Hospital Competition with PhysicianOwned Specialty Facilities

1
Hospital Competition with Physician-Owned
Specialty Facilities

• David A. Argue, Ph.D.
• Washington, D.C.

2
Framing the Debate

• General hospitals perspective cream skimming,
  cherry picking, and otherwise unfair competition
  by specialty hospitals
• Specialty hospitals perspective unfair actions
  by general hospitals that hinder a more efficient
  competitor

3
Complexities of health care

• Use same economic tools of analysis
• Institutional features of health care make
  analysis more complex
• Mutual dependence of hospitals and physicians
• No market mechanism to facilitate allocation of
  resources

4
Incentives, effects and evidence

• Physician ownership provides unambiguous economic
  incentive to refer to own facility
• Mixed empirical evidence, but generally supports
  theory
• Hospitals suffer adverse financial consequences
• Evidence that harm exists, but not clear how
  significant it is

5
Economic model of relationship

• Mutual dependence
• Physicians need privileges to treat patients at
  hospitals
• Hospitals need physicians to get referrals of
  patients
• Neither hospital nor physician pays for benefits
• If market existed
• Second-best solution mutual free riding

6
Inefficiency of free riding

• Non-zero net free riding is inefficient
• Example Mahan v. Avera St. Lukes
• Ends of net free riding spectrum
• Hospital favor physicians practice without
  privileges
• Physician favor hospitals acquire physician
  practices

7
Upsetting and resetting balance

• Physician ownership of specialty facility upsets
  balance through diversion of patients
• Hospitals restore balance
• Economic credentialing
• Managed care contracting (exclusive, bundled
  discount)
• Vertical integration (common ownership)

8
Gordon v. LewistownandBaptist Health v. Murphy

• Similar cases that illustrate different aspects
  of economic model
• Opposite court decisions

9
Free riding benefitsPhysician ? Hospital

• Gordon cataract surgery mostly outpatient
• Implication few free rider benefits to hospital
  of having ophthalmologist on staff
• Baptist Health cardiac surgery entirely
  inpatient
• Implication significant free rider benefits to
  hospital of having cardiac surgeon on staff

10
Free riding benefitsHospital ? Physician

• Gordon continued to attract patients after
  losing hospital privileges
• Implication few free rider benefits to physician
  of being on hospital staff
• Baptist Health hospital access important to
  physician-patient relationship
• Implication significant free rider benefits to
  physician of being on staff

11
Managed care contracting

• Not an issue in Gordon, but significant (though
  unnoticed) consideration in Baptist Health
• Baptist Health had exclusive contracts for
  cardiac surgery with many payors
• Prevented physicians from admitting to Arkansas
  Heart Hospital
• Not likely to be useful lever in Gordon because
  most cataract surgery is on Medicare patients

12
Conclusion

• Before concluding that hospitals actions create
  antitrust injury, must evaluate availability of
  alternatives, entry, etc.
• Another consideration is whether actions help
  correct market failure
• Achieving free riding balance enhances efficiency
  when no market exists to allocate resources