July 24th, 2007
Caveat emptor: joint ventures with specialty hospitals: is a full-service community hospital that joint ventures with a physician-owned limited-service hospital essentially selling its soul?
Financing the Future II–Report 4: Joint Ventures with Physicians and Other Partners touts the success of a particular type of specialty hospital joint venture between a hospital system and physician investors and promotes it as a strategic model of how hospitals can respond to escalating revenue and cost pressures.
There is no question that hospitals face a growing list of challenges. The list is all too familiar to HFMA members: shrinking public financing, increasing numbers of uninsured patients, and preparedness planning to respond to mounting public health threats–from bird flu and natural disasters to terrorism, to name just a few.
The solution, however, is not to encourage the proliferation of physician-owned limited-service hospitals, which research shows to exacerbate these very problems and undermine the fiscal foundation of full-service community hospitals. It is indeed ironic that the joint venture report, highlighting the so-called “Baylor model,” is part of the Financing the Future series. By their very nature, physician-owned specialty hospitals, which deliver only the most highly profitable services, will accelerate a medical arms race and hasten a “bankrupt future” for community hospitals and the networks of care that they provide.
The Core Issue Is Conflict of Interest
The core, and corrosive, issue is the conflict of interest inherent in self-referral. Physician self-referral motivates well-documented abusive behavior, such as cherry-picking patients and increased utilization, which leads to windfall profits for physician owners and weakens classic community hospitals. Conflict of interest also motivates others to get into the game through various schemes, euphemistically labeled “joint ventures,” that in fact, may implicate various anti-kickback and tax laws.
Considering all of the above, we must ask ourselves if a full-service community hospital that enters into a joint venture with a physician-owned limited-service hospital has entered into the healthcare equivalent of a Faustian bargain, which Webster’s dictionary defines as a deal “done for present gain without regard for future cost or consequence.”
This is not to say that specialty hospitals, in and of themselves, are evil. Many community hospitals have responded to community needs and legitimate competition by developing wholly owned units or facilities focusing on cardiac or other limited services. Self-referral is not an issue in these situations because the community hospital, offering a broad spectrum of healthcare services, retains full ownership and operational control.
A recent comment by Robert Meidell, medical director of Harris Methodist Heart Center specialty hospital, wholly owned by the established community hospital Harris Methodist Fort Worth Hospital, illustrates this conflict. Taking the most profitable service away from Harris Methodist and locating it down the block “might be good for me, but it’s not good for Harris hospital or for the community,” he remarks. “You can’t carve out the most financially viable services and expect your community hospital to take care of the rest.” (a)
How did we get here? The growth of physician-owned specialty hospitals emerged more than a decade and a half ago with the enactment of federal laws banning physicians from referring patients to facilities in which the physicians were invested. However, Congress included in these laws an exception allowing physician self-referral to “whole hospitals.”
At the time, lawmakers considered whole hospitals to be what conventional wisdom said they were: traditional, multiservice community hospitals with full-service 24/7 emergency departments that served as the epicenter of the community healthcare delivery network for all citizens, regardless of income, insured status, or medical condition. In such a setting, no individual physician or groups of physicians could realize a sizeable financial gain through a specific referral. Congress did not and could not reasonably foresee the proliferation of today’s physician-owned specialty hospitals that, notwithstanding their state hospital licenses, most closely resemble subdivisions of hospitals, to which Congress explicitly prohibited self-referral. Because of this striking resemblance, arguably, physician-owned specialty hospitals should not be sanctioned, but instead, subjected to enforcement. (b)