Does size matter in healthcare?

A few years ago, Forbes Media Chairman Steve Forbes made the simple, yet powerful, point that the “capitalist” American healthcare system pays little heed to the consumer. In a 2016 interview with My Central Jersey, Forbes pointed out that “not even the crummiest motel would put you in a room with other guests — as hospitals do with sick people — with just a curtain between, nor would they dare give you the kind of gowns provided by most hospitals and clinics.”

This observation challenges policymakers to think critically about the factors that make the hospitality sector so different than the medical care sector. If the government insisted on footing the bill for most hotel stays — or incentivized others to foot the bill on behalf of consumers — hotels would likely have far less incentive to keep rooms well maintained and spacious.

And if regulatory barriers made alternatives to bed & breakfasts and guesthouses cost-prohibitive to operate, hotels would stagnate in quality and offerings.

While hospitals have long sat atop a throne of third-party payments and government favoritism, policy changes will help force hospitals to behave more like hotels.

Hospitals are commonly seen as the “ground zero” of the healthcare system, treating everything from minor wounds to heart attacks and malignant tumors. The large size of many hospitals seems to be the most efficient way to treat patients, since doctors from a wide variety of disciplines can give patients a one-stop shop to treat a variety of maladies. But it’s hard to verify that large-sized institutions are in fact the best way of treating patients, owing to a lack of competition in the healthcare sector. And even if they were, it’s hard to ignore Forbes’ point that hospitals tend to throw patients together in a way that increases the risk of deadly illnesses.

The problem is that there isn’t a level playing field between hospitals and small competing providers. Because of the practices of large government insurers, hospitals disproportionately have an easier time soaking up taxpayer dollars. The Centers for Medicare and Medicaid Services tends to pay more for the same type of visit at a hospital versus at a physician’s office. A lack of “site neutrality” drives hospitals to snatch up physicians’ practices, since converting these offices to hospital grounds results in far more government reimbursements.

Even for physicians hoping to hold their own against their larger competitors, favoritism toward hospitals means a stacked deck against mom-and-pop medicine.

But site neutrality isn’t the only factor preventing competition between different-sized health providers. In a 2015 study, Plymouth State University professor Christina Bradbury examined types of practices more likely to take on these federally insured individuals. The study found that doctors’ offices staffed by one or two individuals are significantly less likely to accept Medicaid. This isn’t much of a mystery, since small practices naturally have a more difficult time absorbing low reimbursement rates and shifting around costs to other patients. And, dealing with the administrative burden posed by Medicaid is even more difficult than dealing with private insurers. While the study specifically honed in on physicians’ practices, the implications are clear: Size matters when it comes to Medicaid acceptance. Barriers to entry make it easier to be a large institution, such as a hospital.

Fortunately, the federal government has begun to level the playing field and ensure more dynamic competition in America’s healthcare system. CMS recently proposed a rule that would bring hospital reimbursement rates in line with physicians’ reimbursement, reducing the acquisition spree that had been fueled by government missteps.

Increased competition could reduce over-hospitalization, and boost physician alternatives to prolonged inpatient care. It’s hard to say for sure whether physician practices would perform better than hospitals for non-emergency care in a competitive market. But a 2014 study in Health Affairs provides compelling evidence that smaller practices provide far-and-away better care than their larger counterparts.

Site neutrality can give physicians breathing room to offer more services to consumers, allowing patients more of an opportunity to find out which model of care is truly better for them.

Ultimately, even more reform is needed to pave the way for a competitive healthcare sector. By block-granting Medicaid, Congress can allow states to make the complicated Medicaid reimbursement system more accessible for smaller providers.

Additionally, giving consumers the means to purchase more care directly through tax-free savings accounts would make providers more responsive to patients. But site neutrality is a promising start, putting pressure on providers to be less like warehouses and more like hotels.

Ross Marchand is the director of policy for the Taxpayers Protection Alliance.

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