Unbiased Analysis of Today's Healthcare Issues

Do we need specialty hospitals?

Written By: Jason Shafrin - Jun• 28•06

According to the Milwaukee Journal-Sentinel (“Orthopedic hospital…“), the Orthopaedic Hospital of Wisconsin posted profit margins of 52%.  The article claims that the healthcare industry generally only has profit margins of around 3%-5%.  Does this mean that the Orthopaedic Hospital of Wisconsin is providing highly valued services?  Is it good at cutting costs?  Or is it simply manipulating the system? 

In Health Affairs, Stuart Guterman (2006) analyzes how specialty hospitals currently operate.  He claims that cardiac most resemble the community hospitals people are accustomed to using.  These hospitals average 52 beds and typically have an emergency room.  On the other hand, orthopedic and surgical hospitals are much smaller.  On average they have sixteen and fourteen beds respectively and few have emergency rooms.

People who are concerned that specialty hospitals are bad for the medical field give the following reasons:

  1. Conflict of Interest: Most of these hospitals are physician owned.  It is possible that these same physicians are advising patients to have unnecessary procedures, simply because it is in their financial interest.
  2. Ignoring the poor: The Guterman study found that these centers often treated those who were richer and better insured.  Fewer Medicaid and uninsured patients are seen in these specialty hospitals than in community hospitals.  Although much of the specialty hospitals market share comes at the expense of community hospitals, Guterman did not find that this fact had a negative impact of the financial stability of community hospitals. 
  3. DRG Creep: Often the specialty hospitals are more profitable than community hospitals, even though MedPAC‘s analysis of 2002 data show that specialty hospitals do not reduce cost once we control for patient mix.  It is possible that the specialty hospitals are simply charging Medicare and private insurance for more lucrative procedures than they are actually preforming. 

Yet many people support the use of specialty hospitals.  Doctors often enjoy more convenient scheduling and more specialized equipment.  Patients may have lower travel costs if the smaller specialty hospitals are less concentrated throughout the city.  Further, overhead costs may decrease from having operations performed in the specialty hospitals than a community hospital (although this finding was not supported by the MedPAC report).  Ineffective specialty hospitals–such as the Heart Hospital of Wisconsin, which closed in 2004–can shut their doors without jeopardizing access to health for a community.  The decentralization of medical care may increase competition between providers.  Further, specialty hospitals have often been innovators in the medical field:

“Children’s hospitals have long been recognized as leaders in the development and delivery of health care to young patients and as assets to their communities and the nation; rehabilitation hospitals also are looked to as sources of specialized care for patients who are temporarily or permanently disabled; psychiatric hospitals address the needs of patients with mental conditions or alcohol- or drug-related problems that require short-term acute care; eye and ear hospitals are viewed as centers for state-of-the art treatment for eye and ear conditions; and a small group of cancer hospitals are generally regarded as being at the forefront of cancer treatment.”

As the trend towards more specialty hospitals continues, further research must be conducted to discover when these ventures are good for society.

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One Comment

  1. BC says:

    It is possible that systemwide costs could be lower than currently if specialty hospitals proliferated if:

    1. The specialty hospitals have significantly lower costs due to lower overhead, high occupancy rates (volume) and greater efficiency because they do only a small number of different procedures many times. This is similar in concept to the high volume focused factory in the manufacturing world.

    2. The lower costs are reflected in proportionately lower prices to the consumer / payer vs what general purpose hospitals would charge.

    3. If many fewer beds are then needed within general purpose hospitals and the excess beds were removed from the system, payments for low profitability procedures could be raised somewhat to allow the hospitals to breakeven or earn a modest profit (assuming respectable occupancy rates and sound management), and total system costs could be lower because of the significant reduction in the number of beds.

    4. To mitigate the potential conflict of interest in referring patients to a facility in which the doctor has a financial interest, he/she could be required to certify in writing the medical necessity (in his or her professional opinion) of the procedure. If a large number of a given procedure are performed relative to the area population compared to other geographies, there should at least be some explaining to do.