MD-Owned Hospitals: Is a Policy Debate Being Overshadowed by Financial Troubles?

Sept. 13, 2023
Is the financial distress of physician-owned hospitals the key to federal policy relief? Or does the debate in Congress signal that it’s time to rethink hospital finances more broadly anyway?

Could the challenges facing physician-owned hospitals ironically help them out in the federal healthcare policy world? Consider the following news item from today’s news out of Austin, Texas—and then the larger picture.

As the Austin American-Statesman reported today, Sep. 12, the 23-staffed-bed Hospital at Westlake Medical Center, a surgical hospital in West Lake Hills, a suburb of Austin, Texas, filed for Chapter 11 bankruptcy protection. The surgical hospital will not close, but instead, its leaders will work to restructure its debt. In a statement released to the press, leaders stated that "Our commitment to being a dedicated partner to our patients and community remains unwavering, both during this process and beyond," the hospital said in its information sheet about the bankruptcy.”

"At the heart of our hospital's restructuring is our unwavering commitment to upholding the highest standards of excellence in patient care," Mark Shen, M.D., the hospital's CEO, said in the release. "Like many of our industry peers, we've battled immense challenges since the onset of the pandemic, which have only magnified the struggles businesses across every industry grapple with, including our own. Facing the stark reality of our financial standing and the unrelenting pressures impacting our industry, we're taking every measure possible to secure the future of our hospital." Dr. Shen had just been named CEO on May 8.

In the “About Us” section of its website, the hospital’s leaders describe their facility thus: “The Hospital at Westlake Medical Center not only provides traditional quality hospital care but also offers services ranging from high-tech diagnostic procedures to inpatient physical therapy and urgent care for emergencies related to trauma or illness.  We also recognize our role as a resource for information and education regarding medicine and healthcare to patients, staff, physicians and the community. Through our commitment to and involvement in Austin, The Hospital at Westlake Medical Center will continue to be an active and responsible healthcare leader. The Hospital at Westlake Medical Center is owned in part by physicians and meets the definition of a physician-owned hospital under 42 CFR 489.3. Diagnostic imaging, laboratory and other services are also provided under the hospital’s license.”

The hospital has reportedly been burdened by inflation, increasing labor and supply costs, and labor shortages.

Meanwhile, the troubles facing some physician-owned hospitals might actually reopen the policy debate that has been swirling around physician-owned hospitals for decades. After chalking up impressive financial successes in the 1990s and the first decade of the 21st century, physician-owned hospitals became embroiled in a multi-dimensional policy debate over reimbursement and regulations, and concerns over physicians potentially “gaming” the system led to a clause in the Affordable Care Act (ACA), Section 6001, which was passed in 2010 and signed into law by President Barack Obama, severely limiting physicians’ ability to build and own hospitals. But might the winds be shifting around the issue?

Elizabeth Plummer, Ph.D., Peter Cram, M.D., and Ge Bai, Ph.D., believe that such might be the case, and they have developed their own data-driven analysis to push the point. Writing in MedPage Today on July 6, under the headline, “Who’s Afraid of Physician-Owned Hospitals? It’s high time to lift the restrictions,” the researchers write that “The Affordable Care Act (ACA) imposed severe restrictions on physician-owned hospitals, preventing the formation of new physician-owned hospitals and limiting the expansion of existing ones. Since then, almost one-quarter of physician-owned hospitals have been acquired, changed ownership, or closed. CMS recently doubled-down on the ACA's restrictions in their 2024 proposal.”

Further, the write, “Using newly available price transparency data, our study in JAMA Network Open revealed that both commercial negotiated prices and cash prices in physician-owned hospitals were about one-third lower than their competitors across eight common services.”

The authors note further that “Ample evidence also suggests that physician-owned hospitals enhance physician engagement, provide higher-quality care, and have improved patient satisfaction, lower costs, and better infection rates compared with their competitors.”

Indeed, they write, “Critics of physician-owned hospitals -- mostly non-physician owned hospitals -- argue that physician ownership creates financial conflicts of interest, because of the concern that physician owners would have both the means and motivation to refer patients to their hospitals for unwarranted care. They would then have the opportunity to make money both from the care they provide and from any profits their hospitals realize (so-called ‘double dipping’). The reality is that such "double dipping" can occur in large integrated healthcare delivery systems that own physician groups. This set up allows for it. For example, Optum, a subsidiary of the insurer UnitedHealth Group, is affiliated with 70,000 physicians, making it the largest employer of physicians in the U.S. These health systems are not subject to self-referral restrictions and can even mandate that contracted physicians refer patients to their hospitals.”

