The Hospital Wars

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Kevin Conlin has a problem.  Physicians in Wichita have been catching a bug. An entrepreneurial bug. One that compels them to build highly specialized hospitals, diagnostic imaging facilities stocked with next-generation scanners, and same-day surgery centers that have hotel-like touches. Conlin, CEO of the $1.2 billion nonprofit Via Christi Health System in Kansas, complains that these outfits are competing unfairly against St. Francis and St. Joseph, his two general hospitals in Wichita. And he intends to do something about it. Via Christi provided Kansans with some $30 million in charity care and $33 million in unpaid Medicaid services this year. Conlin says Via Christi can no longer afford those costs if it keeps losing money to the new guys. "We're left with no option," says Conlin, "but to set a limit on how much of this kind of work we're going to do. Only then will we have a public conversation about the issues this phenomenon raises."

That phenomenon has sparked a war between hospitals and doctors across the country that is transforming the landscape of the U.S. health-care system--while not necessarily improving it. Hospital bosses say doctors, who wield huge influence over their patients, steer the most profitable procedures to facilities they own and shunt the least lucrative ones to the general hospital. This threatens the ability of the general hospital to provide money-losing services like emergency care, which it subsidizes in part with profits from procedures like cardiac surgery. The specialty competitors deny that they are the problem. Quite the opposite. "We raise the bar for the community," says Ed French, CEO of MedCath, which runs 12 specialty hospitals. "Everybody invests in more equipment and focuses more on nursing care because we set the competitive standard."

But researchers led by Paul Ginsburg at the Center for Studying Health System Change (HSC) in Washington find that this standard is fueling a de facto medical arms race, a competition that, perversely, increases health-care costs. Competition is not supposed to do that, but in the topsy-turvy U.S. health economy, excess supply often induces demand.

Hospital executives are responding to the assault of specialists by building and aggressively marketing profitable "service lines," like cancer, heart and brain centers. They're snapping up $1.4 million computed tomography (CT) scanners, which produce palpably detailed, 3-D pictures of bones and organs, and $2.2 million "high field" MRI machines that can watch the brain at work. The inflationary dynamic spawned by this expansion of health-care capacity exposes flaws in the payment system that sustains U.S. health care. Those flaws partly explain why Americans spend $2 trillion, or 16% of their GDP, for medical care, an outlay that's increasing roughly 7% annually.