Hospitals were once merely facilities where doctors could bring their patients who were sick or who needed surgery. This was when doctors were self-employed in solo or group practices. Hospitals have shifted from centers devoted to patient care to profit-driven corporate entities to the detriment of patients medically and financially.
Hospitals have become power brokers in healthcare. The transition has been multifactorial. Medicine has become more complicated over the past 6 decades. The business of running a medical practice has become more complex due to regulatory burdens, declining physician reimbursement, and administrative challenges. Many doctors have ceded these functions to outside entities, and hospitals have stepped in to fill these roles.
Hospitals do not treat patients - doctors do. However, as businesses, hospitals increasingly prioritize financial incentives over patient care. Moreover, they operate with little accountability and have become a primary driver of skyrocketing healthcare costs.
Many factors have allowed hospitals to predominate in healthcare. Still, these would be the most important ones: hospitals are paid more for services in their facilities compared with identical ones performed in outside facilities, tax-exempt status, Affordable Care Act restrictions on physician-owned competing entities, lax enforcement of corporate practice of medicine statutes and anti-trust regulations, and certificate of need laws.
Hospitals are bloated with administrators who contribute nothing to the health or well-being of patients. According to Athena Health, since 1970, the number of physicians has increased by 200%, roughly proportional to population growth. During this same period, the number of hospital administrators has soared over 3800%. In Leopold et al. 2018 study, these administrators account for 30% of healthcare spending. There are over 10 administrators for every doctor. Between 1965 and 2014, the wage gap between healthcare CEOs and orthopedic surgeons (who are at the high end of the clinical pay scale) increased from 3:1 to 5:1. During that same time, the differential between CEO pay and pediatrician compensation went from 7:1 to 12:1. CEO pay does not correlate with quality of care, financial performance of the institution, clinical outcomes or measures of community benefit. Compensation for other hospital administrators is just as disproportionate. Hospital administrators are a financial burden to the system.
The Kaiser Family Foundation reports that hospital care gets paid 2-3X higher by Medicare than identical services outside the hospital. The differential may be even greater for commercial payers. Hospital administrators claim that this higher reimbursement is justified because operational costs are high, and these increased payments offset a wide range of medical services. Hospitals have taken advantage of this by hiring doctors, especially those who do expensive procedures like colonoscopy or pulmonary testing. Additionally, the doctor's visit is charged at hospital rates, even if the office is not there. These inflated charges are passed along to patients as increased co-pays, deductibles, and higher insurance rates. Many states have regulations prohibiting the corporate practice of medicine, but enforcement is often lax or non-existent, allowing hospitals to swallow up medical practices.
Fifty percent of hospitals claim tax-exempt status. This benefit is afforded to hospitals under “community benefit,” yet often fails to provide corresponding charitable care. The Johns Hopkins School of Public Health reported that 2021 these 3000 not-for-profit hospitals received $37.4 billion in tax benefits. This money allows the larger hospital systems to buy real estate tax-free, swallow up smaller hospitals, and become monopolies in their communities. Hospitals have also relied on federal & state regulations to ward off competition. The Affordable Care Act prohibits doctors from opening facilities that receive Medicare funding. Thirty-five states and the District of Columbia have Certificate of Need laws. Originally designed to prevent duplication of scarce resources, hospitals have used it to prevent the entry of new healthcare entities into the marketplace. Hospitals are allowed to oppose and block any potential competitors. The result has been the artificial distortion of the healthcare marketplace, which hospitals control. Competition is stifled, costs go up, and with competition lacking, quality is diminished.
The key to lowering healthcare costs is reducing hospitals’ outsized influence and restoring competition. Hospital employment of doctors leaves patients questioning whether the physicians serve them or the employer. Reimbursement for health services should be agnostic of location- -site neutral. This will disincentivize hospitals from buying medical practices. State and Federal Governments need to work in partnership to take the “handcuffs” off doctors to level the playing field and allow them to compete against hospitals. When hospitals no longer control the marketplace, patients will receive better, more affordable healthcare.