Covid-19 has revealed the hazards of blocking physician-owned hospitals

Covid-19 caught the U.S. flatfooted. With supply shortages, the availability of intensive care unit beds, staffing challenges with nursing shortages, and physician burnout from witnessing thousands of deaths in isolation, the pandemic laid bare the amount of improvement needed in the hospital sector.

Looking back, the country would have been on better footing if it had made different decisions about competition a decade ago when the hospital industry successfully lobbied to prevent physicians from owning and operating hospitals and billing Medicare.

In the words of Federation of American Hospitals CEO Chip Kahn, “the current ban on [new] physician-owned hospitals wouldn’t be there if it wasn’t for the Federation.” And yet, in the midst of the great suffering induced by Covid-19, the hospital lobby managed to secure the sympathies of Congress in the form of more than $175 billion in financial support through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Lawyers own and operate law practices. They cannot split fees for legal services with non-lawyers. Yet when it comes to physicians, a profession directly responsible for patient care, doctors cannot open, own, and operate new hospitals and bill the Medicare program for their services due to a decade-old legal provision enacted as part of legislative haggling between policymakers and the hospital industry. As Medicare payment represents anywhere from one-quarter to one-half of a hospital’s annual revenue, this functioned as a de facto ban on new physician-owned hospitals.

The backstory is Beltway lobbying at its best — or its dirtiest. In the early 2000s, the hospital industry claimed that hospital ownership by physicians was a conflict of interest: physician owners, it was claimed, would drive up the use of physician services, diagnostic tests, and procedures, resulting in higher costs with no increase in quality, while simultaneously cherry-picking healthy patients for physician-owned specialty hospitals, leaving sicker patients for community hospitals.

Congress responded with a provision in the 2003 Medicare Prescription Drug, Improvement, and Modernization Act enacting an initial 18-month moratorium on the construction of new physician-owned specialty and community hospitals. In 2007, the Centers for Medicare and Medicaid Services (CMS) adjusted its inpatient payment methodology to better account for differences in patient severity of illness.

Threatened by the growth of physician-owned hospitals, the hospital industry persisted in its advocacy to permanently block physicians from opening new hospitals. In 2010, based upon research looking solely at specialty hospitals — including both physician- and corporate-owned facilities — hospital industry lobbyists muddied the evidentiary waters and horse traded a ban on new physician-owned hospitals from participating in the Medicare program in exchange for their support of the Patient Protection and Affordable Care Act.

Today the market for physician-owned hospitals is functionally capped, with just over 200 of them — all created before December 31, 2010 — in a country of 6,000 nonprofit and investor-owned hospitals.

New research that we and our colleagues Andrew Meshnick and Ted Cho conducted as part of our work with the Mercatus Center at George Mason University examines more than 30 years of work by both government and academic researchers and suggests that the reality of the comparative cost and quality of care is no different between physician-owned community hospitals and their non-profit or for-profit competitors. Further, specialty or “focused factory” physician-owned hospitals that concentrate on certain medical specialties or procedures, like cardiology or orthopedic surgery, had higher quality and lower or similar costs.

Prohibited from growing in both size and number, physician-owned hospitals struggle to compete with their for-profit and non-profit health system competitors, which are horizontally and vertically integrating, offering cradle-to-grave health care. With the majority of Americans living in consolidated hospital markets and thus facing local monopolies, physician-owned hospitals represent one of the few tools to increase competition. With their growth prohibited, patients miss out on the well-known benefits of competition and instead face the ills of consolidation in the form of higher prices, lack of quality improvement, and a poorer patient experience.

Patients directly experience a less highlighted harm from consolidation and ossified markets: the loss of innovation in care delivery. Patients frequently face day-long stays in emergency departments while awaiting hospital admission; inefficient clinic visits accompanied by hours of waiting and missed work; and bumpy telehealth service roll outs. All are frequently followed by the final insult of many non-profit hospitals: unethical and predatory billing practices.

The Biden administration has recognized the challenges of hospital consolidation with its executive order in July on economic competitiveness, which highlights consolidation’s ill effects in multiple industries, including hospitals. The Federal Trade Commission recently announced its competition enforcement priorities, including a special focus on health care. Congress has stepped up, too, with recent hearings highlighting the harms of local hospital monopolies on patients across the country, including higher prices, lower quality, and fewer choices.

Solutions are few and far between. Competition authorities remain frustrated, as hospital merger challenges can spend years winding their way through the courts, and breaking up existing large health systems presents a similarly long path with uncertain benefits. Meanwhile, those who are ill have no choice but to participate in a delivery system that frequently fails them, while taxpayers continue to fund one-third of the more than $1 trillion dollars in annual hospital spending.

The Biden administration’s executive order provides an entrée to engage creatively in improving health care competition by reexamining laws that undermine a competitive health care marketplace. By partnering with Congress to support the Patient Access to Higher Quality Health Care Act of 2021 and lift the ban on new and expanded physician-owned hospitals participating in Medicare, administration officials can deploy one of the few policy levers available to promote the establishment and growth of new and existing hospitals. They could even ask the Federal Trade Commission and the Department of Justice Antitrust Division to study the likely market effects of such a move.

The effects of hospital consolidation on patients are very real. Given the pandemic-induced hospital bed shortage, one physician-owned community hospital near the Texas border, Doctors Hospital Renaissance, rapidly stood up dedicated Covid-19 units, eventually converting its rehabilitation hospital into a dedicated Covid-19 hospital with more than 100 beds in under 10 days. Such is the product of physician-driven innovation — out of necessity — in care delivery.

Under the current system, patients lose while hospital lobbyists win. The administration and Congress need to work together to change that dynamic.

Brian J. Miller is a hospital medicine physician, an assistant professor of medicine and business at the Johns Hopkins University, and a former special advisor at the Federal Trade Commission. Jesse Ehrenfeld is an anesthesiologist, a senior associate dean at the Medical College of Wisconsin, and a member of the American Medical Association Board of Trustees.