[This article has been revised and updated. An earlier version stated that hospital developer Alonzo Cantu had held a “fundraiser” for Houston Mayor Bill White. A more accurate term would have been “event.” We regret the imprecision.]

This summer’s national debate on health care reform has brought into focus the manifold factors that drive medical costs ever upward. Texas has not escaped scrutiny. The June 1 issue of the New Yorker featured a story headlined “The Cost Conundrum” by Atul Gawande, who uncovered the astonishing fact that the costs of treating Medicare patients in McAllen are twice the national average. Gawande, a surgeon and associate professor at Harvard Medical School, concluded from an analysis of Medicare data that “the primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine.”

His article featured a long passage about Doctors Hospital at Renaissance, in Edinburg, highlighting its business model as a physician-owned facility: “It has a reputation (which it disclaims) for aggressively recruiting high-volume physicians to become investors and send patients there. Physicians who do so receive not only their fee for whatever service they provide but also a percentage of the hospital’s profits from the tests, surgery, or other care patients are given. (In 2007, its profits totaled thirty-four million dollars.)” He raised the question of whether this business model gives “physicians an unholy temptation to overorder.”

Since the publication of the story, the issue of potential conflicts posed by physician-owned health facilities has taken center stage in the national health care debate. The story has even been cited by President Obama as an example of how health care costs have spiraled out of control.

But it is not just doctors who are responsible for the high cost of medicine in McAllen. As extensive as Gawande’s reporting was, his focus on medical issues missed an important part of the story. The cost conundrum Gawande wrote about did not come about by happenstance. It is the result of the confluence of medicine, money, and politics that is unique to the Valley.

The political influence of Valley lawmakers has shielded the region’s health facilities from the scrutiny endured by their peers in every other metro area of the state. Only in the Valley is Medicaid not subject to a state-mandated managed care system for Medicaid patients. While Gawande focused on a different program–Medicare–the state’s Health and Human Services Commission (HHSC) has calculated that extending managed care to the Valley would result in considerable savings: $137 million over the next four years.

Why hasn’t this savings been realized? The short answer is: because of politics. The key actor was state representative Kino Flores, who was recently indicted by a Travis County grand jury for failing to report his sources of income on Personal Financial Statements he filed with the Texas Ethics Commission over the past six years. During the 2003 legislative session, when state budget writers faced a $10 billion hole, he amended Arlene Wohlgemuth’s mammoth revision of health care policy to prohibit HHSC from implementing managed care in the Rio Grande Valley. (He wasn’t the first to advocate the position: Houston representative Garnet Coleman sponsored similar amendments in the early days of managed care.) Since then, Valley lawmakers have fought uniformly and vigorously against changing the state’s policy–despite the savings estimates by HHSC.

In the years after Flores passed his amendment that has proved to be so lucrative for Valley hospitals, he received, according to the indictments, a retainer from McAllen Medical Center from 2004 to 2008.

That Flores began receiving a retainer from a hospital directly affected by his legislation apparently was no isolated arrangement for the seven-term lawmaker: The indictments also cite other retainers from big vendors who benefited from public works projects he championed. (A spokeswoman for McAllen Medical declined to respond to questions about Flores’ work or the hospital’s position on managed care.) And McAllen Medical has other political ties: State senator Juan Hinojosa, for example, has represented the hospital as local counsel in two cases.

A well-funded political action committee has augmented the region’s political influence. The Border Health PAC, whose contributors are closely associated with Doctors Hospital, has contributed $940,000 to state and local candidates and now boasts a war chest in excess of $1 million.

The PAC’S initial treasurer was Dr. Carlos Cardenas, a physician on the Doctors Hospital at Renaissance Board of Managers. The hospital was constructed by Alonzo Cantu, a successful Valley real estate developer who was known nationally as a “bundler” for Secretary of State Hillary Clinton during her presidential campaign. Cantu remains a key investor in the hospital. His involvement in blocking federal legislation banning doctor-owned facilities was highlighted in a 2007 Washington Post profile.

The Doctors Hospital group is obviously well connected: Its board hosted Speaker of the House Nancy Pelosi in 2007 for the grand opening of its new Women’s Hospital. (Cantu made her trip worthwhile, as he personally contributed $6,600 to the Democratic Congressional Campaign Committee that month.)

