'It mystifies me' — Why are physicians blocked from owning the hospitals where they work?

Physician-owned hospitals have long operated under some of the most restrictive regulations in American health care, with constraints that go back to the Stark Law and were cemented by the Affordable Care Act of 2010.

But a new federal request for information (RFI) tied to Medicare's Transforming Episode Accountability Model (TEAM) is prompting a fresh look at whether those restrictions still make sense. Gary Price, M.D., MBA, president of The Physicians Foundation, said the evidence has been clear for years: Physician-owned hospitals deliver equal or better care at significantly lower cost, while fostering the kind of clinical autonomy that keeps physicians engaged and healthy competition alive in the health care marketplace. In an interview with Medical Economics, he makes the case that realigning ownership and management incentives around physicians may be essential to the future of U.S. health care. This transcript has been edited for length and clarity.

As for the TEAM model and CMS’ inpatient rule, a public comment period runs through June 9. More details are here. The RFI explanation can be found under heading “E. Hospital with Physician Ownership Request for Information.”

Medical Economics: Can we start with an overview and talk about the Affordable Care Act and what that did for regulation of physician-owned hospitals?

Gary Price, M.D., MBA: Sure. Specific to physician ownership of hospitals, there was a provision in the Affordable Care Act that essentially eliminated an exception where physicians could own hospitals in rural areas. This was [building on] a previously enacted law called the Stark Law that severely restricted physicians' ability to own health care facilities, and in particular, hospitals. For the younger physician who didn't practice prior to that, you have to go back even further, because states and the federal government, to some extent — and then to a great extent when the Stark law came along and then the ACA — were limiting physicians' ability to have ownership of health care facilities even before that. So I was in practice from 1985 on, and during my career, there were always some sort of limits on physician ownership of facilities. In my state, there were state regulations that many states had called certificate of need laws, that also limited it. However, having said that, the Stark Law, followed by the ACA provisions, set in stone that physicians could not own hospitals, even in rural areas where they needed them. But [the ACA] also grandfathered in physician-owned hospitals that already existed, while prohibiting them from expanding their services, adding beds, et cetera, from that point on. Of course, that was 2010.

Medical Economics: To continue with what's happening now, there is a development about physician-owned hospitals happening within the rules of Medicare's TEAM payment model. Have you had a chance to look that over, and can you explain what that is?

Gary Price, M.D., MBA: I looked it over with great interest, because it overlaps with some other issues that the foundation has studied and research we've done. But basically, CMS, which manages Medicare, has put out a public request for information [RFI] about the possibility of allowing physician-owned hospitals that currently exist to participate in the TEAM model of care, which is a value-based payment system based on episodes of care. In the original announcement of the program, which actually started this past January, physician-owned hospitals that already existed were allowed to participate, but like everyone else, only if they were mandated to by CMS. And so far, it's really been impossible to figure out how many physician-owned hospitals that might involve. CMS has not released that data, but considering their penetration in the U.S. market, at best it would be about 5% to 6% of the hospitals.

The significant thing about this RFI, though, is that it acknowledges that since the ACA was passed, as we just talked about, there have been data which support the idea that physician-owned hospitals actually are cheaper for patients. They're cheaper for Medicare, they provide higher quality care, and they don't actually do some of the things that policymakers were worried about way back in 2010. Back then, there was a lot of talk about potential cherry-picking by physician-owned hospitals, implying that they would somehow only take patients who were less sick and would cost less to care for, and somehow displace patients with a higher acuity — sicker patients — and send them somewhere else. There was also fear that very healthy patients, who would be cheaper to care for, would be selectively brought into those hospitals.

A study that The Physicians Foundation actually co-funded, published in 2023, along with the Physician Advocacy Institute, looked at that exact issue using Medicare data. What they found was that when you looked at the demographic, social status, and how sick Medicare patients were, there was really almost no difference between physician-owned and hospital-otherwise-owned facilities. There have been a couple of other studies that have confirmed that. And the study I just mentioned also showed that, on average, physician-owned hospitals charged anywhere from 7% to 15% less — they cost Medicare that much less for the same kinds of patients, compared with nonphysician-owned hospitals. That translated to over a billion dollars in savings per year for Medicare, if all their patients had been treated in physician-owned hospitals. So there's been a lot of data out there that refutes that notion.

And I should point out that there was a major concern in the health care policy world — it was more than a concern, actually. The policy world just accepted the fact that, as one author put it, the most expensive piece of equipment in the hospital was the physician's pen. What they were implying was that physicians were the whole problem with cost differences between hospitals, and that if you could just stop physicians from ordering more than they really should, you would eliminate the problem of costs varying so dramatically from one place in the country to another.

There was a fundamental problem with that idea, though. It was based on an interpretation of data that came out of something called the Dartmouth Atlas, close to the year 2000. By looking at costs between different hospitals in different areas, researchers came to the conclusion that it must be the physicians causing the difference. They analyzed their data by what are called hospital catchment areas — and that's not a very rigorous way to compare the patient populations at different hospitals.

The foundation was involved in research and the publishing of a book that examined that question, by an economist named Buz Cooper (Richard “Buz” Cooper, M.D.) What he found is that if you took that same data and analyzed patients by their ZIP code, there was one glaring factor that correlated with higher costs, and that was the patient's income. The higher your income, ironically, the lower your health care costs. And the further you went on the poverty spectrum, the more expensive care became. This really showed that the real problem was a correlation with a range of environmental factors that patients brought with them when they came into the hospital or to see their doctor. Unfortunately, it has now taken 25 years to begin to get an acknowledgment of that fact in the policy world.

