[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 SPECIALTY HOSPITALS: ASSESSING THEIR ROLE IN THE DELIVERY OF QUALITY 
                              HEALTH CARE

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 12, 2005

                               __________

                           Serial No. 109-38

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

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                    ------------------------------  
                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

        David Cavicke, Deputy Staff Director and General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                         Subcommittee on Health

                     NATHAN DEAL, Georgia, Chairman

RALPH M. HALL, Texas                 SHERROD BROWN, Ohio
MICHAEL BILIRAKIS, Florida             Ranking Member
FRED UPTON, Michigan                 HENRY A. WAXMAN, California
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
BARBARA CUBIN, Wyoming               BART GORDON, Tennessee
JOHN SHIMKUS, Illinois               BOBBY L. RUSH, Illinois
JOHN B. SHADEGG, Arizona             ANNA G. ESHOO, California
CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
Mississippi                          TED STRICKLAND, Ohio
STEVE BUYER, Indiana                 DIANA DeGETTE, Colorado
JOSEPH R. PITTS, Pennsylvania        LOIS CAPPS, California
MARY BONO, California                TOM ALLEN, Maine
MIKE FERGUSON, New Jersey            JIM DAVIS, Florida
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
SUE MYRICK, North Carolina           JOHN D. DINGELL, Michigan,
MICHAEL C. BURGESS, Texas              (Ex Officio)
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)
?



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Cram, Peter, Assistant Professor of Medicine, Division of 
      General Medicine, University of Iowa College of Medicine...    79
    Hackbarth, Glenn M., Chairman, Medicare Payment Advisory 
      Commission.................................................    24
    Hornbeak, John E., President and CEO, Methodist Healthcare 
      System of San Antonio, Ltd.................................    68
    McClellan, Mark B., Administrator, Centers for Medicare and 
      Medicaid Services..........................................    11
    Pierrot, Alan H., Fresno Surgery Center......................    57
    Thomas, John T., General Counsel, Baylor Health Care System 
      of Dallas, Baylor Health Care System.......................    76
Material submitted for the record by:
    American College of Surgeons, prepared statement of..........    94
    American Medical Association, prepared statement of..........    97
    Association of American Physicians and Surgeons, prepared 
      statement of...............................................   105
    Federated Ambulatory Surgery Association, prepared statement 
      of.........................................................   105
    Hornbeak, John E., President and CEO, Methodist Healthcare 
      System of San Antonio, Ltd., response for the record.......   135
    Howard, Thomas C., McBride Clinic, Inc., prepared statement 
      of.........................................................   107
    Kerrigan, Karen, President and CEO, Small Business and 
      Entrepreneurship Council, prepared statement of............   108
    McClellan, Mark B., Administrator, Centers for Medicare and 
      Medicaid Services, response for the record.................   115
    Parnell, Sean, Vice President-External Affairs, The Heartland 
      Institute, prepared statement of...........................   109
    Pierrot, Alan H., Fresno Surgery Center, response for the 
      record.....................................................   130
    Strayer, John W., III, National Center for Policy Analysis, 
      prepared statement of......................................   113
    Thomas, John T., General Counsel, Baylor Health Care System 
      of Dallas, Baylor Health Care System, letter dated June 15, 
      2005, enclosing response for the record....................   126

                                 (iii)

  

 
 SPECIALTY HOSPITALS: ASSESSING THEIR ROLE IN THE DELIVERY OF QUALITY 
                              HEALTH CARE

                              ----------                              


                         THURSDAY, MAY 12, 2005

                  House of Representatives,
                  Committee on Energy and Commerce,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2123 of the Rayburn House Office Building, Hon. Nathan 
Deal (chairman) presiding.
    Members present: Representatives Deal, Hall, Shimkus, 
Shadegg, Pitts, Bono, Ferguson, Myrick, Burgess, Barton (ex 
officio), Brown, Gordon, Eshoo, Green, DeGette, Capps, Allen, 
and Baldwin.
    Staff present: Chuck Clapton, chief health counsel; Melissa 
Bartlett, majority counsel; Brandon Clark, health policy 
coordinator; Eugenia Edwards, legislative clerk; Bridgett 
Taylor, minority professional staff; Amy Hall, minority 
professional staff; and David Vogel, research assistant.
    Mr. Deal. I am going to ask someone if they could close the 
doors in the back, please.
    Good morning. I am going to call the committee to order, 
and I will recognize myself for an opening statement.
    I am proud to say that this is a hearing that some of you 
have, perhaps, long awaited, and I think we have two rather 
distinguished panels that are going to talk to us about all 
aspects of the issue that is before us and that of specialty 
hospitals.
    This is an issue that, in many respects, is complex and 
certainly is often contentious. So for those of you who are on 
our panels, we look forward to your testimony, and we 
appreciate the fact that you would be willing to appear today.
    Our first panel of witnesses, of course, contains some 
familiar faces to those of us on this subcommittee: Dr. Mark 
McClellan, the Administrator of the Centers for Medicare and 
Medicaid Services; and Mr. Glenn Hackbarth, who is the Chairman 
of the Medicare Payment Advisory Commission, MedPAC. Gentlemen, 
we are pleased to have you here today, and we will hear from 
you in just a few minutes.
    Our second panel, that I will go ahead and recognize at 
this time, comes to us from what some would say are ``outside 
the beltway,'' and offer perspectives from the ``real world'' 
that lies outside: Dr. Alan Pierrot from Fresno Surgery Center, 
representing the American Surgical Hospital Association; Mr. 
John E. Hornbeak from Methodist Healthcare Systems of San 
Antonio representing the Federation of American Hospitals; Mr. 
John Thomas from Baylor Health Care Systems of Dallas, 
representing a joint venture; and Dr. Peter Cram from the 
University of Iowa College of Medicine, who is an independent 
researcher.
    I know, from conversations I have had with many of my 
colleagues on this subcommittee, that they have held numerous 
meetings and have had many inputs from constituents from 
throughout their Congressional Districts. And many of them are 
like me; they are carefully weighing the consideration of the 
options that are liable for us.
    Again, I want to welcome our witnesses and thank them for 
being here and participating in this hearing.
    And I will now recognize Mr. Brown for 5 minutes for an 
opening statement.
    Mr. Brown. Thank you, Mr. Chairman. Thanks to our witnesses 
for joining us this morning.
    It is difficult to assess the costs, quality, and access 
impact, especially hospitals, at least those that have emerged 
over the last decade or so. As MedPAC pointed out in its March 
report, the phenomenon is too recent to provide much in the way 
of trend data. Based on MedPAC's preliminary findings, these 
hospitals may, in fact, weaken the health care system more than 
they strengthen it, however some of their impact simply can not 
be accurately assessed until the market matures.
    For example, while it is not clear that competition from 
specialty hospitals is bringing down cost today, such 
competition could have a positive effect in the future. 
Importantly, it should be possible to revise the rules of the 
game in a way that minimizes the negative effects and maximizes 
the positive ones. In establishing those rules, if we can't 
fully rely on the data, then we will have to rely on logic.
    Closing the physician referral loophole is the most 
controversial and probably the most important of these rule 
changes and, I believe, a logical step. When physicians can 
directly and tangibly affect their income by referring patients 
to a particular health care facility, competition has gone 
awry. As it stands, physicians are permitted to refer patients 
to whole hospitals because the effect of those referrals is 
sufficiently diffuse.
    But I have to say, it makes no sense to me to define a 
specialty hospital in this way as a whole hospital. After all, 
the fact that they are not whole is the very feature that 
differentiates these hospitals from the rest. If referral for 
self gain distorts demand and a referral undercuts fair 
competition, then physicians should not be permitted to refer 
patients to a specialty hospital in which they have a vested 
financial interest. One physician's referrals can, in fact, 
make a tangible difference in a specialty hospital's bottom 
line. Competitive advantage should be a function of efficiency 
and quality, not the product of cream-skimming healthier and 
less-costly patients from community hospitals.
    Remember, hospital reimbursements pegged to the cost of an 
average patient. If specialty hospitals serve a 
disproportionate share of healthier patients, they are not only 
placing community hospitals at risk, they are receiving tax 
dollars that they, in fact, don't deserve. Competitive 
advantage should not be gained by cream-skimming insured 
patients from community hospitals. The consequences of that 
type of gaming are obvious. Competitive advantage should not be 
secured by capitalizing on the vagaries of a hospital 
reimbursement system that has unfortunately produced more 
profitable and less profitable health conditions, and it should 
not be deployed in a way that starves community and public 
hospitals of the patient volume they need to cover their 
significantly larger fixed costs.
    As always, the benefits of competition need to be weighed 
against the needs of the community. Specialization that 
benefits some patients at the expense of other patients doesn't 
move the health care system forward, and specialization that 
strains the already shaky financial viability of community and 
public hospitals moves the health system backward.
    Ideally, free market competition would work perfectly. 
There would be no need for rules. Unfortunately, reality, as we 
know throughout our health care system, is more complicated 
than that. There are rules against collusion, against price 
gouging, and in the case of health care, against physician 
self-referral.
    I support an extension of the moratorium on self-referral 
to specialty hospitals for the same reason that I support the 
prohibition on self-referral and its other applications, 
because self-referral so easily corrupts need-based care and 
value-based competition. In my view, there is definitely a role 
for specialty hospitals in the Nation's health care system; we 
just need to make sure it is a productive role.
    Thank you, Mr. Chairman.
    Mr. Deal. I thank the gentleman.
    We are pleased to have the chairman of the full committee, 
Mr. Barton from Texas, who I will recognize now for an opening 
statement for 5 minutes.
    Chairman Barton. Thank you, Mr. Chairman.
    And I want to compliment you on holding this hearing. I 
also want to compliment you on the selection of witnesses. I am 
sure it is just a coincidence, but half of them are from Texas. 
So we are definitely going to have a good group of panelists.
    This hearing is very important, because it will provide 
members of the committee a valuable perspective on the issue of 
specialty hospitals in the role in delivering quality health 
care.
    I want to particularly thank CMS Administrator, Dr. Mark 
McClellan, for appearing here today. As many of you know, last 
night CMS released their long-awaited recommendations on 
specialty hospitals. CMS has recommended a careful review of 
new special hospital applications.
    I support this approach, and I am going to underline that. 
I support the conclusions of the report that say they are going 
to change the rules on specialty hospitals. But I also am very 
pleased about what the report does not say. They did not say 
that the moratorium on building or expanding specialty 
hospitals be extended, either by legislation or through other 
administrative actions.
    This decision will be a boom to competition and the quality 
of care that patients receive. Let me repeat that. The report 
that CMS released last night does not continue the ban, the 
moratorium on specialty hospitals. And I think that is very 
important.
    I could not agree more: competition drives down cost and 
improves the quality of health care. Some say we need less 
competition and more government regulation, but that will give 
us these bigger bills and sicker patients. The rise of 
specialty hospitals will press traditional community hospitals 
to become leaner, faster, and better. This means more patients 
will get well quicker.
    I have recently met with people on both sides of this 
issue. I understand the concerns of the community hospitals. 
They feel the new specialty hospital will cost them patients 
and revenue. If they decline to react to the competition or sit 
back and wait for a government bail-out, that is exactly what 
is going to happen.
    At the same time, I have also met with the folks from my 
District who told me how much they appreciate the quality and 
service they have received from the existing specialty 
hospitals. I mean for them to have more, not less.
    Taken together, these arguments make the case for why the 
approach that Dr. McClellan has laid out is a reasonable 
compromise. The new recommendations will allow CMS to carefully 
review new specialty hospital applications to assess the need 
for these institutions. At the same time, the policy will not 
be an absolute bar that would prohibit the creation of new 
specialty hospitals and thereby stifle competition. This policy 
will also allow CMS to begin to consider the concerns raised by 
some that the specialty hospitals cherry-pick the healthiest 
and wealthiest patients and deliver only their treatments that 
are the most lucrative.
    That is not going to happen, because we will not allow 
anybody to game the system that way in neither specialty nor 
community hospitals. Now I listened with interest to what the 
Ranking Member, Mr. Brown, said in his opening statement. And 
most of it I agree with. What I disagree with is that we should 
ban self-referral in its totality, because if you really mean 
that and do it across the board, if I go to my family practice 
doctor in Inez, Texas and he says, ``Joe, you have got the 
flu.'' And I say, ``Okay, doctor. Treat me.'' He says, ``I 
can't. I have to refer you to somebody else for treatment. I 
have diagnosed that you have the flu, but I can't treat you.'' 
Well, that is silly. So the answer is not to ban self-referral. 
The answer is that if somebody comes to a particular doctor, 
and let us say that the doctor is an orthopedic surgeon, and he 
says, ``You need a knee replacement.'' Well, if that is his 
diagnosis and he can replace the knee, then he should do that. 
So he should treat all comers, regardless of ability to pay.
    So I agree with what Mr. Brown was saying about making sure 
that we treat all of the people. I disagree the way to do it, 
though, is to ban self-referral.
    The specialty hospital moratorium will expire in June, and 
I don't believe that any further action by Congress is 
necessary. However, should members of the committee want to 
legislate on the issue, I intend to work with both sides of 
this debate. I want to pursue a compromise that would allow 
specialties to continue while ensuring that they carry their 
fair share of Medicaid patients and other uncompensated care.
    So I guess where I am on this particular issue is I am 
going to be a Senator. This is one where I can do nothing and 
win, so I am going to be a Senator on this issue and watch the 
moratorium expire on specialty hospitals.
    And with that, Mr. Chairman, I yield back the balance of my 
time.
    [The prepared statement of Hon. Joe Barton follows:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    Thank you, Chairman Deal, for holding today's hearing. This hearing 
is especially important, because it will provide Members of the 
Committee with valuable perspectives on the issue of specialty 
hospitals and their role in delivering quality health care.
    I want to particularly thank CMS Administrator Mark McClellan for 
appearing here today. As many of you know, last night CMS released 
their long-awaited recommendations on specialty hospitals. CMS has 
recommended a careful review of new specialty hospital applications. I 
support this approach.
    Better yet was what the CMS recommendations did not say. CMS did 
not recommend that the moratorium on building or expanding specialty 
hospitals be extended, either by legislation or through other 
administrative actions. This decision will be a boon to competition and 
to the quality of care that patients receive.
    I couldn't agree more. Competition drives down cost and improves 
the quality of health care. Now, some say we need less competition and 
more government regulation, but all that will give us is bigger bills 
and sicker patients. The rise of specialty hospitals will press 
traditional community hospitals to become leaner, faster and better. 
This means more patients get well quicker.
    I have recently met with people on both sides on this issue, and I 
understand the concerns of the community hospitals. They fear the new 
specialty hospitals will cost them patients and revenue. If they 
decline to react to the competition or sit back and wait for a 
government bailout, that's exactly what will happen to them. At the 
same time, I have also met with folks from my district who told me how 
much they appreciated the quality and service they received from their 
specialty hospitals. I mean for them to have more, not less.
    Taken together, these arguments make the case for why the approach 
Dr. McClellan has laid out is a reasonable compromise. The new 
recommendations will allow CMS to carefully review new specialty 
hospital applications, to assess the need for these institutions. At 
the same time, the policy will not be an absolute bar that would 
prohibit the creation of new hospitals and thereby stifle competition.
    This policy will also allow CMS to begin to consider the concerns 
raised by some that specialty hospitals cherry-pick healthiest patients 
and deliver only the treatments that are most lucrative. That's not 
going to happen because we will not allow anybody to game the system 
that way--neither specialty nor community hospitals.
    Because the specialty hospital moratorium will expire in June, I do 
not believe any action by Congress is necessary. However, should 
Members of the Committee want to legislate on this issue, I intend to 
work with both sides of this debate. I would want to pursue a 
compromise that could allow specialties to continue, while ensuring 
that they carry their fair share of Medicaid patients and other 
uncompensated care.
    Thank you again to our witnesses for appearing here today and I 
look forward to hearing their testimony.

    Mr. Deal. I thank the gentleman.
    I recognize Mr. Gordon from Tennessee for an opening 
statement.
    Mr. Gordon. We will not be here at 2 o'clock, so I am going 
to be very brief.
    First of all, let me just thank you for having this 
important meeting. I am concerned really about the specialty 
hospitals and the impact they are going to have on my general 
hospitals in middle Tennessee as well as in the emergency rooms 
and other critical services that are offered to the community. 
And I will tell my friend from Texas, Mr. Barton, the good news 
is that if that doctor that said you needed some knee surgery, 
he could always take you to the hospital. You wouldn't have to 
go to his hospital. You could go to the general hospital. So 
you could still get that surgery, Joe.
    So I think we will have a----
    Chairman Barton. I wish my knees were as good as yours.
    Mr. Gordon. So I would have to take a contrary position. I 
think we do need to have the moratorium extended as we figure 
this out. And I am glad we are going to have, I guess, 
competing panel reports this morning. And hopefully that will 
help us be able to figure out where we need to go, but I think 
we need a little more time as we figure that out.
    So thank you, Mr. Chairman, for having this meeting.
    Mr. Deal. I thank the gentleman.
    I now recognize Dr. Burgess for an opening statement.
    Mr. Burgess. Thank you, Mr. Chairman.
    I have a statement that I will submit for the record, but I 
do want to make a few remarks before we start, and it is always 
good to see you, Dr. McClellan and John Thomas from Baylor down 
near my District in Dallas. Great to have you here this 
morning.
    And we all look forward to the testimony that we are going 
to hear today. It is important testimony on an important 
subject. And we are very fortunate to have such a distinguished 
panel to give us good information this morning.
    I suppose missing from the panel are the patients and the 
taxpayers, and unfortunately, they are not with us this 
morning.
    It is a complicated issue. On the one hand, the surgery 
center and the specialty hospital who can do a better, faster, 
cheaper, and arguably safer, in some instances, things like 
patient convenience, patient comfort, patient satisfaction, and 
perhaps even patient safety are all likely to score high on any 
survey. Patients requiring heart surgery, very specialized 
procedures, arguably there is a place for these in the 
specialty hospital.
    On the other hand, the full-service community hospital is 
what most of us recognize as a hospital. These hospitals fund 
and support services that are not as likely to provide a hefty 
return on investment. Services such as the pediatric ICU, the 
emergency room, the medicine wards, the intensive care unit, 
which because of the community hospital's mission, are likely 
to have more patients who aren't insured and thus, a lower 
profit margin, if any profit at all.
    And there are likely more examples that we will hear this 
morning from the panel. I think it is important that this 
committee recognize that it may be time to recognize that the 
payment formula is not necessarily going to be the same for 
both the community hospital and the specialty hospital.
    I disagreed with the moratorium when it was passed. I did 
not think it was right. I do not think it should be extended. 
But we do now have an opportunity to craft a balanced solution 
that will benefit the patients and the taxpayers and help us 
move in the direction that we really should be going in in this 
Congress. It is time for us to value health. We can't keep up 
with just paying for disease as it occurs.
    It is hard to say that we are going to let market forces 
work when there has been no free market in the practice of 
health care in the last 40 years, but all in all, I agree with 
the chairman. I think a compromised solution is going to be in 
everyone's best interest.
    But I do look forward to hearing the testimony of the panel 
this morning, and I will yield back.
    Mr. Deal. I thank the gentleman.
    I recognize the gentlelady from California, Ms. Eshoo, for 
an opening statement.
    Ms. Eshoo. Thank you, Mr. Chairman, for holding this 
important meeting.
    And Dr. McClellan, welcome. It is good to see you.
    It is important that we have this hearing and hear from the 
experts, because the 18-month moratorium deadline on self-
referrals to physician-owned specialty hospitals is going to 
expire on June 8.
    As I see it, we have two issues here. We have a 
reimbursement system that pays physicians a higher rate for 
performing services in specialty hospitals. So that is a double 
whammy, because, really, the reimbursement system rewards 
physicians and takes them in a direction that is going to serve 
them even better. That reimbursement system is a public 
reimbursement system. It is not a private reimbursement system. 
So I think it is very important that we find out from Dr. 
McClellan how he views that reimbursement system. We are going 
to keep paying a higher rate when we hear from other physicians 
in the provider community wondering what is going to happen to 
their formula in Medicare. I am not against physicians earning 
a good living. God knows we need the best doctors standing on 
one side of us. And whether my colleagues on the other side of 
the aisle believe this, an excellent attorney on the other side 
of us.
    But the system, as I see it, is tilted. It is tilted. It is 
tilted because there is more money from the system that we 
have, the public system, and in addition to that, you have a 
stake in that specialty hospital. You own that place. You have 
ownership in it. Then obviously you are bringing in more money 
as a result of it. I mean, that is the way it stands. And I 
think that those are the two things that we need to take a look 
at.
    Now if the rest of the system was really doing well, if 
everyone else in the system was doing well, you say, ``Well, 
this is a part of an overall healthy system where there are 
many dollars for it that support it.'' Well, maybe in that 
context, this would not really raise its head as an all-
important issue. But it is, because there are strains on the 
system throughout.
    So I think that that is what we need to examine, and Dr. 
McClellan, I hope that you will address that. I think that you 
touch on this in your printed testimony of shedding more light 
on whether refining the reimbursement system would reduce the 
need for physician self-referrals.
    So thank you, Mr. Chairman, again for having the hearing. I 
am glad to see the witnesses. You are more than welcome here 
always, and I look forward to the testimony.
    Thank you.
    Mr. Deal. Thank you.
    I will recognize the other gentlelady from California, Ms. 
Bono.
    Ms. Bono. Thank you, Mr. Chairman.
    I would like to welcome our witnesses. It is an extremely 
important hearing, and a lot of great questions and comments 
have been brought up by my colleagues, and I look forward to 
hearing the answers.
    I just want to respectfully disagree with my colleague from 
California, for whom I have the highest respect, but I think 
the biggest problem in health care is that lawyer being on the 
other side of the patient.
    So again, welcome. I look forward to hearing you and your 
answers. And I yield back.
    Mr. Deal. Thank you.
    I recognize Mr. Allen.
    Mr. Allen. Mr. Chairman, thank you for convening this 
hearing.
    I want to thank all of the witnesses for being here.
    The growth of physician-owned specialty hospitals has 
coincided with rising concerns about possible conflicts of 
interests inherent in these for-profit entities. Community 
hospitals carry on a proud tradition in Maine providing quality 
health care 24 hours a day, 7 days a week, 365 days a year to 
all patients, regardless of their ability to pay. Maine has a 
certificate of need requirement, and therefore does not have 
any private specialty hospitals. The State of Maine has 39 non-
profit community hospitals.
    In two recent studies conducted by CMS and published in the 
Journal of the American Medical Association, Maine hospitals 
rated third-best in the Nation on 22 indicators of the quality 
of care given to Medicare patients. These indicators measured 
delivery of services that are effective in treating breast 
cancer, diabetes, heart attack, heart disease, pneumonia, and 
stroke. Maine's hospitals strive to improve the affordability 
of health care, increase access, and make investments in 
quality health care a top priority. Balancing the cost of 
quality care to all, regardless of their insurance, is daunting 
in the context of a fragmented health care system.
    I believe that it is critical that initiatives to control 
costs and improve services do not jeopardize access to high-
quality health care. I am particularly concerned about the 
negative financial effects that these physician-owned specialty 
hospitals could have on community hospitals.
    I look forward to hearing our panelists' views on three 
critical issues involving specialty hospitals.
    First, are physicians with a financial stake in a hospital 
``cherry picking'' less-sick, better-insured patients, 
essentially skimming the cream from the broader patient pool?
    Second, specialty hospitals are half as likely to have 
emergency departments. What impact could this have on life-
saving emergency and trauma care?
    Third, what is the prevalence of physicians over-
prescribing care when referring patients for services to 
specialty hospitals in which they have a financial interest?
    With 45 million uninsured Americans and exploding health 
care premiums for businesses and individuals, we already know 
that we have a deeply flawed health care system. Community 
hospitals are an essential component of our Nation's health 
care safety net, providing millions of dollars in charity care 
each year. But in order to provide quality care to all 
patients, community hospitals need to be financially healthy. 
It is important and appropriate for this committee to examine 
the impact of physician-owned specialty hospitals on the entire 
health care system.
    And with that, I want to thank all of the witnesses and 
yield back.
    Mr. Deal. Thank you.
    I recognize Mr. Ferguson for an opening statement.
    Mr. Ferguson. Thank you, Mr. Chairman, and thank you for 
holding this important hearing.
    And I certainly want to thank all of our witnesses for 
being here today.
    Dr. McClellan, great to see you again. Thank you for all of 
your great work. And Mr. Hackbarth, thank you, too, for being 
here. We appreciate you both being here, and certainly we look 
forward to hearing your thoughts on this.
    This issue is really important, as a number of other folks 
have said already, about the referral system through which our 
Nation's hospitals and doctors provide care for our Nation.
    At the heart of the issue is the desire for physicians to 
have more control over hospital operations. This is a noble 
goal, but it is important that it is not done in conjunction 
with practices, such as referring more profitable patients to 
hospitals where doctors have an ownership stake. As a result of 
that behavior, there are fewer Medicaid and Medicare patients 
admitted to the physician-owned hospitals at the heart of it, 
that is why we include it in the moratorium and the MMA almost 
a year and a half ago.
    I am looking forward to hearing the testimony of our panels 
today. I am particularly interested in hearing the findings by 
CMS and MedPAC and their recommendations for future action.
    In the meantime, we can also look at proposals like gain 
sharing that are already being innovated today in my home State 
of New Jersey and other opportunities for physicians to 
participate with the hospital, working in tandem to drive down 
costs and to reach incentives for increased pay. Specifically, 
the New Jersey project is a pay-for-performance efficiency 
project that attempts to align physicians and hospital 
incentives to control Medicare costs and improve the efficiency 
of care. It is a win-win for the doctors and the hospitals to 
work on a level playing field.
    I urge our committee to review this project and to allow 
CMS to approve this pay-for-performance project on a 
demonstration basis.
    Thank you, again, Mr. Chairman, for holding this important 
hearing. I again look forward to hearing the testimony today, 
and I yield back.
    Mr. Deal. I thank the gentleman.
    I recognize Ms. Baldwin for an opening statement.
    Ms. Baldwin. Thank you, Mr. Chairman.
    And I thank the witnesses who are here today.
    Health care is the issue that prompted me to enter public 
service in the first place, and the challenges in our health 
care system continue to be the issue that keeps me here. I am 
always interested in hearing about innovations in health care 
that seek to improve access and delivery of health care. I know 
that the proponents of specialty hospitals see them as a step 
toward more efficient health care while opponents see them as 
draining scarce health care dollars from community hospitals.
    These two totally different perspectives then raise a 
number of questions that I look forward to having addressed 
today. Specifically, I am interested in learning more about the 
impact of specialty hospitals on community hospitals. And I am 
interested in hearing from the specialty hospital proponents 
about their treatment of Medicaid patients and the uninsured 
and what role they can play in moving our country toward one 
where all Americans have access to quality, affordable, 
comprehensive health care.
    I would like to commend the chairman for calling this 
important hearing. The issue of physician-owned specialty 
hospitals raises some serious questions, and I look forward to 
this opportunity to have some of those questions examined more 
closely by the experts.
    Thank you.
    Mr. Deal. Thank you.
    Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I wasn't going to speak, but I wanted to take this time, 
obviously, when you get the bully pulpit for a few minutes to 
raise an issue you and I talked about the last 2 weeks. And I 
just got an article in a local paper. We have lost our second 
doctor in 2 weeks, now probably about 175 practitioners in a 2-
county area. And this is from the Alton telegraph of yesterday. 
Dr. Charles Sam has carried on his father's medical service to 
a local community, but the malpractice insurance crisis is 
sending him to Wisconsin. Sam is a Bethalto native. He has 
practiced here for 20 years. He has announced that July 15 will 
be his last day practicing locally. They are moving to 
Wisconsin, Tammy, so maybe he can help in the medical field 
here.
    His quote says: ``You find yourself waking up every day 
wondering if this is the day that you are going to lose it 
all.'' Sam has said Tuesday, ``It is like doctors here have a 
target on their backs.'' And then he also is quoted as saying, 
``It is with great sadness that I wish to announce my departure 
from the Bethalto medical practice. I truly thought that I 
would practice here until I retired, but the malpractice 
climate has forced me to do otherwise.'' He also quotes, and 
this is what I hope Dr. McClellan will take back to the 
Administration, of course President Bush visited Madison County 
early this year. Great hopes that we would have some reforms. 
We are starting to move in the committee, under the direction 
of the chairman, in discussions, and I hope that you all would 
continue to intervene so that we can get legislation to the 
President's desk.
    With that, Mr. Chairman, I yield back my time.
    Mr. Deal. Thank you.
    Mr. Green, do you wish to make an opening statement?
    Mr. Green. Mr. Chairman, I would just look forward to the 
questioning. I will have a statement for the record. Welcome, 
Dr. McClellan.
    Mr. Deal. Well, thank you. I believe that concludes the 
opening statements of all members who are present.
    [Additional statement submitted for the record follows:]

    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    Mr. Chairman, thank you for holding this hearing. And thank you to 
our witnesses for being here to testify on this critical issue.
    Physician-owned specialty hospitals have been growing rapidly in 
recent years. According to the Government Accountability Office, the 
number of specialty hospitals tripled between 1990 and 2003.
    There are two complex sides to this issue. Some view specialty 
hospitals as innovative, focused facilities for high-quality, 
specialized care, adding competition to the health care marketplace. 
Others say specialty hospitals flourish because they exploit a Medicare 
loophole allowing physician-owners to select patients who are less sick 
and, therefore, more profitable. This leaves the less-profitable 
patients for community full-service hospitals, likely undermining their 
financial viability.
    There are also concerns about physician ownership of speciality 
facilities. The physician self-referral laws were enacted because of 
evidence that doctors prescribe more tests and services when they have 
a financial ownership in facilities providing those tests and services. 
But a loophole in physician self-referral laws allows physicians to 
self-refer to specialty hospitals in which they have a financial 
interest. This loophole may well need closing.
    Because of concerns over specialty hospitals, the Medicare 
Modernization Act put a moratorium on reimbursement of new specialty 
hospitals. Regardless of whether the moratorium on specialty hospitals 
is continued, the recommendations that MedPAC has made on better 
aligning physician-hospital incentives and improving payment accuracy 
merit consideration. These recommendations could mitigate specialty 
hospitals' incentives to choose healthy patients over sick ones and 
could also improve physician satisfaction with hospital management 
practices.
    I am pleased this hearing will provide some perspectives on this 
complex issue, and again thank the witnesses for their testimony today.

    Mr. Deal. So we will proceed to our first panel, and Dr. 
McClellan, welcome. We look forward to your testimony. And I am 
sure you will shed some light on the report that was released 
last night.

  STATEMENTS OF MARK B. McCLELLAN, ADMINISTRATOR, CENTERS FOR 
    MEDICARE AND MEDICAID SERVICES; AND GLENN M. HACKBARTH, 
         CHAIRMAN, MEDICARE PAYMENT ADVISORY COMMISSION

    Mr. McClellan. That is right.
    Well, Mr. Chairman, Representative Brown, Chairman Barton, 
and all of the distinguished members of the committee, it is a 
pleasure to be back with you today. You know, we have been 
dealing with many important health care issues for the Nation 
in this committee. This is another one, the issue of physician-
owned specialty hospitals.
    At the Centers for Medicare & Medicaid Services, we remain 
deeply committed to improving the quality of patient care and 
avoiding unnecessary Medicare spending.
    How Medicare pays for services and how we work with other 
stakeholders in our health care system can significantly impact 
quality and medical costs for our beneficiaries and for the 
overall health care system. By carefully examining features of 
our payments and the realities of medical practice, we can find 
ways to make sure that the financial incentives created by 
Medicare can be improved to help ensure not only that Medicare 
pays accurately, but that our rules promote quality care for 
Medicare beneficiaries and other hospital patients. And to this 
goal, Section 507 of the Medicare Prescription Drug, 
Improvement, and Modernization Act, the MMA, requires us to 
study this set of important quality and cost issues related to 
specialty hospitals and to report to Congress on our findings.
    Now this is the first presentation of our results and our 
recommendations. You all are very knowledgeable, I can tell 
from the opening statements, about this important issue, so I 
am going to just briefly summarize the report and then turn to 
our recommendations and how we intend to proceed.
    As you know, during this 18-month moratorium imposed by the 
MMA, we were required to study a number of factors, including 
referral patterns of specialty hospital physician owners, 
quality of care, patient satisfaction, differences in 
uncompensated care and tax payments between specialty hospitals 
and community hospitals. We contracted with an independent 
research organization to conduct this technical analysis. The 
researchers used available national data for many aspects of 
this report. In addition, they also drew on a collection of a 
considerable amount of new data related to a detailed 
investigation of ownership and performance and impact of 
specialty hospitals, supplemental data from certain 
communities. They made site visits to specialty hospitals in 
six market areas around the country.
    The hospitals there comprised about one-sixth of the 67 
cardiac surgery and orthopedic specialty hospitals that were in 
operation and approved by Medicare in 2003. The researchers 
selected the market areas, because they represented a range of 
circumstances in which specialty hospitals operate as well as 
geographic diversity. They used Medicare claims data from the 
entire national population, the whole country, in terms of 
physician-owned specialty hospitals to assess quality of care. 
To do this, they used inpatient hospital quality indicators 
developed by the Agency for Health Care Research and Quality to 
assess quality of care at specialty hospitals visited and at 
the local competitor community hospitals. To estimate the total 
tax payments on uncompensated care for these hospitals, they 
used data obtained from the Internal Revenue Service as well as 
from the hospitals themselves.
    The empirical evidence from this report clearly shows that 
cardiac hospitals differ significantly from surgery and 
orthopedic hospitals. Compared to surgery and orthopedic 
hospitals, cardiac hospitals tend to have a higher average 
daily count of inpatients in the hospital. They tend to have an 
emergency department. They have other features, like community 
outreach programs, whereas surgery and orthopedic hospitals 
more closely resemble ambulatory surgical centers where they 
focus primarily on outpatient services. All of the cardiac 
hospitals reportedly were built exclusively for cardiac care, 
to specialize in it. The average daily census of the 16 cardiac 
hospitals that were open for more than a year in 2003, was 40 
patients. For surgery and orthopedic hospitals, the average 
daily census was only about 5 patients. Cardiac hospitals in 
2003 treated 38,000 Medicare cases and Medicare patients 
accounted for most, about two-thirds, of the inpatient days of 
these hospitals nationwide. In surgery and orthopedic 
hospitals, Medicare patients accounted for about 36 percent of 
the inpatient days, a much smaller percentage.
    The small number of inpatient cases at surgery and 
orthopedic hospitals prevented a development of meaningful 
findings for this group on some of the dimensions of 
performance in the report. For all of these reasons, the report 
focuses on cardiac hospitals and orthopedic surgical hospitals 
separately.
    Now in the report, CMS found that physician owners referred 
or admitted the majority of Medicare patients in most cardiac 
hospitals, as I said, but these physicians do not refer their 
patients exclusively to the specialty hospitals that they own. 
Patients treated at cardiac specialty hospitals are less 
severely ill than community hospitals. We confirmed other 
results with similar findings. However, both the owners and the 
non-owners refer patients of high and low severity in a very 
similar way. Both send a greater proportion of the more severe 
patients to the community hospital. In addition, in terms of 
quality of care, quality of care is as good as better, and 
patient satisfaction is very high at the cardiac hospitals. 
Although the small number of patients treated in surgery and 
orthopedic hospitals prevented careful measurement of quality 
in many dimensions, the patients at those hospitals also 
expressed very high satisfaction with their care. Moreover, the 
total proportion of net revenue that specialty hospitals devote 
to both uncompensated care and taxes significantly exceeds the 
proportion of net revenues that community hospitals devote to 
uncompensated care. And real estate, property, and a portion of 
these sales taxes remain in the local community.
    These results, and the results of other studies, indicate 
that the activities and impacts of specialty hospitals may 
reflect some important impacts on quality, but also may reflect 
some imperfections in current hospital payment systems and 
differences in the patients served, not just efficiency and 
quality differences. Our current payment systems may not be 
providing appropriate incentives for maximizing quality and 
minimizing costs for all of our beneficiaries.
    As a result of our findings, we expect to proceed with some 
significant administrative reforms to our payment systems. 
These are similar to the recommendations from MedPAC, and we 
also will proceed carefully and deliberately with further 
evaluation of enrollment and health and safety issues before 
additional specialty hospitals receive Medicare payment.
    In particular, we have developed four key recommendations, 
which we can implement with our existing authority.
    First, to help reduce the possibility that specialty 
hospitals could take advantage of imprecise payment rates and 
the inpatient hospital payment system, we are analyzing the 
MedPAC recommendations to improve the accuracy of the payment 
rates for inpatient hospital services, and we expect to adopt 
significant revisions in our payment system in fiscal year 
2007. We will fully examine and simulate the changes between 
now and then, and we are going to proceed with those that lead 
to significant improvements in payment accuracy.
    Second, physicians may be participating in the ownership of 
some of these hospitals, particularly the small orthopedic and 
surgical hospitals, rather than ambulatory surgical centers in 
part to take advantage of payment differences between hospital 
outpatient department and ambulatory surgery centers. We are 
currently planning to reform our ambulatory surgery center fee 
schedule to diminish these differences in payment levels that 
can create artificial incentives to create small orthopedic and 
surgical hospitals. And we plan to implement these ASC payment 
reforms no later than January 1, 2008.
    Third, to address the concern that existing entities, such 
as those that we have been talking about today, these kinds of 
hospitals may be concentrating primarily on outpatient care 
rather than inpatient care, we are going to scrutinize whether 
specialty hospitals truly meet the definition of a hospital. If 
we determine that a specialty hospital operating under an 
existing provider agreement is not or is no longer primarily 
engaged in treating inpatients, the hospital may have its 
provider agreement terminated.
    Fourth, we are going to carefully review our criteria for 
approving and starting to pay new specialty hospitals. We want 
to make sure that, given their limited focus, specialty 
hospitals meet such core requirements as are necessary for the 
health and safety of our beneficiaries. That includes a review 
of our EMTALA, our Emergency Medical Treatment and Labor Act 
policies are applied to specialty hospitals. It includes 
addressing these issues related to whether the hospitals are 
assuring that the safety of our beneficiaries, given their 
limited scope of activities. So we will be conducting that 
review over the coming months.
    All of these issues raise some important policy concerns, 
so during an upcoming 6-month review period, we plan to review 
our procedures for examining whether specialty hospitals meet 
the applicable standards for enrolling in Medicare. We are 
going to instruct our fiscal intermediaries to refrain from 
processing further participation applications from specialty 
hospitals until this review is completed and any indicated 
revisions are implemented. In the course of this review, we 
want to make sure we get all of the input to build on the 
reports to date. We are going to confer with State survey and 
certification organizations, with the Joint Commission on the 
Accreditation of Health Care Organizations, the American 
Osteopathic Association, and we will be having meetings to make 
sure we are getting appropriate public input as well as relying 
on our EMTALA Technical Advisory Group.
    During this same period, we are also going to assess 
whether the standards are appropriate, and I mentioned the 
connection with EMTALA already. We are currently operating this 
Technical Advisory Group so that interested parties can provide 
testimony on issues related to emergency care. Depending on the 
results of this review, we will draft appropriate instructions 
to implement revised EMTALA procedures, and we will consider 
whether to proceed with changes in the regulations governing 
the EMTALA standards. Again, we expect to complete revisions to 
these procedures by January 2006.
    So, Mr. Chairman, I want to thank you for this opportunity 
to discuss our report and recommendations on physician-owned 
specialty hospitals. We have been studying this important and 
complex topic carefully with a lot of data collection as part 
of our ongoing efforts to provide the best possible evidence-
based foundation for implementing effective policies to get 
patients the highest quality care at the lowest cost. We look 
forward to continuing to work with you, with all of you, on 
these important issues.
    Thank you.
    [The prepared statement of Mark B. McClellan follows:]

  Prepared Statement of Mark B. McClellan, Administrator, Centers for 
                     Medicare and Medicaid Services

    Chairman Deal, Representative Brown, distinguished committee 
members, thank you for inviting me to testify today about physician-
owned specialty hospitals. At the Centers for Medicare & Medicaid 
Services (CMS), we remain deeply committed to improving the quality of 
patient care and to increasing the efficiency of Medicare spending. As 
you know, how Medicare pays for medical services can significantly 
impact quality and medical costs for our beneficiaries and our overall 
health care system. By carefully examining interactions between 
physicians and hospitals, we can consider how the financial incentives 
created by the Medicare program might be improved, to help ensure not 
only that Medicare pays accurately but that Medicare's payment rules 
promote quality of care for Medicare beneficiaries and other hospital 
patients. To that end, Section 507(b)(2) and (b)(3) of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
requires HHS to study a set of important quality and cost issues 
related to specialty hospitals, and to report to Congress on our 
findings. I am here today to present the results and recommendations 
from the CMS report and the actions we will take.
    In the CMS report on specialty hospitals we found some notable 
results. For example, we found specialty hospitals provide high patient 
satisfaction, high quality of care and patient outcomes in some 
important dimensions, greater predictability in scheduling and 
services, and significant tax contributions to the community. However, 
our results and those of others indicate that the activities and 
impacts of these hospitals may also reflect imperfections in current 
Medicare payment systems and differences in patients served, not simply 
efficiency and quality differences. Our current payment systems may not 
provide appropriate incentives for maximizing quality and costs for our 
overall beneficiary population. Therefore, we expect to proceed with 
significant administrative reforms to our payment systems, similar to 
those recommended by Medicare Payment Advisory Commission (MedPAC) in 
its specialty hospital report to Congress. In addition, we plan to 
comprehensively review the procedures used to qualify specialty 
hospitals.
    Specifically, CMS has developed four key recommendations for 
physician-owned specialty hospitals. First, to help reduce the 
possibility that specialty hospitals may take advantage of imprecise 
payment rates in the inpatient hospital prospective payment system 
(IPPS), CMS is analyzing MedPAC's recommendations to improve the 
accuracy of the payment rates for inpatient hospital services and 
expects to adopt significant revisions in FY07. CMS will fully examine 
and simulate the changes and proceed with those that actually lead to 
significant improvements in the accuracy of our payment system. Second, 
we will reform payment rates for ambulatory surgical centers (ASCs). In 
particular, our report showed that some physicians may have an 
ownership interest in entities that describe themselves as small 
orthopedic or surgical ``hospitals'' to which they refer patients. We 
speculate that these entities may describe themselves as hospitals 
rather than ASCs in part to take advantage of the more favorable 
payment rates that apply under the hospital outpatient prospective 
payment system (OPPS) as opposed to the ASC payment system. This is 
problematic from CMS' perspective, however, since the Medicare program 
defines a ``hospital'' as an entity that provides care ``primarily'' to 
inpatients. To the extent that such an entity is not, in fact, 
primarily providing care to inpatients, it is inappropriately 
categorized as a hospital and should not be treated as one under the 
Medicare program. CMS is currently planning to reform the ASC fee 
schedule to diminish the divergences in payment levels that create 
artificial incentives for the creation of small orthopedic or surgical 
hospitals. CMS plans to implement these ASC payment reforms in 
conjunction with other revisions to the ASC fee schedule required by 
the MMA by January 1, 2008. Third, to address the concern that entities 
such as those described above may be concentrating primarily on 
outpatient care, CMS will scrutinize whether specialty hospitals meet 
the definition of a hospital. Specifically, we will analyze existing 
data to assess whether specialty hospitals meet the requirement that to 
be defined as a hospital it must provide primarily inpatient care. 
Fourth, we will carefully review our criteria for approving and 
starting to pay new specialty hospitals. CMS wants to be assured that, 
given their limited focus, specialty hospitals meet core requirements 
that we determine are necessary for the health and safety of our 
beneficiaries. In addition, we wish to consider how EMTALA applies to 
specialty hospitals, with particular reference to potential transfer 
cases arising in the emergency departments of other hospitals. All four 
of these issues raise important policy concerns. CMS plans to review 
our procedures for examining such hospitals, and we will instruct our 
state survey and certification agencies to refrain from processing 
further participation applications from specialty hospitals until this 
review is completed and any indicated revisions are implemented. We 
expect to complete this process by January 2006.

