Normally, policymakers refrain from imposing policies that would undermine or retard economic specialization and the positive results that flow from it. Unfortunately, this is not the case in health care, particularly when special interests routinely try to block access to competition or otherwise micromanage their competitive position. Conferees hammering out a final budget reconciliation bill should not erect any legal or regulatory roadblocks to the growth of hospital specialization. Blocking specialization in this way would take aim directly at high-quality medical treatment, to the detriment of millions of Americans.

In the normal functioning of a market economy-especially in a sector of the economy characterized by increasing complexity-the division of labor and increased specialization in the production of goods and services increase productivity and enable individuals and families to obtain higher quality goods and services at affordable prices. Specialty hospitals, often owned and operated by doctors and specialists, focus on the treatment of certain kinds of medical conditions, such as cancer, cardiac care, and orthopedics. As in any other industry, specialization in health care means better service. Indeed, the weight of the professional literature indicates that the greater the volume of treatments or procedures for particular medical conditions, the more effective physicians' and their staffs' medical skills and the greater the likelihood of good outcomes for patients.

The Senate Bill

The Senate bill largely continues a policy adopted in the massive Medicare Modernization Act of 2003 that forbade a doctor from referring Medicare or Medicaid patients to any specialized hospitals that he owns or in which he has a financial interest for a period of 18 months. This moratorium expired on June 8, 2005, but it virtually halted the emergence of physician-owned specialty hospitals in the meantime.

In the Senate version of the budget reconciliation bill, this temporary Medicare moratorium would become retroactive and permanent. The Senate bill would provide exceptions based on the level of a doctor's financial interest, provided that this financial interest, expressed as a percentage, has not increased since June 8th and that the number of operating rooms and beds in the hospital has not increased since June 8th. The House bill contains no language on this issue.

Bad Policy

Critics of specialty hospitals say that doctors who refer patients to hospitals in which they have an interest compete unfairly with other hospitals. Specifically, they argue that such specialty hospitals "cherry pick" fully-insured Medicare patients who require expensive procedures. This leaves the non-specialty hospitals at an economic disadvantage because they lose the revenue from these patients but still must absorb the costs of uncompensated care incurred by poorer patients. In the case of Medicare and Medicaid, the two programs at issue in the House-Senate Budget Reconciliation conference, the physician referral of patients is said to be problematic because it deprives general hospitals of the government reimbursements that they would otherwise secure.

These self-interested objections should be rejected. Specialty hospitals can provide a superior alternative for patients with complex medical conditions. As The Wall Street Journal editorialized last January 8th, "Their focused mission helps to drive down costs, drive up the quality of care and give consumers greater choice over health care decisions." In its 2005 analysis of specialty hospitals, the Department of Health and Human Services (HHS) found that the quality of care at cardiac specialty hospitals was as good as or better than that provided by general hospitals; that patient satisfaction was very high; and that specialty hospitals, with payments of real estate, sales, income, and property taxes, dedicated a significant proportion of their revenues to uncompensated care.

A Better Policy

Congress should directly address the fundamental problems of Medicare's profoundly flawed system of administrative payment, as it applies to hospitals, physicians, and other medical professionals. There are better ways to fix real or perceived problems in the Medicare program than stifling innovation and competition and undermining new options that promise superior quality in the delivery of patient care. Thus, conferees should strike the Senate language on specialty hospitals.

The flaws of Medicare hospital reimbursement should be remedied by adjusting for the real cost of care, particularly in complex cases, not by hindering patients who wish to go to a better hospital that specializes in treatment of their medical condition.

Existing law already addresses "conflict of interest" issues among physicians and other medical professionals. A better approach than the Senate's would be to require physician disclosure of financial interests in a facility to a patient before the physician refers that patient to a specialized hospitals or other facility. With that transparency, the final decision would be matter of patient choice. Moreover, the provision of emergency care and care for the poor and uninsured should be addressed through direct funding, much as policymakers address the social need for firehouses or other emergency services, and not through the current system of hospital cross subsidies. Ideally, the financing of such services should be separate and distinct from Medicare or Medicaid.

Conclusion

The worth of the budget reconciliation bill should be judged not just by the quantity of the money saved on behalf of American taxpayers-clearly the primary purpose of this exercise-but also by the quality of the policies that Congress adopts. In the past, budget reconciliation bills have become vehicles for bad health care policy, especially in Medicare. Congress should make sure that its health care policy is grounded in the values of market competition and consumer choice, improving the prospects for innovation and imagination in the delivery of quality medical care to millions of Americans.

Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.