Ban on doctors’ owning hospitals has backfired

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Lawyers can own law firms. Bankers can own banks. But thanks to the Affordable Care Act, doctors are effectively banned from owning hospitals. At a time when the rapidly consolidating hospital market needs more competition, not less, keeping this poorly conceived provision on the books makes little sense. Congress should repeal it.

America’s first hospital was owned by a doctor, and physician-owned facilities were fairly common through the 1930s and ‘40s. It wasn’t until the mid-20th century that the concept began to recede — partly thanks to new laws that provided federal funding for public institutions and tax-exempt community hospitals. Physician-owned hospitals re-emerged decades later in response to growing demand for specialization. They took off in the early 2000s, roughly split between specialty hospitals that focus on a limited set of procedures and full-service community hospitals.

Large hospital systems weren’t exactly thrilled with this development. The industry lobbied aggressively against physician-owned specialty hospitals (known as POHs), alleging that they cherry-pick healthier patients — foisting sicker ones onto publicly funded community hospitals — and refer patients internally to boost profits.

Concerned by these reports, Congress in 2003 imposed temporary restrictions on the establishment of new specialty POHs. Government investigations and congressional inquiries followed. (Their findings were mixed.) Subsequent studies have shown that, relative to traditional hospitals, POHs often deliver better care at lower or comparable costs. For example, patients who’ve undergone orthopedic surgeries at specialty POHs received more conservative therapies before invasive procedures and experienced shorter stays with lower complication rates.

To address worries about cherry-picking, regulators in 2007 added an adjustment to hospital payments to account for sicker patients. Yet the issue didn’t subside. When Congress started drafting the ACA — which expanded health insurance to millions of Americans — the idea of a more permanent “ban” on all POHs became something of a bargaining chip. Big hospitals reportedly agreed to accept billions of dollars in reimbursement cuts in exchange for restrictions on POHs. The industry touted the provision as one of its biggest achievements from the ACA negotiations.

It’s fair to say the ban has worked: The number of POHs, at roughly 250 facilities nationwide, hasn’t budged since the ACA’s passage in 2010. In the meantime, the market has rapidly consolidated, with hospitals in a health system outpacing those that aren’t by a ratio of about 2 to 1. Decades of research has shown that consolidation is often associated with higher costs. The issue of self-referrals, meanwhile, has merely shape-shifted: Similar practices have been reported at vertically integrated health conglomerates in recent years.

Doctors have many strengths as entrepreneurs. Not only do they interact directly with the “customer,” but often have smart ideas about how to save time and money. (For example, knowing the most efficient way to set up an operating room might minimize the time needed between surgeries and reduce errors.) Labor productivity, an important measure of innovation, has been stagnant or falling among private community hospitals for the better part of this century.

As in any profession, there will always be bad actors — yet it isn’t a stretch to say that cases of avaricious doctors endangering their patients and risking their careers to make an extra buck are outliers. And while it’s hard to predict whether POHs would be able to withstand the larger forces of market consolidation, the fact that the remaining 250 institutions have retained independent ownership should offer some hope. Not every small hospital wants or needs to be acquired.

Competition is the antidote to high prices and poor quality, which characterize too much of the U.S. health care system today. Removing barriers to entry is an obvious first step toward restoring some much-needed efficiency.