           CMS' STUDY OF PHYSICIAN-OWNED SPECIALTY HOSPITALS

    Section 507(a) of the MMA placed a moratorium on physician-investor 
referrals of Medicare or Medicaid patients to new specialty hospitals 
(thus effectively halting the development of new specialty hospitals) 
for an 18-month period and required HHS to study referral patterns of 
specialty hospital physician-owners, to assess quality of care and 
patient satisfaction, and to examine the differences in uncompensated 
care and tax payments between specialty hospitals and community 
hospitals. CMS contracted with RTI International, an independent 
research organization, to conduct the technical analysis.
    In addition, Section 507(a) of the MMA added a new paragraph (7)(A) 
to section 1877(h) of the Social Security Act. That paragraph defined a 
specialty hospital for the purposes of the moratorium as a hospital in 
one of the 50 States or the District of Columbia that is primarily or 
exclusively engaged in the care and treatment of one of the following:

 patients with a cardiac condition;
 patients with an orthopedic condition;
 patients receiving a surgical procedure; or
 patients receiving any other specialized category of services 
        designated by the Secretary (none have been designated thus 
        far.)
    The MMA also required a complementary MedPAC study of certain 
issues related to the payments, costs, and patient severity at 
specialty hospitals. For purposes of identifying appropriate specialty 
hospitals for the MMA study, MedPAC used the following 
criteria.1 Specialty hospitals must:
---------------------------------------------------------------------------
    \1\ Report to the Congress: Physician-Owned Specialty Hospitals,'' 
MedPAC, March 2005

 be physician-owned;
 specialize in certain services--at least 45 percent of their Medicare 
        cases must be in cardiac, orthopedic, or surgical services or 
        at least 66 percent must be in two major diagnostic categories, 
        with the primary one being cardiac, orthopedic, or surgical 
        cases;
 have a minimum volume of at least 25 total Medicare cases during 
        2002; and
 have submitted Medicare cost reports and claims for 2002.
    CMS generally followed the MedPAC report criteria, but with an 
additional requirement that cardiac and orthopedic hospitals perform at 
least five major procedures. To be considered a cardiac specialty 
hospital, 45 percent or more of a hospital's Medicare cases must have 
been in the Major Diagnostic Category (MDC) 5, Diseases and Disorders 
of the Circulatory System. Orthopedic hospitals must have had 45 
percent of their cases in MDC 8, Diseases and Disorders of the 
Musculoskeletal System and Connective Tissue. For surgery hospitals, 45 
percent or more of their discharges must have involved a surgical 
procedure.
    Although the researchers used national data for as many aspects as 
possible of this analysis, some key questions related to quality, cost, 
and community impact required the detailed analysis of richer data than 
have been available previously. Consequently, the analysis involved the 
collection of a considerable amount of new data related to the 
ownership, performance, and impact of specialty hospitals. The analysis 
included information about the environment in which specialty hospitals 
and community hospitals in the same geographic areas operate, and 
sensitive and proprietary non-public data on such issues as ownership. 
Because only a small number of specialty hospitals met the criteria for 
inclusion in this CMS report, and a subset of 11 was analyzed in some 
cases, caution should be used in making generalization based on the 
data.
    These data were collected in six diverse market areas around the 
country. In particular, to conduct this detailed analysis, RTI 
International made site visits to 11 specialty hospitals in six market 
areas around the country including Dayton, OH; Fresno, CA; Rapid City, 
SD; Hot Springs, AR; Oklahoma City, OK; and Tucson, AZ. These 11 
hospitals comprise about one-sixth of the 67 cardiac, surgery, and 
orthopedic specialty hospitals that were in operation as approved 
Medicare providers by the end of 2003. The researchers selected these 
market areas because they were thought to represent a range of the 
circumstances in which specialty hospitals operate. Within each market 
area, the researchers interviewed specialty hospital managers, 
physician owners, and staff in order to gather information that was 
needed to answer the questions posed by Congress. In addition, they 
interviewed executives at several local community hospitals to evaluate 
their views and concerns with respect to the specialty hospitals. To 
assess patient satisfaction with specialty hospitals, the study used 
patient focus groups composed of beneficiaries treated in cardiac, 
surgery, orthopedic and competitor hospitals
    In addition to these detailed analyses within six market areas, 
researchers used Medicare claims data from the entire national 
population of physician-owned specialty hospitals to assess the quality 
of care. They specifically used inpatient hospital quality indicators 
developed by the Agency for Health Research and Quality (AHRQ) to 
assess quality of care at all the specialty hospitals and local 
competitor community hospitals. To estimate total tax payments and 
uncompensated care for these hospitals they used data obtained from 
Internal Revenue Service (IRS) submissions and financial reports, as 
well as from the hospitals themselves.

  CMS' RESEARCH FINDINGS REGARDING PHYSICIAN-OWNED SPECIALTY HOSPITALS

    Based on this research, we reached a number of conclusions that are 
described below.
Cardiac Hospitals Differ from Surgery and Orthopedic Hospitals
    The empirical evidence clearly shows that cardiac hospitals differ 
substantially from surgery and orthopedic hospitals as shown in Chart 
1.

                                                     Chart 1
----------------------------------------------------------------------------------------------------------------
                                                                                               Orthopedic and
                                                                           Cardiac                Surgical
----------------------------------------------------------------------------------------------------------------
Average Daily Census..............................................                    40                      5
Percent Medicare Inpatient Days...................................                    67                     36
Aggregate Percent of Physician Ownership in sample of hospitals                       34                     80
 visited..........................................................
Individual Ownership Shares per Physician in sample of hospitals       Range: 0.1 to 9.8     Range: 0.1 to 22.5
 visited..........................................................           Median: 0.6            Median: 0.9
                                                                               Mean: 0.9              Mean: 2.2
----------------------------------------------------------------------------------------------------------------

    Compared to surgery and orthopedic hospitals, cardiac hospitals 
tend to have a higher average daily census, an emergency department, 
and other features, such as community outreach programs while surgery 
and orthopedic hospitals more closely resemble ambulatory surgical 
centers, focusing primarily on outpatient services. All cardiac 
hospitals reportedly were built exclusively for cardiac care. The 
average daily census of the 16 cardiac hospitals that were open for 
more than one year in 2003 was 40 patients. For surgery and orthopedic 
hospitals, the aggregate average daily census of inpatients is about 5 
patients. Cardiac hospitals treated 38,000 Medicare cases in 2003, and 
Medicare beneficiaries account for a very high proportion (about two-
thirds) of inpatient days in those hospitals nationwide. In surgery and 
orthopedic hospitals, Medicare patients account for about 36 percent of 
the inpatient days in these facilities. The small number of inpatient 
cases at surgery and orthopedic hospitals precluded the development of 
meaningful findings for this group on several of the dimensions of 
performance that we examined. For all of these reasons, our report 
examines cardiac hospitals and orthopedic/surgical hospitals 
separately.
    The degree of physician ownership also differed between cardiac 
hospitals and surgery and orthopedic hospitals. In the study hospitals, 
the aggregate physician ownership averaged approximately 34 percent for 
the cardiac hospitals in the study. Physicians generally own a large 
share of the interest, averaging 80 percent in aggregate, for the 
surgery and orthopedic hospitals in the study. The balance is typically 
owned by a non-profit hospital or national corporation. The average 
ownership share per physician in cardiac hospitals visited is 0.9 
percent, with individual ownership share per physician ranging from 0.1 
percent to 9.8 percent, and a median of 0.6 percent. In surgery and 
orthopedic hospitals visited, the average ownership share per physician 
is 2.2 percent, with individual ownership shares per physician ranging 
from 0.1 percent to 22.5 percent, with a median of 0.9 percent.

Referral Patterns
    CMS' findings on physician-owner referral patterns indicate that 
physician owners refer or admit the majority of Medicare patients in 
most specialty hospitals. However, these physicians do not refer their 
patients exclusively to the specialty hospitals that they own. They 
also refer patients to the local community hospital competitors.
    CMS found that physicians in general are constrained by where they 
refer patients because of several factors, including patient 
preferences, managed care networks, specialty hospital location, and 
taking emergency department ``call'' from local competitor hospitals. 
Using ownership data provided by the 11 specialty hospitals, we found 
Medicare referrals to physician-owned hospitals came primarily from 
physician-owners. The proportion of all Medicare cardiac cases in three 
cardiac specialty hospitals visited, referred by physician-owners, 
ranged from 61% to 82%. In five orthopedic hospitals visited, 
physician-owners referred between 48% and 98% of the orthopedic cases, 
and in one surgery hospital, physician-owners referred 90% of the 
cases.
    CMS also examined the extent to which physician-owners refer 
Medicare patients to other facilities, and how these patients differ 
from the patients referred to the specialty facility, given the 
financial incentive to refer patients to their own facility. In two 
cardiac hospitals visited, owners had a clear preference for referring 
cases to their own hospital, with 65% and 75% of all their cases 
admitted to their hospital. In the third specialty cardiac hospital 
visited, owners referred almost the same percentage of cases to their 
facilities as to competitor hospitals in the area. Physician-owners in 
all orthopedic and surgery specialty hospitals visited, except for one, 
referred most of their orthopedic or surgery inpatient cases to their 
competitor hospitals. This is not surprising, given the very small 
inpatient census at these specialty hospitals. Consequently, CMS did 
not see clear, consistent patterns of preference for referring to 
specialty hospitals among physician owners relative to their peers.
    Overall, the Medicare cardiac patients treated in community 
hospitals are more severely ill than those treated in cardiac specialty 
hospitals in most of the study sites. This generally is true for 
patients admitted both by physicians with ownership in specialty 
hospitals and by other physicians without such ownership. That is, our 
analysis found no difference in referral patterns to community 
hospitals between physician owners and non-owners in this aspect of 
referrals. However, though it does not appear to result from selective 
referral by physician owners compared to non-owners, there is some 
variation in patients treated, with cardiac hospitals in some areas 
having higher average severity than in the community hospitals. 
Although the number of cases was too small to draw definitive 
conclusions for the orthopedic and surgery specialty hospitals, the 
severity level of cases involving the same or similar procedures 
appears to be much lower in these specialty hospitals than in the 
competitor hospitals.
    The analysis of patients transferred out of cardiac hospitals also 
does not suggest any particular pattern. The proportion of patients 
transferred from cardiac hospitals to community hospitals is about the 
same, around one percent, as the proportion of patients transferred 
between community hospitals. The proportion of severely ill patients 
transferred from cardiac hospitals to community hospitals is similar 
(slightly higher but without statistical significance) to patients in 
the same diagnosis related group (DRG) who are transferred between 
community hospitals. The number of cases transferred from surgery and 
orthopedic hospitals is too small to derive meaningful results on this 
type of analysis.

Quality of Care and Patient Satisfaction
    Based on claims analysis using the AHRQ quality indicators and 
methodology, measures of quality at cardiac hospitals are generally at 
least as good and in some cases better than the local community 
hospitals. Complication and mortality rates are lower at cardiac 
specialty hospitals even when adjusted for severity. Because of the 
small number of discharges, a statistically valid assessment could not 
be made for surgery and orthopedic hospitals. Specialty hospitals 
generally provide a more uniform set of services and have fewer 
competing pressures than community hospitals, and thus are able to 
provide more predictable scheduling and patient care. Patient 
satisfaction is very high in both cardiac hospitals and surgery and 
orthopedic hospitals. Medicare beneficiaries mentioned large private 
rooms, quiet surroundings, adjacent sleeping rooms for family members 
if needed, easy parking, and good food. Patients also have very 
favorable perceptions of the clinical quality of care they receive at 
the specialty hospitals.

Uncompensated Care and Tax Benefits
    To calculate their taxes paid and the uncompensated care they 
provided as a proportion of net revenues, the specialty hospitals 
visited provided proprietary financial information. The specialty 
hospitals pay real estate and property taxes, as well as income and 
sales taxes, whereas non-profit community hospitals do not pay any of 
these taxes. Overall, the proportion of net revenue that specialty 
hospitals devote to both uncompensated care and taxes significantly 
exceeds the proportion of net revenues that community hospitals devote 
to uncompensated care. Real estate and property tax payments stay in 
the local community, as does a share of sales tax payments in most 
areas. It should be noted that the physician-owned specialty hospitals 
visited reported very little Medicaid utilization, which, on average, 
ranged from zero to six percent.
    To summarize, we found that physician owners refer or admit the 
majority of Medicare patients in most cardiac hospitals, but these 
physicians do not refer their patients exclusively to the specialty 
hospitals that they own. Patients treated at cardiac specialty 
hospitals are less severely ill than at community hospitals; however 
both the owners and non-owners refer patients of high and low severity 
in the same way. Both send a greater proportion of the more severe 
patients to the community hospital. In addition, quality of care is as 
good or better and patient satisfaction is very high in cardiac 
hospitals. Although the small number of patients in surgery and 
orthopedic hospitals prevented valid measurement of quality, patients 
expressed very high satisfaction. Furthermore, the total proportion of 
net revenue that specialty hospitals devote to both uncompensated care 
and taxes significantly exceeds the proportion of net revenues that 
community hospitals devote to uncompensated care. In addition, real 
estate, property, and a portion of sales tax payments stay in the local 
community.

     RECOMMENDATIONS REGARDING PHYSICIAN-OWNED SPECIALTY HOSPITALS

    After consideration of the results of our study and that of 
(MedPAC) 2, we offer the following four recommendations. 
These recommendations require administrative steps, which CMS will take 
under its current authority.
---------------------------------------------------------------------------
    \2\ Report to the Congress: Physician-Owned Specialty Hospitals,'' 
MedPAC, March 2005

 Reform payment rates for inpatient hospital services through 
        Diagnosis Related Group (DRG) refinements
 Reform payment rates for ambulatory surgical centers (ASCs)
 More closely scrutinize whether entities meet the definition of a 
        hospital
 Review procedures for approval for participation in Medicare

Recommendation 1: Reform Payment Rates for Inpatient Hospital Services 
        through Diagnosis Related Group (DRG) Refinements
    To help reduce the possibility that specialty hospitals may take 
advantage of imprecise payment rates in the inpatient hospital 
prospective payment system (IPPS), MedPAC has recommended several 
changes to improve the accuracy of payment rates in the IPPS.
    In general, CMS agrees with MedPAC that the accuracy of IPPS 
payment rates should be improved, and the emergence of specialty 
hospitals clearly illustrates the need for such change. We have 
initiated analysis of MedPAC's recommendations and intend to simulate 
the changes so we can explore the impacts on hospitals. Consequently, 
CMS addressed this issue briefly in the preamble to the notice of 
proposed rulemaking for the FY 2006 update to the IPPS. After 
completing further analysis, we will consider making recommendations 
for change in the notice of proposed rulemaking for the FY 2007 update, 
if such revisions lead to a significant increase in accuracy of 
payments. We may expect to adopt significant revisions in our payment 
system to address these issues in FY07. The exact details of how these 
payment revisions can best lead to significant improvements in payment 
accuracy and thus to better incentives for hospital quality and 
efficiency will reflect further work in our upcoming regulations. CMS 
plans to publish this notice in April 2006 and make any resulting 
changes, after considering public comment, effective starting in 
October 2006.

A. Refine DRGs to more fully capture differences in severity of illness
    MedPAC recommends that CMS refine the current DRGs to fully capture 
differences in severity of illness among patients. In making this 
recommendation, the Commission recognizes several implementation issues 
regarding potential low-volume DRGs and changes in hospital coding and 
reporting behavior. In particular, MedPAC recommends that the Secretary 
project the likely effect of reporting improvements on total payments 
and make an offsetting adjustment to the standardized amounts.
    CMS will propose changes to the DRGs to better reflect severity of 
illness. There is a standard list of diagnoses that are considered 
complications or co-morbidities (CC). These conditions, when present as 
a secondary diagnosis, may result in payment using a higher weighted 
DRG. Currently, 3,285 diagnosis codes appear on this list, and 121 
paired DRGs are differentiated based on the presence or absence of a 
CC. Our analysis indicates that the majority of cases assigned to these 
DRGs fall into the ``with CC'' DRGs. CMS believes that it is possible 
that the CC distinction has lost much of its ability to differentiate 
the resource needs of patients, given the long time since the original 
CC list was developed and the incremental nature of subsequent changes 
in an environment of major changes in the way inpatient care is 
delivered.
    CMS is planning a comprehensive and systematic review of the CC 
list for the IPPS rule for FY 2007. As part of this process, we will 
consider revising the standard for determining when a condition is a 
CC. For instance, we expect to use an alternative to the current method 
of classifying a condition as a CC based on how it affects the length 
of stay of a case. Similar to other aspects of the DRG system, CMS will 
consider the effect of a specific secondary diagnosis on the charges or 
costs of a case to evaluate whether to include the condition on the CC 
list.
    CMS also is considering a selective review of the specific DRGs, 
such as cardiac, orthopedic, and surgical DRGs, that are alleged to be 
overpaid and that may create incentives for physicians to form 
specialty hospitals. We will selectively review particular DRGs based 
on statistical criteria such as the range or standard deviation among 
charges for cases included within the DRG. It is possible specific DRGs 
have high variation in resource costs and that a better recognition of 
severity would reduce incentives for hospitals to select the least 
costly and most profitable patients within these DRGs. Any analysis CMS 
does would balance the goal of making payment based on accurate coding 
that recognizes severity of illness with the premise that the IPPS is a 
system of payment based on averages. We agree with MedPAC that, in 
refining the DRGs, we must continue to be mindful of issues such as the 
instability of small volume DRGs and the potential impact of changes in 
hospital coding and reporting behavior. As the Commission noted, 
previous refinements to DRG definitions have led to unanticipated 
increases in payment because of more complete reporting of patients' 
diagnoses and procedures. Therefore, CMS is concerned with our ability 
to account for the effect of changes in coding behavior on payment. We 
must consider how to mitigate the risk that the program could pay 
significantly more without commensurate benefit to Medicare patients.
    CMS also will evaluate the use of alternative DRG systems, such as 
the all-patient refined diagnosis-related groups (APR-DRGs), in place 
of Medicare's current DRG system. APR-DRGs have a greater number of 
DRGs that could relate payment rates more closely to patient resource 
needs, and thus reduce the advantage of selecting healthier patients. 
This could have a substantial effect on all hospitals, however, and CMS 
believes we must thoroughly analyze these options and their impacts 
before advancing a proposal.

B. Base DRG weights on estimated cost of providing care
    MedPAC recommends that CMS base the DRG relative weights on the 
estimated cost of providing care rather than on charges.
    CMS does not have access to any information that would provide a 
direct measure of the costs of individual discharges. However, claims 
filed by hospitals do provide information on the charges for individual 
cases. At present, we use this information to set the relative weights 
for the DRGs. CMS obtains information on costs from the hospital cost 
reports, but this information is at best at the department level: it 
does not include information about the costs of individual cases. 
Consequently, the most straightforward way to estimate costs of an 
individual case is to calculate a cost-to-charge ratio for some body of 
claims (e.g., for a hospital's radiology department), and then apply 
this ratio to the charges for that department.
    This procedure is not without disadvantages. Assignment of costs to 
departments is not uniform from hospital to hospital, given the 
variability of hospital accounting systems, and cost information is not 
available until a year or more after claims information. In addition, 
the application of a cost-to-charge ratio that is uniform across any 
body of claims may result in biased estimates of individual costs if 
hospital charging behavior is not uniform. CMS uses estimated costs, 
based on hospital-specific, department-level cost-to-charge ratios, in 
the outpatient prospective payment system. The accuracy of this 
procedure has generated some concern, and without further analysis, the 
extent to which inpatient payment rates would be improved by adopting 
this method is not clear.
    CMS will closely examine the impact of changing the current charge-
based DRG weights to cost-based DRG weights, but we recognize that such 
a change is complex and requires further study. CMS will consider the 
following issues in performing this analysis:

 The effect of using cost-to-charge ratio data, which is frequently 
        older than the claims data currently used to set the charge-
        based weights,
 The impact of changes in hospitals' charging behavior that may have 
        resulted from the recent modifications to the outlier payment 
        methodology.
 Whether using this method has different effects on DRGs that have 
        experienced substantial technological change compared to DRGs 
        with more stable procedures for care.
 The effect of using a routine cost-to-charge ratio and department-
        level ancillary cost-to-charge data as compared to either (1) 
        an overall hospital cost-to-charge ratio or (2) a routine cost-
        to-charge ratio and an overall ancillary cost-to-charge ratio, 
        particularly considering earlier studies performed for the 
        Prospective Payment Assessment Commission indicating that an 
        overall ancillary cost-to-charge ratio led to more accurate 
        estimates of case level costs.3
---------------------------------------------------------------------------
    \3\ Cost Accounting for Health Care Organizations, Technical Report 
Series, I-93-01, ProPAC, March 1993, page 6. Using a cost report 
package, the contractor simulated single and multiple ancillary cost-
to-charge ratios and found that inpatient ancillary costs were 2.5 
percent understated relative to what hospitals thought their costs were 
with the single cost-to-charge ratio, and 4.9 percent understated with 
the multiple cost-to-charge ratios.
---------------------------------------------------------------------------
 Whether developing relative weights by estimating costs from charges 
        multiplied by cost-to-charge ratios compared to using only 
        charges improves payment accuracy.
 How payments to hospitals would be affected by MedPAC's suggestion to 
        recalibrate weights based on costs every few years and to 
        calculate an adjustment to charge-based weights for the 
        intervening periods.

C. Base DRG weights on national average of hospitals' relative values 
        in each DRG
    MedPAC recommended that CMS base DRG weights on the national 
average of hospitals' relative values in each DRG. At present we set 
the relative weights using standardized charges (adjusted to remove the 
effects of differences in area wage costs, indirect medical education, 
and disproportionate share payments). In contrast, MedPAC proposes that 
Medicare set the DRG relative weights using non-standardized hospital-
specific charges. Each hospital's non-standardized charges would become 
the basis for determining the relative weights for the DRGs for that 
hospital. These relative weights would be adjusted by the hospital's 
case-mix index when combining each hospital's relative weights to 
determine a national relative weight for all hospitals. This adjustment 
is designed to reduce the influence that a single hospital's charge 
structure could have on determining the relative weight when it 
provides a high proportion of the total nationwide number of discharges 
in a particular DRG.
    We will analyze the possibility of moving to hospital-specific 
relative values while conducting the analysis outlined above in 
response to the recommendations regarding improved severity adjustment 
and using charges adjusted to estimated cost using cost-to-charge 
ratios to set the relative weights. CMS would like to note that we 
currently use this method to set weights for the long-term care 
hospital prospective payment system. This method is utilized for long-
term care hospitals because of the small volume of providers and the 
possibility that only a few providers provide care for certain DRGs. 
Thus, the charges of one or a few hospitals could materially affect the 
relative weights for these DRGs. In this event, looking at relative 
weights within hospitals first can offset the hospital-specific effects 
on DRG weights. Significantly, a 1993 RAND Report on hospital-specific 
relative values noted the possibility of DRG compression (or the 
undervaluing of high-cost cases and overvaluing of low-cost cases) if 
we were to shift to a hospital-specific relative value method from the 
current method for determining DRG weights. CMS will need to consider 
whether the resulting level of compression is appropriate.

D. Adjust DRG weights to account for differences in prevalence of high-
        cost outlier cases
    One of MedPAC's recommendations is to adjust DRG weights to account 
for prevalence of high-cost outlier cases. Although MedPAC's language 
suggests that the law would need to be amended for CMS to adopt this 
suggestion, we believe the statute may give the Secretary broad 
discretion to consider all factors that change the relative use of 
hospital resources in calculating the DRG relative weights. Under 
current Medicare policy, CMS includes all the charges associated with 
high-cost outlier cases to determine the DRG relative weight. We 
believe that MedPAC's recommendation developed from a concern that 
including high-charge outlier cases in the relative-weight calculation 
results in overvaluing DRGs that have a high prevalence of outlier 
cases. However, CMS believes, that excluding outlier cases completely 
in calculating the relative weights would be inappropriate. Doing so 
would undervalue the relative weight for a DRG with a high percentage 
of outliers by not including that portion of hospital charges that is 
above the median but below the outlier threshold. We believe it would 
be preferable to adjust the charges used for calculating the relative 
weights to exclude the portion of charges above the outlier threshold 
but to include the charges up to the outlier threshold. At this time, 
CMS will further analyze these ideas as we consider the other changes 
recommended by MedPAC.
    CMS believes the recommendations made by MedPAC have significant 
promise in improving the accuracy of rates in the inpatient hospital 
prospective payment system. We agree with MedPAC that they should be 
analyzed even in the absence of concerns about the proliferation of 
specialty hospitals for reasons related to payment advantages rather 
than reasons related to quality and efficiency of care. However, 
improving payment accuracy should reduce inappropriate incentives for 
specialty hospital proliferation, to the extent that Medicare payments 
currently provide significantly higher margins for certain identifiable 
and predictable categories of patients. CMS plans to aggressively 
identify payment reforms to address these concerns.

E. Provide a transition for these changes
    MedPAC explicitly recommended that a transition period be included 
for adopting any changes. Before proposing changes to the DRGs, CMS 
would need to model the impact of any specific proposal and verify our 
authority under the statute, to determine whether any changes should be 
implemented immediately or over a period of time. We do note that when 
replacing the existing DRG system with a revised DRG system that fully 
captures differences in severity, there likely would be unique 
complexities in creating a transition from one DRG system to another. 
CMS' payment would be a blend of two different relative weights that 
would be determined by using two different systems of DRGs. The systems 
and legal implications of such a transition or any other major change 
to the DRGs could be significant.

Recommendation 2: Reform Payment Rates for Ambulatory Surgical Centers 
        (ASCs)
    The results presented elsewhere in this testimony indicate that as 
a group surgical and orthopedic hospitals are different from cardiac 
hospitals. The cardiac hospitals tend to have more inpatient beds and 
to more closely resemble community hospitals (for instance, by 
participating in community emergency medical service protocols). 
Physicians may be participating in the ownership of small orthopedic or 
surgical hospitals rather than in ASCs in part to take advantage of 
payment differences between hospital outpatient departments and ASCs. 
An important goal of Medicare's planned reform of the ASC fee schedule 
is to reduce such divergences of payment levels between these settings 
when resource costs consumed in producing the same service in the two 
settings are similar.
    Section 626 of the MMA requires and sets parameters for a revision 
to the ASC fee schedule. The existing fee schedule is comparatively 
crude, especially relative to recent changes in outpatient medical 
practice, with only nine payment rates used for approximately 2500 
different services. Consequently, each payment cell spans a broad set 
of clinically heterogeneous services. In addition, the basic structure 
of rates has not been updated since 1990. This has resulted in a 
situation in which payment rates for particular services in ASCs differ 
significantly from those in hospital outpatient departments, where 
Medicare pays using the more differentiated and current outpatient 
prospective payment system. In many instances, the payments for 
particular services are significantly higher in hospital outpatient 
departments. Insofar as these divergences do not reflect differences in 
the needs of patients treated in the two settings or the resources used 
in treating them, they create incentives for development of specialty 
hospitals, where the outpatient services are paid under the outpatient 
prospective payment system. Reforming the ASC fee schedule to 1) use 
the same payment categories in the two settings so payments an be 
compared and 2) to adjust payment rates where the resource costs 
consumed in providing the same services are similar can materially 
reduce these divergences and mitigate incentives that now favor 
proliferation of specialty hospitals.
    The MMA requires that the new ASC payment system be implemented 
after December 2005 and not later than 2008. Making these reforms is a 
substantial undertaking. The MMA requires CMS to take into account 
recommendations by the Government Accountability Office, based in turn 
on its survey of the relative costs of services performed in ASCs, 
which is currently underway. Following the completion of the GAO survey 
and report, CMS will design the new payment rates and complete notice-
and-comment rulemaking.
    As a foundation for these payment reforms, the MMA also requires a 
comparison of the relative costs of services delivered in ASCs versus 
hospital outpatient departments. Therefore we are exploring relating 
the ASC fee schedule directly to the outpatient prospective payment 
system, using the same or very similar ambulatory payment 
classifications (APCs). Because this course of action is already 
ongoing, we do not recommend any further changes, however, we will 
continue to look at the ASC payment system.

Recommendation 3: Closer Scrutiny of Whether Entities Meet the 
        Definition of a Hospital
    Section 1861(e) of the Social Security Act provides that in order 
to be a hospital, an institution must be engaged, among other things, 
primarily in furnishing services predominantly to inpatients. This 
requirement is incorporated in CMS' regulations on conditions of 
participation for hospitals. If any institution applies for a Medicare 
provider agreement as a hospital, but is unable to meet this 
requirement, its application will be denied. In addition, an 
institution that currently has a Medicare hospital provider agreement 
but does not presently meet the requirement of engaging in furnishing 
services primarily to inpatients would be subject to termination of its 
provider agreement.
    The results of our study suggest that some entities providing 
specialty care may concentrate primarily on outpatient care and 
consequently do not meet the definition of ``hospital'' in section 
1861(e) of the Social Security Act. While many such entities 
concentrate on surgical or orthopedic care, anecdotal evidence suggests 
that some entities specializing in cardiac care also may not meet the 
definition of a hospital.
    CMS notes in advisory opinions, concerning whether a requesting 
entity is or is not ``under development'' and therefore subject to or 
exempt from the 18-month moratorium on specialty hospitals, that, among 
other things, the requesting entity must meet the definition of a 
hospital. Some entities that describe themselves as specialty hospitals 
may be primarily engaged in furnishing services to outpatients, and 
consequently might not meet the definition of a hospital. Therefore, 
although an entity may be ``under development'' for purposes of 
exemption from the moratorium, if we determine that it is not primarily 
engaged in inpatient care at the time it seeks certification to 
participate in the Medicare program, its application for a provider 
agreement as a hospital will be denied. Furthermore, if we were to 
determine that a specialty hospital operating under an existing 
provider agreement is not, or is no longer, primarily engaged in 
treating inpatients, the hospital may have its provider agreement 
terminated.

Recommendation 4: Review of Procedures for Approval for Participation 
        in Medicare
    To be approved for participation in the Medicare program, a 
hospital must meet the statutory definition of a hospital noted above 
and the hospital conditions of participation. Hospitals must also meet, 
for example, Federal civil rights requirements and advanced directive 
requirements. Compliance with the hospital conditions of participation 
is determined through the Medicare survey process or through 
accreditation by the Joint Commission on Accreditation of Healthcare 
Organizations (JCAHO) or the American Osteopathic Association (AOA). 
Once a hospital has been found to meet all participation requirements, 
CMS must complete various administrative processes before a hospital 
can bill Medicare (e.g., issuing a tie-in notice and a provider 
number).
    As noted earlier in this testimony, we are concerned that some 
specialty hospitals may not meet the definition of a hospital. We also 
want to be assured that, given their limited focus, specialty hospitals 
meet such core requirements that we determine are necessary for the 
health and safety of our beneficiaries. In addition, we wish to 
consider how EMTALA should apply to specialty hospitals, in particular 
with reference to potential transfer cases arising in the emergency 
departments of other hospitals.
    To address these concerns, we plan to revisit the procedures by 
which applicant hospitals are examined to insure compliance with 
relevant standards. We will instruct our fiscal intermediaries to 
refrain from processing further participation applications from 
specialty hospitals until this review is completed and any indicated 
revisions are implemented. During this six-month review period, we 
expect to conduct a comprehensive review of our procedures. In the 
course of this review, we will confer with state survey and 
certification units, the JCAHO, and the AOA. During the same period, we 
will also assess whether revisions of our standards may be appropriate, 
in particular in connection with the EMTALA. We will solicit public 
input on these issues through a town hall meeting or other forums. With 
regard to any EMTALA changes that we may consider, we also note that we 
are currently operating an EMTALA technical advisory group where 
interested parties can also provide testimony on this issue. Depending 
on the results of this input and review, we will draft appropriate 
instructions to implement revised procedures, and we will consider 
whether to proceed with changes to the regulations. We expect to 
complete revisions to these procedures by January 2006.

                               CONCLUSION

    Mr. Chairman, thank you for this opportunity to discuss our report 
on physician-owned specialty hospitals. We have been thoroughly 
studying this important topic, with extensive collection and analysis 
of the data, as part of our ongoing efforts to provide a strong factual 
foundation for implementing policy decisions that help patients get the 
highest quality health care possible at the lowest cost. As part of our 
careful evaluation of this multi-dimensional issue, we strive to ensure 
the best possible alignment of Medicare's financial incentives with our 
goal of improving the quality of care provided to our beneficiaries 
while avoiding unnecessary costs. CMS looks forward to continuing to 
work with you closely on this issue. I thank the committee for its time 
and would welcome any questions you may have.

    Mr. Deal. Thank you, Dr. McClellan.
    Mr. Hackbarth, I noticed that you are a J.D., so I suppose 
we have fulfilled Ms. Eshoo's expectations here. We have a 
medical doctor on one side and a lawyer on the other. And we 
look forward to hearing your testimony as well.
    Thank you.

                 STATEMENT OF GLENN M. HACKBARTH

    Mr. Hackbarth. Congressman Brown, Chairman Barton, I 
appreciate the opportunity to meet with the committee.
    MedPAC was given a specific series of assignments under 
MMA, a specific series of issues on specialty hospitals that we 
were to examine. The findings that were included in our report 
published in March were based on 2002 data. You will note that 
we used 2002 data as opposed to 2003 data used by CMS, and that 
is because we began our work earlier. In the 2002 data, there 
were 48 physician-owned specialty hospitals that met our 
criteria. In addition to looking at the Medicare data base, we 
also conducted site visits to Austin, Wichita, and Sioux Falls.
    Now the data that we had for our analysis are limited in 
three respects. First of all, it is a small number of 
hospitals, and many of these institutions are quite small. 
Second, 2002 is pretty early in the development of the 
specialty hospital phenomenon. And then third, MedPAC did not 
examine any data about quality of care, since that assignment 
was given to CMS under the MMA.
    [Slide.]
    Almost 60 percent of the specialty hospitals that we looked 
about, the group of 48, were in four States: South Dakota, 
Kansas, Oklahoma, and Texas. Today, there are more than 100 
specialty hospitals, but they continue to be pretty 
geographically concentrated, as you can see from the map.
    Now let me turn to our findings.
    [Slide.]
    The first finding is that heart hospitals tend to focus on 
DRGs, diagnosis-related groups, with a greater than average 
expected profit. And you can see that in the table up on the 
screen. If you look at the first column labeled ``across DRG'' 
and look at physician-owned heart hospitals, you see 1.06. And 
what that means is that based on the selection of DRGs, heart 
hospitals would be expected to have a 6 percent better than 
average profitability. As you go down that same column, you 
will notice that orthopedic and surgical hospitals, on the 
other hand, tend to focus on DRGs with a lower than average 
expected profit.
    Now if you will look at the second column labeled ``within 
DRG,'' these data refer to the severity of illness of the 
patients within any given diagnosis-related group.
    Are we having a technical problem with that?
    So just to recap, the first column, labeled ``across DRG,'' 
reflects the profitability of the DRGs provided by the 
different types of specialty hospitals. So physician-owned 
heart hospitals would have a higher than average expected 
profitability based on the type of cases that they serve. 
Orthopedic and surgical hospitals, on the other hand, have a 
somewhat lower than average expected profitability based on the 
DRGs that they provide.
    The second column, labeled ``within DRG,'' relates to the 
severity of illness of the patients within any one of those 
categories. And here, you can see that all three types of 
physician-owned specialty hospitals have a lower severity 
patient and higher than average expected profitability as a 
result of that.
    The last column, labeled ``total,'' sums the two effects. 
So you can see that all three types of physician-owned 
specialty hospitals would be expected to have a higher than 
average profitability based on the combination of the type of 
cases they treat and the severity of illness of the patients 
within those categories.
    The second finding of our work was that specialty hospitals 
tend to draw their patients away from community hospitals, as 
opposed to increase the volume of surgery within their 
communities. We did see a couple indications of potential 
increases in volume as a result of the arrival of a specialty 
hospital, but for the most part, those effects were not 
statistically significant. Now whether this would continue to 
be the case over time is an open question. But in 2002, we did 
not see widespread indications that specialty hospitals were 
increasing the volume of surgery in their communities.
    We also found that the community hospitals facing 
competition from specialty hospitals tended to recover pretty 
quickly from the financial impact of losing those surgical 
patients. And they would do that through a variety of 
strategies. We heard in our site visits increasing revenue from 
new services, reducing costs and the like.
    Now the ability to withstand competition from a specialty 
hospital may be somewhat less for a small, rural hospital than 
for an urban institution. And again, this finding could also 
change if the number of specialty hospitals were to grow 
significantly.
    The next finding is that in 2002, the costs of specialty 
hospitals were not lower than other hospitals. Actually, they 
were higher in our data, although the difference was not 
statistically significant. On the other hand, the average 
length of stay for specialty hospital patients was actually 
less, significantly less than for the comparison hospitals.
    Finally, we found that specialty hospitals serve 
proportionately fewer Medicaid and self-pay patients than 
community hospitals.
    Based on these findings, we made a series of 
recommendations.
    The first is a series of recommendations related to 
refining the DRG payment system. Several of those relate to how 
the DRG weights are calculated. The weights are the relative 
payment amounts that we pay for different types of patients. In 
addition to those recommendations regarding the weights and how 
they are calculated, we also recommend adjusting Medicare 
payment rates for severity of illness.
    [Slide.]
    Now the net effect of our recommendations would be to 
significantly improve the accuracy of the Medicare payment 
system. And this graph illustrates the improvement. The first 
set of three bars is current policy. And then as you move 
across the bottom, we add on each of our proposed refinements 
in the payment system. The last column reflects the cumulative 
effect of all of those payment improvements combined. And as 
you can see, the middle bar here is steadily increasing as you 
move across the graph. And what that signifies is a growing 
percentage of our payments being within DRGs where the expected 
profitability is within plus or minus 5 percent of the average, 
which is what we use as an indicator of payment accuracy.
    So currently, about 35 percent of the payments are for DRGs 
where the expected profitability is within plus or minus 5 
percent of the average. That number would increase as a result 
of our reforms to 86 percent. And so we believe we would have a 
significantly better, more accurate payment system as a result.
    I want to emphasize that the data used to do this analysis 
and formulate our payment recommendations is not limited to the 
48 hospitals. This is based on an analysis of the entire 
Medicare claims and cost report data base.
    These payment changes move around a significant amount of 
money, not just with regard to specialty hospitals, but 
hospitals of all types. On the one hand, the fact that a lot of 
money is moving around makes us want to be very careful about 
what we do. And as part of that, we propose a transition in 
implementing these payment changes so that they are not too 
abrupt. On the other hand, the fact that there is a lot of 
money being shifted around to us is a reason for urgency. That 
is an indication that we are currently not paying very 
accurately. In some cases, we are paying too much and hospitals 
are inappropriately profiting from that. In other cases, we are 
paying too little. And so we feel a sense of urgency about 
making these payment improvements.
    The next recommendation is for a gain sharing, which 
several of the members referred to. Here the concept is that 
physicians ought to have the opportunity to work with hospital 
management and benefit from their collaboration with the 
hospital in the name of both improving efficiency and quality 
of care. Currently, under the rules, physicians can not share 
in those gains. We think that that would be an important 
opportunity for the program to improve quality and reduce cost, 
and that as a result, we recommend Congress give the Secretary 
the authority to permit such gain-sharing arrangements and 
establish a framework to assure that they do support the goals 
of improving quality and reducing costs.
    Finally, we recommend extending the moratorium to January 
1, 2007, and we do that for two reasons. One is that the 
various payment reforms that we recommend will take time to 
develop fully and implement. They will not happen overnight. In 
addition to that, we believe that we still need more evidence 
to be able to fairly and accurately evaluate the impact of 
specialty hospitals on both efficiency and cost. I began by 
emphasizing that we looked at 1 year of data, 2002, a 
relatively small number of hospitals, and MedPAC did not look 
at quality, and we are very anxious to see the CMS results on 
quality.
    Before making a definitive judgment about what to do with 
specialty hospitals, we think we should get as much data on 
both the efficiency and quality issues as we can, and the 
moratorium will also give us an opportunity to do some further 
analysis. Then at the end, we can make a careful, reasoned 
judgment about whether these hospitals contribute on balance to 
constructive, beneficial competition or whether they are 
harmful to the health care system.
    Thank you very much.
    [The prepared statement of Glenn M. Hackbarth follows:]

 Prepared Statement of Glenn M. Hackbarth, Chairman, Medicare Payment 
                          Advisory Commission

    Chairman Deal, Congressman Brown, distinguished Subcommittee 
members. I am Glenn Hackbarth, chairman of the Medicare Payment 
Advisory Commission (MedPAC). I appreciate the opportunity to be here 
with you this morning to discuss physician-owned specialty hospitals.
    Proponents claim that physician-owned specialty hospitals are the 
focused factory of the future for health care, taking advantage of the 
convergence of financial incentives for physicians and hospitals to 
produce more efficient operations and higher-quality outcomes than 
conventional community hospitals. Detractors counter that because the 
physician-owners can refer patients to their own hospitals they compete 
unfairly, and that such hospitals concentrate on only the most 
lucrative procedures and treat the healthiest and best-insured 
patients--leaving the community hospitals to take care of the poorest, 
sickest patients and provide services that are less profitable.
    The Congress, in the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), imposed an 18-month moratorium that 
effectively halted the development of new physician-owned specialty 
hospitals. That act also directed MedPAC and the Secretary of the 
Department of Health and Human Services to report to the Congress on 
certain issues concerning physician-owned heart, orthopedic, and 
surgical specialty hospitals.
    To answer the Congress's questions, MedPAC conducted site visits, 
legal analysis, met with stakeholders, and analyzed hospitals' Medicare 
cost reports and inpatient claims from 2002 (the most recent available 
at the time). From its empirical analyses, MedPAC found that:

 Physician-owned specialty hospitals treat patients who are generally 
        less severe cases (and hence expected to be relatively more 
        profitable than the average) and concentrate on particular 
        diagnosis-related groups (DRGs), some of which are relatively 
        more profitable.
 They tend to have lower shares of Medicaid patients than community 
        hospitals.
 In 2002, they did not have lower costs for Medicare inpatients than 
        community hospitals, although their inpatients did have shorter 
        lengths of stay.
 The financial impact on community hospitals in the markets where 
        physician-owned specialty hospitals are located was limited in 
        2002. Those community hospitals competing with specialty 
        hospitals demonstrated financial performance comparable to 
        other community hospitals.
 Many of the differences in profitability across and within DRGs that 
        create financial incentives for patient selection can be 
        reduced by improving Medicare's inpatient prospective payment 
        system (IPPS) for acute care hospitals.
    These findings are based on the small number of physician-owned 
specialty hospitals that have been in operation long enough to generate 
Medicare data. The industry is in its early stage, but growing rapidly. 
Some of these findings could change as the industry develops and have 
ramifications for the communities where they are located and the 
Medicare program. We did not evaluate the comparative quality of care 
in specialty hospitals, because the Secretary is mandated to do so in a 
forthcoming report.
    We found that physicians may establish physician-owned specialty 
hospitals to gain greater control over how the hospital is run, to 
increase their productivity, and to obtain greater satisfaction for 
them and their patients. They may also be motivated by the financial 
rewards, some of which derive from inaccuracies in the Medicare payment 
system.
    Our recommendations concentrate on remedying those payment 
inaccuracies, which result in Medicare paying too much for some DRGs 
relative to others, and too much for patients with relatively less 
severe conditions within DRGs. Improving the accuracy of the payment 
system would help make competition more equitable between community 
hospitals and physician-owned specialty hospitals, whose physician-
owners can influence which patients go to which hospital. It would also 
make payment more equitable among community hospitals that currently 
are advantaged or disadvantaged by their mix of DRGs or patients. Some 
community hospitals have invested disproportionately in services 
thought to be more profitable, and some non-physician owned hospitals 
have specialized in the same services as physician-owned specialty 
hospitals.
    We also recommend an approach to aligning physician and hospital 
incentives through gainsharing, which allows physicians and hospitals 
to share savings from more efficient practices and might serve as an 
alternative to direct physician ownership. Because of remaining 
concerns about self-referral; need for further information on the 
efficiency, quality, and effect of specialty hospitals; and the time 
needed to implement our recommendations, the Commission also recommends 
that the Congress extend the current moratorium on specialty hospitals 
until January 1, 2007.

