The Specialty Hospital Debate

Robert Pear at the NYT has reported on a big health policy debate in Congress: proper treatment of specialty hospitals by Medicare. The question of whether Medicare should pay for cardiac or orthopedic surgery done in doctor-owned facilities (rather than traditional hospitals) may not seem like a burning issue to most. But as someone who’ll be presenting on this topic at a conference at Harvard later this week, I can say that many of the biggest ideological conflicts about the proper provision of health care are present here.

Over the last few decades, one of the biggest trends in health care has been entrepreneurial doctors’ efforts to strip out the most profitable business from general hospitals. Ambulatory surgical centers were the pioneers here; they didn’t worry general hospitals terribly much at first because patients could not spend over 23 hours in such facilities, and the most lucrative procedures took a longer recovery time. But then other niche providers started providing services at the core of the general hospital’s business model, including cardiac and orthopedic surgery. For various reasons, these are some of the highest margin procedures under the Medicare system, and general hospitals have long used some “profits” from these departments to cross-subsidize care for the uninsured.

When cardiac or orthopedics departments migrate away from the general hospital, it is not easy to find alternative funding for vital public services. The resulting specialty hospitals often do not provide the type of emergency rooms, unsponsored care, or other public health initiatives offered by competing general hospitals. (Though there are some notable exceptions overseas.) Without ERs, most specialty hospitals can more easily avoid serving Medicaid patients, costly Medicare patients, and the uninsured than general community hospitals can.

This “cream-skimming” recalls the classic debate about whether insurers should be allowed to “cherrypick” the healthiest consumers as a business model. This worry is at the heart of various Congressional, administrative, and state moratoria on Medicare reimbursements for the procedures done at specialty hospitals.


Defenders of cross-subsidization have used many tactics to stem the flow of dollars and entrepreneurial doctors to niche providers. After convincing Congress to put a temporary moratorium on specialty hospital participation in the Medicare program, general hospitals focused on lobbying the executive branch (and state governments) to stymie their spread. They also used Certificate of Need (CON) laws and other state level regulations to deter entry of niche competitors–and to this day, virtually all specialty hospitals are in states that abandoned their CON laws.

Though they may protect access to care for the nonwealthy, these tactics have a cost. An on-again, off-again moratorium on specialty hospitals has generated legal uncertainty about their viability. Even their staunchest critics admit that something like the Shouldice Hernia Hospital in Canada does provide a model of innovation in health care. Moreover, critics of CON laws are legion, including the current FTC.

(Some at the FTC have tried to characterize general hospitals use of CON laws to deter specialty hospitals’ entry as anticompetitive conduct. But I query whether the cream-skimming at the heart of the specialty hospital model is all that pro-competitive. If the FTC deems it to be so, it may well start frankly advocating shifting ever more health resources to profit-seeking rather than health-provision.).

In response to these perceived shortcomings of regulation, a coalescing consensus of scholars and policymakers has begun supporting alterations in tax law or payment levels to supplant these complex regulatory responses to niche providers. If specialty hospitals are “cherrypicking” the healthiest Medicare patients and most lucrative DRG’s, then reimbursements should be altered to better reflect the true cost of care. If they are eroding an infrastructure of emergent or indigent care, state authorities can tax them in order to directly subsidize these services (or can decide to directly support the uninsured). Such payment system changes appear to many commentators to be more efficient, calibrated, and transparent than regulatory requirements.

My current (and evolving) opinion is that taxation (and reduction of payments to) niche providers should be based on their real effects in particular markets, not generalized assumptions about their role. Therefore, there should always be a role for state policy to balance federal policy here. If all the cardiac surgeons in a given market affiliate into a specialty hospital, officials have to worry–who will care for Medicaid patients or the uninsured? The extraordinarily disruptive potential of such moves mean that bans like Florida’s should be an option for a state where cross-subsidization is under siege. The FTC may believe that specialty hospitals are one more “dose of competition” that will improve the health care system. But real health insurance options for every American need to be available before policies like the FTC’s undermine extant patterns of cross-subsidization that now provide some backstop of access to care.

By the way, Daniel Goldberg has recently pointed out studies indicating how the complexity of America’s health care system challenges the soundbite-driven narratives of most news outlets. In my experience, even the most dedicated reporters are having a more difficult time seeing the “world of health care” in the “grain of sand” allotted by most newspaper editors. Pear’s article superbly captures the political dynamics behind the current debate, but I hope that the NYT website eventually permits writers like him to link to key documents on the issue that give a real sense of whether specialty hospitals are good or bad in general (or, whom they are good and bad for). Here’s a partial list of resources on the topic:

David Armstrong, A Surgeon Earns Riches, Enmity By Plucking Profitable Patients, WALL ST. J., Aug. 2, 2005

Sujit Choudhry, Niteesh Choudhry, Troyen A. Brennan, Specialty Versus Community Hospitals: What Role for the Law?

John Iglehart, The Emergence of Physician-Owned Specialty Hospitals, 352 NEW ENGLAND J. MED. 78 (1/6/2005)

Anne S. Kimbol, The Debate Over Specialty Hospitals: How Physician-Hospital Relationships Have Reached a New Fault Line Over These “Focused Factories,” 38 J. HEALTH L. 633 (2005)

Suzanne Strothkamp, Note and Comment, Understanding the Physician-Owned Specialty Hospital Phenomenon: The Confluence of DRG Payment Methodology and Physician Self-Referral Laws, 38 J. HEALTH L. 673, 693 (2005)

You may also like...