Hospitals and physicians organize and market services targeted at specific diseases, organ systems and populations, raising cost and quality concerns

The proliferation of heart institutes, cancer centers, orthopedic hospitals and other niche specialty centers signals an escalation in a new medical arms race as hospitals and physicians develop and market profitable specialty-service lines, according to a study by Center for Studying Health System Change (HSC) researchers published as a Web Exclusive in the journal Health Affairs.

Hospitals and physicians often collaborate on specialty-service lines, but increasingly they are competing ferociously for patients as physicians add diagnostic and treatment capabilities to their practices that once were exclusively provided in hospitals, the study found.

"The jury is still out on whether this new competition will lead to better clinical quality, but it's clear that one prime motivation driving specialty-service line development is a desire to attract profitable patients," said Hoangmai H. Pham, M.D., M.P.H, a study coauthor and senior researcher at HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

"Typically, hospitals and physicians will declare their own service line to be a 'center of excellence,' whether or not health plans or other third parties have bestowed such a designation….For most specialized services, there is a paucity of validated quality data to help consumers verify hospitals' claims of expertise," the article states.

The Health Affairs article, titled "Specialty-Service Lines: Salvos in the New Medical Arms Race," is based on HSC's 2005 site visits to 12 nationally representative metropolitan communities-Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. HSC has been tracking change in these markets for the past 10 years.

In all 12 markets, hospitals and physicians were developing single-specialty service lines, with the most common focusing on heart (33), cancer (24) and orthopedic (18) care, according to Pham and lead author Robert Berenson, M.D., an HSC senior consulting researcher and senior fellow at The Urban Institute, and coauthor Thomas Bodenheimer, M.D., an HSC senior consulting researcher and adjunct professor at the University of California, San Francisco.

During the mid-1990s at the height of tightly managed care, which often limited patients' choice of providers, hospitals competed primarily on price to win managed care contracts, according to the study. "However, by 2000, nonprice competition was becoming increasingly important," the article states, and hospitals revived strategies to attract physicians who refer patients and to court consumers directly.

With the decline in risk contracting and a return to fee-for-service payment, hospitals "returned to the traditional business model of filling beds with well-insured patients. Faced with growing competition for patients, both from other hospitals and from ambulatory-based care, hospitals quickly adopted strategies dedicated to increasing the flow of patients into the hospital," sparking a return to a medical arms race, "a form of competition tending to increase, rather than reduce, costs," according to the article.

Recently, as medical advances allow more traditionally inpatient care to move into outpatient settings, competition has intensified between hospitals and physicians for profitable specialty-service lines, raising threats to hospitals' financial health and sparking additional concerns about rising health care costs. Health plans and purchasers in the 12 communities "believe that modest reductions in prices as a result of increased competition over particular service lines are offset by increased volume of those services as a result of (1) aggressive marketing by providers directly to consumers and (2) and specialist physicians' ability to induce demand for services," the article states.

While federal law limits physician self-referrals, a broad exception in the law allows physician to self-refer patients for services provided within the physician's own practice, and many physicians are adding sophisticated and costly diagnostic and treatment capabilities to their practices, according to the study.

While public policy attention has focused on physician-owned specialty hospitals, rapid proliferation of specialty services across settings is a "more pervasive development," the article states.

"Unless Congress is willing to limit internal referrals, other policy tools will be needed to moderate the escalating medical arms race," the article states. Moreover, "Medicare and private plans' payment policies have an opportunity to narrow the payment gap between relatively profitable and unprofitable services, a gap that distorts providers' behavior and fuels the medial arms race."