The U.S. doesn’t need a new ‘essential hospital’ designation

A recent essay in Health Affairs, a prominent health care journal, proposed a useful-sounding idea: The government should create a new federal designation for “essential hospitals” — hospitals that, according to their own metrics, serve a safety-net role but aren’t currently recognized as such.

But it isn’t useful at all. The proposal is a thinly veiled attempt for these so-called essential hospitals to secure more government funds and protections without improving the quality or cost of care. The siren song for additional privileges from the government is all too common in health care, and it’s a key driver of the country’s health care cost crisis. Instead of granting special privileges, lawmakers should seek to establish a level playing field in health care by removing bad incentives.

The pandemic accustomed Americans to the idea that some people and services are “essential.” First, frontline workers were essential. Then the Uber drivers who gave them rides became essential. Suddenly, everyone from yoga teachers to pot shop owners started claiming essential status.

Trying to get the designation wasn’t just about garnering sympathy from the public; it was about securing real benefits, like early access to vaccines and continued employment under lockdowns. Now that things are returning to a new normal, the “essential” qualification has become obsolete — except, apparently, for hospitals.

On the surface, the proposal in Health Affairs sounds like a reasonable idea. After all, hospitals and their staffs are emerging from a nightmarish 2 1/2 years, and workers who didn’t retire or quit are overwhelmed with the extra work caused by growing shortage of doctors, nurses, and other health care professionals.

But the proposed designation has little to do with hospital workers. In fact, it has little to do with any objective criteria at all. After all, what hospital isn’t “essential”? Lives are saved and medical victories are achieved every day in hospitals across the country. Advocating for the protection of “essential hospitals” means advocating for additional layers of government-granted benefits for the hospital industry at large.

And that’s what America’s Essential Hospitals, the organization behind the push for the designation, has been doing since 1981, long before Covid-19 emerged. The organization represents members that are overwhelmingly based in urban areas or part of university systems. In sum, hospitals that are neither small nor serving rural populations nor on the brink of bankruptcy.

Members paid the organization north of $10 million in 2019, the last year with public Form 990 records, to lobby for more advantageous reimbursement from federal and state programs such as Medicaid, Medicare, and the 340B drug pricing program.

As several leaders of the group acknowledged in the Health Affairs essay, many hospitals already benefit from several privilege-granting alphabet-soup designations, from federally qualified health centers to critical access hospitals  to disproportionate share hospitals, all designations that translate into higher reimbursement rates from the government to compensate for shortfalls in revenue due to providing services to underinsured or uninsured patients in underserved areas.

“Essential hospitals,” however, don’t meet the criteria for those classifications, despite the organization’s claim that they “care for the most at-risk patients.” If that were true, they would qualify for those programs. Instead, they’ve resorted to asking for their own designation which would allow the government to “strategically target support” at them.

Never do the authors of the essay argue that the designation will improve the quality of care, or make services more affordable. Instead, the justification for the desired designation is that these hospitals play important roles in communities. There’s no doubt about that: Not only do hospitals — “essential” or otherwise — provide health care services, but they are also powerful economic forces in their communities.

If the survival of “essential hospitals” is at stake — which the authors imply but give no sound evidence for — then the solution isn’t just to throw more taxpayer dollars at them in a haphazard way. Instead, lawmakers should seek to fix the root causes of the problem.

Any revenue shortfalls these “essential hospitals” are enduring are actually due to government policy. The government values the same care differently depending on who is receiving it. On average, Medicaid pays less for the same services and pharmaceuticals than does Medicare. What hospitals with large numbers of people covered by Medicaid can’t get in direct payments for care they obtain by asking the government for additional compensation. And what hospitals can’t get from patients with public insurance they extract from those with private insurance.

The first step to breaking this cycle is to relentlessly apply three principles: First, instead of giving in to calls for additional layers of regulations and crony privileges, lawmakers should strive to undo government-induced problems. In this case, they should try to reconcile Medicaid and Medicare payments so the rates reflect the value of the service or drug. Second, reforms should encourage cost-cutting and innovation-enhancing competition rather than protect existing providers. Third, the ultimate payers — insurance plan beneficiaries and taxpayers — should be given greater responsibility in all payment decisions.

Here, America’s Essential Hospitals is asking taxpayers to help them out. But they shouldn’t be able to unilaterally increase their revenue without patients having a say in whether those additional earnings are justified. Unfortunately, hospitals’ revenues don’t rise and fall based on the value of the care patients received, because the latter don’t spend their money on care directly. They spend it on public or private insurance plans that select providers and negotiate rates without their involvement. If patients were in charge of their own health care dollars, they would vote with their feet.

Hospitals are often first in line for extra funding. With the pandemic winding down and still plenty of cash to go around, now isn’t the time to bail out hospitals. Instead, efforts should focus on fixing underlying issues and putting patients first.

Elise Amez-Droz is a program manager for the Open Health Project at the Mercatus Center at George Mason University.

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