                           HOW MANY AND WHERE

    We found 48 hospitals in 2002 that met our criteria for physician-
owned specialty hospitals: 12 heart hospitals, 25 orthopedic hospitals, 
and 11 surgical hospitals. (Altogether there are now approximately 100 
specialty hospitals broadly defined, but some opened after 2002 and did 
not have sufficient discharge data for our analysis; others are not 
physician-owned or are women's hospitals that do not meet our criteria 
for surgical hospitals.) Specialty hospitals are small: the average 
orthopedic specialty hospital has 16 beds and the average surgical 
specialty hospital has 14. Heart hospitals are larger, averaging 52 
beds.
    Many specialty hospitals do not have emergency departments (EDs), 
in contrast to community hospitals where the large majority (93 
percent) do. Those that have EDs differ in how they are used, and that 
may influence how much control the hospital has over its schedule and 
patient mix. For example, 8 of the 12 heart hospitals we examined have 
EDs, and the heart hospitals we visited that had EDs were included in 
their area's emergency medical systems' routing of patients who 
required the services they could provide. In contrast, even when 
surgical and orthopedic specialty hospitals have EDs, they are often 
not fully staffed or included in ambulance routings.
    Specialty hospitals are not evenly distributed across the country 
(Figure 1). Almost 60 percent of the specialty hospitals we studied are 
located in four states: South Dakota, Kansas, Oklahoma, and Texas. Many 
of the specialty hospitals that are under construction or have opened 
since 2002 are located in the same states and markets as the specialty 
hospitals we studied. As the map shows, specialty hospitals are 
concentrated in states without certificate-of-need (CON) programs.

MOTIVATIONS FOR FORMING PHYSICIAN-OWNED SPECIALTY HOSPITALS AND CRITICS 
                               OBJECTIONS

    Physician control over hospital operations was one motivation for 
many of the physicians we spoke with who were investing in specialty 
hospitals. In the physician-owned specialty hospitals we studied, the 
cardiologists and surgeons want to admit their patients, perform their 
procedures, and have their patients recover with minimal disruption. 
Physician control, they believe, makes this possible in ways community 
hospitals cannot match because of their multiple services and missions. 
Control allows physicians to increase their own productivity for the 
following reasons:

 fewer disruptions to the operating room schedule (for example, delays 
        and canceling of cases that result from emergency cases),
 less ``down'' time between surgeries (for example, by cleaning the 
        operating rooms more efficiently),
 heightened ability to work between two operating rooms during a 
        ``block'' of operating room time, and
 more direct control of operating room staff.
    The other motivation to form specialty hospitals is enhanced 
income. In addition to increased productivity resulting in more 
professional fees, physician investors also could augment their income 
by retaining a portion of the facility profits for their own and 
others' work. Although some specialty hospitals have not made 
distributions, the annual distributions at others frequently have 
exceeded 20 percent of the physicians' initial investment, and the 
specialty hospitals in our study had an average all-payer margin of 13 
percent in 2002, well above the 3 to 6 percent average for community 
hospitals in their markets.
    Critics contend that much of the financial success of specialty 
hospitals may revolve around selection of patients. Physicians can 
influence where their patients receive care, and physician ownership 
gives physician-investors a financial incentive to refer profitable 
patients to their hospital. If the payment system does not adequately 
differentiate among patients with different expected costs, and the 
factors determining cost, such as severity of illness, can be observed 
in advance, then the physician has an incentive to direct patients 
accordingly. At the extreme, some community hospitals claimed 
physicians sometimes transferred low complexity patients out of the 
community hospitals to specialty hospitals that the physicians owned, 
while transferring high complexity patients into the community 
hospitals. Referrals of healthier (more profitable) patients to 
limited-service specialty hospitals may not harm less complex patients. 
Nonetheless, critics argue that referral decisions should not be 
influenced by financial incentives, and therefore, they object to 
physician ownership of specialty hospitals. Critics also argue that 
eventually community hospitals' ability to provide less profitable 
services (which are often subsidized by more profitable services) would 
be undermined.
    Restrictions on physician self-referral have a long history in the 
Medicare program. The anti-kickback statute, the Ethics in Patient 
Referrals Act (the Stark law), and their implementing regulations set 
out the basic limitations on self-referral and create exceptions. The 
primary concern was that physician ownership of health care providers 
would create financial incentives that could influence physicians' 
professional judgment and lead to higher use of services. In addition, 
self-referral could lead to unfair competition if one facility was 
owned by the referring physician, and competing facilities were not. 
Because hospitals provide many kinds of services, an exception was 
created that allowed physicians to refer patients to hospitals in which 
they invest. This is the ``whole hospital'' exception. Physician 
investors have a greater opportunity to influence profits at single-
specialty hospitals--which generally provide a limited range of 
services--than at full-service hospitals.

        DO PHYSICIAN-OWNED SPECIALTY HOSPITALS HAVE LOWER COSTS?

    We compared physician-owned specialty hospitals to three groups of 
hospitals. Community hospitals are full service hospitals located in 
the same market. Competitor hospitals are a subset of community 
hospitals that provide at least some of the same services provided by 
specialty hospitals in that market. And Peer hospitals are specialized, 
but not physician owned.
    After controlling for potential sources of variation, including 
patient severity, we found that inpatient costs per discharge at 
physician-owned specialty hospitals are higher than the corresponding 
values for peer, competitor, and community hospitals. However, these 
differences were not statistically significant.
    Lengths of stay in specialty hospitals were shorter, in some cases 
significantly so, than those in comparison hospitals. Other things 
being equal, shorter stays should lead to lower costs. The apparent 
inconsistency of these results raises questions about what other 
factors might be offsetting the effects of shorter stays. Such factors 
might include staffing levels, employee compensation, costs of supplies 
and equipment, initial start-up costs, or lack of potential economies 
of scale due to smaller hospital size. These results could change as 
the hospitals become more established and as the number of specialty 
hospitals reporting costs and claims increases.

 WHO GOES TO PHYSICIAN-OWNED SPECIALTY HOSPITALS, AND WHAT HAPPENS TO 
                 COMMUNITY HOSPITALS IN THEIR MARKETS?

    Critics of specialty hospitals contend that physicians have 
financial incentives to steer profitable patients to specialty 
hospitals in which they have an ownership interest. These physicians 
may also have an incentive to avoid Medicaid, uninsured, and unusually 
costly Medicare patients. Critics further argue that if physician-owned 
hospitals take away a large share of community hospitals' profitable 
patients, community hospitals would not have sufficient revenues to 
provide all members of the community access to a full array of 
services.
    Supporters counter that the specialty hospitals are engaging in 
healthy competition with community hospitals and that they are filling 
unmet demand for services. They acknowledge that community hospital 
volumes may decline when they enter a market, but claim that community 
hospitals can find alternative sources of revenue and remain profitable 
even in the face of competition from physician-owned specialty 
hospitals. We found:

 Physician-owned heart, orthopedic, and surgical hospitals that did 
        not focus on obstetrics tended to treat fewer Medicaid patients 
        than peer hospitals and community hospitals in the same market. 
        Heart hospitals treated primarily Medicare patients, while 
        orthopedic and surgical hospitals treated primarily privately 
        insured patients.
 The increases in cardiac surgery rates associated with the opening of 
        physician-owned heart hospitals were small enough to be 
        statistically insignificant for most types of cardiac surgery. 
        It appears that specialty hospitals obtained most of their 
        patients by capturing market share from community hospitals.
 Though the opening of heart hospitals was associated with slower 
        growth in Medicare inpatient revenue at community hospitals, on 
        average, community hospitals competing with physician-owned 
        heart hospitals did not experience unusual declines in their 
        all-payer profit margin.
    Note that most specialty hospitals are relatively new, and the 
number of hospitals in our analysis is small. The impact on service use 
and community hospitals could change over time, especially if a large 
number of additional specialty hospitals are formed.

       DO SPECIALTY HOSPITALS TREAT A FAVORABLE MIX OF PATIENTS?

    Specialty hospitals may concentrate on providing services that are 
profitable, and on treating patients who are less sick--and therefore 
less costly. Under Medicare's IPPS, payments are intended to adequately 
cover the costs of an efficient provider treating an average mix of 
patients, some with more and some with less complex care needs. But if 
differences in payments do not fully reflect differences in costs 
across types of admissions (DRGs) and patient severity within DRGs, 
some mixes of services and patients could be more profitable than 
others. Systematic bias in any payment system, not just Medicare's, 
could reward those hospitals that selectively offer services or treat 
patients with profit margins that are consistently above average. We 
found:

 Specialty hospitals tend to focus on surgery, and under Medicare's 
        IPPS, surgical DRGs are relatively more profitable than medical 
        DRGs in the same specialty.
 Surgical DRGs that were common in specialty heart hospitals were 
        relatively more profitable than the national average DRG, those 
        in orthopedic hospitals relatively less profitable, and those 
        in specialty surgical hospitals had about average relative 
        profitability.
 Within DRGs, the least severely ill Medicare patients generally were 
        relatively more profitable than the average Medicare patient. 
        More severely ill patients generally were relatively less 
        profitable than average, reflecting their higher costs but 
        identical payments. Specialty hospitals had lower severity 
        patient mixes than peer, competitor, or community hospitals.
 Taking both the mix of DRGs and the mix of patients within DRGs into 
        account, specialty hospitals would be expected to be relatively 
        more profitable than peer, competitor, or community hospitals 
        if they exhibited average efficiency.
    Table 1 shows the expected relative profitability for physician-
owned specialty hospitals and their comparison groups. The expected 
relative profitability for a hospital is: the ratio of the payments for 
the mix of DRGs at the hospital to the costs that would be expected for 
that mix of DRGs and patients if the hospital had average costs--
relative to the national average expected profitability over all cases. 
It is not the actual profitability for the hospital.
    Heart specialty hospitals treat patients in financially favorable 
DRGs and, within those, patients who are less sick (and less costly, on 
average). Assuming that heart specialty hospitals have average costs, 
their selection of DRGs results in an expected relative profitability 6 
percent higher than the average profitability. Heart hospitals receive 
an additional potential benefit (3 percent) from favorable selection 
among patient severity classes. As a result, their average expected 
relative profitability value is 1.09.
    Reflecting their similar concentration in surgical cardiac cases, 
peer heart hospitals also benefit from favorable selection across DRGs, 
though not as much as specialty heart hospitals. However, peer heart 
hospitals receive no additional benefit from selection among more- or 
less-severe cases within DRGs. Both specialty heart and peer heart 
hospitals have a favorable selection of patients compared with 
community hospitals in the specialty heart hospitals' markets, as well 
as with all IPPS hospitals.

                                                     Table 1
  Specialty hospitals have high expected relative profitability of inpatient care under Medicare because of the
                                             mix of cases they treat
----------------------------------------------------------------------------------------------------------------
                                                             Expected relative profitability due to selection of
                                              Number of    -----------------------------------------------------
            Type of hospital                  hospitals                                         DRGs and patient
                                                                  DRGs        Patient severity      severity
----------------------------------------------------------------------------------------------------------------
All nonspecialty hospitals..............             4,375              1.00              1.00              1.00
Heart hospitals
  Specialty.............................                12              1.06              1.03      \1\,\2\ 1.09
  Peer..................................                36              1.04              0.99          \2\ 1.03
  Competitor............................                79              1.01              1.00              1.00
  Community.............................               315              0.99              1.01              1.01
Orthopedic hospitals
  Specialty.............................                25              0.95              1.07      \1\,\2\ 1.02
  Peer..................................                17              0.95              1.01              0.96
  Competitor............................               305              1.00              1.00              1.00
  Community.............................               477              1.00              1.01              1.01
Surgical hospitals
  Specialty.............................                11              0.99              1.16      \1\,\2\ 1.15
  Peer..................................                25              1.00              1.06          \2\ 1.06
  Competitor............................               237              0.99              1.01              1.01
  Community.............................               289              0.99              1.01              1.01
----------------------------------------------------------------------------------------------------------------
Note: IPPS (inpatient prospective payment system), APR-DRG (all-patient refined diagnosis-related group), DRG
  (diagnosis-related group). Expected relative profitability measures the financial attractiveness of the
  hospital's mix of Medicare cases, given the national average relative profitability of each patient category
  (DRG or APR-DRG severity class). The relative profitability measure is an average for each DRG category, based
  on cost accounting data. Thus, small differences (for example, 1 or 2 percent) in relative profitability may
  not be meaningful. Specialty hospitals are specialized and physician owned. Peer hospitals are specialized but
  are not physician owned. Competitor hospitals are in the same markets as specialty hospitals and provide some
  similar services. Community hospitals are all hospitals in the same market as specialty hospitals.
\1\ Significantly different from peer hospitals using a Tukey mean separation test and a p<.05 criterion.
\2\ Significantly different from nonpeer community hospitals using a Tukey mean separation test and a p<.05
  criterion.Source: MedPAC analysis of Medicare hospital inpatient claims and cost reports from CMS, fiscal year
  2000-2002.

    In contrast to the heart hospitals, neither orthopedic specialty 
hospitals nor their peers seem to have a favorable DRG selection. 
However, by treating a high proportion of low-severity patients within 
their mix of DRGs, specialty orthopedic hospitals show selection that 
appears to be slightly favorable overall (1.02). Surgical specialty 
hospitals show a very favorable selection of patients overall (1.15) 
because they also treat relatively low-severity patients within the 
DRGs.

                        PAYMENT RECOMMENDATIONS

    The Congress asked the Commission to recommend changes to the IPPS 
to better reflect the cost of delivering care. We found changes are 
needed to improve the accuracy of the payment system and thus reduce 
opportunities for hospitals to benefit from selection. We recommend 
several changes to improve the IPPS.
    The Commission recommends the Secretary should improve payment 
accuracy in the IPPS by:

 refining the current DRGs to more fully capture differences in 
        severity of illness among patients,
 basing the DRG relative weights on the estimated cost of providing 
        care rather than on charges, and
 basing the weights on the national average of hospitals' relative 
        values in each DRG.
    All of these actions are within the Secretary's current authority.
    The commission also recommends the Congress amend the law to give 
the Secretary authority to adjust the DRG relative weights to account 
for differences in the prevalence of high-cost outlier cases.
    Taken together, these recommendations will reduce the potential to 
profit from patient and DRG selection, and result in payments that more 
closely reflect the cost of care while still retaining the incentives 
for efficiency in the IPPS. Figure 2 shows that the share of IPPS 
payments in DRGs that have a relative profitability within 5 percent of 
the national average would increase from 35 percent under current 
policy to 86 percent if all of our recommendations were implemented. At 
the hospital group level, under current policy, heart hospitals' 
expected relative profitability from their combination of DRGs and 
patients is above the national average profitability for all DRGs and 
patients. Following our recommendations, that ratio would be about 
equal to the national average. Physician-owned orthopedic and surgical 
hospitals would show similar results.
    These payment system refinements would affect all hospitals--both 
specialty hospitals and community hospitals. Many hospitals would see 
significant changes in payments, and, although our recent analysis 
suggests that hospitals' inpatient profitability increases as selection 
becomes more favorable, a transitional period would mitigate those 
effects and allow hospitals to adjust to the refined payment system. 
Thus, the Commission recommends the Congress and the Secretary should 
implement the payment refinements over a transitional period.
    Making these payment system improvements and designing the 
transition will not be simple tasks. We recognize that the Centers for 
Medicare & Medicaid Services (CMS) has many priorities and limited 
resources, and that the refinements will raise some difficult technical 
issues. These include the potentially large number of payment groups 
created, possible increases in spending from improvements in coding, 
rewarding avoidable complications, and the burden and time lag 
associated with using costs rather than charges. Nevertheless, certain 
approaches that we discuss in this report, such as reestimating cost-
based weights every several years instead of annually, could make these 
issues less onerous. The Congress should take steps to assure that CMS 
has the resources it needs to make the recommended refinements.

           RECOMMENDATIONS ON THE MORATORIUM AND GAINSHARING

    The Commission is concerned with the issue of self-referral and its 
potential for patient selection and higher use of services. However, 
removing the exception that allows physician ownership of whole 
hospitals would be too severe a remedy given the limitations of the 
available evidence, although we may wish to reconsider it in the 
future. Our evidence on physician-owned specialty hospitals raises some 
concerns about patient selection, utilization, and efficiency, but it 
is based on a small sample of hospitals, early in the development of 
the industry. We do not know yet if physician-owned hospitals will 
increase their efficiency and improve quality. We also do not know if, 
in the longer term, they will damage community hospitals or 
unnecessarily increase use of services. The Secretary's forthcoming 
report on specialty hospitals should provide important information on 
quality. Further information on physician-owned specialty hospitals' 
performance is needed before actions are taken that would, in effect, 
entirely shut them out of the Medicare and Medicaid market. In 
addition, the Congress will need time during the upcoming legislative 
cycle to consider our recommendations and craft legislation, and the 
Secretary will need time to change the payment system. Therefore, the 
Commission recommends that the Congress extend the current moratorium 
on specialty hospitals until January 1, 2007. The current moratorium 
expires on June 8, 2005. Continuing the moratorium will allow time for 
efforts to implement our recommendations and time to gather more 
information.
    Aligning financial incentives for physicians and hospitals could 
lead to efficiencies. Physician ownership fully aligns incentives; it 
makes the hospital owner and the physician one in the same, but raises 
concerns about self-referral. Similar efficiencies might be achieved by 
allowing the physician to share in savings that would accrue to the 
hospital from reengineering clinical care. Such arrangements have been 
stymied by provisions of law that prevent hospitals from giving 
physicians financial incentive to reduce or limit care to patients 
because of concerns about possible stinting on care and quality. 
Recently, the Office of Inspector General has approved some narrow 
gainsharing arrangements, although they have been advisory opinions 
that apply only to the parties who request them.
    The Commission recommends that the Congress should grant the 
Secretary the authority to allow gainsharing arrangements between 
physicians and hospitals and to regulate those arrangements to protect 
the quality of care and minimize financial incentives that could affect 
physician referrals.
    Gainsharing could capture some of the incentives that are animating 
the move to physician-owned specialty hospitals while minimizing some 
of the concerns that direct physician ownership raises. Permitting 
gainsharing opportunities might provide an alternative to starting 
physician-owned specialty hospitals, particularly if the incentives for 
selection were reduced by correcting the current inaccuracies in the 
Medicare payment system.

