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The Policy Basis for Destruction of Value by Non-profit Hospitals

Updated: Aug 24, 2021

As an oncologist in private practice in a rural community for nearly 20 years, I have witnessed the devastating impact of misguided healthcare policy on cost and access to care. Well-intentioned programs paying hospitals more for cancer services than private practices, ostensibly to offset the cost of indigent care, have been weaponized against community cancer clinics. Hospitals use wealth from cancer service payments to undermine community practices leading to reduced access in districts without the extra funds and increased costs for all. Outpatient clinics have become huge profit centers for hospitals, which use their payment advantage to induce physician employment with eye-popping high starting salaries. Such salaries cannot be matched by community centers which are paid less for patient services.


This payment asymmetry naturally results in localized physician shortages and exacerbates healthcare disparities. This perverse incentive known as the "site-of-care pay differential" has driven many private clinics out of practice and raised costs for consumers who ultimately bear the burden of rising insurance premiums and deductibles. These government-sanctioned hospital upcharges include facility fees, 340B drug prices, HOPPS infusion pricing, and regional specialty pharmacies. Higher-cost hospital clinics do not improve quality. Further, payment disparities move sites of care to more distant and less personal hospitals. Payment disparities also contribute to the geographic maldistribution of oncology services since not all districts have access to extra cancer funds.


The policy of hospital upcharges has failed because:

1. Hospitals use payment advantages to create oligopolies which further increase costs by stymying competition.

2. Hospitals use payment advantages to displace existing clinics depriving patients of their existing medical care.

3. Hospitals use payment advantages to entice physicians into lucrative, costly hospital employment at consumer expense.

4. Hospital payment advantages have exacerbated healthcare disparities by depriving other catchment areas of needed oncologist labor, which is inexorably drawn to higher-paying jobs at 340B hospitals.


ICOP, Innovative Community Oncology Practices, was formed to protect communities from the harms of unintended consequences from misguided healthcare policy. We aim to eliminate perverse financial incentives and keep cancer care in local communities in the hands of nimble community practices that offer better value. We insist on replacing "site of care pay differential" with a pay equity model in which private practices are no longer penalized for providing efficient, lower-cost care. We hope to counter the trend of practice consolidation in which oncology practices are rewarded with better prices by consolidating into large purchasing consortiums. This amalgamation of clinics is driven by incessant payment cuts for cancer services and by hospitals that aggressively abuse their payment advantage to expand into new markets. Hospitals that succeed in displacing community cancer clinics turn around and hire displaced physicians and workers at the higher-cost hospital clinic. The only consumer benefit of private practice consolidation is to keep higher-cost hospitals from completely overwhelming the outpatient oncology market.


When you walk through your local airport or sporting arena and see costly advertisements for a local hospital center, ask yourself: "Is this any way to spend money obtained from me, my insurance, and other patients? Is this not immoral? Wouldn't this advertising money be better spent on patient care?" One also notices that hospital centers concentrate their advertising in wealthy districts where clients are better able to pay their medical bills.


Community practices have less ability to select high-income customers and attract all clients poor and affluent. If non-profit hospitals are so focused on indigent care, why not advertise in indigent districts? Their argument against paying taxes, which may better serve the needy, is misleading at best and untrue at worst. Not-for-profit institutions, like all institutions, are enticed by financial rewards. The term not-for-profit is a misnomer- it should be "not-for-taxes." These organizations distribute would-be-profit not rendered to local tax jurisdictions to affluent executives and professional employees. They redeploy not-profit into new ventures designed to generate institutional income. This constant infusion of capital into new ventures results in an ever-increasing organizational footprint, an ever-increasing organizational overhead, and consequently an ever-increasing hunger for more capital. This contributes to the cycle of ever-escalating healthcare costs.


