Medicare puts the brakes on specialty hospitals

It’s no secret in the industry that highly-profitable specialties such as cardiology and surgical care subsidize the rest of the hospital. In recent years, physicians have taken advantage of the generous reimbursement in those areas to set up their own specialty cardiac and surgical hospitals. General hospitals have suffered financially as their most profitable patients are sucked away.

The Federal government knows what’s going on (thanks to lobbying by the hospital industry) and since 2003 there has been a moratorium on the construction of new facilities and expansion of existing ones. That moratorium is due to end in June. Medicare is working on rebalancing the payment system to protect general hospitals, but is not ready yet. So Medicare will simply stop processing reimbursement applications for new specialty hospitals, which will have the same effect as Congress extending the moratorium.

The third-party payer system distorts the economics of medicine. Compare the situation to retail, where a variety of store formats –from specialty boutiques to dollar stores to mass merchandisers– battle it out. Their success depends on keeping costs below what consumers are willing to pay.

Is it actually good for patients that payers prop up general hospitals? Are specialty hospitals providing a better service? The consumer signals that drive the rest of the economy are too muted in health care for us to know.

May 13, 2005

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