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Market Changes Set Stage for Growing Health Care Cost and Access Problems

Hospitals and Physicians Intensify Competition for Profitable Specialty Services

News Release
Aug. 24, 2005

Alwyn Cassil (202) 264-3484 or

WASHINGTON, DC—Fierce competition among hospitals and physicians for profitable specialty services is driving costly inpatient and outpatient expansions, especially in more affluent areas with well-insured populations, according to initial findings from the Center for Studying Health System Change’s (HSC) 2005 site visits to 12 nationally representative communities.

"As hospitals and physicians compete more broadly for profitable services, more and more diagnostic and surgical services are shifting from hospitals to physician offices and physician-owned ambulatory centers," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded primarily by The Robert Wood Johnson Foundation.

Competition among hospitals—and between hospitals and physicians—has focused on key, profitable service lines, including cardiac, orthopedic and cancer care, researchers found. Facing stagnant growth in professional fees and pressure from growing malpractice premiums and other practice expenses, physicians increasingly view facility fees as an important new revenue source, according to the study.

The medical building boom and intensified service-line competition identified in the fifth round of HSC site visits potentially have consequences for local health care markets. Whether meeting or creating new demand, the capacity expansions are destined to lead to higher rates of care use and costs.

The intense competition for profitable services also may influence the availability of health care services and patients’ access to care. For example, many hospitals are struggling to get physician specialists to provide on-call emergency department coverage. Increasingly, hospitals are paying physicians to provide on-call coverage—historically part of physicians’ obligation in return for hospital privileges. As specialists provide more services in their practices or in other facilities they have a financial interest in, they become less dependent on having privileges at general hospitals, potentially diminishing access to specialty care for some patients.

"All the signs in the 12 communities are pointing toward higher costs and growing gaps in access to care by income and geographic location," Ginsburg said. "Continuing high cost trends threaten the affordability of health insurance, especially for low-wage workers and small firms, increasing the likelihood that the number of uninsured Americans will continue to rise."

The movement of profitable services out of hospitals and into physician practices and physician-owned facilities poses a threat to some hospitals’ ability to subsidize care for less profitable services and for low-income patients. And, as hospitals expand lucrative services, some are cutting back on less profitable ones such as inpatient psychiatric care.

The study’s findings are detailed in a new HSC Issue Brief—Initial Findings from HSC’s 2005 Site Visits: Stage Set for Growing Health Care Cost and Access Problems—by Cara S. Lesser, M.P.P., HSC director of site visits; Ginsburg and Laurie Felland, M.S. an HSC health researcher. The Issue Brief and five new Community Reports describing market changes in Indianapolis; Cleveland; Little Rock, Ark.; northern New Jersey; and Orange County, Calif.; are available online at

Every two years, HSC researchers visit 12 nationally representative communities across the country, conducting intensive interviews with local health care leaders, including health plans, providers, policy makers, employers and consumer advocates. In addition to the five community reports released recently, HSC will issue reports in the coming months covering Lansing, Mich.; Greenville, S.C.; Syracuse, N.Y.; Boston; Miami; Phoenix; and Seattle.

Other key initial findings from the fifth round of HSC site visits include:

  • Employers and Health Plans Fall Back on Patient Cost Sharing. Employers and health plans have launched few initiatives to control rising costs beyond increasing patient cost sharing. Since traditional managed care tools, such as administrative utilization controls, have fallen into disfavor as a result of the managed care backlash, health plans largely have focused on new product designs aimed at engaging consumers to make more cost-conscious decisions about service use and choice of providers. Plans across the 12 markets quickly developed consumer-driven products-high-deductible coverage linked to spending accounts, including health savings accounts (HSAs) and health reimbursement accounts (HRAs), but enrollment to date is limited.
  • Safety Net Strained as Demands Increase. While health care costs continue to rise and health insurance becomes less affordable, the public sector has fewer resources to respond to growing needs for coverage or subsidized care. The combination of ongoing state budget constraints, unwillingness to raise taxes and federal budget pressures have left state and local governments hard pressed to keep up with growing needs. Many community health centers and safety net hospitals report that funding support has not kept pace with the increasing numbers of uninsured patients they treat.
  • Quality Improvement. Hospitals have increased attention to quality improvement over the past two years. Some hospitals, especially those that lagged in adopting quality improvement initiatives, pointed to Medicare’s linking a portion of the hospital inpatient payment update to public reporting of data on the quality of care as an important catalyst. This initiative has helped focus hospital quality improvement efforts. Indeed, many hospitals expect payer demand for demonstrated quality to increase and, therefore, view these activities as important investments to be able to compete in the future.
  • Information Technology Investment. While information technology (IT) investment has increased, the scope is more limited than some policy makers and industry proponents would suggest. Hospitals and a handful of large physician groups are at the forefront of significant IT investment.
  • No Silver Bullet. Overall, the promise of quality improvement initiatives and IT investments pales in comparison to the scope of the cost and access problems confronting the health care system today. If current trends continue unabated, communities are likely to face growing numbers of uninsured people and increasing disparities in access to care by income and geographic location.

Stakeholder Comments on the HSC Study

Carmela Coyle, senior vice president for policy, American Hospital Association,

"Society faces a balancing act as we weigh the benefits of improved care and longer lives with the growing cost of health care. Advances in medicine can dramatically improve the quality of life for patients. This comes with higher costs, but these investments can make a difference in the health of Americans. With demand for care increasing and the cost of providing that care on the rise, we need
to look at ways to improve care through better management of chronic illness and coordination among providers. The trend toward physician-owned, limited-service hospitals hinders rather than helps this coordination."

Donald W. Fisher, Ph.D., C.A.E., president and CEO, American Medical Group Association,

"The Center’s findings underscore the fact that market forces are becoming the primary drivers of the business of medicine today. While this is understandable, given the economics of the times, it is imperative that we remain vigilant in upholding the highest standards of quality and outcomes and, in the process, change our payment system to one that assures the financial recognition of this value in medical
care. The American Medical Group Association has begun its Result-Based Payment System Initiative to look for useful ways to link medical reimbursement to outcomes and not processes. AMGA’s multi-year study seeks to develop a system that rewards providers and facilities who achieve or improve health care delivery with regard to efficiency, timeliness, quality, appropriateness of care, patient-centricity and other factors of health care traditionally absent from the fee for service or pay for transactions structure."

Karen Ignagni, president and CEO, America’s Health Insurance Plans,

"Health insurance plans have developed a new generation of cost containment tools and techniques that are providing results. For example, the upward trend in spending on prescription drug benefits has been cut dramatically over the past three years as these tools and techniques have been more widely used. The new HSC study looks at emerging patterns in the use of new technologies that may make it more difficult to bring down cost trends and provide coverage for more Americans. This points to a key role for government in overall planning and in evaluating the efficacy of new technologies and their diffusion into practice."

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.



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The Center for Studying Health System Change Ceased operation on Dec. 31, 2013.