Should Doctors Own Hospitals?

Controversy builds over a fast-growing, profit-driven business

Buried in the deficit-reduction bill that President George W. Bush signed on Feb. 8 was a mandate that could put the kibosh on a hot trend in health care: hospitals that are partly owned and run by doctors.

For years critics have complained that when doctors invest in hospitals, conflicts of interest arise that could endanger patients and threaten the survival of general hospitals. The critique cuts across the political spectrum, voiced by the likes of Senator Charles E. Grassley (R-Iowa) and Representative Pete Stark (D-Calif.). In 2003, Congress placed a moratorium on enrolling such facilities in Medicare and Medicaid while it examined the criticisms. The suspension was supposed to end on Feb. 15, but the signed budget bill requires that the Centers for Medicare & Medicaid Services extend the moratorium as much as six more months, while it prepares a report for Congress.

The Medicare delay has chilled what was once a fast-growing niche. Business took off in the 1990s when gargantuan hospital chains such as Tenet Healthcare Corp. (THC ) went on consolidation binges. Bands of doctors broke away and built facilities that would let them practice medicine unfettered by administrative rigmarole. They boosted efficiency and profits by specializing in lucrative practices such as orthopedics and cardiac care.

Now there are more than 100 physician-owned specialty hospitals. Proponents like Dr. Richard I. Fogel, vice-chairman and part owner of Heart Center of Indiana in Indianapolis, say such facilities offer patients superior care. But the business may soon be in jeopardy. "If Medicare were to decide patients shouldn't come here, we'd have to reevaluate the business model," Fogel says.

One concern about specialty hospitals is that they selectively treat the most lucrative patients. A study of heart hospitals in Arizona found that about 21% of patients admitted to physician-owned hospitals undergo routine surgeries such as a heart bypass but are otherwise relatively healthy. Only 10% of patients fit that profile at facilities that aren't doctor-owned; the vast majority are more complicated and expensive to treat because they have serious problems, such as diabetes and other chronic conditions.


When physician-owners focus on less complex cases, they still earn returns on ancillary services, such as X-rays. But they dodge having to dole out care that isn't adequately reimbursed, such as nursing costs for patients who linger for days after their surgeries, too sick to go home. "When you're an owner, you have an incentive to make sure every case is profitable," says Jean M. Mitchell, professor of public policy at Georgetown University and author of the Arizona study. "It's scary."

Some critics charge that specialty hospitals also slough off uninsured patients, who invariably end up in the emergency rooms of nonprofit hospitals. Those hospitals, facing an exodus of insured patients to specialized rivals, may find it hard to stay afloat since they can't balance the cost of treating the uninsured with profits from performing pricey procedures on the insured. A study by the Texas Hospital Assn. (THA) found that the year after a heart-imaging facility opened in one town, the cardiac care center at the nearby community hospital slid from a $524,646 net profit to a $20,786 net loss. "We're all for competition," says THA spokesman Gregg Knaupe. "Problem is, this isn't fair competition."

Specialty hospitals may also drive up aggregate health-care costs by spurring demand for pricey elective surgeries, according to a Jan. 25 survey by the Center for Studying Health System Change in Washington. The THA, the American Hospital Assn., and several other groups are lobbying legislators to impose some restraints, such as barring physicians from referring patients to hospitals they partly own.

This infuriates physicians such as Dr. John R. Harvey, co-president and cardiologist at Oklahoma Heart Hospital in Oklahoma City. He says critics overlook the positives for patients of physician-owned hospitals, such as their tendency to have more nurses on the floor and to invest more in high-tech gear. In fact, specialty hospitals often score high marks from independent rating agencies such as Health Grades Inc. (HGRD ). Harvey adds that at hospitals such as his, a physician rarely owns more than a 3% stake. "To suggest I would admit a patient because I'm motivated by a minuscule profit margin is obscene," he says.

Other physician owners highlight the value of specialization. "We're focused on doing one thing and doing it extremely well," says Dr. John W. Dietz, Jr., chairman of the board of managers of Indiana Orthopaedic Hospital in Indianapolis. "We think focused care is a great model for medicine."

In addition to stalling the experiment of doctor-owned facilities, the Medicare moratorium has been painful for many investors. MedCath Corp. (MDTH ) in Charlotte, N.C., which partners with physicians in operating 12 heart hospitals, has been forced to hold off on its expansion plans. The company's stock has fallen nearly 35% in the past six months, to 18.80.

With the suspension likely to be extended, the onus is now on the Centers for Medicare & Medicaid Services to deal with the conflict. The agency, says a CMS official, will prepare a report that addresses conflict-of-interest concerns by scrutinizing how physician-ownership deals are structured and examining how such hospitals treat uninsured patients. Based on those findings, Congress may decide to revamp the rules for physician-owned care. Legislators are facing a tricky task, says Stuart Gutterman, senior program director at the Commonwealth Fund's Program on Medicare's Future in Washington: "They'll have to balance the physicians' desires with the concerns of patients and communities."

By Arlene Weintraub

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