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Higher health care costs and taxes or free market principles – pick one

Do you want to spend more taxpayer dollars on Medicare? For care that is demonstrably more expensive?
That’s the question before us, and one that (I hope) we can discuss collegially.
Here’s the issue. The House passed legislation that would overturn part of the health reform(known as Section 6001) bill by requiring Medicare reimburse care delivered by new or expanded doctor-owned hospitals. According to the Congressional Budget Office this change would increase federal spending by $300 million over 10 years; undoubtedly private health care costs would also increase, probably by more (cost per day is higher in the private sector).
The bill doesn’t prohibit building new or expanding existing facilities, it just affects Medicare’s certification of new or expanded facilities. New/expanded physician owned facilities can still get certified but there are very stiff requirements currently in place intended to limit building to areas that are truly underserved.
There’s abundant research indicating physician-owned hospitals cost more, treat more, and tout better outcomes because they tend to treat healthy patients with good insurance coverage.
Here’s a series of quotes from Economic Trends:
– the entrance of [physician owned hospitals] POHs and limited-service hospitals to communities is associated with significant growth in total hospital volumes and total hospital spending (Lewin Group, 2004).
– In a related study, Mitchell (2007) found that the entry of a physician-owned orthopedic hospital between 1999 and 2004 drove up market area utilization of complex spinal fusion procedures by 121 percent.
By the end of the period, Mitchell concluded that 91 percent of orthopedic procedures were performed in POHs with the residual nine percent being completed by full-service community hospitals. [orthopedics is one of the most profitable areas of care for all hospitals, by removing these procedures from community hospitals the POH reduced the community hospitals’ margins and likely drove outcomes down]
– In addition to reducing community hospital utilization, it has been concluded that POHs generate higher costs for health care in an area. For example, an analysis by the Medicare Payment Advisory Commission (MedPAC) found that heart, orthopedic and surgical specialty hospitals had higher inpatient costs per discharge than community hospitals (Lewin Group, 2004).
Yes, construction would generate jobs – in the trades over the short term and in the health care sector over the longer term. That’s good – for the investors, owners, and employees.
But these facilities also increase Medicare’s costs, while forcing other facilities to cost-shift to private insureds to make up for lost margin.
What does this mean for you?
Depends on what you want: A “free market” or higher taxes and higher group health premiums?

4 thoughts on “Higher health care costs and taxes or free market principles – pick one”

  1. You stated that the outcomes are better in the POH’s. Is it not a goal of Medicare to improve outcomes because that lowers costs in the long run? Is it better to pay more up front to POH services for better outcomes?

  2. Robert – excellent question and thanks for bringing it up.
    The reality is the POHs select patients that are healthier and have insurance. As many are orthopedic-based they do not have to deal with emergent patients and therefore don’t have many indigent patients or uninsureds; many don’t accept Medicaid either. Uninsured patients are demonstrably less healthy than insured patients, therefore their outcomes tend to be worse – longer duration of care, more complications, slower healing, more readmissions.
    Meanwhile, the community hospitals – who have to take everyone – see a shift in their patient population. They lose the healthier ones, and keep the unhealthy ones, and they always have the indigent, emergent patients due to EMTALA.
    Therefore the community hospitals’ outcomes get worse.
    Make sense?

  3. Before coming to the world of workers’ compensation, I was a hospital strategy consultant. What Joe points out here is a major issue in basic health care economics. The primary focus of my consulting work was helping academic medical centers and community hospitals develop long term strategic plans. One of the critical elements of the planning exercises in which I was engaged was whether or not a POH was present in the marketplace. Our firm made a decision that we would only engage with non-profit health care facilities. We felt that the POH model didn’t meet the threshold for what we were touting as the single most critical success factor in health care facility competition for the next decade: the ability to demonstrate VALUE.
    The community-owned, non-profit model is still competitive in nature and is still largely subject to free market principles. The POH model, though, does little more than take advantage of our current (and flawed) health care reimbursement methodology.
    So what to do? I used to advise my community hospital clients to do the following: Collect the data. Prove that the (quality X service) / cost equation (i.e., the value equation) is clearer and more compelling inside the walls of your facility vs. the POH down the street. Talk about outcomes. Make the case. Make it loud.
    Easy to say. So hard to do.

  4. My naiveté was demonstrated when I assumed out patient surgery centers were a cost effective alternative to in patient care. In California until the State fee schedule included out patient surgery centers the expense in these Doctor owned facilities was unbelievably high. I wonder why the congress thought this was a good idea?

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Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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