Study: Physician-Owed Hospitals Have Lower Prices, Boosts Competition

The Affordable Care Act, a misnomer if there ever was one, has been the law of the land for 13 years now. One of the many ill-thought-out provisions was one that banned further development of hospitals owned by physicians.

“The Affordable Care Act (ACA) imposed severe restrictions on physician-owned hospitals, such as prohibiting the development of new physician-owned hospitals and the expansion of existing ones,” Ge Bai, a professor of accounting and health policy at Johns Hopkins University and one of the coauthors of the study, said.

At the time the thinking (presumably) was that hospitals owned by a group of physicians could self-refer and generate business for themselves through the power of their medical licenses. Such thinking was that it’s a conflict of interest to have physicians own the facility they also work in.

As an aside, for-profit and nonprofit hospitals (both of which very much want to earn profits) are now major employers of physicians. If physician ownership of hospitals leads to abusive self-referrals, it’s logical that physician employment by hospitals would lead to the same pattern of abusive referrals.

Hospital consolidation has led to tremendous market power by large hospital systems, often with only two or three dominating a metropolitan city. The market for hospital care is local. Patients rarely want to travel very far outside of their hometown for a hospital stay. Thus, when two or three large hospital systems consolidate and split market share of a major city among themselves, informal collusion takes place and prices are much higher than they need to be. A case in point that came to light recently: a study of physician owned hospitals found they charged prices much lower than competing hospitals that were not physician owned. This from Modern Healthcare:

Physician-owned hospital prices were about a third lower than traditional hospitals in the same market, a study found, potentially fueling debate over legislation that would remove the ban on building more physician-owned hospitals.

Estimated prices negotiated between hospitals and commercial insurers for eight common procedures were 33.7% lower at physician-owned hospitals compared with traditional hospitals in their markets, according to a peer-reviewed analysis of more than 150 physician-owned and 1,100 non-physician-owned hospitals.

Modern Healthcare went on to say:

The research, published Friday in the Journal of the American Medical Association used January 2023 data from the price transparency law to compare prices for what the Centers for Medicare and Medicaid Services deems as shoppable procedures ranging from an emergency department visit to a spinal scan.

Physician-owned hospitals negotiated prices were lower than their in-market peers for seven of the eight procedures studied, the outlier being comprehensive metabolic panels. The price differences ranged from 4% for blood tests to 33% for lower spinal canal MRIs, researchers found.

Physician owned hospitals tend to be single entities rather than multi-hospital systems. That means that when they negotiate with health plans and insurers, they don’t have the market leverage that larger hospital systems have. In other words, physician-owned hospitals have to compete rather than relying on market power. When large hospital systems negotiate prices with health plans, they negotiate as one entity. Large hospital system prices are generally similar across a region regardless of the competition in, say, one corner of the city. Independent physician-owned hospital don’t have that luxury. According to a coauthor of the study:

Ge Bai, a professor of accounting and health policy at Johns Hopkins University and one of the coauthors of the study, said[,] “Our study suggests that these hospitals actually deliver care at lower prices, instill competition to the hospital market, and expand patient access to hospital care.”

Here is the kicker, explained by Fierce Healthcare:

The findings are likely of interest to legislators and lobbyists grappling with whether or not to lift the ban on new POHs imposed in 2010. Prior to this, the number of PHOs had grown from roughly 67 hospitals in 2000 to about 250 in 2010.

Notice it said “legislators and lobbyists…” Lobbyists employed by larger hospital systems are the ones who convinced Congress to impose a ban on competition in the first place. If there is one takeaway from the JAMA study it is this: It’s not the type of hospital entity that matters. What matters is that hospitals are required to compete. Anything that inhibits competition is bad for consumers. Too often Members of Congress fall prey to fallacies that competition leads to higher costs.