Should policymakers do more to protect community hospitals from direct competition by their primary referral source – physicians?  

The discussion blog topic for Week 5 of Health Care Management is “Competition” – competition between community hospitals and physicians who serve on their medical staffs, and competition between community hospitals and corporate specialized outpatient services providers such as ambulatory surgery centers, outpatient imaging centers, and outpatient diagnostic centers.

Community hospitals serve an important health care need, especially in communities classified as rural which may be hours away from the larger hospital health systems located in urban areas.  Community hospitals tend to serve a disproportionate percentage of uninsured patients and poor patients insured through the state Medicaid program.  The uninsured are at high risk of defaulting on their payment obligations.  State Medicaid programs pay hospitals much less than private insurance plans.  The high payment default rates by uninsured patients and low payments by state Medicaid programs places community hospitals at high risk of financial default and ultimate closure, which in turn places families requiring labor & delivery (L&D) services, emergency (ER) services, intensive care (ICU) services, etc. in a medically dangerous position of being unable to access necessary health care services.

In addition to L&D, ER, ICU and other medical services needed by community residents, community hospitals may be needed to quickly respond to mass illnesses and injuries affecting community residents, such as the COVID-19 virus in 2020.  In an emergency, time is of the essence and patients may not have the time to be transported to an urban hospital.

By way of example, at the outset of the COVID-19 pandemic in March 2020, 24 nursing home residents were emergently transported from the Gallatin Center for Health and Healing to Sumner Regional Medical Center late in the night on March 27. EMS staff dressed in Hazmat suits and ambulances from three counties responded to the emergency on Friday night.  On Sunday afternoon, all of the remaining residents were transferred to Sumner Regional using 54 ambulances, two EMS buses and one wheelchair van.  As a community hospital, Sumner Regional had to be ready, willing and able to accept this sudden influx of critically ill patients.

Community hospitals rely on physicians to refer patients for not only inpatient services, L&D, and other services that often run negative profit  margins, but also for the higher revenue-producing outpatient services that include same day surgery, ER, and X-Ray/MRI/CT imaging services.

The textbook reports at p. 324 that between 1990 and 2000, more than 200 rural hospitals (8% nationally) and nearly 300 urban hospitals (11% nationally) closed for economic reasons.  An Aug. 19, 2019 article in The Tennesseean reported that Tennessee leads the nation in hospital closures per capita; and is second only to Texas, a much larger state, in the absolute number of hospitals closing their doors. 

A Dec. 12, 2019 WKRN.com story reported that rural hospital closures have left a quarter of Tennesseeans without emergency room access.

Increasingly, physicians seek to compete directly against community hospitals by establishing their own physician-owned ambulatory surgery centers (ASC), urgent care centers, walk-in clinics, imaging centers, and other services that can be provided outside of the hospital.  (See textbook at p. 288.)  The advantage to the physician owners of an ASC is that they earn a professional services fee for surgeries they perform, as well as a distribution of the ASC’s profits for the services provided by all of the providers utilizing the ASC.  Many physicians “partner,” either formally or informally, with large urban health systems and/or national specialty outpatient service providers that compete directly with the community hospitals.  The result of the physician having an ownership interest in a health facility such as an ASC, walk-in clinic, imaging center, etc. is that the physician then refers all of their patients who are appropriate for the outpatient setting to the joint venture in which the physician has an ownership interest (again, earning a distribution of profits.)

In addition to physician owners having an incentive to refer their patients to health treatment centers in which they have an ownership interest, third party payers, such as Medicare and commercial insurance providers, encourage patients to go to these non-hospital outpatient services providers because they have a lower charge structure.  The lower overhead, reduced operating hours, leaner staffing requirements, and overall lower operating costs allow for lower charges than community hospitals that must provide 24/7 full-service health care operations to “all-comers” (meaning all patients regardless of insurance coverage).  

However, when there is an disaster, emergency or pandemic affecting the community, we look to our community hospital to be ready, willing and able to take care of the community’s sick.

Corporate owners of these outpatient services facilities actively solicit physicians to invest in the facility.  Physicians are more likely to refer patients to a facility that they own as opposed to a facility that they do not own.  While these outpatient services facilities offer greater efficiencies for physicians and patients, they also provide lucrative investment interests for the physicians.  By way of example, some surgeons will only do outpatient surgeries at ambulatory surgery center facilities in which they have an ownership interest, unless the surgery has to be done in the hospital due to the complexity of the procedure or medical fragility of the patient.  These surgeon owners can realize millions in annual profits distributions that are directly tied to surgeon owners utilizing the facility.  

Physician ownership increasingly encroaches on the revenue sources for community hospitals.  Competitors and policymakers recognize the challenge that the community hospitals are facing, and have commented that the hospitals “just have to figure out” how to be competitive in the changing marketplace.   Yet, these same competitors and policymakers expect the community hospital to be prepared to respond quickly and effectively to emergencies impacting the entire community likeness shootings, ebola outbreaks, and  COVID-19.  

Please comment on the changing health care environment whereby physicians are incentivized through lucrative ownership interests to redirect patient referrals away from the community hospital to outpatient facilities in which they have an ownership interest.

Should policymakers do more to protect community hospitals from direct competition by their primary referral source – physicians?  

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