Report Addresses Kansas Specialty Hospital Controversy

Published November 1, 2006

On September 5, the Kansas-based Flint Hills Center for Public Policy released a study, “Clearing the Air on Specialty Hospitals,” that finds the state’s ongoing debate over specialty hospitals would be better served by focusing on why their numbers are growing.

Specialty hospitals are facilities that offer care only within a specific medical field, such as cardiology.

“Specialty hospitals are not a new development in medical facilities, but physician ownership of them is relatively new,” explained Sean Parnell, vice president of The Heartland Institute. “By specializing in just a few areas of care and putting physicians in charge of the hospital, they are able to be extremely efficient.”

Certificate of Need

Kansas is one of 14 states without “certificate of need” (CON) laws, which force health care providers to seek state government approval of any proposed significant service expansions or capital expenditures. CON laws spread rapidly decades ago as part of an effort to rein in rising health care costs by reducing duplication of services and fostering greater long-term planning among providers.

In May 2005, Mark Miller, executive director of the federal Medicare Payment Advisory Commission (MedPAC), testified before the U.S. Senate that the absence of CON laws and continuing government interference in hospital price-setting are key factors explaining significant specialty hospital growth in states such as Kansas and Texas.

On Miller’s recommendation, the federal Centers for Medicare and Medicaid Services took action to “decrease payments for some cases and increase payments for others” in an effort to eliminate incentives for operators of specialty health care facilities to game the system by targeting high-profit procedures while avoiding those with lower returns.

“We found changes are needed to improve the accuracy of the payment system,” Miller said, “and thus reduce opportunities for hospitals to benefit from selection of higher-profit patients.”

New Analysis

“If it is the case that specialty hospitals are merely the outgrowth of flaws within state and federal pricing structures, then this brings an important consideration to the surface,” noted policy analyst Matthew Hisrich, author of the Flint Hills Center report.

“Will it ever be possible for a government agency to set the ‘right’ price for every procedure at every time in every area of the country?” Hisrich asked. “If not, then adjusting rates to prevent abuse today merely creates the conditions for someone to take advantage of them tomorrow.”

In preparing the study, Hisrich relied partly on the work of health care expert and Flint Hills Center adjunct scholar Michael Bond, who sees administered pricing systems as the Achilles heel of Medicare and Medicaid. Bond said the knowledge government officials need in order to effectively set prices is dispersed among consumers and providers.

“The only practical way for consumers and providers to relay this knowledge to each other,” Bond said, “is through a decentralized system of market-determined prices.”

‘Workable Model’

Hisrich’s report suggests that if Medicare and Medicaid are to avoid the pitfalls of administrative pricing, the government will need to switch to a more workable model–one in which beneficiaries are empowered to act as consumers, and providers respond to demand rather than bureaucratic decree.

“Policymakers should therefore strive to bring consumer preferences to bear on both general and specialty hospitals,” Hisrich wrote. “Any effort to solve the problems created by existing regulation with additional regulation will only create new problems arising from market distortions in the future.”

Calls for Regulation

One of the regulatory possibilities being considered is simply to halt specialty hospitals’ future growth. In August, the federal government lifted a moratorium that had been in place since 2003 on the certification of new specialty hospitals. Kansas policymakers considered legislation last session that would have created a state version of that moratorium.

While the legislation did not pass, more such proposals will likely arise given continued competition. Hisrich said policymakers should let consumers decide the matter.

“Ultimately, the decision over … specialty hospitals or any other health care innovation should not be left to lobbyists and government agencies far removed from the day-to-day health care needs of the average citizen,” Hisrich wrote. “Instead, this important decision should be in the hands of dispersed consumers acting in their own best interests–both in Kansas and throughout the country.”

Greg Schneider ([email protected]) is a senior policy fellow with the Kansas-based Flint Hills Center for Public Policy.

For more information …

“Medical community details its concerns,” by Andi Atwater, The Wichita Eagle, July 14, 2006,

“Clearing the Air on Specialty Hospitals,” by Matthew Hisrich, published on September 5, 2006 by the Flint Hills Center for Public Policy, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to and search for document #19766.