[GRAPHIC] [TIFF OMITTED] T1636.001

    Mr. Deal. Thank you.
    Let me begin the questioning. Mr. Hackbarth, let me just 
see if I can follow what you are saying.
    You said with regard to the specialty hospitals, there was 
a significantly shorter stay, length of stay in those 
hospitals----
    Mr. Hackbarth. Right.
    Mr. Deal. [continuing] than in the community hospital 
setting.
    Mr. Hackbarth. Right.
    Mr. Deal. And I presume that is a comparison of like 
situations?
    Mr. Hackbarth. That is right.
    Mr. Deal. All right.
    But the expected profitability for the specialty hospitals 
was above that in a community hospital?
    Mr. Hackbarth. Yes.
    Mr. Deal. Would you reconcile those two with me, because I 
was always under the impression that the way we save money was 
to try to shorten the length of stay? If the specialty 
hospitals are shortening the length of stay, then how are they 
getting greater profitability?
    Mr. Hackbarth. Well, as you know, we have a fixed per-case 
payment system. All other things being equal, if a hospital 
shortens the length of stay, that would tend to reduce their 
cost and increase their profitability. However, I want to make 
it clear that when I talk about their expected profitability 
and say that specialty hospitals have a higher than expected 
profitability, here we are not looking at their cost 
structures. All of the data that I reported are simply based on 
their selection of patients, the type of patients that they 
treat. And so those gains do not reflect that a particular 
cardiac hospital may have a lower average length of stay. It is 
the result of the type of patients they treat and the severity 
of illness within those categories that we expect them to have 
a higher than average profit.
    Mr. Deal. Okay. But those issues are, of course, best 
addressed in looking at the DRGs and the adjustments in the 
payments that you have referred to and that Dr. McClellan 
likewise referred to----
    Mr. Hackbarth. That is right.
    Mr. Deal. [continuing] because, obviously if we are moving 
in the direction of pay for performance, then if you can 
lengthen the stay and keep the patient satisfaction and quality 
of care at a higher level, those are the two ingredients that 
you would like to see occur, is that correct?
    Mr. Hackbarth. Yes. You know, independently of this, we 
have strongly endorsed the idea of pay for performance whereby 
any institution, whether it is a specialty hospital or other, 
if they provide outstanding quality, we would like to see them 
rewarded for that.
    Mr. Deal. Thank you.
    Dr. McClellan, you eluded to the fact that you are going to 
be looking at the specialty hospitals in terms of whether they 
qualify as a ``hospital'' or are more appropriately labeled as 
an ambulatory surgical center, is that correct?
    Mr. McClellan. Yes, Mr. Chairman.
    Mr. Deal. Would you briefly explain to us what the cost 
differential would be from being classified as a hospital 
versus an ASC?
    Mr. McClellan. That is a good question.
    Under our current payment system for ambulatory surgery 
centers, we are relying on some classification groups that are 
fairly dated, that date for more than a decade ago that 
probably have not kept up with the complexity and range of 
services that could be provided on an outpatient basis today. 
In contrast, we have an outpatient payment system that 
generally provides higher payment rates that are more 
specifically tied to the current services being delivered in 
the outpatient setting, and the result is that, in many areas, 
for many of these procedures that can be performed on a 
hospital outpatient basis or alternatively in an ambulatory 
surgery center, the payment rates are more favorable in the 
hospital outpatient setting. The Medicare Modernization Act 
directed us to rely on a report from the Government 
Accountability Office and other work that we will do to refine 
our payment systems for ambulatory surgery centers and hospital 
outpatients to address these and other issues to try to get the 
payment systems up-to-date to make them more accurate. And I 
would like to get to a payment system that doesn't create 
incentives to, you know, formulate yourself as a hospital 
versus ambulatory surgery center. We ought to be focusing on 
how we get the best care for patients and then let the health 
care organizations decide the best way to provide that.
    So that is where we are going with our ambulatory surgery 
center reforms.
    Mr. Deal. What timeframe do you anticipate that it is going 
to take to do this reform?
    Mr. McClellan. Well, the Medicare Modernization Act 
directed us to complete it by January 1, 2008. We are 
definitely going to meet that deadline. Right now, we are 
waiting for the Government Accountability Office to complete 
its report on the details of the current payment system and 
where there are opportunities for improvement. We are going to 
use that report and public input as a basis for our refinement. 
So we will get this done over the next couple of years.
    Mr. Deal. All right.
    Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman.
    I first want to clarify something. I appreciate Chairman 
Barton's comments earlier, and I admire very much the way he 
has run this committee the last 4 months, and I just want to 
thank him again for that.
    I was not talking in self-referral about diagnosis versus 
treatment, that his doctor would diagnose the flu and have to 
send him somewhere else for treatment. I am talking about self-
referral in terms of a doctor sending someone to an 
institution, a specialty hospital, which has a financial 
interest, just to clarify. I think our agreement is closer to 
100 percent on that.
    So I want to get a clarification from you, Dr. McClellan, 
and welcome you again to this subcommittee. In page three of 
your testimony, you said CMS plans to review our procedures for 
examining such hospitals. We will instruct our State survey and 
certification agencies to refrain from processing further 
participation applications from specialty hospitals until this 
review is completed, and any indicated revisions are 
implemented, we expect to complete this process by January 
2006.
    Mr. McClellan. Right.
    Mr. Brown. I want to make sure I am understanding. That 
means, in essence, a 6-month extension of the moratorium, 
correct?
    Mr. McClellan. We don't anticipate approving any new 
specialty hospitals until January 1, and if we get done with 
our review sooner than that, then we will start sooner. But 
based on the workload that we are expecting, the public input 
process and so forth, we think it will take about 6 months.
    Mr. Brown. That is an important indicator, obviously, of 
CMS authority in this regard. Given that from what we hear 
Medicare legislation is unlikely this year and any 
administrative actions that you all could take that would 
address these matters would be helpful. What area of concern, 
as you know as the issue of physician self-referral, to these 
specialty hospitals in which they have ownership interests if 
these specialty hospitals were characterized differently and 
not as ``whole hospitals,'' as we talked earlier, since they 
don't perform a broad range of services like community 
hospitals do? I believe this would address the self-referral 
problem, as they would no longer be able to profit from the 
``whole hospital'' exception for self-referral. Does CMS have 
the authority to define a specialty hospital as a whole 
hospital and issue rulemaking in this regard? Do you have 
authority to do that?
    Mr. McClellan. Well, we have been asked by a number of 
groups who believe we do have that authority to consider taking 
such actions, and we are reviewing that now. I think there are 
some questions about our authority to do it. I think the kinds 
of steps that I have outlined already are the most important 
ones for us to focus on to get the payment systems right to 
make sure our patients are getting high quality care and all 
patients are getting access to high quality care. So that is 
where our focus is right now. Doing something as broad as 
ending the whole hospital exception could have some potential 
broader ramifications.
    And just to echo some of the things that Chairman Barton 
mentioned, I do think there are some advantages to having 
physicians involved in the consequences of their decisions, 
financially and otherwise. Some of these gain-sharing ideas 
that have been discussed would provide an opportunity to do 
that. The fact is that physicians' decisions do have a big 
impact on overall quality of care, and some of these 
connections can really help. For example, the physician owners 
in the specialty hospitals and all of their patients have told 
us about the benefits of having physicians more directly 
involved in management of the hospital. There is a very lean 
management team. You don't have to go through whole lots of 
administrative layers to get quality of care improved. If the 
nurses or the patient tell them something is wrong, they tend 
to take action. So there are some advantages from this kind of 
connection as well.
    So we are looking at those issues, but I think the most 
important steps for us to take now are the ones that we have 
outlined and that you just summarized in your question.
    Mr. Brown. And I don't think too many of us, or maybe none 
of us, quarrel with the idea that specialty hospitals have a 
role and can do some things better. But I mean, if you have 
this authority we talked about, do you think in terms of 
wanting to stop that self-referral?
    Mr. McClellan. Well, again, I am not sure we have the 
authority. We are reviewing that now. I don't think that is the 
most important thing for us to be focusing on. I think the most 
important things are these refinements in the payment systems 
and these refinements in our process for approving hospitals. 
Now that we have got, you know, a new type of hospital that we 
are dealing with, we want to make sure those are up-to-date. So 
that is where we are focusing our efforts.
    Mr. Brown. Okay. Thank you.
    Mr. Deal. I recognize Chairman Barton.
    Chairman Barton. Thank you, Mr. Chairman.
    Let me get this microphone.
    If I were to introduce a bill to ban teaching of 
specialties in the practice of medicine, in other words, if I 
were to require that every doctor be a general practitioner and 
you couldn't become a heart specialist or an orthopedic 
specialist or an internist, would that be a good thing or a bad 
thing?
    Mr. McClellan. For me?
    Chairman Barton. Well, for either one of you. Either one of 
you.
    Mr. McClellan. Well, since I am a doctor, maybe I can step 
out on this one and say that probably is a bad thing.
    Chairman Barton. That would probably be a bad thing. Okay. 
What if we were to put in the Department of Defense 
authorization bill that we couldn't have fighters and bombers 
and interceptors and close-air ground support, that every plane 
that DOD bought had to be a general plane, they had to do 
everything? Would that be a good thing or a bad thing?
    Mr. McClellan. A bad thing.
    Chairman Barton. A bad thing. So why is it such a good 
thing that we ban these specialty hospitals? Doesn't it go 
against everything in the American culture that specialization 
is good and focus on a specific issue is good whether it is 
that you want to be a Cadillac dealer or you want to be, you 
know, the quarterback coach as opposed to the line coach or 
whatever it is?
    Mr. Hackbarth. Can I take a crack at that?
    Personally, though I am a lawyer by training, I run a large 
physician group, and I think that there is a lot of 
plausibility in both the idea that you can improve quality and 
efficiency through specialization, and you can improve 
performance through engagement with physicians as owners. I 
think those are very plausible ideas. But I like to see 
evidence. And given the relative newness of this phenomenon, 
unfortunately we don't have a lot of evidence in hand right now 
that I would consider to be definitive on either the efficiency 
or quality issues.
    Chairman Barton. Well, but even if they are not better. Let 
us assume the opposite. Let us assume that the specialization 
is bad. Why should we ban it? Why shouldn't we let the market 
sort it out?
    Mr. Hackbarth. Yeah. Well, here, I am going to actually act 
like a lawyer. I see this as a balancing issue. The Commission 
does see risk, potential risk, in self-referral.
    Chairman Barton. Well, have we not had self-referral since 
the practice of medicine began?
    Mr. Hackbarth. What makes this different is that the 
physicians are not just referring to themselves and earning a 
professional fee for the additional services they provide. They 
are sharing in institutional profits and facility fees as well.
    Chairman Barton. What did the Mayo brothers do----
    Mr. Hackbarth. And so the potential gain is larger.
    Chairman Barton. What did the May brothers do when they 
started their clinic? Did they self-refer or not?
    Mr. Hackbarth. Well----
    Chairman Barton. Not well. Did they self-refer? The answer 
is yes.
    Mr. Hackbarth. The Mayo Clinic, I believe, is organized as 
a not-for-profit institution.
    Chairman Barton. But it was established by doctors.
    Mr. Hackbarth. But the----
    Chairman Barton. The doctors owned it.
    Mr. Hackbarth. But the legal----
    Chairman Barton. Or how about Scott and Wyatt in Temple, 
Texas?
    Mr. Hackbarth. I am not familiar with their----
    Chairman Barton. Well, I am familiar with Scott and Wyatt 
in Temple, Texas, and it was started by a doctor, and he owned 
the hospital. Now if self-referral is bad, then the whole 
practice of medicine, since the beginning of medicine, as I 
know it in the modern era is bad. But having said that, I think 
Mr. Brown and his opening comments I agree with. We don't want 
specialty hospitals or doctors to just treat the healthy 
wealthy. That is wrong. So if we are worried about that 
problem, let us fix it by saying you have to treat everybody 
that you have the ability to treat. If they come through your 
door, and you are an orthopedic surgeon, and they need a 
surgical procedure, you do it. And if you have an ownership 
interest in a hospital, you do it in your hospital, if you have 
the ability to do it. And if you want to set some parameters on 
percent of Medicaid and Medicare and we can do it in a way that 
tracks these norms and bell curves, that is okay, too. But to 
say that we have had a moratorium on something that, according 
to everything I know about America, is the right way to go and 
we now want to extend it, to me, is un-American. It is wrong. 
And as I said in my opening statement, this is one case where 
doing nothing wins.
    Now I am an engineer, and I made A's in statistics, and I 
know about probability and averages and means and medians, and 
I looked at all of these charts that you put up, and to me, 
they said nothing. It said there is a little bit of difference. 
A very little difference based on the sample that you took. And 
even there, if we need to make some changes, Dr. McClellan has 
said we are going to go in and review the compensation and DRGs 
and things like that, and if there is really an imbalance, his 
group, the agency, CMS, is going to make some recommendations. 
And I am sure this Congress will accept those. But I just 
absolutely see no reason, from a public policy perspective, to 
continue the ban on something that, according to everything 
that I have seen, absolutely makes sense. And you know, the 
community hospitals can set up a specialty hospital. The non-
for-profits can set up specialty hospitals. If you have no ban 
and you have no moratorium, if the concept is good, we will let 
everybody participate in the concept, and we will do it under 
rules that are fair to everybody. You know. And then if 
somebody is trying to game the system, we will make those 
changes.
    Mr. Hackbarth. Mr. Chairman, just in the interest of making 
sure that the table is properly understood, could I get----
    Chairman Barton. Yeah.
    Mr. Hackbarth. Take the example of the physician-owned 
heart hospitals and the 1.09s. We are saying that the expected 
profitability is 9 percent higher than average based on the 
selection of patients. Just to put that 9 percent in context, 
for a hospital, a total profit margin of 2 or 3 or 4 percent is 
not uncommon. So if you have an expected profitability of 9 
percent, just based on your selection of patients, that is 
quite a significant difference. That is not a small number in 
the context of hospital findings.
    Chairman Barton. Well, I will predict to you, sir, as 
somebody who has played with numbers a little bit myself, if we 
get that sample size larger than 12, if we get that sample size 
to, say, 100 or 200, and you look at your national average and 
the sample size is 4,375. The larger that sample size, I think 
the smaller that dichotomy is going to be. Now I could be wrong 
on that. But again, if, in fact, physician-owned heart 
hospitals have a profitability margin of twice the community-
based hospital, I think we can do something about that. If that 
is the objection, if that is really the objection, specialty 
hospitals make too much money, by God, it is un-American to 
make too much money, we ought to change that, every Democrat on 
this committee is going to vote for an amendment to cut the 
profitability of specialty hospitals in half. And I will 
probably support it, if that is the real argument.
    Mr. Hackbarth. And on that, we completely agree, and we 
have laid out the ways that that ought to be done that are fair 
to all types of hospitals.
    Chairman Barton. But I think the real fight here is not 
about quality of care. It is about control and ownership. That 
is the elephant in the tent that nobody wants to talk about. 
And there are some groups that just thing doctors making 
decisions for themselves to treat their patients in the way 
they think they are best able to be treated, that somehow that 
shouldn't be allowed. And I think it should be allowed under 
the right terms and conditions so that there is not a special 
financial advantage to the specialty hospital.
    And with that, I yield back.
    Mr. Deal. Thank you.
    Mr. Gordon.
    Mr. Gordon. Thank you, Mr. Chairman.
    And let me say to my friend, Chairman Barton, I think that 
the issue goes beyond what you just mentioned. There is also a 
question of access in communities. There is a question, and I 
would say, what happens if someone with a bullet wound or a 
severe, Dr. McClellan, or a severe stomach problem or something 
else and goes into an orthopedic clinic, what are they going to 
say? ``We can't treat you. We don't have an emergency room.''
    Mr. McClellan. Right. Most of the orthopedic hospitals 
don't have emergency rooms, and that is actually why I 
emphasize that we are going to be reviewing our EMTALA 
requirements in light of, you know, the findings of these 
reports. You know, for example, if there is a case where, as 
Chairman Barton was saying, there is a patient who can be 
treated most effectively in a surgical hospital or an 
orthopedic hospital, we want to make sure that there are 
appropriate ways to support that. So right now, hospitals that 
don't have emergency rooms are not subject to any of the EMTALA 
requirements. There could be a situation here, for example, 
where there is a hospital with an emergency room that doesn't 
have a relevant specialist on call but maybe there is one 
available at one of these other facilities. Well, we need to 
think through what the implications of situations like that are 
for our rules about payment and participation in the Medicare 
program. That is what we are going to be doing over the next--
--
    Mr. Gordon. Implications of access if community hospitals 
that have a variety of responsibilities that they are required 
to, if they are not able to be profitable, then they can't have 
emergency rooms. They can't do the other types of community 
services that they are required to do. So I think there is a 
broader issue, not that what Chairman Barton brought up is not 
one of them, but I think there are broader issues to be 
considered today. And that is what brings me, Dr. McClellan, to 
where you had laid out quite a list of things you want to try 
to get done, both things you know you want to do and then areas 
of which you think you want to do but you need more information 
and have set, I guess, an internal moratorium until the end of 
the year. I like an optimist, and I try to be optimistic, but I 
like to try to think realistically, too, and looking at 
probably Congress is more a procrastinator than HHS, but I 
think both of us have missed deadlines. And so I am concerned 
about that, and so I ask you do you see any problem with the 
MedPAC's recommendation of having the moratorium legislatively 
continued until January 1, 2007?
    Mr. McClellan. Oh, Congressman, we are not recommending 
continuation of the moratorium. We are, as you say, looking 
closely at our procedures.
    Mr. Gordon. But by virtue of not----
    Mr. McClellan. Right. And----
    Mr. Gordon. And I assume these hospitals aren't going to 
set up if they don't get reimbursement from you?
    Mr. McClellan. I think that is probably right.
    Mr. Gordon. Yeah.
    Mr. McClellan. And that is why I want to focus on our 
getting the work done. We do think we can this work done by the 
end of the year. I am an optimist, too. We will obviously 
keep----
    Mr. Gordon. And if you can't, will you----
    Mr. McClellan. Well, we will keep in touch with you and 
with the Committee about how this work is progressing, and I 
think this is a reasonable goal at this point, and we will 
obviously keep working with you to make sure we are doing it. 
We are following----
    Mr. Gordon. That sounds more like a lawyer answer than a 
doctor answer. My concern is that probably some ultimate 
solution might very well result in some type of a 
grandfathering situation. And you know, that is just typical 
around here. And the more you do, the more odd situations that 
are produced, and I really think that we would be better off to 
have a longer moratorium so we don't potentially get into 
additional grandfathering.
    Mr. McClellan. Well, I agree that we want to avoid 
grandfathering. I mean, we want to get this right. We want to 
get the participation circumstances correct. We want to get our 
processes correct. We want to get our payment systems correct. 
And we are going to do that in the coming months. I just 
emphasize that if, as we change these processes for being able 
to bill Medicare for services, those changes in many ways will 
apply to some of the existing facilities. So if there is a 
specialty hospital out there that is not providing primarily 
inpatient services, we are not going to continue to allow that 
to be billed as a hospital.
    Mr. Gordon. I have just got a short time, so let me just 
run over to Mr. Hackbarth, please.
    In your recommendation, you did suggest that there needed 
to be this moratorium until January 1, 2007 both to implement 
the various regulations as well as to get more data. I assume 
you feel that is an accurate position.
    Mr. Hackbarth. Sure.
    Mr. Gordon. And if you might expand on that, and also tell 
me if you are seeing threats to emergency room care and other 
types of community services that community hospitals are 
required to provide.
    Mr. Hackbarth. Well, let me tackle the second part first.
    As I was just discussing with Chairman Barton, the 
Commission is concerned about the effects, the incentives 
created by self-referral. On the other hand, from my 
perspective, I worry about saying that the way that we are 
going to assure care for the uninsured, for example, is by 
protecting existing institutions from competition. Looking at a 
lot of different industries, we can see that that sort of 
protectionist approach to trying to get a public good is not 
very efficient. We end up paying a lot, a hidden price, but a 
substantial price. We lose potential gains in efficiency and 
improvements in quality that we would otherwise get from more 
competition. We are in favor of more competition, but we want 
it to be fair competition. And, among other things, that means 
that we need to make the payment system more accurate in the 
ways that we were just discussing. That is a huge step in the 
right direction.
    Now the question that I have about the time schedule that 
Mark has laid out is that the payment reforms are going to take 
longer than to January 1, 2006. And so if we just have a hold 
to that point and then the market is opened up, it will be in 
the context of a payment system that we think is significantly 
inaccurate and results in overpaying specialty hospitals and 
some types of community hospitals and underpaying other types 
of hospitals. And we think there is jeopardy in that.
    Mr. Gordon. If I can just conclude, I would say, to some 
extent, I think you already have competition by virtue of fee 
setting. And when the Federal Government sets fees, then I 
mean, that is the competition. That requires you to be more 
efficient to be able to produce a product where you can make a 
profit.
    Thank you.
    Mr. Deal. Dr. Burgess.
    Mr. Burgess. Thank you, Mr. Chairman.
    Just to follow up on that, I don't believe fee setting is 
adequate for establishing competition. We all know that, again, 
just the overhead costs of a community hospital that runs 24 
hours a day, 7 days a week whereas a surgery center, the lights 
go off at 6 p.m. But to pick up on the Chairman's point, I am 
concerned, also, about the continuation of the moratorium. For 
the life of me, I don't understand. You say we are evaluating 
this, but it is a moving target. There have been more and more 
specialty hospitals and surgery centers that have come on line 
in recent years, so it is difficult to evaluate adequately an 
evolving product or a moving target, and so we put the 
artificial moratorium on top of it. How are we going to deal 
with what happens after the moratorium is removed as far as 
providing that evaluation?
    Mr. Hackbarth. The emphasis, in my comment, was not so much 
on the moving target, although that can be an issue as well, 
but rather on the fact that our analysis is based on 1 year of 
data, 2002 and a limited number of hospitals. So you have got a 
limited number of data points there. It is not far in the 
future that we will have significantly more data on even those 
institutions. By the end of the calendar year 2005, we would 
have an additional 2 years of data on those institutions, which 
would allow us to make more confident conclusions about their 
potential effect on efficiency. When we made our 
recommendations at MedPAC, we had not yet seen any of CMS's 
analysis of quality. In fact, we still haven't seen the data. 
We are eager to do so.
    Mr. Burgess. But the world in which you will exist will 
then change when the moratorium is ultimately lifted, and it 
won't be the same environment that you studied previously.
    But let us move on from that for just a minute.
    I feel obligated to talk about self-referral. My dad, a 
physician himself, when World War II ended, he was a general 
practitioner in Noranda, Canada. He did obstetrics for that 
brief part of his career. If he did a home delivery, he was 
paid $40. If he did a delivery at the hospital, he was paid 
$45. And he would give the patient the $5 to come to the 
hospital. So in a way, that was kind of self-referral back 
then, but I think the patient care was improved by that.
    The reality is, now we are actually talking about two 
universes. We are talking about not-for-profit hospitals, for-
profit community hospitals. Those two are actually very, very 
different species. I know from my own experience that to try to 
get an uninsured patient into a for-profit hospital to have the 
necessary treatment done can be a big deal and require that 
uninsured patient to put up a big bunch of money, because the 
hospital is having to cover all of that additional overhead. 
And the surgery center may be willing to take that patient for 
a significantly lower amount of money, allow her to pay that 
money out over time, and welcome that patient with open arms.
    So yeah, I am going to self-refer to the surgery center 
under those circumstances. I would be crazy not to. We are 
looking at a situation where more and more people may be, 
perhaps, paying for a greater part of their care with the 
improvements that we have done with health savings accounts in 
this country. Why not give them access to a lower-cost product 
in the surgery center or specialty hospital?
    Mr. Hackbarth. I would like to just emphasize the point 
that you made, Mr. Burgess, about how even among ``community 
hospitals,'' there is a lot of variability, for example, on the 
amount of indigent care provided. You know, I don't think if we 
were to prohibit specialty hospitals tomorrow, that is not 
going to have a meaningful impact on the problems of indigent 
care in this country. There are issues that long pre-date 
specialty hospitals. And so I think to----
    Mr. Burgess. Sure, but, sir, if I could, now we have 
another option in my community in that no longer does this 
patient have to come up with $10,000 to pay to, I won't mention 
any initials, but HCA, she can pay $1,000 to come into the 
surgery center. And that is a big difference for someone who 
has no insurance, who wants to pay their bill.
    Mr. Hackbarth. Yeah, and as I said, I agree more options 
are a good thing. I want to see efficiency better. I want to 
see quality of care better. I want to see patient service 
better. But I want to do it in the context of a fairer payment 
system that doesn't overpay or underpay. And I think that that 
is an achievable goal.
    Mr. Burgess. And I agree with you, and I think Dr. 
McClellan is right on the mark with that. I will just come in 
favor of support of his 6-month study of this process rather 
than extending the moratorium. I don't think we need to take 
legislative action on this.
    I will yield back.
    Mr. Deal. I thank the gentleman.
    I recognize Ms. Capps.
    Ms. Capps. Mr. Chairman, could I inquire of the time in 
terms of that I didn't make an opening statement, or are we----
    Mr. Deal. You have 8 minutes.
    Ms. Capps. I may not need to use it all, but I wanted to be 
clear.
    I thank you for holding this hearing. Just a comment 
perhaps directed more at the chair to follow-up on Mr. Gordon's 
timeline kind of questioning.
    I appreciate the hearing on this topic. It is of great 
interest in my District. I am concerned that the moratorium 
expires in about a month, and it seems to be that Mr. McClellan 
has his own sort of timeline that would be internal, perhaps we 
could call it a moratorium, but it will take a while, perhaps. 
But in terms of our legislative response, it seems pretty clear 
that that wouldn't probably happen so that this hearing is not 
about that in terms of the moratorium, but rather 
informational.
    Mr. Deal. Well, the hearing is to examine all of the 
information and all of the options that are out there.
    Ms. Capps. It would be pretty hard to----
    Mr. Deal. But there is no specific legislation that----
    Ms. Capps. [continuing] act.
    Mr. Deal. [continuing] we are in the process of trying to 
mark up.
    Ms. Capps. So if we are coming here thinking we are going 
to affect the moratorium, we probably are mistaken. That being 
said, I----
    Chairman Barton. Would the gentlelady yield?
    Ms. Capps. Of course.
    Chairman Barton. We are not going to move a moratorium 
extension bill in this committee.
    Ms. Capps. I hear you.
    Chairman Barton. Nor will I let the Appropriations 
Committee----
    Ms. Capps. I suppose I should have known that before.
    Chairman Barton. [continuing] put it on an appropriation 
rider.
    Ms. Capps. I hear you.
    That being said, I am very grateful for the hearing on its 
own merits. I appreciate the testimony that you have made, 
particularly in light of the several opportunities that I have 
had to meet with representatives of the community, acute care 
hospitals from my District. They are all very concerned about 
limited service or specialty hospitals as we experience them in 
California, in my area. Advocates of the specialty hospitals 
are claiming that these facilities, and I have heard it 
directly from some of them who are physician owners, that these 
facilities can improve quality and patient satisfaction. These 
are laudable goals, and if they are achieved, then we certainly 
want to handle this topic very carefully. But I believe we need 
to see very real evidence of their success. And we need to be 
sure that the specialty hospitals experiment, if that is what 
we are calling this, or what is happening does not jeopardize 
the overall provision of health care in the country. I mean, 
that is where our real responsibility lies, both yours and 
ours. Community acute care hospitals are deeply concerned about 
this last point, because they are full-service providers, and 
they are, at least the ones that I am familiar with, very 
strapped financially. Inequities in Medicare and Medicaid 
payments have put great pressures on them. And these hospitals 
are the point of care for millions of uninsured who are not 
about to be visiting specialty hospitals. The community 
hospitals are where these people go when they get sick. And my 
community hospitals have the belief, and they need to be 
demonstrated otherwise if it is not true, that the specialty 
hospitals may ``cherry-pick'' relatively healthy and 
inexpensive patients for specific treatments. And this would 
leave the sicker and more costlier patients to the acute care 
hospitals, putting an even additional burden on them because of 
the way the payment structure is. And I understand that 
MedPAC's study of this issue indicates the community hospitals 
have so far been able to deal with this. But that was the 
reason for the moratorium, to gather more information.
    So Mr. Hackbarth, I want to follow up on something that I 
heard Chairman Barton say in his opening statement. He talked 
about, and this is an important issue, competition lowering 
costs. I find it interesting, because we prepared the Medicare 
Modernization Act in this subcommittee, also, in which we have 
provided opportunities for overpaying managed care to provide 
competition with Medicare. So I think it has been said by 
others this is not necessarily an even playing field, but 
competition lowering costs is still something we believe in, if 
it is true. So my question to you, Mr. Hackbarth, is did MedPAC 
find that specialty hospitals had, indeed, lower costs than 
community hospitals?
    Mr. Hackbarth. No, we did not, not in 2002.
    Ms. Capps. So, so far, there is no study that indicates 
that specialty hospitals do lower costs?
    Mr. Hackbarth. Well, I won't say that there is no study.
    Ms. Capps. MedPAC's study did not.
    Mr. Hackbarth. The MedPAC analysis of the Medicare data on 
these hospitals found that they did not have lower costs.
    Ms. Capps. Maybe I should ask Mr. McClellan to corroborate. 
Do you know of any studies, Mr. McClellan, that demonstrate 
that specialty hospitals lower costs?
    Mr. McClellan. We didn't look at the cost issues. That was 
the responsibility for the MedPAC report. But just as Mr. 
Hackbarth said, under the Medicare payment systems now, you get 
paid a certain amount of money for the admission to the 
hospital. If we make the refinements in our payment systems, 
you would see lower payments for the less severely ill patients 
and maybe higher quality of care as well.
    Ms. Capps. But this is still in the presupposing stage?
    Mr. McClellan. Well, because we aren't done it yet.
    Ms. Capps. Okay.
    Mr. McClellan. What MedPAC has recommended, what we are 
going to do is refine our payment system to make it more 
accurate so there is less costs if there are less severely ill 
patients. We are going to be paying them less under the refined 
payment system.
    Ms. Capps. Okay. I guess this question then, as a follow up 
to both of you, even if you make the changes to how Medicare 
reimburses these facilities, how do you ensure that the limited 
service hospitals will take their share of Medicaid patients? 
Is there a plan for that to happen?
    Mr. McClellan. That is one of the issues that we are 
reviewing as part of updating our processes for approving these 
hospitals for payment. We are going to be looking at the EMTALA 
activities, and the way that our EMTALA regulations work, as 
Chairman Barton said, I think it is important that patients who 
have a medical need have access to the right providers for 
doing it. And if a hospital can provide those services, that is 
something that I think is an important public health goal. 
Also, we want to make sure that given the more limited scope of 
these hospitals, that they are providing the right level of 
safety and support for our patients.
    Ms. Capps. And it is true that at this point we really 
don't have definitive answers to all of these questions?
    Mr. McClellan. Well, we do have definitive answers on many 
aspects of quality.
    Ms. Capps. But not all?
    Mr. McClellan. Well, some very important ones, things like 
complication rates in these hospitals, the satisfaction the 
patients have, the satisfaction that nurses----
    Ms. Capps. Right. That part I am clear about, and I have 
heard some anecdotal evidence to that myself.
    Mr. McClellan. Yeah.
    Ms. Capps. But that one question I asked you about making 
sure that specialty hospitals will take their fair share of 
Medicaid patients, that has not been determined, a mechanism 
for making sure that that happens. Am I right or are----
    Mr. McClellan. They do take a lower share of Medicaid 
patients. That is an issue that we will look----
    Ms. Capps. Is there fairness that needs to be discussed 
here?
    Mr. McClellan. That is an issue that we will be looking at.
    Ms. Capps. Okay. I guess now, would you like to----
    Mr. Hackbarth. Yeah, I would just like to make a brief 
comment on that.
    I think it is always important to come back and remind 
ourselves that community hospitals are not all alike. They 
don't all provide equal amounts of Medicaid care.
    Ms. Capps. True.
    Mr. Hackbarth. They don't provide equal amounts among 
compensation----
    Ms. Capps. Yeah. I want to get one more question out, and I 
agree with you, and I think the same could probably be said for 
specialty hospitals.
    And I guess that brings me back to the point, it was an 
onerous part of the Medicare bill to put in this moratorium, 
many people felt. And the moratorium was supposed to deliver a 
lot of answers. I am just not clear about whether we have 
enough of them yet.
    Mr. McClellan. Well, we have both completed our studies, 
and our study did look at the best evidence we had available on 
quality of care. I think it is important to mention the 
quality.
    Ms. Capps. Right.
    Mr. McClellan. There is pretty clear evidence that the 
specialty hospitals do better, certainly in patient 
satisfaction, lower length of stay. That is probably a good 
thing. There are fewer complications in the hospital, more 
opportunities----
    Ms. Capps. But many unanswered questions remain.
    Mr. McClellan. Well, as you know, in all of these health 
care issues that we deal with that are important----
    Ms. Capps. Okay. I am very sorry. I have 5 seconds. I don't 
actually. Mr. Hackbarth, do you want to make one quick comment 
to this?
    Mr. Hackbarth. Well, as I said, I think that we need more 
evidence on both the efficiency and quality issues.
    Ms. Capps. Yeah.
    Mr. Hackbarth. I think what we have got is a very limited 
snapshot, and I don't think it is very far down the road that 
we will have a significant improvement in the data on this.
    Ms. Capps. I appreciate that, and thank you.
    Mr. Deal. Mr. Ferguson.
    Mr. Ferguson. Thank you, Mr. Chairman.
    I want to go back to the concept that I talked a little bit 
about, and you, Mr. Hackbarth, discussed as this gain-sharing. 
And I would like to use my 5 minutes, and maybe the two of you 
can divvy it up a little bit. I would like to hear some more of 
your thoughts, both of your thoughts, but Mr. Hackbarth first, 
specifically about gain-sharing, how it is different from 
physician self-referral. This is obviously something that I 
have mentioned that was being innovated in New Jersey. It, I 
think, shows a lot of promise. It gets doctors and hospitals 
working together on incentives. But maybe could you flush out a 
little bit more of some of the value that you think gain-
sharing would have and then, Dr. McClellan, would you add, 
perhaps, your thoughts on that on the other end of that?
    Mr. Hackbarth. Yeah. Well, you know, I think it is clear 
that physicians and hospitals can achieve more, both in terms 
of improving efficiency in quality together than they could 
achieve independently. And right now, the rules basically put 
up an artificial barrier from their sharing the gains from 
those joint efforts. One way that physicians can get that now 
is through the specialty hospital phenomenon, become an owner 
of the hospital. There you can share in the gains from 
improvement. But if you practice in a not-for-profit 
institution, that opportunity is not equally available. We 
think it is important that all physicians and hospitals have 
the opportunity to engage constructively and share the gains 
from that effort. Right now, the rules prohibit it. What we 
would like to do is see Congress authorize the Secretary to 
permit gain-sharing and then write rules that define the 
boundaries within which it can occur. Obviously, we would like 
to see reasonable protections for quality of care. In that same 
framework, we could also address concerns that some people have 
about this sort of mechanism being used to provide inducements 
for physicians to artificially increase volume or to shift 
patients from one institution to another. We see indications 
that that can be done through the Inspector General's approval 
now, some very specific gain-sharing type arrangements where 
they said this is okay so long as it proceeds within this 
framework. That process is too slow, you know, case by case by 
case. We think a much more efficient means would be a 
regulatory process that would establish rules for everybody 
that they could rely on.
    Mr. McClellan. All right. I would agree with the same kind 
of points that Mr. Hackbarth just described. The fact of the 
matter is that the doctors and hospitals should be working 
together, because there are so many opportunities to improve 
quality of care to make better decisions to get the patient the 
services they need at a lower cost, and gain sharing has some 
potential to do it and these initial limited steps by the OIG 
are something that should be built on with further measures. 
The physician-owned specialty hospitals have that same kind of 
alignment built in. With a typical physician owner in these 
hospitals, they have got maybe a 1-percent share, maybe less, 
so it is not like their individual decisions about a particular 
patient are going to have a huge impact on their own revenues, 
but there is that connection in. I think the right question is 
how do we set up systems like this that promote access to care 
that are really focused on promoting quality and the kinds of 
things that we are doing with the refinements in the payment 
systems, with the refinements in our processes for approving 
specialty hospitals have those same kinds of goals in mind. So 
I think there are, in both of these approaches, some real 
opportunities to get better care at a lower cost, and that is 
what we are trying to achieve.
    Mr. Ferguson. Okay.
    Thank you, Mr. Chairman. I yield back.
    Mr. Deal. Ms. Baldwin is recognized for questioning.
    Ms. Baldwin. Thank you, Mr. Chairman.
    Just a couple of follow-ups from wanting to make sure that 
there is some clarity after some of the previous questions have 
been asked. Just so we are clear, is there any ban on the 
existence of specialty hospitals right now?
    Mr. McClellan. Right now, there are existing physician-
owned specialty hospitals. They are largely, I think, going to 
continue their operations.
    Ms. Baldwin. But is there a ban right now?
    Mr. McClellan. Well, there is a moratorium right now on 
who----
    Ms. Baldwin. Correct, but there is no ban. There was an 
implication earlier in questioning, and I am just trying to 
clarify that. Has anyone proposed a ban on the existence of 
specialty hospitals?
    Mr. McClellan. There have been proposals of the 
continuation of the moratorium so that no more----
    Ms. Baldwin. So it is true that the ban is merely on the 
self-referral issue, not on the existence of specialty 
hospitals?
    Mr. McClellan. That is right, only physician ownership.
    Ms. Baldwin. Okay.
    Mr. McClellan. Right.
    Ms. Baldwin. Mr. Hackbarth, in your testimony you made some 
reference to the frequency with which specialty hospitals treat 
Medicaid patients. I would like to hear a little bit more in 
depth of MedPAC's findings with regard to that conclusion.
    Mr. Hackbarth. Yes. We did find that, again for the 48 
hospitals that we looked at in 2002, that they served a 
significantly lower proportion of Medicaid patients. As I 
recall, for the specialty hospitals, for the cardiac specialty 
hospitals, I think it was, like, 4 percent Medicaid volume 
versus more like 11 or 12 percent for the comparison community 
hospitals. Do I have that right?
    Ms. Baldwin. That is in the cardiac. What about the 
orthopedic and surgical specialty hospitals?
    Mr. Hackbarth. They will give you the answer to that. While 
they are giving you the specific number, here again I want to 
emphasize that we are talking averages, and some individual 
hospitals may have more or less. Specifically within the 
orthopedic category, we found a range of Medicaid volume, and 
there was at least one orthopedic hospital that had a fairly 
significant Medicaid volume. So for hospitals, heart hospitals, 
the Medicaid share averaged 2 percent if they didn't have an 
emergency department, 3 percent if they did have an emergency 
department, and the peer hospitals to which we compared them 
had 8 percent Medicaid. For the orthopedic and surgical 
hospitals, actually we lumped those together, and the specialty 
hospitals had 5 percent Medicaid. The peer hospitals that we 
compared them to had 9 percent Medicaid.
    Ms. Baldwin. Okay. Thank you. You know, in looking at the 
MedPAC study, I know you had challenges with regard to the 
limited data set. I was surprised to find the MedPAC report on 
physician-owned specialty hospitals found that specialty 
hospitals had a limited impact on community hospitals, because 
intuitively, it seems like they would have a greater impact. Do 
you think that that finding was impacted by the restrictions in 
the data set or are you satisfied that the data set was large 
enough to have that be a reliable finding?
    Mr. Hackbarth. Two thoughts on that. One is that we have 
found through our site visits that when faced with competition 
from a specialty hospital, the community hospitals didn't stand 
still. They responded, and the sort of responses that they 
could make would be generally to reduce costs to sustain their 
level of profitability and/or increase revenues by, for 
example, adding new services that the specialty hospital is not 
competing. For example, imaging services or rehabilitation 
services that themselves are reputed to have higher than 
average margins. And through a combination of strategies, and 
they would vary across hospitals, what we found typically was 
that the community hospitals were able to sustain their margins 
in the face of competition. Now whether that would continue to 
be the case if faced with more specialty hospitals is an open 
question. And in that sense, the finding is limited by the 
data.
    Ms. Baldwin. Okay. And quickly, I am running out of time, 
Dr. McClellan, in your analysis, there is certainly the 
statement that specialty hospitals provide benefit to 
communities through the payment of taxes, and I want to 
clarify, do all specialty hospitals pay taxes?
    Mr. McClellan. Just about all of the physician-owned ones 
do. Those are for-profit hospitals that are paying property 
taxes, real estate taxes, sales taxes on income taxes.
    Ms. Baldwin. I believe in the next panel there is a 
representative of a not-for-profit specialty hospital, and my 
understanding is that they would certainly not be paying the 
same range of taxes as the others.
    Mr. McClellan. Not-for-profit ones wouldn't, right, but in 
general, the physician-owned----
    Ms. Baldwin. But I am talking about specialty hospitals, 
not all of them pay taxes, is that correct?
    Mr. McClellan. If they are non-profit specialty hospitals, 
that is true. They would have a different tax structure, but 
most of the physician-owned specialty hospitals that you have 
been interested in are for-profit and do pay these taxes.
    Ms. Baldwin. Thank you.
    Mr. Deal. Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman.
    Gentlemen, I believe I have a very brief amount of time, so 
I would appreciate it if you could answer my questions as 
quickly as possible.
    Dr. McClellan, your study found that quality and patient 
satisfaction were higher at specialty hospitals. Is that 
correct, and did you go into the issue of why?
    Mr. McClellan. That is correct. I can give you just a 
couple of reasons to be quick. One is there do seem to be some 
advantage of specialization. If you talk to the nurses there 
and the doctors there, they really do focus on delivering care 
for these particular procedures and these particular conditions 
really effectively, and that shows up in the patients having a 
better understating of their illness and what to expect, and it 
shows up in the lower length of stay and apparently some lower 
rates of complications. Another reason may be the tighter 
management, because the physicians who are providing the care 
are also much more directly involved typically in the 
management of the hospital. There is a really tight connection 
between a problem that a patient might identify, a problem that 
a nurse might identify, and actual changes in the way that the 
hospital practices medicine. There is very much a culture of 
quality improvement at many of the hospitals that we saw in our 
report and that I have seen in visiting some of these 
facilities. That translates into higher patient satisfaction 
and many dimensions of care and also some improvements in some 
dimensions of complications.
    Now that is not to say there is not high-quality care at 
many community-based hospitals. We are seeing lots of efforts 
in community-based hospitals to improve the quality of care as 
well. They can also do a very good job, and we want to make 
sure they are paid appropriately.
    Mr. Shadegg. Your study also found that mortality rates 
were lower at cardiac specialty hospitals and even lower than 
community hospitals when you factor in the severity of the 
case, is that correct?
    Mr. McClellan. That is correct.
    Mr. Shadegg. Okay. One of the arguments about specialty 
hospitals is that they do not provide as much uncompensated 
care under EMTALA. Yet your study also found that specialty 
hospitals spend a greater proportion of their net revenue on 
uncompensated care, is that correct?
    Mr. McClellan. That is right. And as Mr. Hackbarth 
emphasized, this does vary. Some are providing much more than 
others. You know, one of the hospitals, we saw Oklahoma Heart 
is doing a lot of uncompensated care, also taking some very 
severely ill patients. And again, if we get the payment 
incentives right, I think we can encourage more of that kind of 
behavior, too.
    Mr. Shadegg. One of the points I want to make is that you 
made a reference to the importance of making sure people can 
get care and that EMTALA achieves that goal. I think it does 
achieve that goal, and it is a societal goal that we have 
decided upon. Although I think it is important in this 
discussion to note that although EMTALA achieves that goal, it 
does, that in a way that many of us think is inappropriate. I 
think one of the huge problems in our community hospitals is a 
lot of people in there are getting free care, under EMTALA, for 
services that could be more efficiently, or at least more 
appropriately provided, in another venue, that is to say not in 
an emergency room. If you walk into an American hospital's 
emergency room today, whether it is a specialty hospital or a 
full-service hospital, you will find people in there getting 
treatments for the flu or the cold or a chronic pain in their 
leg that does not need to be treated in an emergency room. So I 
think we have to look at the broader spectrum of reform. For 
example, I have legislation that I have had for almost 10 years 
in pushing a refundable tax credit so that we could give the 
Americans in this country who need health care but can't afford 
it a tax credit to go buy that health care and then get it 
delivered in the doctor's office or a community health center 
or a better venue than an emergency room.
    The CMS study did not find a pattern of physician owners 
referring more patients to specialty hospitals than community 
hospitals. I think at the heart of this issue is the issue of 
self-referral, and I would appreciate your comments on self-
referral.
    Mr. McClellan. Well, we did find these differences in 
patient severity that appear to be related to the types of 
cases being treated at the specialty hospitals. They do appear 
to be focusing on, you know, different kinds of procedures than 
many of the community hospitals where they deal with patients 
not just with heart disease but maybe with other conditions and 
so forth. Again, we want to pay appropriately for that, but in 
terms of the referral patterns, we found that physicians who 
were not owners in the specialty hospitals were just as likely 
to refer severe and not severe cases as the physician owners. 
Now the physician owners did have more referrals overall. That 
is how they provide their care, but it wasn't clearly related 
to any differences in severity. No selected behavior of the 
physician owners versus non-owners in just referring in less 
severe cases or something like that.
    Mr. Shadegg. My time is very limited, and I want to get in 
two more questions.
    One, when you could see that the quality is better at a 
specialty hospital, the patient outcome is better at a 
specialty hospital, mortality rates are lower at a specialty 
hospital, I think you can see why it is difficult for some of 
us to endorse the notion of extending the moratorium, 
especially with the baby boom generation coming on. I 
understand that you don't favor extending the moratorium. I 
would appreciate a quick answer to that, and then I have one 
last question.
    Mr. McClellan. Well, we have not proposed an extension of 
the moratorium. We have proposed some important steps to get 
our payment systems up-to-date, and we are going to start 
working on that now so that those payment changes should be 
getting pretty clear by next January, and then we will 
implement them later on in 2006. And we are also going to be 
implementing these changes in our processes, and that may have 
some important effects, not only on the specialty hospitals 
that end up getting payments from Medicare, but on some of the 
hospitals that are billing Medicare today, perhaps 
inappropriately.
    Mr. Shadegg. Mr. Chairman, I won't ask any more questions, 
but I simply want to say that I would like to submit in writing 
some questions to you going to the issue of a level playing 
field. The community hospitals have come to me and said, 
``Look, Congressman. We understand you think that specialty 
hospitals are performing a vital service, but you need to know 
the playing field isn't level.'' And they refer to some current 
provisions of Federal law, which, they say, make it impossible 
for them to compete on a level playing field with the specialty 
hospitals. They know my position is I don't want to put greater 
burdens on the specialty hospital. My solution to this problem 
isn't moratorium on specialty hospitals. My solution to this 
problem is to take some of the burdens that are currently 
imposed on the community hospitals off, and I would like to 
submit to you a series of questions of whether you have looked 
at those issues, what you might recommend that we could remove, 
and how we could, in fact, if there is an unlevel playing field 
with regard to the community hospitals, how we could fix that 
without increasing the burden on the specialty hospitals.
    Mr. McClellan. We would be delighted to look into that. I 
think there are some important opportunities there.
    Mr. Shadegg. Thank you very much.
    Mr. Deal. Thank you.
    Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    And again, welcome, Dr. McClellan.
    It is interesting, because I find myself agreeing with my 
Arizona colleague and that we are correct, if there are other 
ways we can provide health care instead of through our 
emergency rooms in our community hospitals, whether it be for-
profit or non-profit, you know, CAP funding to have the 
organization of what providers we have in communities, and of 
course community health care clinics that the President has 
plussed-up in his budget. And we are having some success, at 
least in the Houston area in Texas, because we have been behind 
the curve on that.
    Since the chairman said that there will not be legislation 
on extending the moratorium, I just want to make sure, and I 
think you told Mr. Shadegg, that CMS, even without the 
extension, can make these changes for 2007.
    Mr. McClellan. We will be making the payment changes 
effective for fiscal year 2007. That is actually during the 
fall of 2006. And we will be making these changes in our 
process for approving specialty hospitals for payment before 
then.
    Mr. Green. Okay. I have a number of questions, and like 
everyone, I will try to talk as fast as I can.
    The CMS study indicated specialty hospitals devote a higher 
portion, the net revenue taxes and uncompensated care in 
community hospitals, and given their for-profit status, I know 
these taxes go for lots of communities, not just for Harris 
County Hospital District, for example, in my area. Yet, without 
a doubt, every penny of the uncompensated care at the community 
hospital has to do goes to health care. Did CMS look at a study 
comparing that uncompensated care for the community hospitals 
as compared to what--maybe when there is a facility like a 
local tax for a public hospital system?
    Mr. McClellan. Well, communities have, as you know, many 
priorities, including public health, and that is an important 
source of where local and State funding goes. We don't have any 
specific numbers, you know, for the hospitals in the study, but 
if you think about priorities, having new resources available 
to local county governments and other governments to meet their 
community needs is important.
    Mr. Green. Well, and that is a concern, and again, some of 
us trying to think outside of the box not only here, but also 
in Texas, and looking for other ways to support the public 
hospitals that we have.
    Mr. Hackbarth, MedPAC's study found that specialty 
hospitals had limited financial impact on community hospitals, 
however, the findings were understandably limited due to the 
moratorium and the relative scarcity of physician-owned 
specialty hospitals. Did you look at certain regions or areas 
that currently have specialty hospitals competing with 
community hospitals? And I know, for example, the example I 
heard was in Austin, Texas where just on the northwest corner 
of one of our facilities, a cardiac facility, and I have one in 
Pasadena, Texas that competes with Bayshore Hospital for profit 
and also a for-profit specialty hospital, did MedPAC go into 
some of the regions of the areas to actually show that 
competition now?
    Mr. Hackbarth. Yes. If I could get the map up here.
    [Slide.]
    The red spots on the map show the 48 hospitals that we 
looked at. And then in addition to that, we did some site 
visits in Wichita, Austin, and Sioux Falls. The data about the 
impact on community hospitals is of two types. One, we looked 
at what was happening to the au pair margins of community 
hospitals facing competition, and we did that broadly across 
all of these areas.
    Mr. Green. Okay.
    Mr. Hackbarth. And then when we went into particular 
markets or we did more detailed case studies, that is where we 
learned about some of the strategies that community hospitals 
might apply to try to deal with the competition. So it is broad 
data supplemented with some focused case study reports.
    Mr. Green. Okay. And that is available in the report?
    Mr. Hackbarth. Yes, that is in the report.
    Mr. Green. And following my colleague, Mr. Shadegg, on 
self-referral, I think the biggest issue is the concern about 
physicians being able to self-refer, and I think in the MedPAC 
study, the average physician may own 2 or 3 percent of a 
facility, and that they gain by self-referral. And I understand 
MedPAC reached a different conclusion in a report using the 
example of what a group of physician owners might gain through 
self-referral, for example, for heart surgeries. Would you 
elaborate on that?
    Mr. Hackbarth. Well, the point that we were trying to make 
is that looking just at the individual physician's percentage 
of ownership may not fully show what the potential impact is on 
the physician's decisionmaking in two respects. First of all, 
when you are thinking about incentives, you want to think about 
how does it change the physician's behavior about doing one 
more surgery or admitting one more patient, thinking about what 
happens at the margin. And the way hospital finance works is 
that the profit based on one more additional case is much 
higher than the average profit in the institution, because to 
do that analysis, you are just looking at the revenue from the 
new case compared to the variable costs of the treatment. And 
so the profit can be pretty significant from one additional 
surgery. Then in addition to that, although an individual 
physician's ownership piece might be small, the physicians 
collectively own a larger share. In the case of orthopedic and 
specialty hospitals, often the majority of the institutions, in 
the case of heart of hospitals, more like 30 or 40 percent of 
the institution is owned by physicians collectively.
    Now if the physicians together say, ``Well, let us each add 
one more patient,'' each individual physician not only gets the 
profits from his or her additional patient, but also a share of 
the group's profits. So there is some magnification, if you 
will, of the financial effect. So for those two reasons, we 
think that just talking about, oh, the physicians only own 1 
percent or 2 percent may give a misimpression about the 
magnitude of the economic incentives.
    Mr. Green. Okay. Dr. McClellan, I know this CMS study 
looked a little different. Do you agree with basically what 
MedPAC----
    Mr. McClellan. Well, we did investigate some of the quality 
of care impacts, and that figure is prominently in our report. 
I think that, as I have said, we want to make sure that the 
payments are appropriate and that we have an appropriate 
process for approving the hospitals, so I think we agree on 
most of these issues.
    Mr. Green. One of the concerns I have, and in fact in my 
own District, I have a problem, because of the scarcity of 
beds, and we see doctors oftentimes, in fact, in the one case 
where there is already a specialty hospital, a group of doctors 
are trying to form a facility because they can't get bed space 
at local community hospitals, so they are going together and 
trying to do it so they can. I think that is what I am hearing, 
not so much from the profitability point of view, but just so 
they can have adequate bed space for their patients.
    Mr. McClellan. Yeah. Yeah.
    Mr. Green. And I know that that is something both MedPAC 
and CMS and we are all concerned about.
    Mr. Hackbarth. Yeah, and I can relate to that. As I said 
earlier, I ran a large physician group, and I heard often from 
surgeons about their frustrations in working with hospital 
management and getting OR time and disruptions in the OR 
schedule. These are real problems for physicians in many 
institutions. And so I can sympathize for them wanting to have 
more control over their practice environment. I just want to 
make sure that it is a fair opportunity.
    Mr. McClellan. And in our report, we did find, from the 
physician standpoint, much higher satisfaction with these 
arrangements specifically because they could get a lot more 
predictability about their OR time and a lot more 
responsiveness from the management, provide their services more 
efficiently, and one of the doctors told us, one of the 
surgeons told us about, you know, now that he is working there, 
he can actually go to some of his son's little league games, 
something that he had never been able to count on or do before 
because of the scheduling predictability.
    Mr. Green. Well, and again, the patient benefit weighs into 
it, Mr. Chairman, because of, you know, the timeliness of 
getting your treatment that you need.
    I thank you, Mr. Chairman, and I know I am over my time.
    Mr. Deal. Thank you.
    Ms. Myrick.
    Ms. Myrick. Thank you, Mr. Chairman.
    My question has two parts to you, Mr. Hackbarth, please. 
And it is relative to the over-utilization issue as it may 
relate to this self-referral problem. Has the growth of 
specialty hospitals increased this utilization by Medicare 
beneficiaries? And the second part of that, as it will relate 
to other issues, like other physician-owned facilities, like 
imaging equipment, et cetera, have you seen any increases?
    Mr. Hackbarth. Well, let me tell you about the first part. 
What we have found was that the arrival of a specialty 
hospital, a cardiac specialty hospital, in particular we looked 
at, does increase the volume of cardiac surgery, although the 
difference that we found was not a statistically significant 
one, with an exception for one particular type of surgery, but 
in general, we did not see a statistically significant increase 
in volume.
    Mr. McClellan. What seemed to be happening more was a 
shift. There is a shift. The specialty hospitals do take away 
some of the volume from the community hospitals. Also, 
specialty cardiac hospitals, in particular, get a significant 
number of transfers in from other facilities, maybe, you know, 
more rural facilities for referrals as well.
    Ms. Myrick. Right.
    Mr. McClellan. But it is not a substantial increase in most 
areas in the number of cases overall in the community.
    Ms. Myrick. How about the imaging issue? Is that one that 
you can address?
    Mr. Hackbarth. Well, separate from this study, in our most 
recent report, we published some research and recommendations 
related to the growth of imaging, and there we do have some 
concern that physician ownership of the imaging facilities may 
be contributing to a significant increase in imaging volume.
    Ms. Myrick. And I have a second question.
    Since you found in your study that there were contrasting 
cardiac hospitals and that the orthopedic hospitals didn't seem 
to have a favorable DRG selection, if you were going to do a 
moratorium, would you suggest limiting the types of specialty 
hospitals that would fall under any extension of a moratorium?
    Mr. Hackbarth. Well, what we found is that for orthopedic 
and surgical hospitals, the types of patients that they treated 
were not, on average, more profitable. But then within those 
categories, they were taking the lowest-risk patients. And when 
you take those two factors together, their expected 
profitability was significantly higher than average, and we 
think you need to look at both.
    Ms. Myrick. Both of those?
    Mr. Hackbarth. Yes.
    Ms. Myrick. Okay. Thank you both.
    Mr. Deal. Does the gentlelady yield back?
    Ms. Myrick. I am sorry. Yes, I do yield back.
    Mr. Deal. Mr. Shimkus.
    Mr. Shimkus. Thank you.
    I hate to do that, you know. No one is here and then 
someone jumps out and tries to get the mic.
    This is an important issue, though, and I want to ask, 
first of all, there are three brief questions. The first one is 
on the MedPAC report. Did you all do any calculations about 
medical liability calculations and the difference between 
regular hospitals and specialty hospitals? What is occurring in 
southern Illinois is that because individual practitioners, as 
I said in the opening statement, no longer can afford. The 
hospitals are trying to assume that and roll that into their 
coverage. Was there a calculation for this?
    Mr. Hackbarth. No, we didn't look at that.
    Mr. Shimkus. I would suggest that that might be something. 
I mean, if you understand the argument that there may be less 
risk, and especially fewer, you know, cases and that the 
medical liability insurance may have a role in this debate as 
far as costs. So that is issue No. 1.
    Issue two is certificate of need. Illinois is a 
certificate-of-need State. And I have always had a hard time 
understanding this, because I am a market-driven competitive 
marketplace, and if someone wants to invest and place a 
facility, they are assuming a lot of risk, but when you have a 
certificate of need, and the State says you can or can not, how 
does that relate in this calculation?
    Mr. Hackbarth. Well, if we could get the map put up again.
    [Slide.]
    You will see in this map, the blue shaded States are States 
that have certificate-of-need programs.
    Mr. Shimkus. Right.
    Mr. Hackbarth. And so you can see from this that the 
specialty hospitals tend to be in States that do not have 
certificate of need. There are a few exceptions to that, but 
that is the general pattern. Now exactly why that is and how 
the programs function in each of those States is beyond the 
scope of our study, but there is certainly a coincidence 
between the two.
    Mr. Shimkus. Believe or not, there were some members 
speaking about this issue on the floor before we opened. We 
were waiting to do some other things, and one was from Indiana, 
of course, a certificate-of-need State, in addressing who has 
them in their District and how do you define them and whether 
they are almost stand-alone facilities or couldn't they be the 
back room of a physician's office that has all of the equipment 
to do some type of surgical issues?
    Mr. Hackbarth. Yeah.
    Mr. Shimkus. So I need you to follow up more on that for 
me.
    Mr. Hackbarth. Yeah. The other dimension of it is that some 
States also specifically prohibit physician-owned specialty 
hospitals, and there are various State laws on self-referral 
that can impact whether a specialty hospital exists in a given 
State. So there are potentially multiple layers of State law 
rules that affect whether there are specialty hospitals there.
    Mr. Shimkus. Dr. McClellan, if we were more to closely 
define hospital and we define that with an ER and other types 
of amenities, it is my concern that that would actually address 
some so rural hospitals that because of trying to survive no 
longer have that service. Are you all thinking about that as 
you----
    Mr. McClellan. No, let me be clear when I say we are going 
to review our EMTALA rules. I am not saying that we would 
define a hospital to require an emergency room. Many community 
hospitals today don't have emergency services, and they are 
providing critical access to care in the community, so we are 
not talking about that. What I do want to emphasize, though, is 
that some of these specialty hospitals do appear to be 
primarily providing outpatient services, and that does fall 
outside of our definition of a hospital, which is an entity 
that is primarily engaged in inpatient care. So we are going to 
look closely and make sure that the organizations that are 
actually providing primarily outpatient care are provided 
payments under our outpatient payment systems, like our 
ambulatory surgery payment system, in particular.
    Mr. Shimkus. Great. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Mr. Deal. I thank the gentleman.
    And thanks to both of you for being here, and we look 
forward to continuing this dialog and certainly appreciate the 
reports and the studies that you have provided us information 
about.
    We will now call up panel No. 2.
    Well, gentlemen, welcome. I have already introduced you in 
my opening statement, so I won't do that again. I will just 
tell you that we are moving rather rapidly on the floor, and so 
we will try to get your statements, at least, before we have to 
scoot out of here for votes.
    And with that, Dr. Pierrot, we will start with you. Thank 
you.
    Will one of staff check on his microphone for us, please? 
Would you check his microphone, please?

