FAH Hospital Policy Blog

Perspectives on health policy affecting America's hospitals and the patients we serve.

Physician-Owned Hospitals | FAH Policy Blog Team

Theories Don’t Replace Facts: Physician-owned Hospitals Cherry-pick Patients, Lead to Lower Quality and Less Access

By Chip Kahn, Federation of American Hospitals President and CEO, and Stacey Hughes, American Hospital Association Executive Vice President

One of the tenets of our nation’s health care system is a level playing field in service of higher-quality, more affordable, and improved access to care for patients. This was the impetus for the Ethics in Patient Referrals Act, more commonly known as the “Stark Law,” which limited physicians’ ability to self-refer to entities in which they have a financial stake. And, it is why in 2010 Congress closed the law’s “whole hospital” exception loophole, prohibiting physicians from referring Medicare and Medicaid patients to new hospitals in which they have an ownership interest (also known as physician-owned hospitals or POHs), and limiting the growth of existing POHs.

For more than a decade, this has protected the Medicare program from unfettered growth in these facilities and further expanding their practices of selecting the healthiest and most profitable patients, driving up utilization, and deferring emergency services to publicly funded 911 services or general acute care hospitals when their patients need emergency care. Despite these protections, existing POHs have leveraged their position to continue cherry-picking patients and deferring emergent care to community providers.

Opponents of these protections — such as the authors of this white paper from earlier this year — would eliminate Medicare’s prohibition on physician self-referral to new POHs and restrictions on their growth. They falsely argue that repealing these protections will generate competition that will reduce costs.

Despite these claims, the facts and data tell an entirely different story:

  • POHs don’t increase competition but can increase risk for patientsPOHs often provide limited or no emergency services, relying instead on publicly funded 911 services when their patients need emergency care. This delays timely access to needed care for patients. The Department of Health and Human Services’ Office of Inspector General reported that “[t]wo-thirds of physician-owned specialty hospitals use 911 as part of their emergency response procedures,” and “[m]ost notably, 34 percent of [these specialty] hospitals use 911 to obtain medical assistance to stabilize patients, a practice that may violate Medicare requirements.”
  • POHs increase costs for the governmentClosing the “whole hospital” exception loophole to the Stark law reduced the federal deficit by $500 million over ten years, according to the non-partisan Congressional Budget Office. But federal legislation now under consideration, H.R. 977/S. 470, would erase those savings and raise the deficit.
  • POHs cherry-pick patients, creating inequities in access and choice Proponents of rolling back protections argue that allowing POHs to grow would increase consumer choice because patients would have more options for care. However, POHs can limit choice by selecting only the healthiest and wealthiest patients. A recent report from Dobson| DaVanzo, a health care data and consulting firm, showed that POHs had lower Medicaid, dual-eligible, and uncompensated care/charity care discharges than full-service acute care hospitals. Specifically, POHs had less than half the proportion of Medicaid discharges compared to non-POHs (3.4% vs. 8.4%). POHs also were less likely to care for dual-eligible patients compared to non-POHs (15.6% compared to 26.3%). Moreover, Dobson | DaVanzo found that POHs treated far fewer COVID-19 patients than non-POHs, illustrating the fact that they are ill-equipped to handle patient surges and provide the specialized care needed in a public health crisis. Providing access and choice only for the healthiest and most profitable patients poses program integrity, access and health equity risks for the Medicare program and its beneficiaries. 
  • POHs do not improve quality Additional recent data from Dobson| DaVanzo showed that POHs report fewer quality measures and are more likely to fall into the lowest peer group under the Hospital Readmission Reductions Program (HRRP). This means that POHs not only treat fewer patients who are dually-eligible for Medicare and Medicaid — a demographic that is documented to be on average sicker and more complex to treat and is the basis for peer-grouping under the HRRP — but also are not subject to many of the quality measures that most full-service acute care hospitals are. Although POHs treat younger, less medically complex patients with fewer comorbidities, the report shows that POHs had higher average readmission penalties, and a much higher percentage of POHs received the maximum payment penalty compared to general acute care hospitals in the same lowest dual-eligible peer group and market. Collectively, these findings suggest that POHs do not improve quality of care, even though they cherry-pick the healthiest patients.
  • POHs will not “stall or reverse” consolidation in health care markets The theory that expanding POHs will reduce consolidation among hospitals and physician offices is entirely flawed. There are several compelling reasons why such consolidation occurs. First, hospital consolidation with physician offices allows physicians to manage financial pressures and ensure that access to care in the community is maintained. Also, physicians are increasingly turning to hospitals, health systems and other organizations for financial security so they can focus more on clinical care and less on the administrative burdens and cost concerns of managing their own practices. Despite efforts to paint hospitals and health systems as the sole cause of physician practice pattern changes, the truth is that commercial insurer policies, such as prior authorization, are creating unworkable environments, forcing physicians to prioritize administrative duties over caring for patients. Physicians are searching for alternative practice settings that reduce these burdens and provide adequate reimbursement, while allowing them to focus on caring for patients. Additionally, most of the consolidation of physician practices is due to private equity firms and insurance companies acquiring physician practices, not hospitals.

When it comes to POHs, the facts are clear — POHs cherry-pick healthy and wealthy patients, they provide limited emergency services and are ill-equipped to respond to public health crises, and they increase costs for patients, other providers, and the federal government. The CBO, the Medicare Payment Advisory Commission (MedPAC) and the Centers for Medicare & Medicaid Services (CMS) all have concluded that physician self-referral leads to greater per capita utilization of services and higher costs for the Medicare program, among other negative impacts. Indeed, recently CMS once again reinforced the need for this law, proposing to reinstate program integrity restrictions for POHs approved as “high Medicaid facilities” due to the risk for patients and the Medicare program, noting that “protecting the Medicare program and its beneficiaries, as well as Medicaid beneficiaries, uninsured patients, and other underserved populations, from harms such as overutilization, patient steering, cherry-picking, and lemon-dropping outweighs any perceived burden on high Medicaid facilities.”

It is therefore imperative that we maintain the current law, which protects the Medicare program from expansion of POH practices, and not roll-back protections under false, theoretical arguments.