Specialty Hospitals, Price Competition and the Medical Arms Race

Purchasers in Three Communities View Specialty Hospitals as Spurring Medical Arms Race

News Release
Jan. 25, 2006

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON, DC—Purchasers in three communities with significant specialty hospital development—Indianapolis, Little Rock and Phoenix—generally believe specialty hospitals are contributing to a medical arms race that is driving up costs without demonstrating clear quality advantages, according to a study released today by the Center for Studying Health System Change (HSC).

While specialty hospitals have received significant scrutiny in relation to Medicare payment policies, the new HSC study focuses on the impact of specialty hospitals on employer-sponsored health coverage and local health care market dynamics. Health plans and employers in the three communities have had time to observe the impact of specialty hospitals on overall costs; price competition and quality among hospitals; whether contract negotiations with general hospitals are affected by the market entry of specialty hospitals; and whether employers want specialty hospitals included in health plan networks.

"While purchasers are predisposed to favoring increased competition to help keep prices low, what we heard generally from health plans and employers is that specialty hospitals are contributing to higher costs without any clear quality benefits," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation

Some purchasers reported receiving significant price discounts on specific cardiac or orthopedics services because of new specialty hospital competition, while others did not. Even if specialty hospitals have lower unit costs, some purchasers believe that referring physicians, especially those with a financial interest in the specialty hospital, increase volume by inducing patient demand for elective procedures. The higher volume raises costs more than the savings achieved from lower prices from competition, leading to increased aggregate costs

Although there was some evidence of increased price competition, purchasers observed that the more important outcome was the perceived need for general hospitals to compete aggressively with the new physician-owned specialty hospitals by developing similar dedicated centers, as distinct hospitals-within-hospitals or freestanding facilities.

"There’s no question that physician-owned specialty hospitals have caused general hospital competitive juices to flow, but those juices are flowing toward expansion of lucrative specialty services not necessarily toward improved quality and efficiency," said HSC Senior Consulting Researcher Robert A. Berenson, M.D., of The Urban Institute and coauthor of the study with HSC Consulting Researchers Gloria Bazzoli of Virginia Commonwealth University and Melanie Au of Mathematica Policy Research.

The study’s findings are detailed in a new HSC Issue Brief—Do Specialty Hospitals Promote Price Competition?—available by clicking here. The study is based on HSC’s 2005 site visits to 12 nationally representative communities, including three with significant specialty hospital development: Indianapolis; Little Rock; and Phoenix.

Other key findings of the study include:

• Purchasers observed that general hospitals responded to the loss of profitable services by raising prices on services where there is less competition. In general, purchasers thought that the current level of specialty hospital competition was too limited to interfere with general hospitals’ ability to raise prices on other services to offset losses from specialty hospital competition
• Employers generally did not expressly demand the inclusion of specialty hospitals in health plan networks, although health plans tried to respond to the general desire of employers for broad, inclusive hospital networks. Consistent with plans’ desire for broad networks, community hospitals generally were unable to prevent plans from contracting with specialty hospital competitors.

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.