Opposition to purchase of Reading's Surgical Institute sheds unfavorable light on health-care act

The decision by federal and state regulators to oppose Reading Health System's proposed $43 million purchase of the physician-owned Surgical Institute of Reading suggests that a provision of the Affordable Care Act could keep health expenditures higher than they need to be.

The Federal Trade Commission and the Pennsylvania attorney general announced Friday that they would sue to block the deal. Reading Health System said Monday that the deal had been terminated to avoid an expensive court fight.

The episode illustrates how the U.S. Department of Health and Human Services - which is implementing the Affordable Care Act - and the FTC sometimes work against each other.

The Federal Trade Commission credited the five-year-old Surgical Institute with reducing costs in the Berks County heath-care market. Then it cited the health-reform law's prohibition of new physician-owned specialty hospitals as a reason to preserve the independence of the Surgical Institute.

What could replace the Surgical Institute in the competitive landscape?

"Based on recent history, the most likely entrant into this market would be another physician-owned specialty hospital," the FTC's complaint said.

But that can't happen because the health-care-reform law prohibits the formation and expansion of physician-owned specialty hospitals.

"There is a sort of schizophrenia about them," Philip H. Lebowitz, a health-care lawyer at Duane Morris L.P., said of physician-owned hospitals.

"The argument against them is that they don't have an emergency department. They don't tend to get patients that are uninsured or underinsured because those patients generally come to the emergency department," Lebowitz said.

That adds to the financial pressure on hospitals.

On the other hand, "the statistics and quality indicators are that physician-owned hospitals generally do very well," Lebowitz said.

The Surgical Institute, which was founded in 2007, has consistently charged 30 percent to 40 percent less than Reading Hospital for many medical procedures with quality as good as or better than competitors, Pennsylvania Attorney General Linda Kelly said Friday. The Surgical Institute had $20.33 million in net patient revenue in fiscal 2011, according to data from the Pennsylvania Health Care Cost Containment Council. During that period, just 0.18 percent of its care went unpaid. Only 3.6 percent of its revenue was from Medicaid, which pays far less than expenses.

Reading Health's main hospital, by contrast, had $747 million in net patient revenue in fiscal 2001. Medicaid accounted for 7.5 percent of revenue, and uncompensated care was 3.5 percent.

Physician Hospitals of America, a trade group that represents 265 physician-owned hospitals across 33 states, and the Texas Spine & Joint Hospital Ltd., in 2010 sued to overturn as unconstitutional the provision of the health-reform legislation that blocked segments of the health-care market from expanding. The group lost in lower court and is waiting for a decision on its appeal.