 STATEMENTS OF ALAN H. PIERROT, FRESNO SURGERY CENTER; JOHN E. 
HORNBEAK, PRESIDENT AND CEO, METHODIST HEALTHCARE SYSTEM OF SAN 
 ANTONIO, LTD.; JOHN T. THOMAS, GENERAL COUNSEL, BAYLOR HEALTH 
  CARE SYSTEM OF DALLAS, BAYLOR HEALTH CARE SYSTEM; AND PETER 
  CRAM, ASSISTANT PROFESSOR OF MEDICINE, DIVISION OF GENERAL 
        MEDICINE, UNIVERSITY OF IOWA COLLEGE OF MEDICINE

    Mr. Pierrot. Thank you.
    Mr. Chairman, members of the subcommittee, I am Alan 
Pierrot, an orthopedic surgeon from Fresno, California and a 
member of the Board of Directors of the American Surgical 
Hospital Association, ASHA, and a founding partner of the 
Fresno Surgery Center, a physician-owned acute care hospital 
specializing in providing elective surgical services in several 
disciplines. Thank you for the opportunity to represent ASHA 
today.
    I will summarize the statement briefly previously submitted 
for the record.
    For the subcommittee to effectively consider the debate 
over physician-owned specialty hospitals, I think you need to 
have the answers to several key questions. First, why would 
physicians go to the time and trouble to build a surgical 
hospital or specialized cardiac facility? Second, can those 
facilities provide high-quality, efficient, and cost-effective 
surgical and medical care? Third, are the many allegations 
hurled at specialty hospitals true? Fourth, what are the 
legitimate issues in the debate? And finally, what action 
should Congress take to address them?
    The primary reason that surgeons build specialty hospitals, 
either alone or in partnership with other hospital or corporate 
partner, is that they can not provide elective surgery 
efficiently and with the quality they desire at many general 
hospitals. If you look at the development of virtually every 
specialty hospital, it has its roots in the failure of the 
traditional hospital model to respond to the needs of the 
elective surgery patient.
    You will not find specialty hospitals in every State for 
two reasons. First, certificate-of-need laws in some States 
preclude the construction of these facilities. Second, 
enlightened hospital management in other areas has found 
positive ways to address the legitimate concerns of physicians.
    Do surgical hospitals provide high-quality care? The answer 
is no question, absolutely for sure. If you examine any measure 
of quality, such as nurse-to-patient ratios, infection rates, 
medical errors, you will find that specialty hospitals' 
outcomes are equal, if not superior, to the outcomes in general 
hospitals. I encourage you to look at independent rating 
services, like health grades, to confirm this statement.
    The quality of care stems from two main factors. First, the 
physician investors are committed to excellence and strive to 
continually improve their outcomes. And second, by specializing 
in certain areas, physicians, nurses, and other hospital staff 
become expert at what they do.
    Have the allegations of our opponents been substantiated? I 
submit that the answer is no.
    Let me give you some examples.
    Specialty hospitals have been accused of hurting general 
hospitals. MedPAC found that that is not the case. No general 
hospital has closed or reduced essential services because of 
competition from an ASHA member. Certainly, if you look at the 
recent earnings reports of HCA, you would be hard-pressed to 
see that they are hurting.
    Most not-for-profit systems are also doing well. The 
current level of hospital renovation and construction is ample 
proof that this is not an industry in distress. The issues that 
can cause financial problems for hospitals, such as high levels 
of uninsured patients or poor management decisions, can not be 
blamed on ASHA members and would not be fixed if all specialty 
hospitals disappeared tomorrow.
    We have been accused of selecting only the best paying 
patients and ignoring Medicare, Medicaid, and the uninsured. 
This is simply not true. GAO, MedPAC, and our own internal 
studies show that our members accept Medicare, Medicaid, and 
the uninsured. It is the not-for-profit general hospitals that 
are being examined by Congress for their billing practices and 
for inadequate charity care, not us. ASHA is committed to equal 
access and will work with the Congress to make sure that no 
hospital discriminates on the basis of a patient's ability to 
pay.
    Do we ``cherry-pick'' only the best paying Medicare 
services, ignoring the rest? Again, I think the data supports 
our contention that we do not selectively admit our patients. 
Analysis of the GAO reports shows that the differences in 
patient acuity between general hospitals and specialty 
hospitals are not significant. MedPAC has demonstrated that 
some surgical DRGs pay more richly than other DRGs and has 
recommended changes to address that imbalance. ASHA supports 
this MedPAC recommendation.
    Physician owners have been accused of a conflict of 
interest. This ownership is alleged to give specialty hospitals 
a competitive advantage. I submit there is no conflict of 
interest. According to CMS, the referral patterns of investors 
and non-investors are much alike. MedPAC found no unusual 
increase in services in communities were specialty hospitals 
are active. Congress addressed this issue when it adopted the 
exception to the Stark laws, allowing physician ownership of 
hospitals. The American Medical Association has thoroughly 
examined this issue and found no conflict. We support their 
position and their call for full disclosure of ownership.
    Other than our quality and efficiency, we have no special 
competitive advantage over general hospitals. In fact, we 
compete at a disadvantage because large hospitals enjoy a 
variety of advantages, such as exclusive contracts with health 
plans, economic credentials, State, Federal, and property tax 
exemptions, and low-cost bond financing. MedPAC demonstrated 
that the general hospitals have responded effectively to the 
competition that our members provide.
    The critical question in the debate is whether or not the 
Federal Government is serious about injecting real competition 
into the health care sector as one of the primary tools to 
improve quality and lower costs. If so, then you will encourage 
innovation and competition by many parties, not just specialty 
hospitals. If the government is not serious about competition, 
then you will give general hospitals additional protections 
they neither deserve nor need.
    If you support competition, then make sure that the rules 
are fair and apply to all. For example, adopting the MedPAC DRG 
reforms is important and should be done now. Requiring all 
hospitals to make sure that there is no discrimination based on 
ability to pay is another critical step. Full disclosure of 
ownership is also important so that consumers can make informed 
decisions about their options. This includes physician 
ownership of specialty hospitals and hospital ownership of 
physician practices and control of referrals.
    Finally, what should Congress do? ASHA recommends that you 
allow the moratorium to expire on June 8 and not extend it or 
allow CMS to administratively extend it by not assigning 
provider billing numbers for 6 months. Further, Congress should 
reject the CMS recommendation to eliminate specialty hospitals 
on definitional grounds. This recommendation would stifle the 
evolution of new models of care and run strongly counter to the 
overwhelming trend in health care to non-institutional, non-
traditional models of care. You do not need to eliminate 
physician ownership of hospitals because no harm to Medicare 
has been shown. You should require all parties to disclose 
ownership and prohibit discrimination based on ability to pay. 
Congress should also adopt MedPAC's payment recommendations. 
These actions will encourage the competition and innovation and 
can lead to increased quality, efficiency, and cost savings.
    Thank you, and at the appropriate time, I would be pleased 
to answer questions.
    [The prepared statement of Alan Pierrot follows:]

Prepared Statement of Alan Pierrot, on Behalf of the American Surgical 
                          Hospital Association

    Mr. Chairman and Members of the Health Subcommittee: My name is 
Alan Pierrot. I am an orthopedic surgeon from Fresno, CA and a founding 
member of the Fresno Surgery Center, a multispecialty physician owned 
surgical hospital. I am here today on behalf of the American Surgical 
Hospital Association (ASHA), the national trade organization 
representing 75 physician owned hospitals that specialize in surgical 
care, the vast majority of such hospitals in the United States. I 
served as the first president of ASHA and continue to be active on the 
board of directors. I appreciate the chance to represent our patients, 
our staff, our doctors and our facilities.

                    THE VALUE OF SPECIALTY HOSPITALS

    The Fresno Surgery Center opened as an ambulatory surgery center in 
1984, largely in response to the problem surgeons were having with 
operating room schedules and the efficiency at the local hospitals. 
Four years later we added a 20-bed inpatient care unit under a pilot 
project authorized by the California legislature. In 1993 we converted 
that unit to a licensed hospital. We promised the legislature that we 
could improve surgical care and patient satisfaction and we did. 
Physicians in other communities have now adopted this structure as a 
response to their frustration with general hospital operations. Our 
hospital is licensed by the state of California as an acute care 
facility, just like all the general hospitals in the state. This is the 
case in other states as well.
    The Fresno Surgery Center and the other members of ASHA provide 
cost effective, high quality surgical care in a very efficient manner. 
Specialty hospitals offer a choice of surgical site both for patients 
and physicians. Our patients are very satisfied with the care they 
receive, and far prefer the model we offer to that provided in the 
typical general hospital. We get high marks from our patients, our 
staff and our physicians, whether or not they are investors. Surveys of 
patients indicate there are five conditions they would like in a 
hospital experience: a private room, good food, a welcome environment 
for visitors, a nurse that responds promptly and control over sound, 
heat and light. The typical American hospital provides not one of those 
conditions to its patients, its customers. There is probably no 
industry less responsive to customers than the hospital industry.
    I particularly want to emphasize the excellent patient outcomes we 
achieve. In Fresno our nurse to patient ratio is about 1:3.5 and it is 
well established that the nurse-patient ratio is a prime determinant of 
quality of care and medical outcome. In California hospitals generally 
the ratio is about 1:8 and the state had mandated a standard of one 
nurse for every six patients. That standard has been challenged by 
California general hospitals. On all measures of quality, surgical 
hospitals excel, including lower infection rates, few transfers to 
other hospitals, fewer medical errors and very low readmission rates.
    ASHA believes that two factors are primarily responsible for this 
excellent record that is replicated across its membership. The first is 
physician ownership and control of the hospital's values and patient 
care standards. The second is the very fact of specialization that 
allows physicians and staff to develop proficiency in all facets of 
surgical care.
    Physician investment in these facilities, whether alone or as part 
of a joint venture, is a key ingredient to our success. It means that 
the people whose names are on the door are responsible for setting the 
quality standards, the operational requirements and directing all 
facets of the hospital's activities. It is this group of investors who 
are fundamentally responsible for the existence of the hospital and the 
maintenance of its standards. They create the environment that is so 
attractive to patients and other physicians. One of my greatest points 
of pride about the specialty hospital concept is the number of surgeons 
who bring patients to the facility even though they have no investment 
interest. They know that their patients will be treated with skill and 
respect from the moment they enter until discharge.
    Because these hospitals provide a focused set of surgical services, 
the staff is able to develop a high degree of skill in these 
specialized areas. This skill makes possible the efficiency of 
operation and the high quality of patient outcome. We succeed because 
we are ``focused factories'' designed to provide elective surgical care 
to otherwise healthy patients. Cardiac hospitals may care for a 
different population, but their adoption of heart focused, best 
hospital practices under the guidance of their physician investors also 
allows them to provide an excellent level of care to patients with 
serious medical conditions.
    The presence of a surgical hospital in a community is positive for 
patients and health plans. Competition forces general hospitals to 
improve their own services to patients and can lead to a reduction in 
overall costs, as health plans are able to negotiate for lower rates. 
In non-competitive environments, there is little incentive to improve 
services and cost effectiveness, whether to please patients or payers.

   THE GOVERNMENT'S REVIEW OF SPECIALTY HOSPITALS DOES NOT SUPPORT A 
                     CONTINUATION OF THE MORATORIUM

    For the past four years there has been a great deal of rhetoric 
about specialty hospitals, but little solid information. We now have 
reports from the Government Accountability Office (GAO), the Medicare 
Payment Advisory Commission (MedPAC) and the Centers for Medicare and 
Medicaid Services (CMS) that shed more light on the issues in the 
debate.
    MedPAC has looked carefully at the fundamental issue raised by 
general hospitals at the beginning of this debate--are specialty 
hospitals harming general hospitals to the detriment of patients? The 
current moratorium was imposed because of concern that such harm was 
occurring and the desire of Congress to obtain information that would 
let it answer this basic question.
    MedPAC's report on March 8 found that general hospitals have not 
been harmed. They have effectively responded to the competition posed 
by specialty hospitals and remained as profitable as their peers in 
communities where no specialty hospitals exist. This is certainly true 
in Fresno where the general hospitals have thrived since Fresno Surgery 
Center opened. I know this to be the case in other cities where 
specialty hospitals operate. No proof of harm to general hospitals, 
risk to patients or abuse of the Medicare program because of excessive 
or unnecessary surgery has been found. Therefore, there is no 
justification to continue the moratorium beyond the legislated 
expiration date.
    I want to make an important observation about the current 
moratorium. I think there is a widespread view that the 18-month 
moratorium is benign, allowing existing specialty hospitals to proceed 
unhindered, while only limiting new development. This leads to the 
conclusion that an extension of the moratorium as recommended by MedPAC 
would also not harm existing facilities. In fact the moratorium is not 
benign, but has hurt many well-established specialty hospitals. That is 
because it limits the expansion of facilities, the introduction of new 
services and the addition of new investors in response to changing 
needs and circumstances in our communities. Most of our members are 
located in areas experiencing rapid population growth, yet they have 
not been able to expand the number of beds or add new specialties to 
meet that increased patient demand. Our ability to serve our patients 
has been eroded. Another moratorium would only exacerbate this 
situation. There is no justification for extending the moratorium on a 
model of care that does not harm general hospitals and that provides 
superior care and patient satisfaction.
    Under the moratorium, hospitals that were under development were 
permitted to seek review by CMS to determine if the moratorium would 
apply. CMS announced that it expected to complete these reviews within 
60 days of submission. As far as I know, only a few decisions were made 
in that time frame. For everyone else, it has taken months, following 
numerous CMS requests for detailed information, to get an answer. I 
have been involved in the development of a surgical hospital in 
Thousand Oaks, CA. It took almost ten months for CMS to finally issue 
an opinion, even though that facility was nearly ready to open in 
November 2003 when the moratorium was imposed on this industry.
    I know that some concern has been expressed that there would be a 
rush to open surgical hospitals as soon as the moratorium expires. This 
is not accurate. Right now there are only about forty hospitals that 
are close to opening and all are currently under review by CMS to 
determine if they are exempt from the moratorium's restriction on 
referrals. To my knowledge, no corporate developer has any projects in 
the pipeline beyond those just mentioned. It is important to understand 
that it usually takes two years to launch a new surgical hospital, so 
physicians deciding in June 2005 that they would like to build a 
surgical hospital would most likely not see that become reality until 
2007. The idea that hundreds of specialty hospitals will quickly open 
once the moratorium expires has no basis in fact.
    While other hospitals have posted impressive financial gains 
recently, our part of the industry has been hamstrung by the moratorium 
which has caused harm to patients, staff, physicians and the hospitals. 
The harm to patients arises because they are denied the opportunity to 
have their elective surgery in a facility with extremely low post 
operative infection rates. The risk of infection at a general hospital 
is much higher, and post operative infections delay healing and are 
costly to treat.
    ASHA also believes that none of the government findings would 
justify any change to the current law governing physician ownership of 
hospitals.
    MedPAC's analysis of specialty hospitals did show that Medicare's 
inpatient hospital payment system needs substantial revision. ASHA 
agrees with their recommendations and urges action on them this year. 
We are pleased that CMS is evaluating these proposals as part of the 
recently published proposed rule on the inpatient payment system. If 
adopted these proposals would greatly reduce the need for hospitals to 
depend on cross subsidies to support necessary, but poorly reimbursed 
care. Federal healthcare dollars would be better targeted to the actual 
costs of providing medical and surgical services in the hospital.
    ASHA also supports full disclosure of ownership, consistent with 
the ethical standards of the American Medical Association. I, for one, 
am proud of my hospital and my involvement in it. I have had no 
hesitation in telling my patients about my ownership. I also have never 
hesitated to perform their surgery in another facility if they 
requested that I do so.

           THE WHOLE HOSPITAL OWNERSHIP EXEMPTION IN STARK II

    The Federation of American Hospitals has filed a petition calling 
on the Department of Health and Human Services to restrict the whole-
hospital exemption in the Stark law to hospitals that ``provide a full 
range of services customarily offered by general community-based 
hospitals.'' ASHA believes that no evidence exists that should cause 
Congress or the Department to modify the current hospital ownership 
exemption. Physician ownership of hospitals and other facilities is not 
new. Physicians who owned the facilities started many of today's finest 
medical clinics, like the Mayo Clinic, Cleveland Clinic and the Ochsner 
Clinic Foundation.
    Certainly no evidence supporting limits on physician ownership of 
hospitals was found in the original studies that led to the 
establishment of the Stark laws. In testimony before the House Ways and 
Means Committee in 1991, the individuals who conducted the original 
Florida studies on physician ownership and referral arrangements 
concluded that, ``Joint venture ownership arrangements have no apparent 
negative effects on hospital and nursing home services.''
    The American Hospital Association also encouraged Congress to 
incorporate flexibility in the law governing referral arrangements. In 
testimony before the Ways and Means Committee in 1989, AHA noted, 
``Oftentimes, joint ventures which are the subject of H.R. 939 are well 
intended to provide the highest quality, most accessible and most 
reasonably priced medical care to the community.'' AHA urged Congress 
to take a ``more flexible or less proscriptive approach, allowing 
ventures consisting of referring physicians, if such ventures are for a 
legitimate business reason . . .''
    In 1995, testifying before the same Committee, AHA stated that 
``First there needs to be careful examination of the effects of the 
self-referral law on the development of new, more efficient delivery 
systems, and elements of the law that prevent new systems from evolving 
must be stricken or amended.'' AHA went on to call for an expansion of 
the physician hospital ownership provisions in the Stark II law. The 
language that allows physicians to have ownership of hospitals is not a 
``loophole'' in the Stark law, but a carefully reasoned provision 
designed to maintain flexibility in the evolution of healthcare 
delivery systems.
    Regarding the FAH petition, an examination of the variation in 
services provided by general hospitals across the country quickly shows 
that there are many differences among those facilities that might be 
considered ``general community-based hospitals.'' CMS could devote 
considerable energy to solving this puzzle. Does the Federation include 
a heart program among the obligatory ``full range of services''? Most 
hospitals don't have one. Is Ob-gyn a requirement? There is great 
variation among general hospitals in how, or even whether, they provide 
those services. Maybe it should be based on revenue sources, but 
there's a problem with that also. According to a number of hospital 
consultants, more than 60 percent of general hospital revenue comes 
from inpatient surgical services. Does that mean that most ``general 
community-based hospitals'' are, in fact, surgical hospitals?
    MedPAC debated whether or not to include a recommendation on the 
whole hospital exemption but decided not to incorporate one in their 
report on specialty hospitals. Among the concerns expressed during 
discussion of this idea was the fact that no one could predict where 
elimination or modification of the exception might lead. For example, 
physicians have purchased rural hospitals in an effort to keep them 
open. Those acts of community concern could be outlawed if the 
exemption were to be amended or eliminated. The recent purchase of a 
Tenet hospital in California by the physicians who had a long-standing 
relationship with the hospital might not be allowed. The effort of 
African American physicians in Atlanta to purchase and reopen a 
hospital serving a low income community might be frustrated. It is 
obvious that there is no clear line that easily distinguishes physician 
ownership of one hospital versus another.
    ASHA is concerned that CMS has announced in the inpatient payment 
proposed rule that it is considering whether or not specialty hospitals 
provide sufficient levels of inpatient care to be considered a hospital 
for Medicare purposes. Just as the FAH petition raised more questions 
than it answered, ASHA believes that this idea is equally perplexing. 
Where does this leave many small, rural hospitals? Will they meet the 
standard, whatever that is? What about some of the more traditional 
specialty hospitals like eye and ear hospitals, psychiatric facilities 
or women's hospitals? CMS does not bother to elucidate a standard, 
suggesting that it has no real idea how to proceed with this concept. I 
want to remind the Subcommittee that every ASHA member is licensed by 
their state as an acute care hospital and is also certified by 
Medicare. Is CMS now going to ignore the lawful actions of the state 
licensing authorities? Will every hospital's Medicare certification be 
questioned and now be subjected to some new federal test, yet to be 
defined? Is this the way this Subcommittee wants the federal government 
to honor the lawful acts of state agencies? Is this how Congress 
intends to encourage healthcare innovation, improved quality and 
increased cost effectiveness, by giving new protections to costly, 
inefficient facilities?

               SPECIALIZED HOSPITALS IN THE UNITED STATES

    Specialized hospitals are not a new phenomenon in medicine and have 
been in existence in this country for many years. There are many 
hospitals, both not-for-profit and for-profit, that provide a limited 
array of medical services. For example, psychiatric hospitals are very 
focused in the kinds of patients they treat. Often they will not admit 
a psychiatric patient with significant physical comorbidities because 
they do not have the medical services that patient requires. Such 
individuals are admitted to general hospitals with psychiatric units. 
However, I have yet to hear the general hospitals accuse their 
psychiatric colleagues of ``cherry picking.'' Children's hospitals and 
women's hospitals have a long history in this country and their 
services are certainly focused on those appropriate to the populations 
they serve. Eye and ear hospitals are just one more example of the 
kinds of specialization that has developed in hospitals. Again, I am 
not aware that general hospitals have accused eye and ear hospitals of 
``skimming the cream''. Cancer hospitals are also facilities with a 
focused mission. Clearly specialization is not the issue driving the 
opponents of ASHA's members. Something else must be motivating their 
enmity.
    Perhaps that enmity stems from the fact that today's physician 
owned specialty hospitals are not seeking out niche services of no 
interest to the general hospitals, but are competing directly with them 
across a number of valued service lines. In any other industry 
competition and the benefits it can bring to consumers is encouraged. 
Hospital services should be no different so that society can reap the 
benefits of innovation and cost effectiveness that accompanies 
competition. Yet our opponents ask Congress to protect them from that 
competition. ASHA urges you to resist their call for protection, since 
MedPAC found that general hospitals have responded effectively to the 
competition offered by ASHA members, even going so far as to make an 
effort to improve their own services to patients, physicians and 
hospital staff. I doubt if those enhancements would have occurred in 
the absence of effective competition.
    A careful examination of general hospitals in this country would 
show that they vary widely in the types of services they offer, 
consistent with their facilities, staffing and the kinds of physicians 
present in the community. For example, few hospitals have burn units 
and most do not have heart programs. Level 1 trauma centers are not 
common. Rural hospitals routinely send complex medical and surgical 
cases to their larger colleagues. The less difficult cases stay behind. 
Yet no one is accusing rural hospitals or critical access facilities of 
``unfair competition'' or ``skimming the cream'' or ``cherry picking.''
    The reality is that every hospital tries to do those things for 
which it is best suited and whenever possible sends other cases to a 
better equipped facility. Such behavior is appropriate and in the best 
interests of patients. I am certain that the Members of this 
Subcommittee would be outraged if hospitals failed to ensure that 
patients were treated in the most suitable facility, whatever or 
wherever that might be.
    As I noted, ASHA is the trade organization for specialty hospitals. 
We have 75 member facilities, and all have some degree of physician 
ownership. All specialize in surgical care. While our cardiovascular 
hospital members focus just on heart care, the typical ASHA member 
provides services in six surgical specialties. Urology, general 
surgery, orthopedics, gynecology, neurosurgery and ENT are commonly 
found in these facilities.
    Our members are located in eighteen different states. GAO found 
that 28 states had at least one specialty hospital, but approximately 
two thirds were located in seven states. In MedPAC's sample, almost 60 
percent were concentrated in four states. This concentration is 
primarily due to the presence of certificate of need (CON) laws 
governing hospital construction. Most specialty hospitals are in states 
that do not have hospital CON requirements. Since CON laws tend to 
protect existing facilities from new entrants into the market, it 
should come as no surprise that our members are usually found in states 
that do not have such barriers to market entry. It is worth noting that 
both the Department of Justice and the Federal Trade Commission have 
called for an end to CON because of its anticompetitive effects.

              WHY PHYSICIANS ESTABLISH SPECIALTY HOSPITALS

    It is important that the Subcommittee understand why physicians 
establish specialty hospitals. Those reasons will vary in each 
community, but the interest in a specialty hospital usually begins 
after physicians have failed to persuade the general hospitals at which 
they practice to make changes that will improve physician efficiency 
and patient care. For example, the Stanislaus Surgical Hospital in 
Modesto was established first as an ambulatory surgery center and later 
as a hospital by surgeons who could not get reasonable access to the 
operating rooms at the two other hospitals in town. These hospitals 
were profiting from their cardiovascular and neurosurgery services. 
Those cases had first call on the OR. Orthopedics, urology, ENT and 
other surgical disciplines took what was left, and even then were often 
bumped by trauma and other emergency cases. The result was that 
elective cases were delayed until 10:00 PM or later, to the great 
unhappiness of patients and surgeons alike. While no one disputes the 
need for hospitals to deal quickly and effectively with emergencies, 
many hospitals have figured out ways to keep the rest of the surgical 
schedule moving along. However the Modesto hospitals apparently could 
not do that, so Stanislaus arose out of this unresolved conflict.
    Fresno is a similar case. My colleagues and I believed that we 
could provide a better model for elective surgical care. We could not 
persuade the hospitals to go along with our ideas, so we built our own 
facility and have never regretted it. We continue to care for patients 
at the other hospitals in Fresno, as do our colleagues in Modesto. In 
fact, we require our physicians to maintain privileges at one of the 
other general hospitals in town. That means, of course, that we are all 
subject to the on call and other requirements of those hospitals. In 
California, like many states, insurance contracts are the dominant 
reason patients go to one hospital or another. Therefore, we all must 
have privileges at multiple facilities if we are to meet the medical 
and financial needs of our patients. There may be rare examples of 
physicians moving their entire caseload to a surgical hospital, but 
those are truly the exceptions to the general rule.
    To me this is one of the most interesting facets of the national 
debate over physician owned specialty hospitals. States historically 
have determined what kinds of facilities can be licensed as hospitals 
and have established various regulatory standards in this regard. For 
example, not all states require hospitals to have emergency departments 
as a condition of licensure. That is the case with my home state of 
California. The federal government has respected this state role and 
has focused its attention on quality standards for facilities 
participating in federal health benefit programs, for example 
Medicare's conditions of participation. Yet now we are debating whether 
or not the federal government should usurp that state role and decide 
what does and does not constitute a hospital for purposes of federal 
health programs. ASHA would argue that absent evidence of Medicare or 
Medicaid fraud or grave risk to the public health, there is no need for 
the federal government to infringe on these state determinations
    Using state law as an indicator of the will of those residents, the 
Subcommittee could easily conclude that an extension of the moratorium 
or the addition of any other restrictions on specialty hospitals would 
be unnecessary in CON states. In those states that have abandoned CON, 
such restraints on competition and innovation would probably be 
unwelcome.
    While physician ownership characterizes ASHA members, the nature of 
those arrangements varies widely. GAO found that about one third of 
their sample was independently owned by physicians; one third had 
corporate partners like MedCath or National Surgical Hospitals; and one 
third were joint ventures between physicians and local general 
hospitals. ASHA's own survey of its members found similar 
characteristics.
    Clearly not all general hospitals are hostile to specialty 
hospitals or joint ventures with their physicians. For example, Baylor 
hospital in Dallas has a variety of joint ventures with physicians, 
including specialized hospitals and ambulatory surgery centers. 
Integris Health System in Oklahoma City has a joint venture with an 
ASHA member hospital specializing in orthopedic services. HCA partners 
with physicians in numerous ambulatory surgery centers and an 
orthopedic hospital in Texas. Avera McKennan in Sioux Falls, SD, has a 
joint venture with MedCath and the cardiovascular physicians who 
practice there. Incidentally, Avera McKennan is across the street from 
the Sioux Falls Surgery Center, a physician owned surgical hospital. 
Both facilities have grown and prospered, and the physicians practice 
at both hospitals. The Fresno Heart Hospital is a joint venture between 
our largest not for profit hospital and local physicians.

      RESPONSES TO CRITICS OF PHYSICIAN OWNED SPECIALTY HOSPITALS

    I would like to turn to the main criticisms of physician owned 
specialty hospitals and address them. In many respects these attacks 
mirror what not for profit hospitals used to say about for profit 
institutions. Ambulatory surgery centers came under similar attack from 
both the for profit and not for profit hospital sectors. Years later 
the sky has not fallen as predicted and most hospitals across the 
country are doing well.
    Fundamentally the allegations are that specialty hospitals hurt 
general hospitals financially and engage in unfair competition because 
they have physician owners. There are a number of arguments used to 
justify these criticisms. These are (1) ASHA members have a favorable 
payor mix and refuse to admit or otherwise limit the number of 
Medicare, Medicaid and charity cases; (2) they focus on the highest 
paying inpatient DRGs; (3) they only take the easier cases in those 
DRGs; (4) physician ownership is a conflict of interest and gives 
specialty hospitals an unfair competitive advantage in the market; and 
(5) physician ownership leads to increased, and unnecessary utilization 
of surgical services.
    Let me start with the first fundamental accusation made by our 
opponents--specialty hospitals have hurt general hospitals. The facts 
do not support that allegation. No general hospital has closed because 
of competition from a specialty hospital. There is no evidence that 
general hospitals have eliminated a critical service, like the 
emergency department, because of competition from a surgical hospital. 
MedPAC concluded based on its review of 2002 data that the financial 
impact on general hospitals in the markets where physician-owned 
specialty hospitals are located has been limited and those hospitals 
have managed to demonstrate financial performance comparable to other 
hospitals. Fresno has a 16 year history with specialty hospitals and 
our experience confirms the MedPAC conclusions. All Fresno hospitals 
have expanded since the debut of Fresno Surgery Center.
    Although MedPAC tries to caveat this conclusion by noting the 
``small number'' of specialty hospitals in its sample, the reality is 
that they looked at 48 hospitals, more than 50 percent of the entire 
complement of physician owned specialized facilities. By any 
statistical measure that is a more than adequate sample upon which to 
base sound conclusions.
    I know for a fact that in Fresno the specialty hospital model has 
had no negative financial impact on local hospitals. The same is true 
in nearby Modesto, which also has a specialty hospital. The other 
hospitals are either expanding or have plans to expand. Kaiser is 
building a new hospital in Modesto. In fact hospital construction 
nationwide totals in the billions of dollars, hardly a sign of an 
industry in financial distress. General hospitals obviously have access 
to capital and are sufficiently sound financially that lenders continue 
to finance their projects.
    GAO found that ``financially, specialty hospitals tended to perform 
about as well as general hospitals did on their Medicare inpatient 
business in fiscal year 2001''. According to GAO, specialty hospital 
Medicare inpatient margins averaged 9.4 percent, while general 
hospitals averaged 8.9 percent. This is not a significant difference in 
performance. The highest margins were reserved for the for-profit 
general hospitals, such as those operated by Tenet and HCA.
    According to the Health Economics Consulting Group (HECG), ``Based 
on a longitudinal study of general hospital profit margins in markets 
with and without specialty hospitals, we find that profit margins of 
general hospitals have not been affected by the entry of specialty 
hospitals. Consistent with economic theory, the models consistently 
showed that the most important predictor of general hospital 
profitability was the extent of competition from other general 
hospitals in the same market area--Contrary to the conjecture that 
entry by specialty hospitals erodes the overall operating profits of 
general hospitals, general hospitals residing in markets with at least 
one specialty hospital have higher profit margins than those that do 
not compete with specialty hospitals.''
    Let's look at the unfair competition argument next. Our accusers 
say that specialty hospitals engage in unfair competition because they 
have physician owners. That ignores the reality identified by GAO that 
``approximately 73 percent of physicians with admitting privileges to 
specialty hospitals were not investors in their hospitals.'' Clearly 
these physicians find something very attractive about the specialty 
hospital model, even without an investment interest. They have no 
motivation to engage in ``unfair competition''. Perhaps they are drawn 
to the high quality of hospital care, as evidenced by a nurse to 
patient ratio of one nurse for every 3.5 patients and an almost 
nonexistent infection rate. Possibly the ability to keep to a tight 
surgical schedule attracts them. Most surgeons see patients in their 
offices once they finish their surgery. If that schedule is disrupted 
so are the lives of the patients waiting not so patiently for their 
surgeon to meet with them.
    The percent of ownership is another important factor. According to 
GAO, ``On average, individual physicians owned relatively small shares 
of their hospitals. At half the specialty hospitals with physician 
ownership, the average individual share was less than 2 percent; at the 
other half, it was greater than 2 percent.'' MedPAC reported the range 
of ownership to be from 1 to 5 percent. While the return on investment 
can vary among physician owned facilities, the modest ownership shares 
and the large number of physicians who are using the facilities, but 
who have no investment, suggest that financial gain is a secondary 
consideration for most physicians. In previous testimony the House Ways 
and Means Committee, CMS reported that it found virtually no difference 
in referral patterns between physicians who were investors in specialty 
hospitals and physicians who used those facilities, but had no 
investment. Ownership is not affecting the medical judgment of 
physicians.
    One cannot look only at a single side of a competitive market. 
Congress needs to consider the tools that general hospitals have to 
compete against specialty hospitals. According to the December 2004 
report on specialty hospitals of the American Medical Association's 
Board of Trustees, these include (1) revoking or limiting medical staff 
privileges to any physician who invests in a competitive facility; (2) 
hospital-owned managed care plans denying patients admission to 
competing specialty hospitals; (3) exclusive contracting with health 
plans to exclude specialty hospitals; (4) refusing to sign transfer 
agreements with specialty hospitals; (5) requiring primary care 
physicians employed by the hospital to refer patients to their 
facilities or to specialists closely affiliated with the hospital; (6) 
requiring subspecialists to utilize the hospital for all of their 
medical group's referrals; (7) limiting access to operating rooms for 
those physicians who invest in competing facilities; and (8) offering 
physicians guaranteed salaries to direct or manage clinical services 
and departments in the general hospital.
    In addition, not-for-profit facilities have significant advantages 
because of their special tax status. Society has given not-for-profit 
hospitals special tax benefits in part to compensate them for the 
essential community services they offer. If they fail to hold up their 
end of the bargain, they should lose this special treatment. An 
analysis by Harvard professor Nancy Kane suggests that as many as 75 
percent of not-for-profit hospitals receive more in tax relief than 
they provide in charity care.
    Much has been made of the unfair burdens that weigh down general 
hospitals that are not shared by specialty hospitals. Often cited is 
the fact that specialty hospitals are less likely to have emergency 
departments. The burden of EMTALA is frequently raised. General 
hospitals often talk about the need to support burn units or other 
costly services and how competition from specialty hospitals affects 
their ability to do that.
    State law determines whether or not a hospital is required to have 
an emergency department. Surgical hospitals that are in states 
requiring emergency facilities have them and they are thus subject to 
EMTALA. If they are not required, surgical hospitals that treat only 
elective cases are not likely to have an ER, since it is an unnecessary 
expense and not consistent with the model of care provided. Heart 
hospitals, on the other hand, almost always have emergency departments 
because of the nature of the diseases they treat.
    To the extent that such disparities are widespread, the payment 
changes recommended by MedPAC would relieve them by moving Medicare 
dollars from high pay to low pay cases, evening out the differences. 
However, Congress needs to remember that most general hospitals do not 
have burn units, level 1 trauma centers or even heart programs. In 
fact, most hospitals must transfer burn patients or cardiac cases to 
another facility with the capacity to care for those individuals. No 
one challenges that practice as ``cherry picking''. It is widely 
regarded as appropriate medical practice because the facility is not 
designed to care for that particular individual or condition.
    The situation at most surgical hospitals is no different. They are 
designed to provide elective surgery to otherwise healthy patients. 
Patients needing such surgery who have multiple comorbidities would not 
be good candidates for a surgical hospital. Good medical judgement 
requires that the patient be admitted into the appropriate facility. In 
1987-1988 I served on the California committee that developed the 
regulations for recovery care centers. The primary charge of the 
committee was to develop standards that would assure patient safety by 
preventing the admission of higher acuity patients to those specialized 
facilities. We fulfilled our mandate and developed rules to prevent 
high acuity patients from being inappropriately admitted to recovery 
care centers. Yet today those same actions would be characterized as 
``skimming the cream''.
    Heart hospitals are different in that many of their cases will be 
emergent, so they are designed to accommodate them. Emergency 
departments and ICUs or CCUs are commonly part of these facilities. 
They are likely to offer a broader array of supporting medical 
services, consistent with the medical needs of their cardiovascular 
patients.
    Payor mix has been another contested area, with accusations lodged 
that specialty hospitals don't take Medicare or Medicaid patients. This 
simply is not true. According to the HECG, the average specialty 
hospital earns 32.4 percent of its revenue from Medicare, 3.7 percent 
from Medicaid, 46.4 percent from commercial payors, 18.1 percent from 
other sources, and provides charity care equal to 2.1 percent of total 
revenue. Cardiac hospitals have even higher Medicare rates. In addition 
the average specialty hospital paid nearly $2 million in federal, state 
and local taxes.
    According to MedPAC, there was wide variation in Medicaid 
admissions among hospitals, although on average the rate of Medicaid 
was lower in specialty facilities when compared to general hospitals. 
Several factors account for the difference. First, hospital location is 
a major determinant of the level of Medicaid and charity care. Second, 
because surgical hospitals tend to focus on elective surgeries and have 
fewer emergency admissions, they may not see the same level of Medicaid 
traffic as a general hospital with a busy emergency department, which 
often serves as the source of primary care for the uninsured or those 
on Medicaid. Third, many states have moved to managed care in Medicaid 
and have limited Medicaid patients' access to certain facilities. If a 
hospital is not on the approved list, it will not see very many 
Medicaid patients, and those that do show up will have to be 
transferred to another hospital that is on the state's list. This is 
the case in Fresno, where nearly all Medicaid patients are directed to 
a single hospital.
    The disparities in the distribution of Medicaid and uncompensated 
care were recognized at MedPAC when Chairman Hackbarth said on January 
12 that ``I think all of us would agree that right now the burden of 
providing care to Medicaid recipients or uncompensated care is not 
evenly distributed. That's an issue that long predates specialty 
hospitals and it's an issue that has very important implications for 
the system. And to say that stopping specialty hospitals is going to 
materially alter that problem, fix that problem, I don't think that's 
the case.''
    Specialty hospitals may indeed have a different payor mix than many 
general hospitals, but that does not mean that the general hospital is 
being harmed. Hospitals with higher levels of Medicare and Medicaid are 
eligible for DSH payments in compensation. If their Medicare caseload 
is more complex, another point of contention, then the outlier payments 
can offset the higher costs. In California, Medicare is one of the best 
payers for inpatient surgery. No hospital, whether specialty or 
general, limits Medicare admissions in California.
    ASHA members do not discriminate based on a patient's insurance or 
ability to pay. While our payer mix may be different than some other 
hospitals, it is not because of efforts to select the best insured 
individuals. As someone who spent many years in medical practice, I can 
assure you that most physicians know very little about the insurance an 
individual patient may, or may not, have. ASHA has committed to the 
Chairman of the Energy and Commerce Committee that our members will not 
discriminate based on ability to pay, and we will work with Congress to 
make sure that reality is true for every hospital. I offer the same 
pledge to the Subcommittee today.
    Specialty hospitals have been challenged on the basis that they 
select only the highest paying DRGs. While MedPAC has demonstrated that 
some of the DRGs are more profitable than others, many of the cases 
treated in specialty hospitals are not drawn from the ``rich'' DRG 
pool. In fact many surgical DRGs are no more or less profitable than 
other services. To the extent that this is an issue, however, the 
payment recommendations of MedPAC would correct any disparities between 
rich and poor DRGs.
    Within DRGs, the case is made that surgical hospitals select the 
easiest cases, thus maximizing the profit that can be obtained in any 
DRG. There are some differences in patient acuity, but they are slight, 
and would be addressed by MedPAC's payment recommendations.
    When GAO looked at this issue, its analysis revealed little real 
difference in acuity of admissions. For example, among admissions to 
surgical hospitals, two percent of the cases were in the highest acuity 
groups, while general hospitals had four percent of their admissions 
for the same surgery fall into the most severe classification. In other 
words, 98 percent of admissions to surgical hospitals were healthy and 
96 percent of admissions for the same services to general hospitals 
were in equally good health.
    In hospitals that specialized in orthopedic care, 95 percent of 
admissions were in the lesser acuity categories, while 92 percent of 
comparable admissions to general hospitals had the same severity 
classification. In heart hospitals GAO found only a five-percent 
difference in acuity between specialized facilities and general 
hospitals.
    These are not large differences. The only conclusion one can draw 
is that patients having elective procedures are generally healthy, no 
matter what kind of hospital they are in. If there are differences in 
the profitability of specialty hospitals versus general hospitals, it 
must be for reasons other than patient selection.
    Let me now turn to the allegation that physician ownership of 
surgical hospitals has generated additional surgical volume, some of it 
of dubious medical necessity. The facts do not support this accusation.
    MedPAC has determined that specialty hospitals do not add to the 
volume of surgery. The Commission could not find evidence that the 
increase in service volume experienced in communities with specialty 
hospitals was higher than that found in areas that had no specialty 
hospitals.
    I would like to conclude by examining the allegations that 
physician ownership of hospitals is a conflict of interest and gives 
specialty hospitals a competitive edge over the general hospitals in 
their communities. I would argue that there is no conflict of interest 
when a physician owns the facility in which he or she provides services 
to patients. That issue was thoroughly debated when Congress considered 
the Stark laws and Congress chose to allow physician ownership of 
hospitals, ambulatory surgery centers, lithotripsy facilities and a 
number of other sites where the physician provided the service in 
question. The AMA has also addressed the potential conflict of interest 
at length and concluded that no conflict exists in these circumstances. 
AMA also recommends additional safeguards to protect patients and some 
of those have been incorporated in various safe harbors developed by 
the Inspector General.
    AMA also raises an issue that I believe the Subcommittee must 
explore if it is going to consider whether physician ownership creates 
a conflict of interest that should be addressed in federal legislation. 
That is the conundrum of hospital ownership of physician practices, 
their employment of physicians (particularly specialists), and the 
ownership of health insurance plans by hospital systems. If one is to 
argue that physician ownership of hospitals is a conflict of interest, 
then one is surely bound to agree that hospital ownership of physician 
practices or employment of physicians raises the same concerns. If one 
arrangement is outlawed, then all should be dealt with in the same way.
    There is one other resource that I urge you to look at as you 
consider the issue of physician owned specialty hospitals, and that is 
the more than 20 years' experience that Medicare has with ambulatory 
surgery centers (ASCs). There are now about 4,000 Medicare certified 
ASCs in this country, providing millions of surgical services every 
year. Nearly every ASC has some physician owners. Yet in the history of 
Medicare's coverage of ASCs, there is virtually no evidence that 
physicians performed unnecessary services or engaged in behavior that 
placed patients at risk. Nor is there any evidence that an ASC forced a 
hospital to close or curtail essential community services. Medicare's 
ASC experience should be a strong predictor to Congress that physician 
owned specialty hospitals also pose no risk to Medicare, to patients or 
to general hospitals.
    A great challenge to the Subcommittee and to Congress generally 
will be digging through the layers of rhetoric, spin and cant to get to 
the real facts. It amazes me that so much has been said or written, 
much of it wrong or false, about fewer than 100 hospitals that make up 
about one percent of Medicare inpatient payments. However, it will be 
worth the effort to get past the rhetoric and examine the facts because 
there is solid information available to you on many points in the 
debate. I hope you will rely on that data to make any decisions about 
legislation that might impact the future of specialty hospitals.
    In summary, after thorough government study the allegations against 
specialty hospitals have not been proven. Therefore, ASHA urges the 
Subcommittee to allow the moratorium to expire as scheduled in June. 
The reforms to Medicare's inpatient payment system suggested by MedPAC 
would greatly benefit the Medicare program and should be adopted. 
However there is no evidence to justify putting specialty hospitals 
under another moratorium during the period these needed changes are 
implemented or imposing any other limit on physician ownership of 
hospitals. ASHA will also work with Congress to address any concerns 
about disclosure of ownership or alleged discrimination based on 
ability to pay.
    Mr. Chairman, ASHA appreciates the opportunity to present this 
testimony, and I would be pleased to answer any questions the Members 
of the Subcommittee may have.

    Mr. Deal. Thank you.
    Mr. Hornbeak.