And former Texas comptroller John Sharp, now a Democratic candidate for the U.S. Senate, owns a small stake in the hospital.  He has also contributed $250 per month since November 2005, to the Border Health PAC. That  same month Governor Rick Perry named Sharp chairman and Cantu a member of his tax reform commission. Sharp has also contributed $250 each month to the federal Border Health PAC. There are others who make clockwork-like contributions like Sharp’s–Cantu, for instance has sent a $250 check each month since August, 2004, as has Doctors Hospital CEO Lawrence Gelman. Cardenas said in a phone interview that all owners are encouraged, but not required to give to the PAC. The PAC has received authorization to draw a certain contribution from each owner, but Cardenas says there is no link between those sums and the hospital’s profits.

Sharp, who is an announced candidate for the U.S. Senate seat that Kay Bailey Hutchison will give up this fall, said his contributions to the PAC do not mean he agrees with the positions advocated by the group. As for the proposed federal ban on doctor-owned facilities, Sharp said, “It is not on my radar screen.” He said he signed up to make regular contributions to the PAC at Cantu’s request, and said he believed most investors did as well. “See, they have these deals at banks where you can automatically deduct,” he told me. “It’s no different than any other PAC.”

He also noted that Cantu has not held a fundraiser for him in his current race. According to news reports, Cantu held an event for Sharp’s opponent, Houston mayor Bill White, to meet community leaders.

The largesse of the Border Health PAC is significant. Since 2006, here are some of its beneficiaries: in the Texas Senate, Juan Hinojosa, $125,000; Judith Zaffirini, $50,000; Eddie Lucio, $25,000; in the House of Representatives, Richard Raymond, $20,000; Yvonne Gonzales-Toureilles, $20,000; Veronica Gonzales, $22,500, Flores, $42,500. Perry picked up $75,000 during the same period, and Lieutenant Governor David Dewhurst and former House Speaker Tom Craddick both netted $25,000.

Undoubtedly, political influence has been brought to bear on the federal issue of physician-owned facilities and the state issue of managed care. So should lawmakers revisit the issue of extending managed care for Medicaid in the Valley?

State representative John Zerwas, who oversaw the state health care budget for the House this spring, says he advocated moving to managed care in the Valley to take advantage of the estimated cost savings, but Valley lawmakers “would have none of it.” Zerwas, a physician, says, “There is no doubt that managed care makes costs go down. The question is what will that do to the hospitals and the docs?” The delivery system in the Valley is “fragile,” he said.

Still, given evidence of “overutilization” of medicine dramatized by the New Yorker article, he said “It should be a wake-up call to practitioners in the Valley to recognize that the single biggest driver of the cost of care is the pen in their hand.”

Coleman, who is leading a group of state lawmakers making recommendations for national heath care reform, recently met with representatives of Doctors Hospital. “I was chagrined that Texas was being used as an example of the worst in terms of costs, particularly when we have the most uninsured. A change needs to occur in how health care is delivered in Hidalgo County.”

But he cautioned against a “knee-jerk” reaction, like banning physician-owned facilities or switching to a traditional managed care system that does not take into account the region’s unique mix of poverty and chronic illness.

Cardenas argued that the Valley has needed its current system for Medicaid administration—primary care case management, which allows many medical procedures to be billed as “fee-for-service”—because its population is more spread out, poorer, and more sickly than is characteristic in other areas of the state. Adopting the managed care system of the state’s other metro areas might realize savings, but would also result in poorer care for patients, Cardenas said. It is not immediately clear why managed care would not work in these circumstances.

Senator Steve Ogden, chairman of the Texas Senate Finance Committee, says he’s always believed managed care would trim health care costs in the Valley. But, he acknowledged, “Valley legislators line up uniformly opposed to it. It was not a fight I took on because there wasn’t anything I could do about it.”

This is how the system works: The politicians who get huge contributions from the Border Health PAC protect the status quo, the doctors continue to order expensive medical procedures, and the money rolls in. The question is whether, given the spotlight shone on the Valley by the New Yorker and now by the New York Times (“Texas Hospital Flexing Muscle in Health Fight”) the question is whether the status quo can be changed in the face of resistance from the region’s delegation. Says Ogden: “There are some providers using poor people to make a lot of money. And I think South Texas is probably ground zero for that.”

[Editor’s note: After posting this story last Thursday, TEXAS MONTHLY received a letter from Doctors Hospital strongly disputing some of its conclusions.]