In the (Specialty) Hospital

January 3, 2005; Page A8
WSJ REVIEW AND OUTLOOK

"Count us among those who'd like to see Congress pass more market-
oriented health-care reform.

In the meantime, it wouldn't hurt if elected officials kept their
hands off one of the more encouraging new areas of health
competition, namely "specialty hospitals."

These private facilities are popping up everywhere, specializing in
particular procedures or areas of care -- cardiac, orthopedic,
women's medicine, you name it. Their focused mission helps to drive
down costs, drive up quality of care and give consumers greater
choice over health decisions.

For all these reasons, they've earned the ire of traditional
hospitals and the government-run-medicine crowd, who've teamed up to
try to outlaw or overregulate these new competitors.

That'd be a shame, not least since the freedom that allows for
specialty hospitals has been a long time in the making. It once was
the federal government that basically decided where and when
hospitals were built, an inefficient bit of central planning the
Reagan Administration abolished.

States also began to loosen their own controls over health
facilities, paving the way first for centers that specialize in
elective, outpatient procedures (cataract removal, hernia repair),
and now for newer hospitals that concentrate on full-blown in-patient
treatments (heart bypasses, spine surgeries).

Now, according to 2003 GAO reports, the nation has at least 100
specialty hospitals, two-thirds in the seven states with the best
regulatory environment (Arizona, California, Kansas, Louisiana,
Oklahoma, South Dakota and Texas).

While that's still small -- representing only about 2% of short-term
acute-care hospitals nationwide -- growth has been rapid, with the
number of facilities tripling since 1990 and another 20 now under
development.

Many are at least partly physician-owned and -operated, reflecting
the growing discontent doctors have with the bureaucracy that often
rules full-service hospitals.

Patients, for their part, love them. Full-service hospitals play
vital community roles, but as generalists they aren't able to excel
in every type of care.

Hospitals that concentrate on targeted areas can provide superior
services at the lower costs that come with efficiencies. A study of
MedCath's cardio-hospitals, for instance, found that its patients had
shorter lengths of stay, fewer complications and lower mortality
rates than in comparable general hospitals.

The new competition is also giving patients the sort of options in
care (nicer rooms, made-to-order meals) that have rarely been
possible in busy, publicly funded hospitals.

All this choice is giving heartburn to critics, who tend to make the
same arguments against specialty hospitals as they do against school
choice. They complain that specialty hospitals siphon off the most
profitable patients, leaving community hospitals with the hard-to-
treat cases. And since many full-service hospitals rely on private,
paying patients to cover the costs of shortfalls in Medicare,
Medicaid and bad-debt patients, they say the very existence of
specialty facilities is only worsening the plight of financially
strapped general hospitals.

They've also leveled ethics charges, arguing for instance that it is
a conflict of interest for physicians to refer patients to their own
profit-making hospitals.

Terrible as these accusations sound, they're little more than that.
It's true general hospitals can get the toughest cases, both
medically and financially. But that's why many not-for-profit
hospitals are granted enormous advantages over competitors, including
freedom from federal and state income taxes, property tax exemptions,
low interest-rate bond financing, and the freedom to collect tax-
deductible donations.

Moreover, early findings from the federal Medicare Payment Advisory
Commission, which is studying specialty hospitals, found that while
full-service hospitals do take a hit from specialty hospitals, they
usually find a way to recover.

That's because the competition is a "wake-up call" that results in
everything from better equipment to more flexible operating room
schedules.

Other studies suggest specialty hospitals take in a wide mix of
patients. And as for physician ownership, we already have laws
designed to protect against abuse.

What the critics really want is to take away consumer choice, forcing
patients into treatment at less-optimal facilities for no reason
other than to prop up the current system.

The Republican Congress has taken some baby steps toward empowering
consumers over their health care dollars with the creation of health
savings accounts.

But the other side of the equation is ensuring that consumers have a
choice of places to spend those dollars, which means competition
among hospitals.

Advocates of health care reform might remember this in coming months
as the specialty hospital debate heats up. Democratic Senator John
Breaux obtained an 18-month federal moratorium on specialty hospitals
that ends in June, and some are already looking to make it permanent.

State politicians are also working -- at the prodding of
protectionist groups like the American Hospital Association -- to
enact bans on physician ownership or load up specialty hospitals with
costly new regulation.

The last thing health reformers need are more laws standing in the
way of choice.

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