A Mortal Wound for Physician-Owned Specialty Hospitals? The Legal and Ethical Prognosis for Market-Driven, Entrepreneurial Medicine in the Wake of 2010 Health Care Insurance Reforms

As of March 2010, approximately 265 physician-owned hospitals operate throughout the United States. These health care delivery centers constitute big businesses that provide approximately 75,000 jobs, $3.4 billion in cumulative payroll, and hundreds of millions of dollars in state and federal tax revenues. Moreover, a 2009 Consumer Reports analysis rated physician-owned hospitals as the “Number One Hospital” in 19 of the 30 states in which they operate, illustrating their popularity with patients.Yet, research suggests that physician-owned hospitals generate disproportionately higher overall health care costs, due in large part to compensation schemes that incentivize physicians to over-utilize hospital diagnostic tests, services, and procedures in which the physicians have an ownership interest. In addition to these conflicts of interest, unfair competition with other “general” hospitals is also an issue, as these physician-owned “specialty” facilities do not typically offer unprofitable services or treat uninsured, Medicaid-eligible, or severely ill patients. Tragically, patients have died when these specialty hospitals, operating without costly emergency departments, had to dial 9-1-1 to attempt rescues on their patients. Motivated by these economic and ethical concerns, provisions were written into the recently passed “Patient Protection and Affordable Care Act” (“Act”) that will sharply curtail the expansion of physician-owned specialty hospitals by prohibiting future Medicare contracts after December 31, 2010, and restrict any future increases in aggregate percentage of physician ownership and patient capacity. This paper argues that this most recent congressional action constitutes a move in the right direction, but that more government regulation of the hospital marketplace may be warranted.The paper begins with the issue of patient safety before moving in Part II to a brief review of pertinent historical policy and legislative actions, including antitrust precedents, anti-kickback laws, and Stark I & II that were intended to prohibit physicians from referring their Medicare or Medicaid patients for specific health care services to facilities in which they or members of their immediate family have an ownership interest. Part III of the paper describes physician-owned specialty hospitals, examines the language and intent of the Act, and reviews a pending legal challenge against the new law. In Part IV, ethical issues triggered by physician-ownership of specialty hospitals, self-referral incentives, and the intersection of professional duties and personal business self-interests are explored. Premised upon these ethical considerations and an analysis of the Act that explores the notion of ethical health policy, the conclusion of the paper in Part V argues that the recent legislation is a model of reasonable government regulation that is largely consistent with principles grounded in clinical medical ethics and appropriately sensitive to medicine’s uniqueness among free-market institutions.