim they were being unlawfully deprived of revenues that their employed physicians generated in excess of what those doctors would generate if they could refer to other hospitals, but this might be a hard case to make in court. Government attorneys would point out that hospitals cannot legally require employed doctors to refer to them. They could also observe that hospital employment of doctors has driven up health costs and, in some cases, resulted in inferior or unnecessary care.

The hospitals might also argue that they were being forced to divest their practices without compensation for their intrinsic value. Most hospital-owned practices, however, were acquired for little more than the value of their hard assets (equipment, fixtures, etc.) and receivables. Since most of these practices are losing money, it would be difficult to maintain that the hospitals should be compensated for giving them up.

Certain kinds of physicians should continue working for or exclusively contracting with hospitals because they are indispensable to inpatient or ED care. Among these are radiologists, pathologists, emergency department specialists, and critical-care physicians. Hospitals should also be allowed to employ hospitalists, who can increase the efficiency of care; however, at-risk physician groups should also have their own hospitalists. Hospitals would continue paying members of faculty practices for teaching and supervising residents, but the clinical practices of these physicians should also be divested.

Eliminating hospitals’ market power and prohibiting them from owning practices are only the beginning of the restructuring that physician-led healthcare reform would require. But these changes are the prerequisites for the new system, and nothing else is possible without them.

Ken Terry is a journalist and author who has covered health care for more than 25 years. He tweets @kenjterry.