                  STATEMENT OF JOHN E. HORNBEAK

    Mr. Hornbeak. Thank you, Chairman Deal, Ranking Member 
Brown, and members of the subcommittee.
    My name is John Hornbeak, and I am President and CEO of the 
Methodist Healthcare System. We are a partnership between the 
not-for-profit Methodist Ministries of South Texas and Hospital 
Corporation of America. We are a comprehensive, community 
health care system serving the San Antonio, Texas market and 
the 25 surrounding counties.
    My remarks regarding this critical issue will focus on four 
key points. First, physician-owned specialty hospitals operate 
as if they were a subdivision or department of a full-service 
hospital. Second, physician ownership of subdivisions or 
departments of hospitals is, in fact, illegal. Third, physician 
ownership, coupled with their ability to self-refer, represents 
a conflict of interest that is anti-competitive because their 
deal can not be legally duplicated by existing hospital 
competitors. And fourth, Medicare payment adjustments are not 
the solution to this problem, but rather closing the legal 
loophole that allows these facilities and their physician 
ownership that is.
    In contrast to full-service community hospitals, specialty 
hospitals largely limit their care to just one of the most 
lucrative services hospitals provide, like cardiac, orthopedic, 
spine, or surgical services. And this guarantees them high 
profit margins while allowing them to avoid essential but 
unprofitable community services, such as emergency rooms, as 
just one example.
    This point is underscored by studies conducted by the GAO 
and MedPAC, which found that a majority of specialty hospitals 
do not have fully functioning, fully staffed, 24-hour emergency 
rooms. Specialty hospitals avoid full-blown emergency rooms, 
because the emergency rooms are the primary portal through 
which indigent and Medicaid patients get admitted to most 
hospitals. For example, last year, 41 percent of the 180,000 
patients that visited Methodist Healthcare System's different 
ED, emergency departments, 41 percent of those 180,000 were 
indigent, self-pay, or Medicaid.
    Specialty hospitals are not ``whole hospitals'' but rather 
subdivisions or departments focusing on the most profitable 
patients and services. Now why is that important? Under current 
law, physicians are permitted to have an ownership interest in 
an entire or ``whole hospital,'' but not a subdivision of the 
hospital. Now why is this? The regulatory theory is that a 
physician who has a stake in an entire hospital would not 
materially benefit from the referrals that they make to that 
hospital, and as such, their potential conflict of interest 
would be diluted. However, a physician's ownership in a 
subdivision of the hospital, such as a surgical or cardiac 
wing, is deemed to be illegal due to the ability of their 
referrals in that instance to produce material financial gains.
    Let me be clear as a business leader in San Antonio. I am 
committed to free and fair competition. Community hospitals 
routinely compete for patients on the basis of quality, 
service, physician relations, and the latest in medical 
technologies. However, true competition requires a level 
playing field. That is, in part, why groups such as the U.S. 
Chamber of Commerce, the National Black Chamber of Commerce, 
and the Business Roundtable are all supporting either a 
continuation of the current moratorium or an outright ban on 
physician self-referral to specialty hospitals.
    The business model of a physician-owned specialty hospital 
depends upon the control of referrals by its physician owners. 
Remember, it is the physician that is the gatekeeper and 
ultimately decides where patients receive their care, not 
hospitals. And it is the physician that is entrusted by 
vulnerable patients to help guide them through this 
decisionmaking process under oftentimes difficult and highly 
emotional circumstances. That is why highly lucrative specialty 
hospital investment deals are granted only to physicians able 
to refer patients and not to investors from the general public. 
You have to understand the anatomy of these deals. As an 
example, a 60-bed cardiac hospital will cost $60 million to 
build. It is about $1 million per bed. The parent company will 
typically loan the local partnership 90 percent of that amount, 
or $54 million. Now keep in mind, the doctor investors aren't 
on the hook for the $54 million, because they are just limited 
partners. They can only lose the money that they put into the 
deal. The general partner is on the hook. If it goes bankrupt, 
the general partner is on the hook for that $54 million, 90-
percent loan.
    Well, with that kind of loan, it leaves only $6 million in 
equity to be split by the parent company and the referring 
physicians. So for example, 60 to 75 physician partners will 
become owners of half of a $60 million cardiac hospital, 
sharing all of the profits and equity for only about a $40,000 
to $50,000 personal investment for each one. Those are huge 
rewards, millions of dollars at virtually no risk and very 
little real investment compared to the gains. The physician 
partners are not recruited for their investment. They are 
recruited for their referrals. The ownership structure is not 
an arms-length business arrangement but a sweetheart deal that 
induces patient referrals. It is not free and fair competition 
when, under Federal law, the Methodist System is prohibited 
from offering physicians ownership in specialty wings of its 
genuine whole hospitals, but specialty hospitals can 
effectively do that by masquerading as whole hospitals.
    Finally, MedPAC was certainly correct in recognizing the 
problems inherent in physician ownership of specialty 
hospitals. However, its public policy response, which focuses 
on future payment refinements in the DRG payment is, I believe, 
inadequate. It is inadequate because the underlying economics 
of these facilities are so powerful that refinements to the DRG 
payments would not change the referring physician's behavior, 
that is selecting the healthy wealthy and privately insured.
    It is my belief that the current specialty hospital 
moratorium should be extended, and it is also my hope that 
Congress closes the loophole in the self-referral prohibition 
law that allows for the exploitation of the whole hospital 
exception.
    Thank you for your time. I will be happy to answer your 
questions.
    [The prepared statement of John E. Hornbeak follows:]

   Prepared Statement of John Hornbeak, President and CEO, Methodist 
                           Healthcare System

                              INTRODUCTION

    Good Morning. My name is John Hornbeak, and I am the President and 
CEO of the Methodist Healthcare System of San Antonio. I am delighted 
to be here today to testify on behalf of the Methodist system, the 
Hospital Corporation of America (HCA, Inc.), and the Federation of 
American Hospitals.
    The Methodist Healthcare System is a taxable partnership between 
the not-for-profit Methodist Ministries and HCA, Inc., the nation's 
largest provider of health care. The Methodist Healthcare System 
comprises five full-service acute care hospitals, with more than 1,500 
beds. We serve the San Antonio, Texas, market as well as twenty-five 
surrounding counties.
    I am delighted to be here this morning to discuss the unique 
problems created by physician ownership of, and self-referral to, 
specialty hospitals. I view this as one of the most critical issues 
facing full-service community hospitals today. By injecting self-
referral into the clinical process, physician-owned specialty hospitals 
undermine and complicate the delivery of responsible, effective health 
care.

                               BACKGROUND

    Let me begin by stating that as CEO of a large health care system, 
I certainly understand the pressures faced by both hospitals and 
physicians. We all must overcome numerous obstacles just to keep open 
the doors to quality patient care--the constraints of often 
unpredictable and inadequate Medicare and Medicaid reimbursement, 
increasing medical liability insurance premiums, pressures of managed 
care, demanding regulatory burdens, and on-call requirements, are just 
a few of the challenges. Within this demanding environment, it is 
understandable that some physician specialists would be seduced by a 
specialty hospital's promise of incomparable personal financial gain. 
However, I believe that each of these challenges requires a 
comprehensive solution aimed at reforming a fractured health care 
system, not an anti-competitive solution in the form of self-referral 
to specialty hospitals, which ultimately impacts patient access to 
health care. By not confronting the underlying public policy problems 
of allowing physician ownership and self-referral, we are creating a 
potentially devastating trend in the way health care is delivered, the 
long term results of which are far worse than the underlying issues 
which in part have caused them.
    I am deeply concerned about the effect physician-owned specialty 
hospitals are having on our health care system, and how their continued 
proliferation will impact the ability of full-service hospitals to 
continue to offer the services communities need and expect. I am also 
concerned about the duplicative nature of these facilities, which 
invariably leads to increasing health care costs at a time when our 
public health care infrastructure is financially stressed on both the 
state and federal levels.
    When Congress enacted the physician self-referral ban, it did not 
envision the development of facilities whose business model relied upon 
the control of referrals by its physician-owners. However, within the 
past several years, physician-owned specialty hospitals have emerged to 
capitalize on an unintended loophole in this law. The business model 
arrangements provide physician-owners with strong monetary incentives 
for referring carefully selected patients to the facilities in which 
the physicians have ownership interests, while leaving less profitable 
cases to be handled by local community hospitals.
    As both the independent Medicare Payment Advisory Commission 
(MedPAC) and Government Accountability Office (GAO) found, physicians 
owning a financial interest in a specialty hospital tend to direct to 
their facilities only the most attractive patients--those who are not 
on Medicaid or those who are less sick. However, those same specialists 
tend to refer underinsured or uninsured patients, as well as those with 
higher acuity (more complexity), to full-service community hospitals 
for treatment. The care provided to underinsured or uninsured patients 
at the full-service community hospital is often administered with 
little to no reimbursement of costs. Consequently, full-service 
hospitals then are left without adequate resources to treat the sickest 
patients.
    This practice of patient selection is unethical, and does not serve 
the best interests of the American health care system, community 
hospitals, and most importantly, the patients in our care.
    I am not alone in expressing these concerns. Study after study 
continues to reach similar conclusions and raise questions about the 
manner in which these facilities operate. These studies include: GAO 
reports from April 2003 and October 2003; MedPAC report from March 2005 
; Dr. Peter Cram's recent analysis in the New England Journal of 
Medicine; Dr. Jean Mitchell's analysis of specialty hospitals in 
Arizona and Oklahoma markets; report from O'Melveny & Myers LLP and 
KPMG dated July 3, 2003; McManis Consulting case studies of markets in 
South Dakota, Nebraska, Oklahoma and Kansas; and Cara Lesser with the 
Center for Health System Change analysis of inappropriate utilization, 
to name just a few. The gravity of the issues highlighted in these 
studies, the long term health care cost implications, and the striking 
potential for the creation of a tiered health care delivery system is 
dividing the physician community and is leading other, non-hospital 
groups to express their opposition to physician-owned specialty 
hospitals. In fact, the American Academy of Family Physicians , 
American College of Emergency Physicians, the U.S. Chamber of Commerce, 
and the National Black Chamber of Commerce have all recently expressed 
their support for extension of the moratorium on new physician-owned 
specialty hospitals. The U.S. Chamber of Commerce, in a letter from 
Thomas Donohue to Chairman Bill Thomas states: ``The Chamber favors a 
market-based health care system that is rooted in competition based on 
the highest possible (sic) quality, excellent outcomes and reasonable 
price.'' He concludes his letter by saying, ``The Chamber believes 
further evaluation of this topic is warranted, and thus urges an 
extension of the current moratorium.'' More recently, in a May 2, 2005 
front page article, the Wall Street Journal raised questions about the 
concept of self-referral and the link to utilization of services.
    It is my understanding that the specialty hospital industry is 
prepared to move forward with the development of new facilities if the 
moratorium expires in June 2005. As stated in a November 15, 2004 issue 
of Modern Healthcare, ``Donald Burman, Chief Executive Officer of the 
27-bed Orthopedic Hospital of Oklahoma in Tulsa, said he believes that 
there are at least `100 facilities out there ready to go if the 
moratorium' is lifted next June. `You could see 250 more in the next 
few years.' '' This is entirely consistent with what I am hearing 
throughout Texas.
    The only way to solve this problem is to close the loophole in 
federal self-referral prohibition by permanently banning physician 
ownership of, and self-referral to, specialty hospitals. The success of 
these facilities depends entirely upon the physician owners' referrals, 
and this type of relationship is exactly what the self-referral ban is 
designed to prevent.

                       SELF-REFERRAL IS THE ISSUE

    As the CEO of five full-service acute care community hospitals in a 
vigorous healthcare market, I am committed to supporting free and fair 
competition. True competition, however, requires a level playing field. 
Methodist Healthcare System, and other full-service community hospitals 
nationwide, routinely compete for patients on the basis of quality of 
care, physician recruitment, and provision of the latest medical 
technologies. Yet the recent proliferation of physician-owned specialty 
hospitals in Texas and across the country has dramatically altered the 
delivery of health care services by stifling fair competition and even 
threatening the viability of certain vital health care services 
nationwide.
    The existence of specialty hospitals is not the problem. Instead, 
it is the physician ownership of and self-referral to these facilities 
that creates an uneven playing field and directly harms full-service 
community hospitals. In recent years, physician-owned specialty 
hospitals built across the country are distorting the marketplace 
wherever they appear. These facilities limit their care to just one 
type of high-margin service--often cardiac, orthopedic, or surgical 
care--which guarantees high profit margins, while avoiding essential 
but unprofitable community-based services, such as emergency 
departments and burn units.
    Ownership interests in these facilities are typically granted only 
to physician-investors who are able to refer patients, not to any 
investors from the general public. Referring physicians are given 
sweetheart equity arrangements, with little risk, at bargain basement 
rates. In contrast, offering a physician any ``inducement'' for 
referrals would land me in jail under the anti-kickback law. These laws 
together prohibit me from giving specialists at my hospital more than 
$300 in gifts per year, none of which could be given in exchange for an 
induced referral. Fair competition under the current interpretation of 
the self-referral ban is simply impossible.
    The ``whole hospital'' loophole in the self-referral prohibition 
permits specialty hospitals to cherry pick only the most profitable 
patients, leaving to community hospitals high-cost patients, 
individuals on Medicaid, and the uninsured. GAO and MedPAC have found 
clear evidence of this behavior, concluding that physician ownership 
and self-referral result in favorable patient selection. Because of 
their adverse financial impact, self-referrals to physician-owned 
specialty hospitals threaten the long-term viability of our full-
service community hospitals.

                                QUALITY

    Proponents of physician-owned specialty hospitals often suggest 
that quality is superior in these settings. Until very recently, no 
independent, non-industry supported, data existed to support or refute 
this assertion. However, Dr. Peter Cram from the University of Iowa 
found in a study recently published in the New England Journal of 
Medicine that quality is in fact no better in a specialty hospital 
setting. Specifically, Dr. Cram found that ``there is no definitive 
evidence that cardiac specialty hospitals provide better or more 
efficient care than general hospitals with similar procedural 
volumes.'' Moreover, Dr. Cram found that specialty heart hospitals 
treat fewer seriously ill patients than community hospitals, creating 
the illusion they provide better care, and ``given that we found no 
significant differences in outcomes between specialty and general 
hospitals with similar volumes or between specialty cardiac hospitals 
and specialized general hospitals, it could be argued that the 
specialty-hospital model itself does not yield better outcomes.''
    The findings of the study also reinforce previous conclusions found 
by MedPAC and GAO that specialty hospitals cherry pick healthier 
patients. In an interesting development, Dr. Cram also found that 
patients receiving care in physician-owned specialty hospitals 
``resided in ZIP Code areas with somewhat higher socio-economic status, 
as evidenced by higher mean home values and higher per capita income.'' 
I find it troubling that specialty hospitals, when injecting physician 
ownership into the equation, are creating a foundation for the 
development of an ``economically-tiered'' health care delivery system.

                        COMMITMENT TO COMMUNITY

    In this anti-competitive environment, full-service community 
hospitals struggle to achieve the level of care that we desire to 
provide, and that our communities expect. When specialty hospitals 
drain essential resources from full-service community hospitals, they 
particularly harm, over time, our capacity to provide emergency care 
and other vital health services.
    The Methodist Healthcare System believes that maintaining a fully 
functioning and fully staffed twenty-four hour emergency department is 
part of our commitment to the community. In 2004, we received 180,000 
visits to our emergency department. Physician-owned specialty hospitals 
simply do not share in the full compliment of critical ED services, 
which full-service hospitals consider as a responsibility and 
commitment to their communities. In fact, during one site visit, MedPAC 
noted that a specialty hospital had to turn on the light to show what 
it claimed as its emergency department. Many others have no emergency 
department at all.
    As the Members of this Committee are well aware, America's hospital 
emergency departments are quickly becoming our de facto public 
healthcare system, the primary point of access to quality healthcare 
services for the nation's uninsured. Hospitals equipped with emergency 
departments must provide medical evaluation and required treatment to 
everyone, regardless of their ability to pay. Since the advent in 
recent years of physician-owned specialty hospitals, which skim 
profitable service areas for low-risk patients, the emergency 
department burden has grown significantly greater. While specialty 
hospitals treat the most profitable patients, full-service hospitals 
are left with the task of handling uninsured and high-risk patients 
within their community. At Methodist Healthcare System, 41 percent of 
patients who visited our emergency department in 2004 were self-pay/
indigent or Medicaid patients. Maintaining this essential community 
service for those who need it most also means contending with a regular 
population of those with little or no health care options. Moreover, 
this population often seeks emergency room care only once an illness 
has reached a level of acuity that makes their case more complex and 
costly to handle.
    A 2003 GAO study sheds considerable light on the attitude of 
specialty hospitals toward emergency services. According to the GAO, a 
majority of specialty hospitals do not have fully functioning, fully 
staffed, twenty-four hour emergency departments. The GAO study reveals 
that while nine in ten of all full-service community hospitals maintain 
an emergency department to address any medical situation that walks or 
is carried through its doors, half of all specialty hospitals do not 
provide emergency services. Even among those specialty hospitals that 
do have emergency departments, GAO found that the care provided was 
almost entirely within the specialty hospital's field. By opting not to 
operate fully functioning emergency departments, specialty hospitals 
enjoy a high degree of self-selection, which allows them to treat a 
healthier and better paying patient population with fewer complications 
and shorter lengths of stay. In my market, I regularly see specialty 
hospitals avoid this commitment to our community. For example, while 
the local MedCath facility does maintain an ED, it states quite openly 
that it is only for cardiac emergencies. In addition, the President and 
CEO of Austin Surgical Hospital, Patricia Porras, stated 
``Structurally, there is an ED department. However, we will not pursue 
a public ER, and we will not be tied into an EMS system.''
    Moreover, GAO and MedPAC separately found that specialty hospitals 
treat a much smaller share of Medicaid patients than do community 
hospitals within the same market area. In its results, MedPAC found 
that physician-owned specialty hospitals treat far fewer Medicaid 
recipients than do community hospitals in the same market--75 percent 
fewer for heart hospitals and 94 percent fewer for orthopedic 
hospitals.
    The departure of specialists who relocate their practices from 
full-service community hospitals to physician-owned specialty 
facilities causes an additional strain on specialty coverage for full-
service hospitals. Communities expect full-service hospital emergency 
departments to maintain a complete state of readiness around the clock, 
every day of the year. On-call requirements for specialists ensure 
adequate staffing outside normal work hours, as well as on holidays and 
weekends for hospital emergency departments. The lack of physician 
specialists to provide coverage at full-service community hospitals has 
compromised the ability of those hospitals to provide twenty-four hour 
emergency services and to meet the significant obligations hospitals 
face under the Emergency Medical Treatment and Active Labor Act.
    Recognizing the importance of our role in the community, the 
Methodist Healthcare System also provides a vital charity care program, 
and has made significant investments in specialized, essential state-
of-the-art health care services, such as transplant, open heart, 
neurosurgery, children's health care, rehabilitation, psychiatric care, 
and neonatal intensive care. It is important to note that the Methodist 
Healthcare System is a proponent of specialization and its benefits; 
however, it is equally important to note that none of these inpatient 
specializations are physician-owned. The benefits of specialization can 
be achieved without the inherent conflict of interest found in 
physician-owned specialty hospitals.

                   IMPACT ON METHODIST HEALTH SYSTEM

    Like full-service community hospitals nationwide, the loss of 
specialists willing to cover on-call responsibilities poses a 
significant cost to community hospitals nationwide, and directly 
threatens patient care. Prior to the development of physician-owned 
specialty hospitals within the San Antonio area, our specialists 
largely accepted on-call responsibilities as a member of the volunteer 
medical staff and pro-bono commitment to our community. However, 
following the development of the Spine Hospital of South Texas, in 
particular, the Methodist Healthcare System has been unable ensure on-
call participation of those orthopedists who are part-owners in the 
specialty facility.
    The Methodist Healthcare System prides itself in working with all 
physician specialists within the community and ensures their access to 
our facilities. Nevertheless, this is often done at a significant cost 
to our hospital. Many of the cardiac surgeons with ownership in the 
MedCath facility direct the healthier, less complex patients away from 
our hospital and admit them to the MedCath facility in which they have 
an ownership interest. The only time we see those patients again is 
when complications arise.
    Proponents of physician-owned specialty hospitals claim that their 
presence in a community generates efficiencies and lowers costs. This 
could not be further from the truth. MedPAC found that specialty 
hospitals do not have lower Medicare costs per case, even though they 
treat healthier patients for a shorter period of time than full-service 
community hospitals do. In addition, when specialty hospitals enter a 
community, their services are generally duplicative and impose 
significant cost burdens on the full-service hospitals, which must both 
compete and continue to meet the needs of the community that specialty 
hospitals shun.

PHYSICIAN-OWNED SPECIALTY HOSPITALS ARE DIVERTING NEEDED RESOURCES FROM 
                    FULL-SERVICE COMMUNITY HOSPITALS

    Full-service community hospitals long have used funds generated by 
higher margin services to subsidize the losses suffered by less 
financially desirable services. Only by maintaining the successful 
product lines are full-service hospitals able to subsidize other 
critical but (less financially advantageous) services, such as trauma 
and burn centers, as well as fund special programs for delivering care 
to uninsured and underinsured patients. By removing the highest margin 
services from full-service community hospitals, physician-owned 
specialty facilities have a monetary incentive to refer only those 
better-funded and less severely ill patients. This leaves the 
uninsured, underinsured and more severely ill patients to be treated by 
community hospitals, often without adequate (or any) compensation. 
While paying and less severely ill patients are diverted to physician-
owned specialty facilities, community hospitals are left with the 
burden of caring for a higher percentage of the uninsured, 
underinsured, and the sickest patients, yet with fewer resources to 
cover the vast and unreimbursed costs involved.

               FEDERATION OF AMERICAN HOSPITALS' PETITION

    Fundamental to understanding the proliferation of physician-owned 
specialty hospitals is recognizing how this industry has abused the 
whole hospital exception to the physician self-referral ban. As this 
Committee is aware, the self-referral ban was intended to prohibit 
questionable conflict of interest arrangements between physicians and 
providers that could lead to an abuse of the Medicare program. This law 
generally prohibits physician referrals for Medicare services to 
entities in which the physician has an ownership interest. The intent 
of this prohibition was to establish and maintain a thriving 
marketplace for health care, free of conflicts of interest and 
protecting the integrity of the Medicare program. Under current law, 
physicians are permitted to have an ownership interest in an entire 
full-service inpatient hospital, but not a subdivision of a hospital. 
The logic behind the exception is that any referral by a physician who 
has a stake in an entire hospital would produce little personal 
economic gain, because hospitals tend to provide a diverse and large 
group of services. However, a physician's ownership in a subdivision of 
a hospital would not sufficiently dilute the potential conflict of 
interest and, instead, would constitute a material conflict of interest 
regarding improper influence over physician referrals.
    Clearly, the intent of Congress was to prohibit physician ownership 
of and referral to subdivisions such as cardiac, surgical or orthopedic 
wings. It is difficult for me to imagine how a facility that has five 
beds or even twenty-five beds is a full-service hospital. The average 
bed size of a surgical hospital, according to MedPAC, is 15 beds. These 
facilities, however, have taken advantage of state hospital licensing 
laws which allow them to be considered ``whole hospitals,'' 
circumventing the intent of the whole hospital exception in the anti-
referral law.
    There is no question, in my professional opinion, physician-owned 
specialty hospitals are effectively subdivisions of full-service 
hospitals. It is my hope that Congress will revisit this issue and 
address this new type of facility legislatively. In the meantime, it is 
important to recognize the role the Department of Health and Human 
Services (HHS) can play in re-examining the definition of a whole 
hospital. To this end, our trade association, the Federation of 
American Hospitals, petitioned HHS on February 28, 2005, to define a 
whole hospital. The Federation argues that because Congress did not 
intend to protect physician-owned limited service facilities under the 
whole hospital exception, HHS is obligated to take action so its 
regulations adapt to changing circumstances. Specifically, the 
Federation's petition recommends refining the whole hospital exception 
to apply only to ``full-service hospitals.''
    Physician-owned specialty hospitals are clearly different from 
community hospitals, and therefore, should be analyzed separately and 
addressed in the regulation under the whole hospital exception. In the 
petition, the Federation urges the whole hospital exception regulation 
be changed to include a more refined definition of whole hospital that 
focuses on demographics and service mix, in addition to state licensure 
status. I believe that continuing to allow physician-owned specialty 
hospitals to qualify as whole hospitals under this regulation is a 
triumph of form over substance and thwarts Congressional intent to 
protect the Medicare program from over-utilization and self-induced 
demand.

               SOLUTION: CLOSE THE SELF-REFERRAL LOOPHOLE

    Allowing for the continuation of these unethical financial 
arrangements between referring physicians and specialty hospitals is 
tantamount to purchasing admissions. I understand that Congress is 
weighing recommendations by MedPAC that would seek to level the playing 
field through Medicare payment adjustments. While I would certainly 
advocate for more accurate and appropriate Medicare reimbursement, I 
think it is important to recognize that Medicare payment adjustments 
alone will not level the playing field and will not solve the 
exploitation of this loophole.
    MedPAC was correct in recognizing the problems inherent in 
physician ownership of specialty hospitals, and the need to prevent 
such conflicts of interest; however, its recommended policy response, 
which focused on refinements of Medicare's DRG payment system, is 
inadequate. As an operator of acute care hospitals, I can assure the 
Committee that simply adjusting the DRG's will only marginally reduce 
the profitability of self-referral. It is the ownership and referral 
relationship that creates patient selection. The underlying economics 
of these facilities, which rely upon referrals from physician-owners, 
would not change materially. Furthermore, while some modifications of 
the DRG payment system may be warranted, we have to be careful that the 
wholesale refinement of the DRG system, which MedPAC proposes, could 
threaten the original reasons for, and subsequent achievements of, the 
Prospective Payment System we have in place today--that is, rewarding 
efficient providers. While payment refinements will not solve the self-
referral problem, I can tell you that the massive redistribution of 
funds nationwide would have the unintended consequence of hurting some 
full-service community hospitals, even in markets where there are now 
no physician-owned specialty hospitals. We have to be extremely careful 
about a solution this broad in scope that in my opinion does not 
address the central problem of physician self-referral.

                               CONCLUSION

    Ultimately, the only effective solution for the Methodist 
Healthcare System and for hospitals nationwide demands an amendment to 
the physician self-referral prohibition. The ``whole hospital'' 
exception was intended to allow physician ownership in a comprehensive 
health care facility, as long as that ownership interest is in the 
entire facility and not merely a subdivision. Congress never 
contemplated the proliferation of specialty hospitals, which 
essentially have turned the entire concept of the ``whole hospital'' 
exception on its head. In my professional opinion, specialty hospitals 
are not whole hospitals; rather they are akin to subdivisions of 
hospitals--essentially cardiac, surgical, or orthopedic wings--that 
have been removed from the full-service hospital. As such, I believe 
physician referral to specialty hospitals in which they have an 
ownership interest is as clear a violation of the anti-referral law as 
would be physician ownership in a hospital subdivision. Simply put, 
under the present interpretation of the ``whole hospital'' exception, 
physician-owned specialty hospitals are exploiting an unintended 
loophole to engage in precisely the financial arrangement that Congress 
intended to prohibit. This situation must be changed.
    Not only must the current moratorium be extended, but also it is my 
hope that Congress will close the loophole in the physician self-
referral ban that allows for self-referral to physician-owned specialty 
hospitals. The whole hospital exception loophole is not in the best 
interest of our patients, and it will continue to undermine the vital 
health care services your communities expect from your full-service 
community hospitals.
    Thank you for your time. I would be glad to answer any questions.

    Mr. Deal. Thank you.
    Mr. Thomas.

                   STATEMENT OF JOHN T. THOMAS

    Mr. Thomas. Mr. Chairman, members of the committee, my name 
is John T. Thomas. I am the general counsel at Baylor Health 
Care System based in Dallas-Fort Worth, Texas.
    Baylor is a 101-year-old, faith-based institution with 
strong ties to the Baptist General Convention of Texas.
    It is an honor for me to address you today on behalf of the 
Baylor Health Care System and to ask you to allow the 
moratorium on the development and growth of physician-owned 
specialty hospitals to end June 8, without renewal.
    Baylor Health Care System is the corporate sponsor of 13 
non-profit hospitals. Our flagship, Baylor University Medical 
Center, is located in downtown Dallas, an inner-city hospital, 
is a 1,000-bed, quadenary teaching hospital with a Level I 
trauma center. We treat more penetrating trauma victims than 
Dallas County's tax-supported Parkland Hospital. Baylor 
University Medical Center has the largest Neonatal ICU in the 
Southwest, and one of the five largest organ transplant 
programs in the country. Baylor is deeply committed to its 
mission as a non-profit hospital. Last year, we provided more 
than $240 million in community benefits at cost, not including 
bad debt. Charity care is provided under the most generous 
charity care/financial assistance policy among all Dallas-Fort 
Worth hospitals, including Parkland.
    One of the most effective strategies Baylor has ever 
implemented is partnering with physicians economically, and 
more importantly, clinically in the design, development, and 
operation of ambulatory surgery centers, surgical hospitals, 
and heart hospitals. Today, Baylor has an ownership interest in 
25 facilities partnered with physicians. Over 2,000 physicians 
actively practice at these facilities while only about 500 have 
an ownership interest. Texas Health Resources, the other large, 
major non-profit hospital system in Dallas-Fort Worth, also has 
a number of hospitals and facilities partnered with physicians.
    Five of Baylor's facilities are affected by the moratorium. 
Three are surgical hospitals, two are heart hospitals. Each is 
critically important to the mission of Baylor, and in each 
case, we have followed the guidelines developed by the Internal 
Revenue Service and Revenue Ruling 98-15 for partnerships 
between tax-exempt organizations like Baylor and for-profit 
organizations, or individuals like physicians. The IRS requires 
the tax-exempt entity to have certain governance controls with 
respect to the partnership and for the partners to agree, by 
contract, that ``charitable interests'' will prevail over for-
profit interests. All of our facilities participate in Medicare 
and Texas Medicaid, and they all agree, by contract, to take 
all patients, regardless of their ability to pay. While 
physicians contribute their time, energy, and capital, Baylor, 
through lay members of the community, including pastors and 
other community leaders, actively participate and oversee this 
strategy and have determined that partnering with physicians is 
in the best interest of our mission and the communities we 
serve.
    With respect to our surgical hospitals, a Baylor-controlled 
entity owns at least 50 percent of the equity in the 
partnership that owns and operates a licensed hospital, a fully 
licensed, accredited hospital. For our two heart hospitals, the 
Baylor-controlled entity is actually the adjacent Baylor 
hospital. Our flagship hospital, Baylor University Medical 
Center, owns 51 percent of the Baylor Jack and Jane Hamilton 
Heart and Vascular Hospital, located adjacent to and physically 
attached to Baylor University Medical Center, again an inner-
city hospital. Cardiologists and vascular surgeons invested the 
capital necessary to own the remaining 49 percent of the equity 
in that facility. In North Dallas, the Baylor Regional Medical 
Center at Plano owns 51 percent of the Texas Heart Hospital of 
the Southwest, LLP, and 83 cardiologists, cardio-thoracic 
surgeons, and vascular surgeons own the remaining percentage. 
Notably, the Texas Heart Hospital physicians agreed the 
hospital would be committed to the Texas State law requirement 
for charity care for tax-exempt hospitals. The physicians made 
this commitment to the community despite the fact that as a 
for-profit facility the hospital is not subject to the charity 
care law, which requires tax-exempt hospitals to provide 
charity care equal to 4 percent of net patient revenue.
    Mr. Chairman, our model of partnering with physicians has 
now been in operation for over 6 years, with Baylor's inner-
city Heart Hospital open for almost 3 years. The results have 
far exceeded our expectations. This hospital has the highest 
rated heart program for quality reported on the CMS website, 
HospitalCompare.gov. By partnering with physicians, Baylor 
delivers on its mission. The fact is, we can not deliver on all 
aspects of that mission without aligning with physicians. That 
alignment takes several forms, but in the end, each has 
delivered to the patient better, safer care at a lower cost.
    We urge you to allow the moratorium on physician ownership 
and development of specialty hospitals to end June 8. The 
moratorium has not been benign, and a continuation will be even 
worse. This moratorium has affected our ability to meet our 
mission: specifically the inner-city Heart Hospital needs to 
expand to meet the demand for the services provided as well as 
to continue to attract physicians to practice at this inner-
city hospital that provides the emergency heart services for 
our Level I trauma center. The moratorium has prevented Baylor 
from bringing higher quality heart and vascular care to Plano, 
where heart disease remains the No. 1 killer. The moratorium 
has prevented the Baylor-Frisco Medical Center from expanding 
to provide obstetrics and other women's services to one of the 
fastest growing communities in the United States.
    We would also note the Texas legislature has been reviewing 
this issue this spring, and the Texas Senate has rejected all 
efforts to impose any moratorium. In fact, the Texas Hospital 
Association testified at the Texas Senate hearing: ``Baylor and 
Medcath are not the problem.'' We urge you not to pass the 
legislation that will renew the moratorium and urge you not to 
pass legislation now or in the future that prevents physicians 
from aligning with the community to bring higher quality and 
safer care. Physicians are part of the solution and must be at 
the table to help all of us improve quality, safety, patient 
satisfaction, and to lower costs.
    And last, in response to the previous comments, nothing in 
the law prevents Methodist, or any other hospital in the United 
States, from pursuing strategies and alignment like Baylor has.
    Thank you.
    [The prepared statement of John T. Thomas follows:]

  Prepared Statement of John T. Thomas, Senior Vice President-General 
                   Counsel, Baylor Health Care System

    Mr. Chairman, Members of the Committee, my name is John T. Thomas, 
and I am the General Counsel of Baylor Health Care System, based in 
Dallas-Fort Worth, Texas. Baylor is a 101 year old, faith based 
institution, with strong ties to the Baptist General Convention of 
Texas.
    It is an honor for me to address you today on behalf of the Baylor 
Health Care System and to ask you to allow the moratorium on the 
development and growth of physician-owned specialty hospitals to end 
June 8, without renewal.
    Baylor Health Care System is the corporate sponsor of 13 non-profit 
hospitals. Our flagship ``Baylor University Medical Center (BUMC) is 
located in downtown Dallas. BUMC is a 1,000 bed quadenary teaching 
hospital, with a Level I trauma center that provides care to more 
penetrating trauma victims than Dallas County's tax-supported Parkland 
hospital. BUMC has the largest Neonatal ICU in the Southwest, and one 
of the five largest organ transplant programs in the Country. Baylor 
Health Care System is deeply committed to its mission as a non-profit 
hospital. Last year, we provided more than $240 million in Community 
Benefits, at cost and not including bad debt. Charity care is provided 
under the most generous Charity Care/Financial Assistance policy among 
all Dallas-Fort Worth hospitals, including Parkland.
    At the same time, Baylor has a long history of innovation. In the 
early 1900s, Baylor developed the ``pre-paid hospital plan,'' which 
today operates as the Blue Cross Blue Shield Association. With the 
changes in medical practice, Baylor has sought, and continues to seek, 
new and innovative ways to lower the cost of the delivery of care, 
while improving quality, safety and satisfaction.
    One of the most effective strategies Baylor has implemented is 
partnering with physicians economically and, more importantly, 
clinically, in the design, development and operation of ambulatory 
surgery centers, surgical hospitals, and heart hospitals. Today, Baylor 
has an ownership interest in 25 facilities partnered with physicians. 
Over 2000 physicians actively practice at these facilities, while only 
about 500 have an ownership interest. Texas Health Resources, the other 
major non-profit hospital system in Dallas-Fort Worth also has a number 
of hospitals and facilities partnered with physicians.
    Five of Baylor's facilities are affected by the Moratorium. Three 
are surgical hospitals. Two are heart hospitals. Each is critically 
important to the mission of Baylor Health Care System, and in each 
case, we have followed the guidelines developed by the IRS in Revenue 
Ruling 98-15 for partnerships between tax-exempt organizations like 
Baylor and for-profit organizations (like individual physicians). The 
IRS requires the tax-exempt entity to have certain governance controls 
with respect to the partnership and for the partners to agree, by 
contract, that ``charitable interests'' will prevail over for-profit 
interests. They all participate in Medicare and Texas Medicaid and they 
all agree to take all patients regardless of their ability to pay. 
While physicians contribute their time, energy and capital, Baylor, 
through lay members of the community, including pastors and other 
community leaders, actively participate and oversee this strategy, and 
have determined partnering with physicians is in the best interest of 
our Mission and the communities we serve.
    With respect to each of our surgical hospitals, a Baylor controlled 
entity owns at least 50.1% of the equity in a partnership that owns and 
operates a licensed hospital. For our two heart hospitals, the Baylor 
controlled entity is actually the adjacent Baylor hospital.
    Our flagship hospital, Baylor University Medical Center, owns 51% 
of the Baylor Jack and Jane Hamilton Heart and Vascular Hospital, 
located adjacent to and physically attached to BUMC, in the inner city 
of Dallas. Cardiologists and vascular surgeons invested the capital 
necessary to own the remaining 49% of the equity in the facility. In 
north Dallas, the Baylor Regional Medical Center at Plano owns 51% of 
the Texas Heart Hospital of the Southwest, LLP, and 83 cardiologists, 
cardio-thoracic surgeons and vascular surgeons own the 49% interest. 
Notably, the Texas Heart Hospital physician partners agreed the 
hospital would be committed to the Texas state law requirement for 
Charity Care for tax-exempt hospitals. The physicians made this 
commitment to the community, despite the fact that as a for-profit 
facility, the hospital is not subject to the law, which requires tax-
exempt hospitals to provide charity care equal to 4% of net patient 
revenue.
    Mr. Chairman, our model of partnering with physicians has now been 
in operation for over six years, with Baylor's inner city Heart 
Hospital open for almost three years. The results have far exceeded 
expectations. This hospital has the highest rated heart program for 
quality reported on the CMS website, HospitalCompare.gov. By partnering 
with physicians, Baylor delivers on its mission. The fact is, we cannot 
deliver on all aspects of that mission without aligning with 
physicians. That alignment takes several forms, but in the end, each 
has delivered to the patient better, safer, care--at a lower cost.
    We urge you to allow the Moratorium on physician ownership and 
development of specialty hospitals to end June 8. The Moratorium has 
not been benign and a continuation will be even worse. This Moratorium 
has affected our ability to meet our Mission--specifically, the inner-
city heart hospital needs to expand to meet the demand for the services 
provided as well as to continue to attract physicians to practice at 
this inner-city Trauma Center. The Moratorium has prevented Baylor from 
bringing higher quality heart and vascular care to Plano, where heart 
disease remains the number 1 killer. The Moratorium has prevented the 
Baylor-Frisco Medical Center from expanding to provide obstetrics and 
other women's services to one of the fastest growing communities in the 
United States.
    We would also note the Texas legislature has been reviewing this 
issue this Spring, and the Texas Senate has rejected efforts to impose 
any moratorium. In fact, the Texas Hospital Association testified to 
the Texas Senate ``Baylor and Medcath are not the problem.''
    We urge you NOT to pass legislation that will renew the Moratorium, 
and urge you NOT to pass legislation now or in the future that prevents 
physicians from aligning with the community to bring higher quality and 
safer care. Physicians are part of the solution, and must be at the 
table to help all of us improve quality, safety, patient satisfaction, 
and to lower cost.
    Thank you.

    Mr. Deal. Thank you.
    Dr. Cram.

                     STATEMENT OF PETER CRAM

    Mr. Cram. Thank you.
    I would like to begin by thanking Chairman Deal and Ranking 
Member Brown for inviting me to speak today. I would also like 
to acknowledge that I haven't received any relevant funding 
from interested parties for this work, nor, for that matter, do 
I have material investments in specialty hospitals or for-
profit hospitals.
    Briefly, my testimony will cover a bit about my background, 
an overview of the debate, some summary of research we have 
conducted on this issue, some unanswered questions that should 
be considered in the future, and some recommendations.
    I am a physician research at the University of Iowa. I have 
clinical training as a general internist as well as a Masters 
in Business from the University of Michigan. Of note, there are 
no specialty hospitals currently located in the State of Iowa, 
and we do have a certificate-of-need regulation.
    To summarize the debate, basically the supporters seem to 
be, as best we can tell, contending that specialty hospitals 
and specialization breeds improved efficiency and the 
specialization also is leading to improved clinical outcomes, 
while opponents are suggesting that specialty hospitals are 
selecting healthier and more lucrative patients and that 
specialty hospitals fail to deliver improved clinical outcomes.
    Over the past 18 months, I have been leading a research 
team at the University of Iowa conducting investigations into 
the quality of care in specialty and general hospitals. Our 
first manuscript detailing preliminary results was recently 
published in the New England Journal of Medicine.
    To summarize our findings, we compared characteristics and 
outcomes of Medicare beneficiaries who underwent angioplasty 
and bypass surgery in specialty cardiac and competing general 
hospitals during 2000 and 2001. Our results were generally 
similar to the results Dr. McClellan discussed and found 
earlier today. In short, patients who underwent angioplasty and 
bypass surgery in specialty hospitals were healthier than those 
who underwent the same procedures in general hospitals. So, for 
example, patients who are being treated in specialty hospitals 
are less likely to have congestive heart failure, less likely 
to have kidney failure, less likely to be admitted with an 
acute heart attack than patients who are treated in those 
general hospitals. And those differences were quite 
significant.
    Second, we found that specialty hospitals perform many more 
procedures, and that is angioplasties and bypass surgeries, per 
hospital per year. And that is significant, because there is a 
well-recognized relationship between volume of procedures and 
outcomes. The more you do, the better you do. Specialty 
hospitals do more.
    Then what we found is that unadjusted mortality for 
angioplasty and bypass surgery was lower in specialty 
hospitals, but when you accounted for the fact that specialty 
hospitals were caring for healthier patients, this eliminated 
much, but not all, of the specialty hospital advantage.
    And finally, when we accounted for the healthier patients 
and the greater procedural volumes that the specialty hospitals 
were performing, specialty cardiac and general hospitals had 
similar mortality rates.
    So what questions haven't been answered?
    Well, No. 1, if specialty hospitals are admitting healthier 
patients, as data suggests, how and why is this occurring? So 
are healthier patients choosing to go to specialty hospitals or 
are specialty hospitals choosing or seeking out those healthier 
patients? The implications will be quite different.
    How do specialty hospitals ``acquire'' the large number of 
patients they are performing cardiac procedures on? Are these 
patients being drawn from small hospitals, as some data 
suggests, or alternatively, are some of these patients who 
previously weren't undergoing bypass surgery or angioplasty at 
all?
    Third, the data is much more robust for specialty cardiac 
hospitals. How do orthopedic specialty hospitals compare with 
their competing general hospitals?
    And finally, how do specialty and general hospitals compare 
in other outcomes? So patient satisfaction, in particular. Dr. 
McClellan eluded a bit to some data on that.
    And what is the long-term financial impact of specialty 
hospitals on general hospitals? We have some relatively short-
term data suggesting that the impact is not significant. But in 
the long-term, we don't know what that effect would be.
    So in terms of possible recommendations, No. 1, extending 
the moratorium on new specialty hospitals to allow for further 
study is reasonable, and a further study is desired. Funding 
sources should be created to fund this research. But the 
moratorium should not be permanent and, if it were extended, 
should be done to allow for updating of the Medicare payment 
system, as this could reduce the financial incentives that are 
driving specialty hospitals to seek out healthier patients.
    And finally, a premature ban on specialty hospitals could 
hinder regionalization of care and could ultimately harm 
patient care in this country.
    Thank you.
    [The prepared statement of Peter Cram follows:]

  Prepared Statement of Peter Cram, Assistant Professor of Medicine, 
                           University of Iowa

                              INTRODUCTION

    Hello. My name is Peter Cram. I am a physician, health services 
researcher and Assistant Professor of Internal Medicine at the 
University of Iowa Carver College of Medicine. I would like to thank 
Chairman Deal and Ranking Member Brown for inviting me to speak today.
    My research involves three principal areas: cost-effectiveness of 
new medical technologies; medical errors in the outpatient setting; and 
measuring quality of care in hospitals. Over the past 18 months, I have 
conducted investigations in cooperation with researchers at the Iowa 
City Veterans Administration Hospital assessing the quality of care 
provided by specialty cardiac and general hospitals. In terms of 
conflicts-of-interest, I have none to disclose. In particular, I do not 
receive funding from any specialty hospital associations or the 
American Hospital Association. There are no specialty hospitals located 
in Iowa, where I am employed.
    My testimony today will briefly cover 5 specific topics related to 
specialty hospitals: 1) the history of hospital specialization; 2) the 
specialty hospital controversy; 3) available data on specialty 
hospitals; 4) areas of uncertainty; 5) recommendations to the 
committee.