Hospital networks create expansive new centers for the administration of novel processes to serve institutionally defined quality metrics that yield marginal benefit but convey institutional prestige, which can be used to enhance revenue. The number of possible quality metrics in healthcare is infinite. Institutions choose quality metrics that deliver reputational and financial rewards. Metrics that might negatively impact reputation or revenue are not selected. The use of public monies in pursuit of institutional glory is of little practical value to consumers. Your healthcare dollars were intended to reimburse hospitals for the cost of providing your care, not as rivers of cash to float massive hospital budgets and burnish the institution's reputation. Because professionals who lead large healthcare institutions have primary loyalty to their institution and are mission-driven, at times to a messianic degree, they avoid such unflattering truths. They know Americans pay nearly twice as much as consumers in other advanced economies with no better health outcomes.


Hospitals lobby politicians for policies favorable to their financial position. Private medical clinics lack resources for intensive political lobbying. Hospitals hungrily seek public money and relentlessly pursue policy advantage. They warn of discontinuation of service lines and deterioration of "quality" if their requests are not granted. These warnings are veiled threats against those who might stand in their way. The hospital lobby, one of the country's largest and best-funded political lobbies, is quick to vilify opponents as uncaring or cruel using funds sourced from peoples' afflictions. Even fiscally conservative politicians motivated by a noble cause such as efficient operations, waste minimization and preservation of taxpayer trust are cowed. Hospitals find it easier to acquire new money from customers and taxpayers, whom they leverage via weak or corrupt politicians, than to streamline operations that have become bloated with a multilayered bureaucracy rationalized as serving some carefully devised and crafted quality metric. Hospitals play "chicken" with policymakers like two speeding cars on a collision course until one, usually the policymaker, turns away. The loser in this game is the public purse. This unhealthy dynamic forever removes the incentive for hospitals to become more efficient by jettisoning operations of negligible value.


Policy failure always falls to the inability to anticipate then measure the unintended consequences. A policy's full impact is seldom judged on both intended benefits and unintended harms because the institutions sitting in judgment usually had a hand in crafting the policy. Consequently, the influencer institutions are incentivized to ignore unintended harms because they gain rewards from the policy. Societal harms from unintended consequences take time to manifest and are challenging to identify and measure. Public elaboration of policy harms can put the policy-rewarded institution at risk of diminished funds and reputational harm. This naturally results in institutional denial of visible policy failure. Denial of policy failure is an expression of self-interest by policy-rewarded institutions. The phenomenon of policy-failure denial is widespread in healthcare and other policy-dependent sectors. If a policy-rewarded institution designs to weigh the harms of a policies' unintended consequences, they're apt to propose a remedy in which their institution is elevated as a problem solver because large healthcare institutions are haughty bodies that declare first rights on any healthcare problem. They will then seek to reap the rewards mined from another costly taxpayer-funded project designed to solve the problem incited by the original policy failure. The obvious solution, abandonment of the original policy, is anathema because it hinders institutional cash flow.


As always happens over time when human beings work within and around the rules of any regulated enterprise, that enterprise and the provision of that enterprises' services become distorted much in the same way that a car's shock absorber becomes deteriorated, or the tires develop dry rot. It naturally follows that the relationship between hospital and patient has become inverted because the rules used in the operation of the healthcare enterprise become distorted by the enterprise to the point the old rules become obsolete and stop serving their original purpose. Large institutions that once viewed their mission as serving the healthcare needs of their communities now view customers (patients) and policymakers (politicians) as serving their financial needs.


ICOP was formed to protect healthcare consumers from misguided federal policies. New rules must be devised to better serve the public interest to level the playing field between community oncologists and hospitals. Unfortunately, healthcare institutions' natural process of rule-bending has led to unintended harms, making the old rules obsolete. We must no longer allow consumers to ride in a vehicle made unsafe by policy failure. It is time to put the old car in the garage for repairs. We are beyond the point at which the shock absorbers and tires can be salvaged.


Keith Lerro, M.D., Ph.D.

Regional Medical Oncology Center

Wilson, NC

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