Higher costs resulting from medical arms race

May 1, 2012

The "arms race" among hospitals to be more competitive has led to the trend of hospitals expanding into targeted geographic markets to capture well-insured patients.

NATIONAL REPORTS-The "arms race" among hospitals to be more competitive has led to the trend of hospitals expanding into targeted geographic markets to capture well-insured patients.

Key tactics include building full-service, state-of-the-art hospitals; establishing freestanding emergency departments and other outpatient services; acquiring physician practices; and operating medical transport systems to shore up a referral base and increase the number of inpatient admissions.

Researchers from the Center for Studying Health System Change (HSC), a nonpartisan research organization, conducted interviews in 12 metropolitan areas and found that many hospital systems are aggressively going after well-insured patients in prosperous suburbs or nearby areas with growing populations.

Hospitals have long offered perks and amenities to attract physicians and patients. Investing in expensive technology to allow specialists to perform advanced procedures and offering hotel-like amenities to patients have become standard hospital practices. The expansion strategy is an evolution of the existing marketing practices, according to the report.

Payers should be concerned because these expansive institutions will likely have negotiating leverage, and systems will seek a return on the facility investments. In addition, payers could see overuse of higher priced technologies and procedures because of excess capacity. In South Florida, for example, one hospital system opened a state-of-the-art facility less than six miles from an existing regional medical center. Both facilities will be vying for the same patients.

"If you build something, you are probably going to want to make use of it and be reimbursed for it," Dr. Carrier says.

However, she says there are scenarios that could lead to better use and lower costs, namely if care delivery models, such as accountable care organizations (ACOs) become more widespread.

"We spoke to people who were very passionate about how they were going to save costs with what they were doing," she says.

NEED TO COMPETE

However, some hospitals claim they need to expand to create the infrastructure to become an ACO. Comprehensive care requires a full suite of capabilities.

"They say to be active in this area, they need to have this facility, so they can offer a full range of services," she says.

Dr. Carrier says if payers want to control costs they will have to change the payment structure significantly.

"If fee for service persists, unchanged or essentially unchanged, you will have a stronger argument that there is an incentive to use your facilities to get more revenue, and you will have to be a more dedicated and committed [hospital] leader to use them and keep costs down," she says.

Keeping costs down should be the goal of everyone involved in healthcare, according Thomas Vincz, public relations manager of Horizon Blue Cross Blue Shield of New Jersey.

"We are familiar with the trends presented in this report, but we also believe that our network of hospitals share our interest in providing members with access to quality care at an affordable price," he says. "Patients cannot afford to pay more for healthcare, and everyone has a responsibility to keep costs under control."