                 THE HISTORY OF HOSPITAL SPECIALIZATION

    While specialty hospitals are a relatively new phenomenon, it is 
important to recognize that hospital specialization per se is not a new 
development. The healthcare management, health economics, and health 
services research literature have been addressing the potential 
benefits of hospital specialization for years.\1\-\4\ For 
example, in the past healthcare management would have considered a 
free-standing rehabilitation hospital to be a specialty hospital while 
today such free-standing hospitals are considered commonplace.\5\ 
Analyses in health economics have provided additional evidence that 
hospital specialization is not a new phenomenon, but rather that 
general hospitals have become increasingly specialized over 
decades;\4\,\6\,\7\ interestingly, the majority 
of these studies have found evidence that hospital specialization is 
associated with improved efficiency.\8\,\9\ Finally, studies 
from the health services research literature have focused less on 
hospital specialization and more on the relationship between hospital 
procedural volume and patient outcomes. These studies have demonstrated 
a consistent relationship between volumes of procedures such as bypass 
surgery or esophageal surgery and lower patient 
mortality.\14\-\20\ Some policy makers have suggested that 
based upon this evidence, certain high risk procedures should be 
triaged to specialized hospitals that perform large numbers of these 
procedures (a.k.a. 
regionalization).\19\,\21\,\22\ Thus, while 
specialty hospitals can in many ways be considered a new development, 
hospital specialization has actually been progressing for decades.
    That being said, the new generation of specialty hospitals appears 
to be different for at least three reasons: first, and foremost, their 
focus on procedural aspects of medicine that tend to be more lucrative 
than ``cognitive'' aspects of medicine; second, their focus on 
healthier patient populations within their areas of specialization 
(e.g., cardiac care, orthopedic care); third, physician investment/
ownership of specialty hospitals.

                   THE SPECIALTY HOSPITAL CONTROVERSY

    Despite the widespread concern about the emergence of specialty 
hospitals, the absolute number of specialty hospitals remains 
relatively small. By most estimates there are no more than 100 such 
hospitals in operation currently.\23\,\24\ Nevertheless, the 
300% growth rate in the number of specialty hospitals between 1990-2000 
and the purported economic impact of these new hospitals on existing 
general hospitals merits discussion.
    The controversy concerning specialty hospitals ultimately can be 
distilled down to a limited number of issues.
    Supporters of specialty hospitals claim that:

 Specialty hospitals perform higher volumes of procedures.
 By focusing on narrow procedural areas, specialty hospitals deliver 
        improved outcomes relative to general hospitals.
    Opponents of specialty hospitals allege that:

 Specialty hospitals preferentially select healthier patients for 
        admission (a.k.a. ``cherry picking'').
 Specialty hospitals do not generate any improvement in patient 
        outcomes.
 Specialty hospitals reduce the profitability of general hospitals.

Available Data
    While 18 months have passed since Congress passed their initial 
moratorium on further specialty hospital development, high-quality data 
remain limited. This underscores the complexity of measuring the impact 
of specialty hospitals on general hospitals and the possible value that 
specialty hospitals add to the health care delivery system.
    I will now enumerate each of the major areas of controversy and 
will summarize both the available data addressing each concern and the 
major gaps in these data that should be answered before rendering a 
binding decision on this issue.
1) Specialty hospitals admit healthier patients than general hospitals.
    There are four studies that have compared the severity-of-illness 
of patients admitted to specialty hospitals and general hospitals. A 
study performed by the Lewin Group for MedCath Inc. found that MedCath 
specialty cardiac hospitals admitted sicker patients than those 
admitted to competing general hospitals.\25\ Alternatively, three 
studies have found evidence that specialty hospitals admit healthier 
patients than general hospitals.\23\,\24\,\26\ In 
an analysis we recently published in the New England Journal of 
Medicine, we found that Medicare beneficiaries admitted to specialty 
cardiac hospitals had lower rates of kidney failure, heart failure and 
were less likely to be admitted with myocardial infarction (``heart 
attacks''') than patients admitted to general hospitals.\26\ In 
aggregate these studies suggest that specialty hospitals admit 
healthier patients than competing general hospitals.
    A recently released report by MedPAC provides some data to explain 
why specialty hospitals (and, in actuality, all hospitals) prefer 
admitting these healthier patients.\24\ Under the Medicare Prospective 
Payment System (PPS), there is a well recognized variation in 
profitability of caring for different patients with the same 
diagnosis.\27\-\29\ This variation in profitability occurs 
because Medicare typically pays hospitals a single ``lump-sum'' payment 
for providing care to a specific patient based upon the patient's 
diagnosis.\30\ To the extent that among patients with the same 
diagnosis, some are sicker (and hence more expensive to care for) and 
others are healthier (and less expensive to care for), but Medicare 
payments are similar for both patient groups, healthier patients become 
more profitable for hospitals than sicker patients. Hospitals that 
could consistently attract healthier patients without attracting the 
sicker patients could make excess profits.
    Thus, the balance of the available data suggest that specialty 
hospitals care for patients with less severe disease than competing 
general hospitals. This behavior is likely to be motivated by 
inefficiencies in the Medicare PPS.
    There are, however, a number of important and unanswered questions:

 How do specialty hospitals attract healthier patients?
 Do healthier patients seek care from specialty hospitals or do 
        physician-investors preferentially admit healthier patients to 
        the specialty hospitals?
2) Specialty hospitals perform higher volumes of procedures than 
        competing general hospitals.
    Two studies have provided data on the volumes of procedures 
performed by specialty and general hospitals. A report by the GAO 
(Government Accountability Office) found evidence that specialty 
hospitals perform significantly greater numbers of cardiac and 
orthopedic procedures than their general hospital competitors.\31\ Our 
research published in the New England Journal of Medicine found that 
cardiac specialty hospitals performed significantly more angioplasty 
procedures and coronary bypass surgeries on average than general 
hospitals on average, confirming the GAO report. This is important, 
given the large body of evidence that has found that patients 
experience better outcomes in higher volume hospitals. However, it is 
important to note that we also found wide variation in the volumes of 
procedures performed by individual hospitals.
    The balance of data suggest that the average specialty hospital 
performs greater numbers of procedures (e.g., bypass surgery and 
angioplasty) than the average competing general hospitals.
    There are a number of important unanswered questions concerning the 
volumes of procedures performed by specialty and general hospitals:

 Do the differences in procedural volume demonstrated for specialty 
        cardiac hospitals and general hospitals also apply to other 
        types of specialty hospitals (e.g., orthopedic hospitals)?
 How do new specialty hospitals generate the high volumes of 
        procedures they perform? Does the specialty volume represent a 
        consolidation of patients formerly treated in many low-volume 
        general hospitals within the new specialty hospital? Do these 
        patients come from large general hospitals? Or does the 
        specialty hospital volume represent an increase in the number 
        of procedures performed on groups of patients who were not 
        receiving procedures previously?
3) Specialty hospitals generate improved patient outcomes compared to 
        general hospitals.
    Data comparing the outcomes of patients receiving care in specialty 
and general hospitals are very limited. A study by the Lewin Group 
reported that patients treated in MedCath cardiac hospitals had a 17% 
lower risk of death than patients treated in community hospitals.\25\ 
Our analyses found that Medicare beneficiaries who underwent 
angioplasty or bypass surgery in specialty cardiac hospitals had 
approximately a 30% lower risk of death before we accounted for the 
fact that the average patient in a specialty hospital was healthier 
than the average patient in a general hospital. However, once the 
analyses accounted for the fact that specialty hospitals were caring 
for healthier patients, mortality rates in specialty cardiac hospitals 
were 15% lower and this difference was no longer statistically 
significant. Finally, once we accounted for the healthier patients and 
the fact that specialty hospitals perform significantly greater numbers 
of angioplasty and bypass surgery than general hospitals, mortality 
rates in specialty and general hospitals were nearly identical.
    Thus, the available data suggest that mortality rates in specialty 
cardiac hospitals and general hospitals are similar once patient 
characteristics and hospital procedural volume have been accounted for. 
From this perspective, it is reasonable to say that there is nothing 
inherent in the specialty hospital model that produces improved 
outcomes. Alternatively, it could be argued that mortality rates in 
specialty cardiac hospitals are approximately 10-15% lower because of 
the fact that specialty cardiac hospitals perform significantly more 
procedures than the average general hospital.
    There are a number of unanswered questions that remain. In 
particular:

 How do specialty and general hospitals compare for other non-cardiac 
        procedures (e.g., orthopedic procedures)?
 How do specialty and general hospitals compare with respect to 
        outcomes other than mortality (e.g., patient satisfaction, 
        functional status)?

4) Specialty hospitals reduce the profitability of general hospitals.
    While there is widespread concern and anecdotal reports that 
specialty hospitals are reducing the profitability of competing general 
hospitals, available data are limited. A study by the GAO did not find 
clear evidence that this was occurring. Similarly, preliminary analyses 
by Schneider et al. found evidence lacking that specialty hospitals 
significantly harm general hospital profitability.\31\,\32\
    Thus, available data have not demonstrated that specialty hospitals 
reduce general hospital profitability in the short term.
    However, there are a number of questions that remain regarding the 
impact of specialty hospitals on the profitability of general 
hospitals. In particular:

 What is the long-term effect of specialty hospitals on the financial 
        performance of general hospitals?
 Does the entry of specialty hospitals limit the ability of general 
        hospitals to perform important social missions such as charity 
        care?
           summary of available data and areas of uncertainty
    Specialty hospitals appear to admit healthier patients than 
competing general hospitals and on average specialty hospitals perform 
many more procedures per-year than competing general hospitals. For 
cardiac procedures (e.g., bypass surgery, angioplasty) unadjusted 
mortality is significantly lower in specialty hospitals than general 
hospitals, but this difference is no longer statistically significant 
once the analyses have accounted for the fact specialty hospitals treat 
healthier patients. Adjusting for patient characteristics and hospital 
procedural volume demonstrates similar mortality rates in specialty 
cardiac and general hospitals. In short-term analyses, specialty 
hospitals do not appear to reduce general hospital profitability.
    There are a number of important areas of uncertainty that require 
further investigation. First, it is unclear how and why healthier 
patients concentrate in specialty hospitals. Second, it is unclear 
whether the findings we have demonstrated with respect to hospital 
procedural volume and patient mortality can be extrapolated from 
cardiac hospitals to other types of specialty hospitals. Third, it is 
unclear how specialty and general hospitals compare in other important 
types of outcome measures such as patient satisfaction or functional 
status. Finally, the longer-term financial impact of new specialty 
hospitals on existing general hospitals is uncertain.

6) Recommendations and Conclusions.
    In summary, I agree with the recent recommendations that the 
Medicare Payment Advisory Commission (MedPac) presented to The Congress 
in March, 2005.
    First, I believe that extending the current moratorium on further 
specialty hospital development to allow for time for investigation of 
the remaining questions about specialty hospitals and their impact on 
general hospitals is reasonable. Furthermore, if the moratorium on 
specialty hospitals is extended to allow for further study, The 
Congress should consider making funds available either through Medicare 
or the National Institutes of Health to facilitate these studies. 
Second, I agree with the MedPAC conclusion that updating the current 
Medicare PPS could reduce the financial incentives that may encourage 
hospitals to focus on admitting healthier (more profitable) patients. 
Third, I believe that any legislation prematurely banning specialty 
hospitals could hinder regionalization of high-risk medical procedures 
and could ultimately harm patient care.

[GRAPHIC] [TIFF OMITTED] T1636.002

[GRAPHIC] [TIFF OMITTED] T1636.003

    Mr. Deal. Thank you all. Very interesting testimony.
    As we promised, we are all over the board of this one.
    Mr. Thomas, I think yours is a unique situation. You have 
explained to us how, under the tax law, you can, in a 
collaborative effort, work with specialty hospitals, and it 
appears to be working rather well with your overall 
encompassing of that, is that correct?
    Mr. Thomas. Absolutely.
    Mr. Deal. Mr. Hornbeak, is your hospital an HCA hospital?
    Mr. Hornbeak. We are a partnership with HCA as one of the 
partners and the Methodist Health Care Ministries of South 
Texas being the other, a non-profit organization.
    Mr. Deal. So you have got a combination even met.
    Mr. Hornbeak. I do. I sure do.
    Mr. Deal. Yet you----
    Mr. Hornbeak. But the doctors don't own any piece of it.
    Mr. Deal. I thought HCA started out with the doctors owning 
it?
    Mr. Hornbeak. Well, they started their company, but they 
don't refer patients. Dr. Friss does not refer any patients to 
HCA hospitals. He is an owner.
    Mr. Deal. Are you partnering with any ambulatory surgical 
centers in HCA?
    Mr. Hornbeak. Yes, sir. I do have ambulatory surgery 
centers, and three of them are joint-ventured with surgeons.
    Mr. Deal. Well, would you distinguish for me the difference 
between you condemning the hospital situation and then now 
being in an ambulatory surgical center setting? What is the 
difference?
    Mr. Hornbeak. Yes, sir, I would be happy to.
    Our participation in joint-ventured ambulatory surgery 
centers is as inconsistent as the public policy that governs 
ambulatory surgery centers versus specialty hospitals. 
Ambulatory surgery centers, unlike hospitals, are not a 
designated health service under the anti-referral laws, so they 
are not covered. Ambulatory surgery centers, unlike hospitals, 
operate under a specific safe harbor within the fraud and abuse 
laws. The fraud and abuse laws establish specific guidelines 
that ASCs have to follow that they must meet, and our ASCs are 
operated within those guidelines. Specialty hospitals, on the 
other hand, exploit a loophole in the law, and this is the 
issue that we have been asked to address. Self-referral and 
ownership do present a risk, under any arrangement, including 
ASCs, and if the guidelines change, we would adjust our model. 
But hospitals have been faced with you either play according to 
those joint-venture guidelines or you get out of the business, 
you default away your ambulatory surgery business. The 
composite----
    Mr. Deal. Okay. Let me let this to----
    Mr. Hornbeak. Yes.
    Mr. Deal. [continuing] Dr. Pierrot, first of all a comment 
on that and then Mr. Thomas after that on what you make your 
distinction.
    Mr. Pierrot. Yes, sir.
    On the distinction between owning an interest in a surgery 
center and the surgical hospital, I don't see a distinction.
    Mr. Deal. Okay. Mr. Thomas?
    Mr. Thomas. There is no distinction. The only distinction 
that I can think of is in when the patient needs to spend the 
night and has additional ancillary services required of a 
hospital, and the other the patient doesn't spend the night and 
doesn't need those ancillary services that a hospital setting 
provides. That is the only difference.
    Mr. Deal. One of the suggestions I think that Dr. McClellan 
made that he is going to be doing is looking at some of the 
specialty hospitals and see if they actually are more closely 
aligned with the definition of ACS. Is there a problem with 
that approach to it? Do you see any problems that might be 
inherent in that? Dr. Cram, I will let you comment, too. Maybe 
I will start with you.
    Mr. Cram. I think that when we first started looking at 
this, actually, we thought everybody knows what a specialty 
hospital is, we can all agree. But as you can tell, we can't. 
And specialty hospitals probably represent a continuum. Let me 
give you an example. When we started our research, there were 
some Catholic hospitals in particular, faith-based, I would 
say. I am not sure if they are actually Catholic, but faith-
based hospitals, which were actually extremely specialized. So 
these were not in the traditional mold of a specialty hospital, 
but yet they were behaving in every manner like a specialty 
hospital. Does a specialty hospital have to be for-profit? 
Maybe, maybe not. Does a specialty hospital have to have 
physicians in the owner investors? Maybe, maybe not. Deciding 
what is and what isn't a specialty hospital, or even a hospital 
and an ambulatory surgical center, is, you know, not cut and 
dried.
    Mr. Deal. Okay. Well, it seems to me that that is an area 
that would be fruitful to explore and, quite frankly, Mr. 
Hornbeak, the distinctions that you make, from a practical 
standpoint, to me, sound like, on the one hand, you would be 
arguing for the specialty hospitals because of the arguments 
you have made in support of the ambulatory surgical centers. I 
mean, it seems to me we ought to clear all of that up and maybe 
it will be done administratively by Dr. McClellan and his 
staff.
    My time is, really, almost gone, but I will simply say 
this. You all have given us a really unique view of the issue. 
I come from a certificate-of-need State, also, so we don't have 
the issue developing there. But I do say, and I see more and 
more, that patients are demanding that they have better 
services, and sometimes it appears that the overall 
administrative hierarchy of the hospital setting is going to 
force even States like mine that have certificate-of-need laws 
to address that question. When doctors are saying, ``I can't 
get operating time.'' When doctors say, ``There is no ability 
to plan a schedule, because I get bought by emergencies in the 
normal hospital setting,'' which is certainly understandable, 
and nobody argues that the emergencies should take priority, 
but I think there is an issue that is continuing to develop 
around this, and you all have helped to shed light on it, and I 
thank you for that.
    Mr. Gordon.
    Mr. Gordon. Thank you, Mr. Chairman.
    I want to concur; this has been a very good hearing. I 
think we have had diverse speakers that have helped us answer a 
few questions but that have also opened up a lot more, and we 
need to learn more about this.
    Mr. Hornbeak, just a couple of questions for you, please.
    Mr. Hornbeak. Yes, sir.
    Mr. Gordon. Are you providing services like charity care 
and other services to your local community that are not 
provided by specialty hospitals? And do you have regulatory 
obligations that do not apply to specialty hospitals? And if 
so, what is the impact, if any, that these hospitals are having 
on your ability to be able to continue these services and 
charity care?
    Mr. Hornbeak. Yeah, we certainly provide charity care. Our 
write-offs in the past year totaled over $49 million. That is 
about 2 percent of our gross revenue. Twenty-two percent of our 
patient admissions are Medicaid and self-pay. I already 
mentioned 41 percent are ER visits in that category. All five 
Methodist hospitals are Medicare and Medicaid disproportionate 
share providers. We provide free clinics. We provide 
transportation. We provide services all over town, so we do 
that in spades.
    But we have seen some really deleterious effects from the 
specialty hospitals that have come to our town, and so I will 
mention just a couple of those.
    We have seen a deterioration in our volumes, payer mix, and 
net income. The Heart Hospital has affected us to the tone of 
about $1 million a month. Patients are ``cherry-picked'' right 
out of the ERs and in the hospital, and this is often very 
subtle. A patient might even have his calf, be told he is going 
to be needing a surgery. The surgeon comes in and says, ``But 
you need to go home.'' And then when that patient is appointed 
for the surgery, it is not done at the Methodist Hospital where 
the patient came in through the ED, but it is done at the Heart 
Hospital. ER call coverage problems have been exacerbated 
because of the exodus of particularly orthopedics in the case 
of the spine hospital, and full-service SA hospitals have seen 
a steady stream of transfers from specialty hospitals when 
patients have complications.
    If the green flag comes out on June 8, I think you will see 
the systematic dismantling of the community hospital safety net 
in this country, or at least in the States where this is 
rampant. We have at least two more teeing up in San Antonio. I 
understand there are five in Houston, and I understand there 
are at least three or four in Dallas. I am not sure if that 
counts all of the Baylor ones or not. They are going to be 
huge, and you haven't seen huge deleterious effects among the 
community hospitals. We can defend and patch leaks for a while, 
but when heart goes, when neuro goes, when spine surgery goes, 
when oncology goes, the cumulative effects within a few years 
will be gargantuan.
    And outpatient surgery actually gives us a real idea of how 
this is going to play out, because what happened in outpatient 
surgery is hospitals did outpatient surgery centers starting 30 
years ago. And first of all, the surgeons didn't own any of it. 
Entrepreneurs came to town in round one and said, ``Doctors, 
you ought to own 25 percent of this.'' So they did what I call 
the round one, 25-percent deals. Hospitals said, ``We either do 
25-percent deals with our surgeons or we lose it.'' A few years 
later, they came back for round two, and said, ``We are going 
to do 50 percent.'' You know, these hospitals are only allowing 
you to do 25 percent. So they did 50-percent deals. We upped 
our model in the mid-1990's to 50-percent joint ventures in 
surgery centers. Now the Foundation Surgical Corporation out of 
Oklahoma is back just this last year, and now the surgeons are 
being told, ``You need to get 80 percent.'' As long as I still 
have a significant chunk of outpatient surgery, even in my own 
joint-ventured surgery centers, the entrepreneurs will come 
back to town to take each successive chunk until there is 
absolutely nothing left. In the foundation proforma that we got 
hold of, the surgeons are flocking like bees around it, because 
it is $5,000 and a first year return of $237,000. I don't blame 
them for doing it, either, but it is wrong.
    Mr. Deal. Dr. Burgess.
    Mr. Burgess. Thank you, Mr. Chairman.
    And perhaps we could continue on that just for a moment, 
Mr. Hornbeak.
    Mr. Hornbeak. Yes, sir.
    Mr. Burgess. Now when you did your joint-venture surgery 
center with your doctors in San Antonio, what percentage of 
ownership was the hospital and what percentage of ownership was 
physician?
    Mr. Hornbeak. Originally, we did the 20 or 25-percent 
physician ownership. Then we had to up it in successive surgery 
centers to the 50-percent model.
    Mr. Burgess. And do you currently have any joint ventures 
on the drawing board?
    Mr. Hornbeak. We have three currently. We don't have any on 
the drawing board. We are worried about the three that are 
being emptied out by that Foundation 80-percent deal. We are 
thinking of turning them into bowling alleys. That will be 
about the use we will have left for them, because we have 
already got mothball surgery centers at other hospital systems 
who have been decimated. This business is just moving from one 
place to the other to the other.
    Mr. Burgess. You said, what, you had a $49 million write-
off last year? Did I understand that correctly?
    Mr. Hornbeak. Yes, sir; that is just the charity care, not 
the community benefits and also not what our non-profit parent 
also does in addition to that. But yes, $49 million is the 
number.
    Mr. Burgess. Okay. What were your earnings last year?
    Mr. Hornbeak. Community hospitals, as was stated earlier, 
are making about a 2- or 3-percent margin. HCA margins over the 
last several years have been in the 4- to 7-percent range. And 
our margin is in that range, the upper end of that range.
    Mr. Burgess. Could you give us any idea what that figure 
would be in dollars?
    Mr. Hornbeak. Yeah, it is $90 million in 2004.
    Mr. Burgess. Okay. And please don't misunderstand me. I 
love HCA. I practiced in an HCA hospital for all of my 
professional life, and I think highly of the mission that you 
all have and the good work that you do and all of the good 
people that work for you.
    Mr. Hornbeak. Thank you.
    Mr. Burgess. Now Mr. Thomas, of course, I am very familiar 
with your program as well, being just down the street in 
Dallas, and I think it is a very attractive middle ground that 
you have staked out, and I am grateful for you for being up 
here today and telling that great story that Baylor has 
partnering with physicians.
    Mr. Thomas. Thank you.
    Mr. Burgess. I think it only makes sense, and for the life 
of me I don't understand why it has not been copied with every 
for-profit hospital chain in the country, given what Mr. 
Hornbeak is up against. How is this different from what Mr. 
Ferguson was talking about with the gain-sharing?
    Mr. Thomas. We wouldn't be opposed to gain-sharing, but 
gain-sharing is a very limited, targeted example of how to 
capture costs or reduce cost, and you know, the joint-venture 
model we do is a permanent reduction in cost. It is a permanent 
solution to having the physicians continuously improving the 
quality and the cost-savings and monitoring costs in the 
hospital and providing efficient care. So gain-sharing is very 
limited. The physician has nothing to lose. They don't invest 
any capital. And if the gain-sharing program is not monitored 
closely, the physician is really incentivized just to cut 
costs, period, without any impact on safety or quality. The 
Baylor model, the physician is completely at risk not only 
financially, but their reputation, and it is a continuous 
improvement in monitoring that cost.
    Mr. Burgess. So clearly, you see that as a superior model 
to the gain-sharing model?
    Mr. Thomas. Yes, sir.
    Mr. Burgess. Now is there anything that we are doing at the 
legislative end that is injurious or pernicious to your model 
to allow that to fully develop and go forward, besides the 
obvious, the moratorium?
    Mr. Thomas. Well, the moratorium has been very devastating 
to our furtherance of the model. As I mentioned, the inner-city 
Heart Hospital needs to expand to provide more care to, you 
know, an emergency room. About 40 percent of the patients who 
come to that hospital have no ability to pay.
    Mr. Burgess. Now just for my own edification, as far as 
this percentage breakdown of hospital-doctor ownership, what 
are your current models providing as far as hospital and doctor 
ownership percentages?
    Mr. Thomas. Our models, and we firmly do the 51 percent, at 
least 51 percent, through Baylor or a Baylor-controlled entity, 
and physicians up to 49 percent.
    Mr. Burgess. And are you feeling the same pressure from the 
Foundation Health that Mr. Hornbeak spoke about, the Oklahoma 
company?
    Mr. Thomas. We feel competition from all of the community 
hospitals, and you know, all kinds of models. We have pursued 
this successfully, and again, the physicians talk to each other 
in the success of one center and in working with an 
organization like Baylor, like United Surgical Partners, they 
want to work in those settings. And one, you know, 6 years ago 
has turned into 25 facilities today.
    Mr. Burgess. Yeah, I wish we had had that in the 1970's.
    Finally, Mr. Thomas, do you do Medicare in your facility?
    Mr. Thomas. Yes, sir. Medicare----
    Mr. Burgess. And do you do Medicaid?
    Mr. Thomas. Medicaid and all of our facilities operate 
under the same Baylor charity care policy as our non-profit 
hospitals do.
    Mr. Burgess. And so you see uninsured patients where there 
is little hope of recovering the fee?
    Mr. Thomas. Yes, sir.
    Mr. Burgess. Okay. I see my time is up, so thank you, Mr. 
Chairman.
    Mr. Deal. Thank you.
    Ms. Myrick.
    Ms. Myrick. Thank you, Mr. Chairman.
    Mr. Thomas, just a point of clarification because of the 
mix that you have. You said you have complied with all of the 
laws----
    Mr. Thomas. Yes, ma'am.
    Ms. Myrick. [continuing] but are the joint-venture for 
profit specialty hospitals for profit or are they non-profit?
    Mr. Thomas. Well, they are for-profit. They have physician 
partners as investors, so they have it structured as----
    Ms. Myrick. So they are treated the same way as a for-
profit hospital?
    Mr. Thomas. They are for-profit hospitals. The physicians 
pay taxes, and they pay property taxes, just like the other 
for-profit hospitals that don't have physician owners.
    Ms. Myrick. And then are you familiar with other models in 
the country that are doing the same thing you are, other 
hospitals?
    Mr. Thomas. Yes, ma'am. The Sisters of Mercy has an 
Oklahoma heart hospital. The Ascension, which is the largest 
Catholic faith-based hospital system in the world, I think, has 
many joint ventures like Baylor has pursued. The largest heart 
program in the State of Illinois is a joint venture between St. 
John's, a Catholic institution, and physicians in the 
Springfield community, and a number of other similar non-profit 
physician partnerships around the country.
    Ms. Myrick. I appreciate it.
    Thank you.
    Mr. Thomas. Yes, ma'am.
    Ms. Myrick. I yield back.
    Mr. Deal. I thank the gentlelady.
    Mr. Hall.
    Mr. Hall. I thank you, Mr. Chairman.
    I will ask Mr. Thomas. I think Baylor operates a couple of 
specialty hospitals in my District, the largest one is up in 
Frisco, and then there is one in Rockwall County, which is my 
home county, in this little city called Heath there. And it is 
a pretty important issue for them. Although they are not in my 
District anymore--they were for the last 15 years--a Texas 
spine and joint hospital in Tyler was part of my District.
    Is Baylor the only non-profit hospital to form a joint 
venture with physicians?
    Mr. Thomas. No, sir. As I have mentioned, the----
    Mr. Hall. The doctor asked you about that just a moment 
ago?
    Mr. Thomas. No, that is okay. But Texas Health Resources, 
which is the other Presbyterian hospital system in Dallas and 
Harris Methodist in Fort Worth, they partner with physicians in 
similar facilities.
    Mr. Pierrot. If I might comment, the GAO study showed that 
one-third of the specialty hospitals that they studied were 
not-for-profit joint ventures or solely owned. And in our 
community, there is another 51/49 percent. The Fresno Heart 
Hospital has the same model. The largest community hospital is 
the joint venture partner in that.
    Mr. Hall. Has the legislature in Texas passed any 
legislation banning physician ownership of hospitals?
    Mr. Thomas. No, sir. In fact----
    Mr. Hall. Have they had it up before them? Have they had 
bills introduced to that effect?
    Mr. Thomas. Yes, sir; they have. And the Texas Senate 
specifically has rejected that proposal.
    Mr. Hall. And what would happen to Baylor if Congress 
repealed the ``whole hospital'' exception? And what would 
happen to these specialty hospitals, the one in my county and 
the two in my District?
    Mr. Thomas. Yes, sir; they would have to be unwound. The 
physicians would have to be bought out, and I am not sure we 
would be able to continue to provide those services or those 
facilities in those communities.
    Mr. Hall. I think, Mr. Chairman, that is what I wanted to 
hear, and I thank you.
    I yield back my time.
    Mr. Deal. Would the gentleman yield to Mr. Gordon for a 
question that he would like to ask?
    Mr. Hall. Well, I wouldn't want to, but I will.
    Mr. Gordon. Thank you, Mr. Hall. I will be quick.
    Mr. Thomas, you believe that Baylor Hamilton provides 
superior care for cardiac, don't you?
    Mr. Thomas. Yes, sir.
    Mr. Gordon. Does Baylor Hamilton Heart Hospital treat all 
cardiac care, or are some of those referred to the Baylor 
University Medical Center?
    Mr. Thomas. When you say cardiac care, there is cardiac 
surgery, there is transplant surgery, and then there is 
interventional cath and vascular----
    Mr. Gordon. Well, are you referring some of the things that 
Baylor Hamilton can do? Are you referring some of those to----
    Mr. Thomas. No, sir. That was my point. For the cardiac 
services provided, Baylor Hamilton is the only hospital on that 
campus that provides those services.
    Mr. Gordon. So you would only refer someone to the medical 
hospital that that service could not be provided at Baylor?
    Mr. Thomas. That is correct.
    Mr. Gordon. Is that correct?
    Mr. Thomas. That is correct. And 35 percent of Hamilton's 
patients come from the medical center, because they don't 
provide that service.
    Mr. Gordon. Okay. Thank you.
    Mr. Hall. Mr. Chairman.
    Mr. Deal. Yes, sir.
    Mr. Hall. If I have any time left, I would like to yield it 
to Dr. Burgess.
    Mr. Deal. You may do so.
    Mr. Burgess. I just wanted to ask, Mr. Thomas, you heard 
Dr. McClellan's testimony and his plans. Now I understand you 
don't want to see the moratorium extended, but what he was 
talking about, the 6-month look at the payment schedules and 
the payment formulas, is that going to be deleterious to your 
business?
    Mr. Thomas. We would support that look, and we think 
hospitals ought to be appropriately compensated for the 
services they provide, and it sounds like that is where they 
are headed.
    Mr. Burgess. And do you feel you will be able to maintain 
profitability in your joint ventures if, indeed, the Medicare 
pricing is altered?
    Mr. Thomas. Well, I would obviously like to see the 
pricing, but let me say, our hospitals have significantly 
reduced the costs to provide those services. The Heart Hospital 
downtown reduced the cost to provide that service $12 million 
the first year it was in operation.
    Mr. Burgess. Very good.
    Thank you, Mr. Hall, and Mr. Chairman. I will yield back.
    Mr. Hall. I yield back my time, Mr. Chairman.
    Mr. Deal. I thank all of you. I would like to thank the 
members who are here. Regrettably, we have lost some of our 
members over the course of this morning, but I do thank you 
all. Your testimony has been presented in written form to 
everyone's office and to their staff. And as this issue 
continues to become significant, and I think it will even with 
the expiration of the moratorium, I think it will take on some 
new significance, and certainly with the review that Dr. 
McClellan is going to go forward with, I think that is an 
important review. And I think your participation in going 
forward with his efforts will be significant as well.
    Thank you all for being here. Thanks for your patience for 
waiting this long.
    The hearing is adjourned.
    [Whereupon, at 1:02 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

         Prepared Statement of the American College of Surgeons

    The American College of Surgeons (College) is pleased to submit a 
statement for the record of the Subcommittee on Health's hearing on 
specialty hospitals. This is a very important issue for the College and 
its members. As you know, surgeons provide patient care in all of 
America's hospitals. The College strongly believes that maintaining 
care in all types of hospitals, including specialty hospitals, is 
necessary to sustain full patient access to the highest quality of 
surgical care.
    Surgeons advocate the following policies for addressing the issue 
of specialty hospitals:

 We oppose elimination of the whole hospital exception, either by 
        legislation or regulation;
 We oppose extension of the MMA moratorium temporarily or permanently; 
        and
 We support refining the hospital DRGs to ensure that Medicare 
        payments properly reflect the cost of providing care.
    Specialty hospitals are an important marketplace innovation. 
Indeed, when the hospital prospective payment system was implemented in 
1982, it was widely expected to lead to hospital specialization in 
order to increase efficiency and improve the quality of care. This is 
exactly what is happening today with the establishment of specialty 
hospitals. These hospitals provide more choices for patients and they 
provide high-quality care. Patients frequently choose these hospitals 
and they report high satisfaction with their care and experience.
    Physician-ownership of specialty hospitals is a positive trend. It 
is the joint ventures among physicians, hospitals, and other investors 
that are making possible the growth of specialty hospitals and the 
improvements they bring. Frequently, the initiative to create a 
specialty hospital comes from a physician group, often a group 
recognized in the community for its clinical excellence, as Regina 
Herzlinger notes in her case study of MedCath.1 Physicians 
and hospitals working together, and with shared incentives, are able to 
make important changes in the delivery of health care.
---------------------------------------------------------------------------
    \1\ Herzlinger RE. MedCath Corporation. Harvard Business School 
case 9-303-041. Cambridge, Mass.: Harvard University, 2003
---------------------------------------------------------------------------
    The College is concerned about the misplaced emphasis that some 
attach to financial gain as the prime motivator for physicians becoming 
involved in these ventures. Physicians are motivated to form specialty 
hospitals because they recognize the potential to increase productivity 
and efficiency while also improving quality of care and patient 
satisfaction. Sometimes physicians have been frustrated while trying to 
achieve these goals in existing community hospitals. At a MedPAC 
meeting last September, a MedPAC analyst reported on site visits, 
saying, ``We repeatedly heard about the frustrations physicians had 
with community hospitals. Many community hospital administrators 
acknowledged they had been slow to react to the issues raised by their 
physicians.'' 2
---------------------------------------------------------------------------
    \2\ Transcript of public meeting: Medicare Payment Advisory 
Commission, September 10, 2004, Washington, D.C; available at 
www.MedPAC.gov
---------------------------------------------------------------------------
    We want to emphasize that physicians have experienced very 
significant gains in productivity and efficiency through their 
involvement in specialty hospitals. According to a MedPAC staff report, 
``Physicians . . . told us that they can perform about twice as many 
cases in a given time period at specialty hospitals as at community 
hospitals. Physicians mentioned operating room turnaround times at 
specialty hospitals of 10-20 minutes, compared with over an hour at the 
community hospitals where they also practice. . . . At one specialty 
hospital, we were told that physician incomes had increased by 30 
percent as a result of increased productivity.'' 3
---------------------------------------------------------------------------
    \3\ Specialty hospital study meeting brief: prepared for meeting of 
Medicare Payment Advisory Commission, September 9-10, 2004, Washington, 
D.C.
---------------------------------------------------------------------------
    Finally, the entry of a specialty hospital into a community can be 
a powerful force for change and improvement. Efficiency and quality are 
the result of competition, which is healthy for the marketplace. In 
fact, the Federal Trade Commission recently reported that state 
certificate-of-need laws have an adverse impact on health care because 
they stifle competition. Further evidence comes from MedPAC, which 
reported that community hospitals in areas it visited responded to 
marketplace pressure created by specialty hospitals and improved their 
own performance. Specialty hospitals provide efficient, high-quality 
care, and patient satisfaction is high. They bring value to local 
health care systems.
    Indeed, quality and efficiency are the prime motivators for 
surgeons who choose to practice in these hospitals--including those who 
have no ownership interest. They can be more productive and have 
greater access to specialized equipment and staff than is possible in a 
general hospital. The end result is higher quality at lower cost.
    The criticisms of physician-owned specialty hospitals are not well 
founded. Critics say that they lead to increased utilization and 
unnecessary services, but there is no evidence to support this claim. 
Critics also say specialty hospitals do not serve low-income patients 
or those who lack health insurance coverage. While it is true that 
specialty hospitals tend to treat relatively few Medicaid and uninsured 
patients, this is because of the markets where they are located. 
Investors tend to build specialty hospitals in financially stable 
suburban areas, where community hospitals also tend to treat fewer 
Medicaid and uninsured patients. Further, unlike most hospitals in 
these markets, specialty hospitals support their communities through 
the taxes they pay.
    Finally, critics say that specialty hospitals tend to treat less 
severely ill--and more profitable--patients, thus leaving the less 
profitable patients to community hospitals that provide a full range of 
services to all types of patients. Many of these services tend to be 
unprofitable. Unprofitable services, for example, include medical 
admissions rather than surgical ones, emergency and trauma care, and 
burn care. Thus, critics are concerned that specialty hospitals will 
drain resources from full-service community hospitals and perhaps hurt 
them financially.
    The College would share this concern, but we do not believe that 
this will occur or that prohibiting specialty hospitals is the most 
appropriate way to address the issue. As you know, the College has long 
championed improvements to our nation's emergency medical systems and 
trauma care systems, and we continue do so. We also support the DRG 
changes that will address this issue of unprofitable services, as 
recommended by MedPAC in its March report to Congress.
    It is also important to recognize that, by their nature, specialty 
hospitals can only treat patients whose medical needs can be met by 
their resources. Patients with underlying conditions beyond a 
hospital's capabilities must be referred to more comprehensive 
facilities. The same is true for ambulatory surgical centers (ASCs)--
some patients cannot be cared for appropriately in these facilities and 
must be referred to general or tertiary care hospitals. We also note 
that some comprehensive hospitals have denied privileges to physicians 
who practice in competing hospitals or ASCs, a development that clearly 
should cause concern among patients.
    Like nearly all hospitals, specialty hospitals are paid based on 
DRG payments that vary according, to patient diagnosis, complications, 
procedures, and the average resources required to treat comparable 
cases. The recent MedPAC reports describe flaws in the Medicare DRG 
system that cause payments for some cases to be higher than would be 
dictated by the average cost of providing services and, conversely, to 
pay less than would be indicated for other cases. These discrepancies 
can provide an opportunity for any hospital, whether specialty or 
comprehensive, to select patients that are more profitable and to 
provide fewer services--or even none at all--for less profitable 
patients. The College believes that these perverse incentives ought to 
be addressed and so we strongly support the recommendations advanced by 
MedPAC in its recent reports to Congress.
    We also are pleased that, as reported in the President's budget for 
FY 2005, CMS plans to adopt MedPAC's recommendation by initiating a DRG 
refinement process. Done properly, this process will ensure that 
Medicare payments accurately reflect the cost of providing care and 
that all hospitals are paid fairly and appropriately for their services 
to Medicare patients. We believe that these changes should resolve 
concerns that have been raised about the impact that specialty 
hospitals can have on community hospitals. In effect, the changes will 
create a level playing field in which healthy competition can operate, 
leading to enhanced quality and efficiency in the delivery of all 
healthcare services. The College believes that improvements like those 
recommended by MedPAC must be implemented in order to ensure the 
financial viability of providing emergency and trauma care as well as 
the broad range of care provided by tertiary care centers and other 
comprehensive hospitals.
    In closing, we want to emphasize that specialty hospitals are not 
new--physicians and others have been establishing them for 75 years. In 
fact, some of the nation's finest hospitals are specialty specific. 
Also, it is worth noting that the average physician investor has a very 
small financial stake in specialty hospitals, and the majority of 
surgeons who work in physician-owned hospitals have no ownership 
interest. Further, a ban on physician ownership of specialty hospitals 
will not stop the trend. Corporations, including hospitals, are 
building them and they will continue to do so. Clearly, any action to 
prohibit specialty hospitals would be an action to limit the 
competition that is so vital to keep the healthcare system improving 
its efficiency, quality of care, and patient satisfaction. This is 
healthy competition and it is an example of the values that have been 
promoted by the Administration and by Congress. We must work together 
to preserve specialty hospitals, support healthy competition, and end 
distortions in our payment systems that can interfere with patient 
access and harm providers.
    Surgeons remain committed to community health care. Teaching 
hospitals, tertiary care centers, trauma and burn centers, and the 
network of community hospitals are all vital to the well-being of 
surgical patients. Considering this, the American College of Surgeons 
encourages all physician hospital owners to practice according to the 
following principles:

 Specialty hospitals should accept all patients for which they can 
        provide appropriate care, without regard to source of payment.
 Patient selection should be based on medical criteria and facility 
        capabilities. Those patients with needs that extend beyond a 
        facility's resources should be referred to a tertiary care 
        center or other hospital that is appropriately equipped and 
        staffed.
 Surgeons practicing in specialty hospitals should maintain their 
        commitment to providing the emergency services needed in their 
        communities and should take calls in community hospital 
        emergency departments, as necessary.
 The issue of whether specialty hospitals should have their own 
        emergency rooms is, and should remain, a matter of state law 
        and community need.
 Physician investors should disclose their financial interest to 
        patients they propose to treat in a specialty hospital.
    Thank you for the opportunity to share the views of the American 
College of Surgeons. Questions and comments may be directed to the 
College's Washington Office, at 202-337-2701.
                                 ______
                                 
         Prepared Statement of the American Medical Association

    Chairman Deal, Ranking Member Brown, and Members of the Energy and 
Commerce Committee, Subcommittee on Health, the American Medical 
Association (AMA) appreciates the opportunity to provide our views 
regarding specialty hospitals.
    The AMA commends the Subcommittee for holding this hearing on 
specialty hospitals and their role in the delivery of quality health 
care. As you may know, hospitals that provide care for a specific type 
of a patient or a defined set of services are not new. Specialty 
hospitals have been in existence for most of the latter half of the 
twentieth century. Yet more recently, numerous market and environmental 
factors have led to the increase in physicians' desire to own and 
operate these hospitals. Since 1995, the number of specialty hospitals 
that focus on cardiac, orthopedic and surgical services has grown. This 
growth has led to concern among general hospitals who must compete with 
these facilities. The hospital associations and many general hospitals 
are vigorously attempting to eliminate this competition.
    The AMA strongly supports and encourages competition between and 
among health facilities as a means of promoting the delivery of high-
quality, cost-effective health care. Consistent with medical ethics, we 
support physician ownership of health facilities, and referrals by 
physician owners, if they directly provide care or services at the 
facility. The growth in specialty hospitals is an appropriate market-
based response to a mature health care delivery system and a logical 
response to incentives in the payment structure for certain services 
and the increasing medical needs of elderly patients.
    Physician owned specialty hospitals have not harmed general 
hospitals financially. They have improved care for Medicare 
beneficiaries and other patients, and patient satisfaction with these 
hospitals is extremely high. Specialty hospitals increase competition 
in the hospital industry by providing patients with more choice and 
forcing general hospitals to innovate. Therefore, the AMA believes 
there is no need to extend the moratorium on physician referrals to 
specialty hospitals.
    The AMA does believe, however, that changes are needed in the 
inpatient and outpatient Medicare prospective payment systems to more 
accurately reflect the relative costs of hospital care, thus 
eliminating the need for cross-subsidization of services by general 
hospitals. In addition, we support policy changes that would help 
ensure the financial viability of ``safety-net'' hospitals so they can 
continue to provide access to health care for indigent patients. 
Combined, these changes would ensure the continued financial stability 
of general and safety net hospitals, further enhancing competition in 
the market for hospital services.