Indeed, write Plummer (a professor of accounting and of medical education at Texas Christian University in Fort Worth), Cram (a professor of medicine at the University of Texas Medical Branch in Galveston), and Bai (a professor of accounting and of health policy and management at Johns Hopkins University in Baltimore), “The Federal government's restrictions on physician-owned hospitals create an unfair playing field that protects the interests of powerful hospitals. As a result of protectionism, health system consolidation has accelerated. We now have market domination by a limited number of powerful health systems with unparalleled pricing power. Patients and employers have ended up with limited choices and higher prices. We need more, not fewer, physician-owned hospitals,” they argue. “They deliver high-quality care at lower prices, instill competition in the hospital market, expand patient access to quality care, and pay taxes. Congress should create value for American workers and employers by lifting restrictions on physician-owned hospitals. If these hospitals are truly bad, market competition will make them irrelevant. Do not pick winners and losers. Let them compete!”

The advocacy of Plummer, Cram, and Bai is, however, still opposed by the hospital industry. Just last month, the American Hospital Association came out with a strongly worded broadside penned by president and CEO Rick Pollack, who argued in a post entitled “Keeping the Brakes on Physician-owned Hospitals Is Best for Patients,” that “Closing the loophole made good sense then, and it makes even better sense now. We’re concerned that some members of Congress want to roll back this basic patient protection by eliminating Medicare’s prohibition on physician self-referral to new physician-owned hospitals (POHs) and all restrictions on their growth,” Pollack wrote.

And, he continued, “Backing up 15 years of research, a new report from Dobson | DaVanzo [“New Analysis Validates Need to Preserve Restrictions on the Growth of Physician-owned Hospitals”] helps cement the powerful case for Congress to maintain current law, preserve the ban on physician self-referrals to new POHs and retain restrictions on the growth of existing POHs. This new study found that POHs report on fewer Medicare quality measures and perform worse on readmission penalties than full-service community hospitals, demonstrating that POHs are fundamentally different from full-service community hospitals — they treat fewer patients, provide fewer services and do not meet as wide a range of patient clinical needs,” he wrote.

The American Medical Association, of course, wants the Section 6001 ban lifted. On Aug. 10, Jesse M. Ehrenfeld, M.D., M.P.H., the AMA’s president, wrote

 that “The trend toward sharply higher levels of hospital market concentration around the nation has not benefited patients, who experience higher costs and poorer health outcomes in highly concentrated markets. Fostering greater competition by dismantling barriers to physician ownership of hospitals will provide patients with another option to receive high-quality care through integrated, coordinated care delivery. Competition, not consolidation, remains a key factor in providing higher-quality care at a lower cost to a wider cross section of patients. Multiple studies have demonstrated that hospital mergers in the same market yield higher prices (PDF)—in some cases, 10% to 40% higher—and that prices continue to increase for at least two years after the merger is completed,” Ehrenfeld wrote.

And, he added, “Even when hospital mergers result in cost savings, these benefits are not usually passed along to patients. In recent years, hospital groups have sought to further increase their market share by acquiring privately owned physician practices of all sizes and absorbing them into their operations. This works to marginalize physicians who seek to maintain their independence while further sacrificing patient choice.”

And, per all that, Sens. John Boozman (R-Ark.) and James Lankford (R-Okla.) and Reps. Michael C. Burgess (R-Tex.) and Henry Cuellar (D-Tex.) have introduced legislation in Congress, the Patient Access to Higher Quality Health Act of 2023 (in the House, H.R. 977) that would reverse Section 6001 and lift the ban on physician-owned hospitals, allowing physicians to open new hospitals and acquire existing hospitals.

It's hard to know how that legislation might fare, at a time of intense partisanship in both houses of Congress, and challenging budget issues for members of both chambers to work out over the coming months. The legislation also comes at a time when Administrator Chiquita Brooks-LaSure and her fellow senior officials at CMS (the Centers for Medicare & Medicaid Services) are intensely focused on shifting reimbursement away from fee-for-service payment and into value-based payment.

But what is clear is that the financial-operational landscape around physician ownership of hospitals has shifted, and the time when the argument was regularly made that physicians were simply running away with all the financial rewards of running hospitals, has dramatically faded away. Whoever wins the battle over physician ownership of hospitals will be confronting the stark reality that all the energy is shifting away from inpatient hospital operation now anyway, and that, faced with intensifying clinician (especially nurse) shortages and high operating costs, those running hospitals need to think very carefully and strategically about what it means to run a hospital facility overall, anyway.

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