Restrictions, Bans on Doctor-Owned Facilities to Benefit Chains

by: Donald Johnson

Doctor-owned specialty hospitals deliver better quality of care, are more convenient for physicians and patients and take business away from not-for-profit and investor-owned general acute care hospitals, which have been trying to put them out of business for years.

The NY Times reports on the latest effort by liberal Democrats to take down the for-profit speciality hospitals. The Democrats behind this drive don't believe in for-profit health care providers even though not-for-profit providers are as profit driven as the investor-owned providers. Most Republicans oppose the effort to restrict the growth of doctor-owned hospitals, because they understand that many local hospital markets are dominated by a few institutions and that patients and insurance buyers need more competition among providers to keep costs under control.

This is a battle between the powerful American Medial Association, which supports doctor-owned hospitals, and the American Hospital Association, which represents mostly not-for-profit hospitals and wants to end competiton from the doctor-owned specialty hospitals. The irony is that if Congress restricts physician ownership of hospitals, nursing homes, specialty clinics and other institutional providers, the doctors who own those businesses most likely will sell out to regional and national hospital, nursing home and specialty hospital chains. Congress will give acute care hospitals even stronger oligopolies and monopolies and more pricing power than they already have, which is considerable.

All of this is strange when Sen. Obama is promising to increase enforcement of anti-trust laws. Historically, the government has found it is difficult to enforce anti-trust laws against hospital and health care system monopolies and oligopolies. President Bush opposes the proposed legislation. This probably means nothing will happen until next year. If doctor-owned hospitals should be banned in the next Congress under a new president who signs the legislation into law, the acute care and specialty hospital chains that partner with physicians in specialty hospitals and other businesses would be the biggest winners while members of their medical staffs and insurance buyers would be the biggest financial losers.

The chains would win because they could consolidate the specialty hospitals and other businesses they own with physicians into their organizations. This would allow them to expand in markets where there aren't a whole lot of expansion opportunities. It would boost their bottom lines by allowing them to buy their specialty hospital competitors, which have taken significant market shares from them in the local markets where they operate. And it would simplify their administrative and management organizations, which spend a lot of time baby sitting their physician partners.

The major reason that doctors are partners with national chains in specialty hospitals is that the chains know that doctors who own a piece of a hospital or clinic are likely to refer patients to the business, and, more important, are likely to take their patients to the specialty hospitals. Of course, most doctors own their practices or are partners in for-profit medical groups. In multi-specialty groups, physicians have financial incentives to refer to other members of their groups. No matter how much physicians deny it, money talks, and they are like the rest of us. They respond to financial incentives even when it hurts patient care. While these financial incentives can hurt some patient care, they also can improve patient care. And the financial incentives and disincentives offered by Medicare and Medicaid are much more detrimental to patient care than doctor-owned hospitals.

But I digress. It is impossible to take financial incentives out of medicine or any other business that pays its employees and independent contractors. Physicians do deals with the national chains because they want to make money, the chains help finance their businesses and the chains are good hospital operators. Secondarily, specialty hospitals are more flexible and accommodating when it comes to scheduling operating room time and other procedures than larger general acute care hospitals. Even if doctors are taken out as partners in specialty hospitals, they won't stop referring patients to those facilities or practicing in them. There is nothing like a new hospital that takes care of its physicians and patients when it comes to attracting physicians and their patients.

What would happen, besides fattening the bottom lines of competing not-for-profit and investor-owned general acute care hospitals, is that payers, including patients with high deductibles and co-pays, would lose. Hospital chains that would benefit from enactment of legislation that would ban physicians ownership of institutional providers would include Universal Health Services (NYSE:UHS), Community Health (NYSE:CYH), Health Management Associates (NYSE:HMA), Tenet Healthcare (NYSE:THC), Lifepoint (NASDAQ:LPNT) and Medcath (NASDAQ:MDTH). Their daily charts are here. Almost all of these chains have deals with doctors and many are competing with physicians-owned hospitals that specialize in cardiac and orthopedic care. These are big ticket, profitable product lines for hospitals. I have blogged on specialty hospitals here and here, on Medcath here and on hospital stocks here.

Disclosure: I don't own any of these stocks.