Medical Economics: With these rules in place, in your own words, how would you describe the economic environment for medical practice, and especially independent practice, over the last 15 years?

Gary Price, M.D., MBA: Well, one of the interesting things in the research that's gone on over the last 15 years is the fact that not only do physician-owned hospitals cut costs while maintaining the same or better quality, but where physician-owned hospitals exist, there is clearly less consolidation of health care in a given area. What I mean by that is: Where physician-owned hospitals exist, the huge conglomerates, where one hospital system might control an entire state, or half of a state, that level of consolidation has not occurred to as great a degree. That has tremendous implications for the cost of health care. But that consolidation itself, of course, also makes the environment very, very difficult for physicians to practice independently, let alone own hospitals.

We've found that to be a huge problem. In addition to the sheer difficulty of establishing an independent practice where one hospital system might control the entire market for health care services in your area, from top to bottom, a lot of the problems we're seeing with physician burnout and well-being relate to the fact that physicians' ability to feel like they're actually directing the care of their patients has been significantly infringed upon. To the point where physicians are frustrated daily that they no longer feel in control of what happens to their patients, yet the system holds them responsible nonetheless. That's a very important part of the research and work we've been doing, trying to make the environment physicians practice in healthier for both them and their patients.

Medical Economics: Do you think that the Medicare request for information right now signals a potential change at a bigger scale?

Gary Price, M.D., MBA: I think it's very significant in that it indicates, on the part of CMS, at least a willingness to look objectively at some of these differences between physician-owned hospitals, as far as economics, quality and cost, versus the alternative model. I think that's very significant, because it's the first time they've been willing to do that in over 15 years. I applaud that.

I noticed, though, that built into the request for information are some of those same biases about what physician-owned hospitals will do. They specifically mentioned cherry-picking and what's called lemon-dropping [the concern that physician-owned hospitals will selectively transfer] sicker patients and how they could deal with that. There are also some interesting conundrums within that RFI. They have thoughtfully raised some questions about what some of the consequences would be. For instance, the law, that part of the ACA prohibited existing grandfathered physician-owned hospitals from expanding in any way. Yet if they were voluntarily, or otherwise, asked to participate in this program, they might need to add beds or other services to satisfy the requirements. That would require additional waivers from actual law, and that raises some real problems. Let's say a hospital participates and adds beds. This program only lasts until 2030 under the law. Once it ended, they would have to divest all of those investments they had made. So there are some real practical problems in approaching it.

The CMMI (Center for Medicare and Medicaid Innovation) does good work, but CMS itself is notoriously slow in adopting some of the findings that arrive there. And while I'm optimistic, I don't think we can look forward to major changes on the basis of this anytime soon.

There are, however, several bills on Capitol Hill — none of which have been acted upon — which would, through legislation, reverse some of those restrictions in the ACA that have made it harder for physicians to own and lead hospitals. And I should mention there's a tremendous amount of data showing that not just physician ownership, but physician active involvement in the management of hospitals, clearly increases quality and helps them deliver better, more efficient health care. Physician-owned hospitals themselves, as I mentioned, have a clear track record of providing care at lower cost and at equal or higher quality.

Another very interesting finding in some of those studies was that physician-owned hospitals actually charge cash-paying patients, not insurance, 47% less than traditional [nonphysician-owned] hospitals do. So there's a lot of reason to look at that model and re-examine why it was set aside, if you will.

Medical Economics: There are states that have CPOM, the corporate practice of medicine, laws on the books that regulate ownership of hospitals, and then we have the federal law that essentially prohibits physician ownership of hospitals. Who's supposed to own the hospitals?

Gary Price, M.D., MBA: It's an interesting interplay. I think to understand it clearly: Right now, the biggest barrier is the federal laws and regulations. That's the critical stop point right now. Each state has its own regulations and rules about who can own health care facilities. Some states still have something called certificate of need laws, where even acquiring a piece of radiology equipment above a certain cost requires going before a state commission, and often appearing at hearings where you're opposed by the hospital association in that quest. That's not true all over the country. It's different everywhere, to some degree, based on some of the same reasoning I think we've carried with us out of the last century. So you're right, it has to be addressed differently at each state level.

Interestingly, some states have now started to look really critically at private equity ownership of hospitals, and what that does to costs and patient care. It's interesting to me that a group of private equity investors can own a hospital, but a physician can't.

Medical Economics: What did I not ask about that you would like our audience to know or consider?

Gary Price, M.D., MBA: I think one question I've asked myself is: Why is it that health care policymakers regard the participation of physicians, the key deliverers of care, key stakeholders of one sort or another, as intrinsically a bad idea in health care? I can think of no other segment of our economy where that's regarded as something negative. It's universally regarded as a good way to align everyone's incentives. So it mystifies me why this has persisted.

But certainly, if you ask me how we can make this better: An acknowledgment on the federal government's part that maybe this was a little wrongheaded to start with, and that they need to investigate how it really works in practice, is a great place to begin. As I said, I applaud that, and I think that's a great way to look at it and question it.