Banning Competition Won’t Get Us Better Hospitals

Published December 10, 2004

Something very odd is happening in the hospital industry. A relatively new kind of hospital, called the specialty hospital, is emerging that seems to be more efficient and produce better health outcomes than existing general hospitals. But instead of welcoming this innovation, policy makers are trying to ban the innovation.

Specialty hospitals are typically smaller than traditional general hospitals and focus on a few specific areas of care such as orthopaedic surgery or heart care. They typically offer a higher level of care than general hospitals because specialization allows them to be more effective and efficient. Specialty hospitals typically have more nurses per patient, lower infection rates, less bureaucracy, and lower costs.

But specialty hospitals are not universally welcomed in the industry. Their competitors–the bigger, more established general hospitals– claim specialty hospitals are “stealing” patients–and revenue–from them.

In most industries, companies facing competition are expected to improve their service, lower their costs, or go out of business.

Instead, general hospitals lobbied Congress to include in the recently passed Medicare reform bill an 18-month ban on the construction of new specialty hospitals. They are now lobbying to make the ban permanent.

The general hospitals’ arguments for shutting down the competition aren’t very persuasive.

One of their arguments is that doctors with an ownership interest in a specialty hospital will send patients there, instead of to a general hospital, in order to generate profits. Two recent studies by the federal government disprove this charge, however, pointing out that most doctors have little or no economic incentive to steer patients to one hospital over another.

To the extent physicians do refer their patients to specialty hospitals, health care experts suggest they do so because they feel better about the quality of care that can be delivered in a facility that specializes in a particular area of care and avoids the bureaucracy that engulfs many general hospitals.

The industry association for general hospitals has also claimed, in a letter to Congress attacking their competitors, that specialty hospitals violate the ethical guidelines of the American Medical Association (AMA). This drew a stinging rebuke from the AMA, which told Congress the general hospitals had distorted its position and that specialty hospitals were fully consistent with its guidelines.

General hospitals also charge their rivals have an unfair advantage because they don’t offer a full range of services, such as mental health or emergency care. But this misses the point of specialization entirely. By not trying to be all things to all people, specialty hospitals can deliver a higher quality of care at lower costs. Where exactly is the problem?

If there is a kernel of truth to the claims made by the general hospitals, it is that private insurers and government agencies reimburse some procedures at less than they cost to perform, and that specialty hospitals tend to focus on procedures that are not money-losers.

The answer to this problem isn’t to force specialty hospitals to lose money too. Instead, general hospitals should stop accepting payments that are below the cost of care–if a general hospital loses money for every privately insured patient it sees in the maternity ward, isn’t the real answer for them to stop signing contracts that pay them less than it costs to deliver babies?

In virtually every other sector of the U.S. economy, competition has led to higher quality, lower costs, and innovative services and products. Consumers lose when elected officials give in to the demands of special interests seeking protection from competition. Congress should side with patients and not make the ban on specialty hospitals permanent.

Sean Parnell ([email protected]) is vice president for external affairs at The Heartland Institute in Chicago. He is the author of a recent three-part series on specialty surgical hospitals in Health Care News.