                               BACKGROUND

    As this subcommittee is aware, the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA) imposed an 18-month 
moratorium on referrals of Medicare and Medicaid patients by physicians 
investors in certain specialty hospitals not already in operation or 
under development as of November 18, 2003.1 The MMA required 
the Medicare Payment Advisory Commission (MedPAC), in consultation with 
the Government Accountability Office (GAO), and the Secretary of the 
Department of Health and Human Services (HHS) to conduct studies of 
specialty hospitals and report their findings and recommendations to 
Congress.
---------------------------------------------------------------------------
    \1\ The MMA defined specialty hospitals as those primarily or 
exclusively engaged in cardiac, orthopedic, surgical procedures and any 
other specialized category of services designated by the Secretary.
---------------------------------------------------------------------------
    According to the GAO,2 there are 100 existing specialty 
hospitals that focus on cardiac, orthopedic, women's medicine, or on 
surgical procedures.3 Of the 100 specialty hospitals 
identified by the GAO and 26 others under development in 2003, there 
were various owners/investors, including both hospitals and physicians. 
Seventy percent had some degree of physician ownership. One-third of 
these specialty hospitals were joint ventures with corporate partners, 
one-third were joint ventures with hospitals, and one-third were wholly 
owned by physicians.
---------------------------------------------------------------------------
    \2\ See U.S. General Accounting Office, Specialty Hospitals: 
Information on National Market Share, Physician Ownership, and Patients 
Served, GAO-03-683R (April 18, 2003); and U.S. General Accounting 
Office, Specialty Hospitals: Geographic Location, Services Provided, 
and Financial Performance, GAO-04-167 (October 22, 2003).
    \3\ This number excludes numerous other specialty hospitals that 
have been in existence for some time, such as eye and ear hospitals, 
children's hospitals, and those that specialize in psychiatric care, 
cancer, rehabilitation, and respiratory diseases.
---------------------------------------------------------------------------
       FACTORS CONTRIBUTING TO THE GROWTH OF SPECIALTY HOSPITALS

    There are numerous market and environmental factors that have 
contributed to the growth of specialty hospitals, including:

 Many physicians are frustrated over hospital control of management 
        decisions and investment decisions that affect their 
        productivity and the quality of patient care. Physicians often 
        have little or no involvement in governance and management, 
        control over reinvestment of profits in new equipment, or 
        influence over scheduling and staffing needs for cases 
        performed in the operating room. They believe that hospitals 
        are not collaborating with them to align hospital processes or 
        engage in joint ventures. Physicians who invest in specialty 
        hospitals are able to increase their productivity, improve 
        scheduling of procedures for patients, maintain appropriate 
        staffing levels, and purchase desired equipment--all of which 
        improve the quality of patient care.
 Medicare and private insurer payment rates are perceived to be 
        relatively high for certain services, often exceeding hospital 
        costs associated with these services, and relatively low for 
        other hospital services.
 Payments for physician professional services have declined while the 
        costs of medical practice, such as professional liability 
        premiums, have continued to escalate substantially. As a 
        result, some physicians have sought to increase their practice 
        revenues with the facility fees derived from investment in a 
        specialty hospital.
 Advances in technology (e.g., minimally invasive surgery) have 
        allowed care to be provided in a variety of settings.
 Data shows that facilities that focus on certain procedures and 
        perform a significant number of them have better quality 
        outcomes.
 Business partners willing to provide capital and management expertise 
        are more readily available.

              EFFICIENCY, QUALITY AND PATIENT SATISFACTION

    For various reasons, specialty hospitals have achieved better 
quality, greater efficiency, and higher patient satisfaction than 
general hospitals. Specialty hospitals are able to achieve production 
economies by taking advantage of high volumes of a narrow scope of 
services, and by lowering fixed costs by reengineering the care 
delivery process. Managerial and clinical staff at specialty hospitals 
focus on a relatively narrow set of tasks, thus providing the 
capability to perfect those tasks and benefit from increased 
accountability for the quality of care provided to patients. According 
to the Center for Studying Health System Change, the health services 
literature supports the premise that ``focused factories'' can lead to 
higher quality and lower costs as a result of more expert and efficient 
care.4
---------------------------------------------------------------------------
    \4\ Kelly J. Devers, Linda R. Brewster and Paul B. Ginsburg, 
Specialty Hospitals: Focused Factories or Cream Skimmers? HSC Issue 
Brief Number 62, April 2003.
---------------------------------------------------------------------------
    Managers of specialty hospitals consistently report the factors 
they perceive as critical to achieving high quality patient outcomes: 
high volume and high nursing intensity.5
---------------------------------------------------------------------------
    \5\ John E. Schneider, PhD, et al., Economic Policy Analysis of 
Specialty Hospitals, February 20, 2005.
---------------------------------------------------------------------------
    Specialty hospitals tend to have higher nurse-patient ratios 
despite the fact that physicians at specialty hospitals contend that 
they spend about 30% of their operating expenses on labor, compared to 
40 to 60% for general acute-care hospitals.
    Physician control and facility design also increase productivity 
and quality. Specialty hospitals improve patient access to specialty 
care by providing additional operating rooms, cardiac-monitored beds, 
and diagnostic facilities. Specialty hospitals offer newer equipment, 
more staff assistance and more flexible operating room scheduling, 
thereby increasing productivity and physician autonomy over their 
schedules. Patients are therefore able to benefit from the higher 
productivity and increased flexibility in scheduling their procedures.
    Preliminary findings from the 2005 HHS study suggest that measures 
of quality care at specialty heart hospitals were at least as good and 
in some cases better than general hospitals.6
---------------------------------------------------------------------------
    \6\ Thomas Gustafson, Ph.D., Deputy Director, Center for Medicare 
Management, Centers for Medicare and Medicaid Services (CMS), testimony 
before the Senate Committee on Finance, March 8, 2005.
---------------------------------------------------------------------------
    In addition, complication and mortality rates were lower, even when 
adjusted for severity. Furthermore, HHS found that ``patient 
satisfaction was extremely high'' in the specialty hospitals studied, 
and patients had very favorable perceptions of the clinical quality of 
care they received.7
---------------------------------------------------------------------------
    \7\ Id.
---------------------------------------------------------------------------
    Specialty hospitals are well positioned to address projected 
increases in demand for cardiac, orthopedic, and surgical services 
because they are a more efficient and effective way to deliver the 
services. In 2002, for example, 500,000 patients were diagnosed with 
congestive heart failure. With the estimated number of Americans at 
risk of cardiovascular disease projected to mushroom over the next 
decade, cardiovascular surgeons and cardiologists will need to see 
twice as many patients in ten years as they see today. Aging of the 
population, population growth, higher functioning and higher quality of 
life expectations associated with the baby boom generation are driving 
increased demand for cardiac, orthopedic, and surgical services. The 
greater efficiency of specialty hospitals will better enable physicians 
to care for these patients. Furthermore, the GAO found that 85 percent 
of specialty hospitals are located in urban areas and tend to locate in 
counties where the population growth rate far exceeds the national 
average.8
---------------------------------------------------------------------------
    \8\ GAO, supra note 2.
---------------------------------------------------------------------------
    Patient satisfaction with specialty hospitals is extremely high. 
They enjoy relatively greater convenience and comfort, such as lack of 
waiting time for scheduled procedures, readily available parking, 24 
hour visiting for family members, private rooms, more nursing stations 
that are closer to patient rooms, decentralized ancillary and support 
services located on patient floors, and minimized patient transport. 
Specialty hospitals have engaged in extensive collection of data on 
quality and patient satisfaction, and use the data to modify care 
processes. Because of the smaller size and narrow focus of specialty 
hospitals, they are more nimble and flexible to quickly respond to 
modify care processes as perceived necessary.
hospital industry strategies and anticompetitive tactics in response to 

                         INCREASED COMPETITION

    As physicians began seeking greater involvement in the governance 
and management of patient services provided at hospitals, many who 
ultimately became investors in specialty hospitals tried initially to 
form joint ventures with hospitals to expand the availability of 
cardiology and orthopedic services. In many cases, the hospitals 
declined to enter into joint ventures with physicians. In other cases, 
the hospitals opened units or specialty hospitals of their own. By and 
large, however, general hospitals have become staunch opponents of 
physician owned specialty hospitals.
    According to the GAO, the financial performance of specialty 
hospitals tended to equal or exceed that of general hospitals in fiscal 
year 2001.9 The 55 specialty hospitals with available 
financial data tended to perform better than general hospitals when 
revenues and costs from all lines of business and all payers were 
included. When the focus was limited to Medicare inpatient business 
only, specialty hospitals appeared to perform about as well as general 
hospitals.10
---------------------------------------------------------------------------
    \9\ Id.
    \10\ Id.
---------------------------------------------------------------------------
    General hospitals and their respective national and state hospital 
associations feel threatened by the growth of specialty hospitals and 
physician-owned ambulatory facilities, (e.g., ambulatory surgery 
centers, GI labs, imaging facilities, radiation oncology centers). 
Although they claim to support healthy competition, general hospitals 
have recently engaged in an aggressive assault on facilities owned and 
operated by physicians which they have characterized as ``niche-
providers.''
    The hospital industry has engaged in numerous focused strategies to 
prohibit physicians from opening a competing facility. Three core 
strategies the hospital industry is employing to address physician 
ownership of specialty hospitals are:

 Preemptive strike strategy--The hospital establishes its own 
        specialty hospital and addresses some of the physician 
        concerns, but does not offer physicians an opportunity for 
        investment. Some hospitals also implement this strategy when a 
        competing hospital or health system decides to build its own 
        specialty hospital.
 Joint venture strategy with local physicians--The hospital recognizes 
        a competitive threat from members of its medical staff or other 
        local physicians and decides to engage in a joint venture with 
        them rather than facing a reduction in the services.
 Fight physicians that try to open a competing facility by building 
        barriers--The hospital aggressively limits the potential for 
        developing competing services by implementing actions to 
        restrict physicians' capabilities to do so (e.g., adopting 
        ``economic credentialing'' or ``exclusive credentialing'' 
        policies that revoke or refuse to grant medical staff 
        membership or clinical privileges to any physicians that has an 
        indirect or direct financial investment in a competing entity).
    At the state level, hospitals have initiated several different 
types of anti-competitive strategies to limit physician-owned specialty 
hospitals. These initiatives include, but are not limited to, the 
following:

 Adopting legislation banning the creation of any facility that 
        focuses on cardiac care, orthopedic services or cancer 
        treatment. (Florida)
 Proposing legislation prohibiting physicians from having a financial 
        ownership in specialty hospitals. (Ohio and Washington)
 Proposing legislation to expand Certificate of Need (CON) 
        requirements to include other physician-owned facilities such 
        as ambulatory surgery centers and diagnostic imaging 
        facilities. (Minnesota)
 Resisting efforts to repeal CON legislation. (Iowa)
 Proposing legislation and or regulations requiring specialty 
        hospitals (but not other hospitals) to provide emergency 
        departments and/or accept Medicare, Medicaid, and uninsured 
        patients. (Washington)
    Individual general hospitals have also implemented a variety of 
anti-competitive strategies and tactics to discourage their medical 
staff from investing in competing specialty hospitals or to harm the 
medical practice of those who do make such investments. These 
initiatives include, but are not limited, to the following:

 Adopting economic/exclusive credentialing/conflict of interest 
        policies and medical staff development plans that revoke or 
        refuse to grant medical staff membership or clinical privileges 
        to any physicians or other licensed independent practitioner 
        that has an indirect or direct financial investment in a 
        competing entity.
 Hospital-owned managed care plans denying patient admissions to 
        competing specialty hospitals.
 Requiring health plans to sign an exclusive managed care contract or 
        otherwise discouraging them from contracting with competing 
        facilities.
 Removing physicians that have a financial interest in a competing 
        facility from their referral and on-call panels.
 Refusing to cooperate with specialty hospitals, (i.e., refusing to 
        sign transfer agreements).
 Requiring primary care physicians employed by the hospital or 
        vertically integrated delivery system to refer patients to 
        their facilities or those specialists that are closely 
        affiliated with the hospital/health care delivery system 
        regardless of the needs of the patient.
 Limiting access to operating rooms and cardiac catheterization labs 
        of those physicians who have a financial interest in a 
        competing entity.
 Removing competing physicians from extra assignments at the hospital, 
        such as serving as department directors or reading EKGs, 
        ultrasounds, echocardiography, and x-rays.
    The hospital industry's overarching message is that physicians who 
invest in a specialty hospital have a conflict of interest. They use 
this to justify their strategies to eliminate legitimate competition. 
However, it is both ethical and legal for physicians to invest in and 
refer patients to health facilities.
    AMA ethical opinion E-8.032, ``Conflicts of Interest: Health 
Facility Ownership by a Physician,'' delineates two scenarios where 
physicians may appropriately make patient referrals to health 
facilities in which they have an ownership interest. First, it sets 
forth a general rule that physicians may appropriately make such 
referrals if they directly provide care or services at the facility in 
which they have an ownership interest. Second, it describes a separate 
situation where physicians may appropriately make such referrals, which 
arises when a needed facility would not be built if referring 
physicians were prohibited from investing in the facility. In the 
latter case, the appropriateness of the referrals would not depend upon 
whether the physicians have personal involvement with the provision of 
care at the facility, but whether there is a demonstrated need for the 
facility. Physician ownership of specialty hospitals and referral of 
patients for treatment at such facilities fits squarely within this 
ethical opinion.11
---------------------------------------------------------------------------
    \11\ The hospital associations, however, claim otherwise by 
distorting AMA ethical opinion E-8.032. They claim that it prohibits 
physician referrals to facilities in which they have an ownership 
interest unless there is a demonstrated need in the community. (July 6, 
2004 letter to members of Congress from the Federation of American 
Hospitals (FAH) and the American Hospital Association (AHA )) The AMA 
quickly set the record straight, but the hospital associations continue 
to distort AMA policy. (August 4, 2004 letters from Michael D. Maves, 
MD, MBA to House Energy and Commerce Committee, House Ways and Means 
Committee and Senate Finance Committee.) Although a demonstrated need 
in the community is one ethical justification for a referral to a 
facility that one owns, it is a mischaracterization of AMA ethical 
opinion to state that it is the only justification.
---------------------------------------------------------------------------
    In addition to ethical policy, physicians are legally permitted to 
own health care facilities and refer patients to them. The physician 
self-referral law and the federal anti-kickback statute both set forth 
very broad prohibitions that generally prevent physicians from 
receiving any form of remuneration in exchange for referrals. Because 
the laws contain such broad prohibitions, that effectively prevent many 
legitimate forms of remuneration, they also contain exceptions or safe 
harbors that define permissible forms of remuneration. Both laws permit 
physician ownership of treatment facilities and referrals to such 
facilities under various circumstances.12 The physician 
self-referral law, the ``Stark law,'' explicitly permits physician 
ownership of a hospital, and referral of patients to the hospital, if 
the physician is authorized to perform services at that hospital and 
the ownership interest is in the ``hospital itself'' and ``not merely 
in a subdivision of the hospital.''
---------------------------------------------------------------------------
    \12\ See generally 42 U.S.C. 1395nn., 42 CFR 411.350-411.361, 42 
U.S.C. 1320a-7b, and 42 CFR 1001.952.
---------------------------------------------------------------------------
    The hospital associations, however, claim that physicians who own 
specialty hospitals should not be permitted to make referrals to those 
hospitals under that exception because they claim a specialty hospital 
is equivalent to a subdivision of a hospital. They call the use of this 
exception a ``loophole'' to bolster their efforts to eliminate the 
ability of physician owned facilities to compete with their member 
hospitals.
    This claim is simply unfounded. Specialty hospitals are entire 
hospitals, not subdivisions of a hospital. They are independent 
legally-organized operating entities that provide a wide range of 
services for patients, from ``beginning-to-end'' of a course of 
treatment including specialty and sub-specialty physician services, and 
a full range of ancillary services. A significant number of specialty 
hospitals also have primary care services, intensive care units and 
emergency departments.
    The protection of referrals to an entire hospital, and not just a 
``subdivision of a hospital,'' was intended to prevent circumvention of 
the ban on referrals of laboratory services. As originally enacted, 
``Stark I,'' only prohibited referrals for laboratory services to 
facilities physician owned.13 It would not have made sense 
to prohibit ownership of and referral to a laboratory, but permit 
ownership of and referral to a hospital subdivision that provided only 
laboratory services. The Centers for Medicare and Medicaid Services 
(CMS) (then HCFA) confirmed this intent in its 1992 proposed 
regulations interpreting the original Stark law. CMS explained that the 
exception protected referrals when the physician's ownership interest 
is in the entire hospital and ``not merely a distinct part or 
department of the hospital, such as the laboratory.'' 14
---------------------------------------------------------------------------
    \13\ Public Law 101-239, December 19, 1989.
    \14\ 57 Fed. Reg. 8588, 8598 (March 11, 1992).
---------------------------------------------------------------------------
    In the 1995 Final Rule, there is a protracted discussion of what 
constitutes a hospital and a distinct part or department of a 
hospital.15 CMS defined ``hospital'' for purposes of the 
Stark law as ``any separate legally-organized operating entity plus any 
subsidiary, related, or other entities that perform services for the 
hospital's patients and for which the hospital bills . . .'' 
16 A specialty hospital fits squarely within this 
definition.
---------------------------------------------------------------------------
    \15\ 60 Fed. Reg. 41913, 41956 (August 14, 1995).
    \16\ 60 Fed. Reg. at 41956-41957.
---------------------------------------------------------------------------
    In 1993, Congress enacted amendments, referred to as ``Stark II,'' 
expanding the ban on physician referrals from just clinical laboratory 
services to an entire list of ancillary services referred to as 
``designated health services.'' 17 The hospital ownership 
exception was appropriately retained in Stark II, permitting physicians 
to refer patients to a hospital they own and where they practice 
medicine, but prohibiting referrals to a hospital ``subdivision'' they 
own. This was so the referring physician could still refer patients to 
a hospital he or she owns for a course of treatment, but not circumvent 
the intent of the prohibition by referring patients to a subdivision of 
a hospital that only provides one or more of the designated ancillary 
services.
---------------------------------------------------------------------------
    \17\ Public Law 103-66, August 10, 1993. These ancillary services 
include clinical laboratory services, physical and occupational 
therapy, radiology services (including MRI, axial tomography, and 
ultrasound), radiation therapy services and supplies, durable medical 
equipment supplies (DME), parenteral/enteral nutrients, prosthetics/
orthotics supplies, home health services, outpatient prescription 
drugs, and inpatient and outpatient hospital services.
---------------------------------------------------------------------------
    As noted, the designated health services are ancillary services, 
not physician services.18 The Stark laws prevent referrals 
for ancillary services, not professional services performed by a 
physician. Furthermore, the Stark laws specifically prohibit referrals 
of these services at locations where the referring physician is not 
directly involved in the care of the patient. Under the Stark laws, no 
referral restriction is imposed if the referring physician personally 
performs a service, even if it is an ancillary service that would 
otherwise be prohibited by the law. There is also an exception for 
referrals of ancillary services rendered by another physician in the 
referring physician's group practice, or supervised by that physician, 
as long as it is in the same building where the referring physician 
regularly practices or a centralized building used by the referring 
physician for some or all of the designated health services performed 
by the group practice. Thus, the Stark laws prohibit physicians from 
making referrals for ancillary services at facilities where they do not 
practice and that provide only ancillary services.
---------------------------------------------------------------------------
    \18\ Radiation therapy and certain radiology services often 
encompass a professional component as well as a technical component, 
but there is no carve out for the professional service. CMS notes, 
however, that in most cases these services will fall under the 
exceptions for physician service or will not be a referral because they 
are personally performed by the physician.
---------------------------------------------------------------------------
    A specialty hospital is an entire hospital that provides a wide 
range of services for patients. In addition, physicians who invest in 
these hospitals and refer patients to them also treat patients at the 
hospital. Moreover, specialty hospitals do not provide only ancillary 
services. As stated previously, specialty hospitals provide a spectrum 
of care, from ``beginning-to-end'' of a course of treatment, including 
specialty and sub-specialty physician services, a full range of 
ancillary services, and often including primary care services, 
intensive care units, and emergency departments. Therefore, a specialty 
hospital is not equivalent to a hospital subdivision.
    There is no credible data to support the hospital industry's claims 
that physicians are inappropriately referring their patients to 
specialty hospitals. Physicians have an ethical and legal obligation to 
refer patients to the facility that best meets the needs of the 
individual patient. Preliminary findings from the HHS study contained 
no evidence that physicians who have an investment interest in a 
specialty hospital inappropriately refer patients.19 In 
fact, the study showed no difference in referral patterns between 
physician investors and non-investor physicians regarding referrals to 
both general hospitals and specialty hospitals.
---------------------------------------------------------------------------
    \19\ Gustafson, supra note 6.
---------------------------------------------------------------------------
    In fact, it is disingenuous for the hospital industry to claim that 
physicians have a conflict of interest when many general hospitals 
engage in self-referral practices. One hospital association claims that 
a ``community hospital that tried to buy admissions in this way would 
be outlawed.'' 20 Ironically, however, general hospitals 
often channel patients to their facilities and services. They do this 
mainly by acquiring primary care physician practices or by employing 
primary care physicians, and requiring those physicians to refer all of 
their patients to their facilities for certain services such as x-ray, 
laboratory, therapy services, outpatient surgery, and inpatient 
admissions. They also require such referrals by physicians under 
certain contractual arrangements or by adopting policies that require 
members of the medical staff to utilize their facilities.
---------------------------------------------------------------------------
    \20\ Charles N. Kahn III, A Health-Care Loophole, Washington Times, 
February 3, 2005.
---------------------------------------------------------------------------
    Hospitals value these controlled referral arrangements to such a 
degree that they maintain them despite the fact that many of these 
primary care practices and other physician arrangements operate at a 
loss for the hospital. The hospitals are frequently willing to 
subsidize these practices with profits derived from other departments 
and services provided by the hospital or health system.
    The AMA is very concerned about efforts by hospitals and health 
systems to control physician referrals as they pose a number of 
significant concerns. By dictating to whom physicians may refer, the 
hospital governing body or administration takes medical decision-making 
away from physicians. This introduces financial concerns into the 
patient-physician relationship, imposes upon the professionalism of 
physicians, and can run counter to what the physician believes is in 
the best interest of the patient. These hospital self-referral 
practices also limit patient choice.
    To reduce this interference in the patient-physician relationship, 
the AMA believes that disclosure requirements for physician self-
referral, where applicable, should also apply to hospitals and 
integrated delivery systems that own medical practices, contract with 
group practices or faculty practice plans, or adopt policies requiring 
members of the medical staff to utilize their facilities and services.
    Despite claims by the hospital associations that physician 
ownership of specialty hospitals is a conflict of interest, the data 
does not support their assertions. MedPAC found that overall 
utilization rates in communities with specialty hospitals were similar 
to utilization rates in other communities. In addition, of the 
specialty hospitals identified by the GAO with some degree of physician 
ownership, the average share owned by an individual physician was less 
than two percent. Of particular significance, the GAO found that the 
majority of physicians who provided services at specialty hospitals had 
no ownership interest in the facilities. Overall, approximately 73 
percent of physicians with admitting privileges at specialty hospitals 
were not investors in those hospitals.21 Therefore, the vast 
majority of physicians who admit patients to specialty hospitals 
receive no financial incentives to do so. Further, of those physicians 
who do have an ownership interest in the hospital, there is no evidence 
that their referrals are inappropriate or have increased utilization.
---------------------------------------------------------------------------
    \21\ GAO, supra note 2.
---------------------------------------------------------------------------
    Specialty hospitals with physician investors believe that the 
playing field is actually tilted in support of nonprofit hospitals. 
Nonprofit hospitals are exempt from federal and state income taxes and 
local property taxes and have access to tax-exempt financing. In fact, 
according to preliminary findings from the HHS study, the total 
proportion of net revenue that specialty hospitals devote to both 
uncompensated care and taxes ``significantly exceeds'' the proportion 
of net revenues general hospitals devote to uncompensated 
care.22 Most nonprofit hospitals also receive Medicare and 
Medicaid DSH payments to help defray the costs of uncompensated care.
---------------------------------------------------------------------------
    \22\ Gustafson, supra note 6.
---------------------------------------------------------------------------
    There is no evidence that general hospitals are suffering as a 
result of the growth of physician owned specialty hospitals. MedPAC 
found that the financial impact on community hospitals in the markets 
where physician owned specialty hospitals are located has been limited. 
These hospitals have demonstrated financial performance comparable to 
other community hospitals.23 Another study found that 
general hospitals residing in markets with at least one specialty 
hospital actually have higher profit margins than those that do not 
compete with specialty hospitals.24 MedPAC also found that 
specialty hospitals have forced community hospitals to become more 
competitive, and that specialty hospitals are an attractive alternative 
for patients and their families.
---------------------------------------------------------------------------
    \23\ MedPAC, ``MedPAC Report to the Congress: Physician-Owned 
Specialty Hospitals,'' March 2005.
    \24\ Schneider, et al., supra note 4.
---------------------------------------------------------------------------
competition should be promoted and cross-subsidies should be eliminated
    The AMA continues to have serious concerns about the tactics being 
employed by hospitals in their attempts to eliminate competition by 
prohibiting physician referrals to specialty hospitals in which they 
have an ownership interest. The AMA believes that the growth in 
specialty hospitals is an appropriate market-based response to a mature 
health care delivery system and a logical response to incentives in the 
payment structure for certain services. This type of market response 
will create an incentive for general hospitals to increase efficiencies 
to compete. In fact, it already has. Specialty hospitals have 
admittedly been a ``wake-up'' call for general hospitals in certain 
communities.25
---------------------------------------------------------------------------
    \25\ MedPAC, supra, p. 10.
---------------------------------------------------------------------------
    The cross-subsidies that hospitals use from profitable services to 
provide unprofitable services should be eliminated by making payments 
adequate for all services. The Federal Trade Commission (FTC), the 
Department of Justice (DOJ), the Center for Studying Health System 
Change, and others believe there are inherent problems in using higher 
profits in certain areas of care to cross-subsidize uncompensated care 
and essential community services. In the July 2004 FTC/DOJ Report on 
Competition and Health Care, Recommendation 3 states:
        Governments should reexamine the role of subsidies in health-
        care markets in light of their inefficiencies and the potential 
        to distort competition. Health-care markets have numerous cross 
        subsidies and indirect subsidies. Competitive markets compete 
        away the higher prices and profits needed to sustain such 
        subsidies. Competition cannot provide resources to those who 
        lack them, and it does not work well when providers are 
        expected to use higher profits in certain areas to cross-
        subsidize uncompensated care. In general, it is more efficient 
        to provide subsidies directly to those who should receive them 
        to ensure transparency.26
---------------------------------------------------------------------------
    \26\ Federal Trade Commission and Department of Justice, Improving 
Health Care: A Dose of Competition, July 23, 2004.
---------------------------------------------------------------------------
    Support for specialty hospitals in no way diminishes the important 
role of the general hospital in the community. Emergency and safety net 
care are important and necessary aspects of hospital care--and general 
and non-profit hospitals should be adequately reimbursed for these and 
other essential services. The AMA does not believe that cross-
subsidization by high-profit service lines is the appropriate method to 
fund community health and medical services. To ensure that hospital 
payments better compensate for these services so that safety-net 
hospitals receive proper funding, HHS should make changes to the 
Medicare hospital prospective payment system to minimize the need for 
cross-subsidization and accurately reflect relative costs of hospital 
care.
    MedPAC recommends that CMS improve payment accuracy in the hospital 
inpatient prospective payment system (PPS) by refining the hospital 
Diagnosis Related Group (DRG) payments to more fully capture 
differences in severity of illness among patients, basing the DRG 
relative weights on the estimated cost of providing care rather than on 
charges, and basing the weights on the national average of hospitals' 
relative values in each DRG. MedPAC also recommends that DRG relative 
weights be adjusted to account for differences in the prevalence of 
high cost outlier cases.27
---------------------------------------------------------------------------
    \27\ See MedPAC, supra, note 23.
---------------------------------------------------------------------------
    The AMA supports such recommendations and believes that such 
payment changes will ensure full and fair competition in the market for 
hospital services. The AMA also believes that further policy changes 
are necessary to protect America's public safety net hospitals. Safety-
net hospitals provide a significant level of care to low-income, 
uninsured, and/or vulnerable populations. Public hospitals in the 
largest metropolitan areas are considered key safety-net hospitals. 
These hospitals make up only about 2% of all the nation's hospitals, 
yet they provide more than 20% of all uncompensated care. Compared with 
other urban general hospitals, safety-net hospitals are nearly five 
times as likely to provide burn care, four times as likely to provide 
pediatric intensive care, and more than twice as likely to provide 
neonatal intensive care. Safety-net hospitals are also more likely than 
other urban general hospitals to offer HIV/AIDS services, crisis 
prevention, psychiatric emergency care, and other specialty care.
    Safety-net hospitals rely on a variety of funding sources. However, 
to finance the significant portion of uncompensated care, safety-net 
hospitals rely on local or state government subsidies, Medicaid and 
Medicare Disproportionate Share Hospital (DSH) payments, cost shifting, 
and other programs. As a group, safety-net hospitals are in a 
precarious financial position because they are uniquely reliant on 
governmental sources of financing.
    The AMA believes that CMS should correct the flawed methodology for 
allocating DSH payments to help ensure the financial viability of 
safety-net hospitals so they can continue to provide access to health 
care for indigent patients. In addition, the current reporting 
mechanism should be modified to accurately monitor the provision of 
care by hospitals to economically disadvantaged patients so that 
policies and programs targeted to support the safety net and the 
populations these hospitals serve can be reviewed for effectiveness. 
Medicare and Medicaid subsidies and contracts related to the care of 
economically disadvantaged patients should be sufficiently allocated to 
hospitals on the basis of their service to this population in order to 
prevent the loss of services provided by these facilities. The AMA 
recognizes the special mission of public hospitals and supports federal 
financial assistance for such hospitals, and believes that where 
special consideration for public hospitals is justified in the form of 
national or state financial assistance, it should be implemented.

                               CONCLUSION

    There is no evidence that general hospitals are suffering as a 
result of the growth of physician owned specialty hospitals. Specialty 
hospitals increase competition in the hospital industry and provide 
patients with more choice--forcing existing hospitals to innovate to 
keep consumers coming to them. This is a win-win situation for 
patients. Supporting health delivery innovations that enhance the value 
of health care for patients is the only way to truly improve quality of 
care while reigning in health care costs.
    Based on the MedPAC, HHS and FTC/DOJ findings and recommendations, 
the AMA believes that patients will be better served if Congress does 
not act to extend the moratorium on physician referrals to specialty 
hospitals in which they have an ownership interest. While the payment 
changes take effect, MedPAC, HHS and others should continue to monitor 
specialty hospitals and the impact on general hospitals and patient 
care.
    We appreciate the opportunity to testify on this important issue. 
We urge the Subcommittee and the House to consider the recommendations 
we have discussed today. We are happy to work with Congress as it 
considers these important matters.
                                 ______
                                 
 Prepared Statement of Jane Orient, Executive Director, Association of 
                    American Physicians and Surgeons

    Mr. Chairman and Members of the Committee: The Association of 
American Physicians and Surgeons was founded in 1943 to preserve 
private medicine. We represent thousands of physicians in all 
specialties nationwide, and the millions of patients that they serve. I 
am the executive director.
    Members of the Association of American Physicians and Surgeons are 
pleased that this subcommittee has undertaken this hearing as a means 
to assess the role of specialty hospitals in the delivery of quality 
health care. The AAPS membership can attest to the quality of health 
care these hospitals deliver and we regard them as a sensible and 
proper element of American health care delivery.
    We collectively agree that Congress should not extend, make 
permanent or broaden the moratorium on physician-owned specialty 
hospitals contained in the Medicare Modernization Act. A resolution to 
this effect was passed without dissent at our 2004 annual meeting.
    Responsible competition and the dynamics of the free-market 
encourage innovation and reduce costs. Furthermore, specialty 
facilities have consistently delivered superior results in terms of 
patient outcomes, operating efficiency, and patient satisfaction; 
therefore AAPS believes that it is not in the best interests of 
patients, physicians or taxpayers for government to arbitrarily limit 
the growth of physician-owned single-specialty hospitals.
    A joint study by the Federal Trade Commission and the Department of 
Justice strongly endorsed expansion of competitive, free-market choice 
as a means for delivering excellent medical care and containing costs. 
Their conclusion was echoed by the Medicare Payment Advisory Commission 
(MedPAC) at a recent presentation of preliminary study findings in 
which they acknowledged that specialty hospitals can serve as a ``wake 
up call'' for community hospitals to improve quality of care and 
service.
    The growth of physician-owned specialty hospitals over the last 10 
years represents a free-market trend that should be encouraged, not 
stifled by Congress.
    In the relatively short number of years that specialty hospitals 
have been a part of the medical landscape, innovation is one of the 
words that are consistently applied to their work. Innovation drives 
quality improvements. These physician-owned hospitals show innovation 
in a number of ways. First, they utilize the newest, cutting-edge 
technology and equipment. They also operate with a high nurse-to-
patient ratio. And the care at these facilities is specifically 
designed to meet and exceed patient expectations.
    Not only do these facilities provide premium care, because of their 
efficient business models, physician-owned specialty hospitals are able 
to pass cost savings on to patients and taxpayers while maintaining the 
highest quality of care. These innovative facilities encourage quicker 
turn-around in operating facilities, lower labor costs and ease patient 
transportation. Because the physician-partners at specialty hospitals 
are involved in decision-making, hospitals are able to introduce and 
adapt to new procedures and methodology, resulting in innumerable cost-
saving measures.
    The choice of these physicians is deliberate and it is based 
largely on the management model of the specialty hospitals. Traditional 
hospital management is based on the bureaucracy of hospital 
administrators making decisions, rather than physicians who are aware 
of patients' needs. At physician-owned facilities, decisions are always 
based on the need of the patient, rather than the preference of an 
administrator. At these facilities, because physicians are involved in 
all steps of the decision-making progress, a premium is placed on 
maximizing efficiency.
    The physician ownership model couples doctors with administrators 
to oversee everything from quality to operations to purchasing. Because 
of this, physician-ownership proves to be the most cost effective 
business model for hospitals.
    The U.S. Congress continues to enact onerous regulations effecting 
physicians under the guise of reducing costs to the taxpayers. The 
moratorium on specialty hospitals is one example. Such hospitals could 
help reduce the cost of federal health programs paid for by the 
taxpayers, while enhancing access to the highest quality of health care 
that the American taxpayers expect.
    Please do all you can to lift the moratorium.
                                 ______
                                 
   Prepared Statement of the Federated Ambulatory Surgery Association

    The Federated Ambulatory Surgery Association (FASA), which 
represents more than 1,600 ambulatory surgical centers (ASCs) and the 
professionals who deliver care and the patients who seek care in ASCs 
concurs with CMS Administrator McClellan's statement that ``An 
important goal of Medicare's planned reform of the ASC fee schedule is 
to reduce such divergence of payment levels between these settings 
[ASCs and hospital department outpatient departments] when resource 
costs consumed in producing the same service in the two settings are 
similar.''
    ASCs will provide more than 12 million procedures in 2005, more 
than 30 percent to Medicare patients. ASCs save both the Medicare 
program and its beneficiaries money. A recent study by the well-
respected Moran Company, which analyzed actual hospital outpatient 
departments (HOPDs) claims data found that Medicare would have paid 
ASCs an average of $320 less than HOPDs for each claim. Because 
Medicare beneficiary copayments for ASCs are always 20% and copayments 
for HOPD vary and sometimes exceed 40%, patients save money when they 
choose an ASC over a hospital. In 2005, Medicare will pay $1.1 billion 
less as a result of care provided in ASCs. ASCs have led the way in 
innovation with regards to outpatient surgery contributing to even 
larger savings.
    However, the Medicare Prescription Drug, Improvement and 
Modernization Act of 2003 (MMA) threatens access to these cost-
effective institutions by placing a six-year payment freeze on ASCs. 
ASCs confront the identical inflationary pressures as hospital 
outpatient departments--attracting and retaining nurses, IT 
improvements, overhead, and medical supplies. Yet because hospitals are 
receiving the full market basket every year, by 2009 hospital 
outpatient departments will receive payments that are 27% higher than 
ASCs. This is based on a hypothetical procedure where payments for the 
procedure were equal in 2000, the year when the HOPD prospective 
payment system was first implemented.
    FASA supports a transition from the current ASC payment system to 
one based on the HOPD payment system. This would provide a more refined 
payment system and address concerns raised by Administrator McClellan. 
FASA believes that ASCs should be transitioned to the HOPD system in 
all respects--the ambulatory payment classification system, outlier 
payments and the annual market basket updates. Of course, appropriate 
transitions would be needed. Just as important, CMS should implement 
the MedPAC recommendation reforming how CMS determines which procedures 
it will reimburse ASCs for providing. The existing list denies Medicare 
beneficiaries access and limits Medicare savings. Instead as MedPAC 
recommends, CMS should develop a list of those procedures it will not 
reimburse and determine which procedures to put on such a list using 
only two criteria--the procedure is unsafe when performed in an ASC or 
an overnight stay is required. These two reforms would enhance Medicare 
beneficiaries access to ASCs and the benefits they offer and save the 
Medicare program money.
    Regrettably, some are attempting to drag ASCs into the specialty 
hospital debate. ASCs are distinct from specialty hospitals. Since 
their inception in 1970s, ASCs have provided millions of Americans 
access to high quality cost effective care. The major difference 
between specialty hospitals and ASCs is that ASCs are not hospitals. 
ASCs are not licensed as hospitals, are not reimbursed as hospitals and 
do not provide inpatient services. Physicians practicing at ASCs 
typically provide some services in the ASC and others, including 
inpatient services, at a community hospital. ASCs have been in 
existence and in many communities have co-existed with hospitals since 
the seventies. Many hospitals, including non-profit ones, joint venture 
to form ASCs with physicians. More than half of ASCs are multi-
specialty, performing an array of surgeries in different specialties. 
The reasons for promoting ASCs for Medicare beneficiaries have long 
been recognized the the HHS Office of Inspector General. Indeed the 
Office of Inspector General (OIG) stated in the November 19, 1999 
Federal Register, ``We agree that ASCs can significantly reduce costs 
for Federal health care programs, while simultaneously benefitting 
patients. The HCFA has promoted the use of ASCs as cost-effective 
alternatives to higher cost settings, such as hospital inpatient 
surgery. Where the ASC is functionally an extension of a physician's 
office, so that the physician personally performs services at the ASC 
on his or her own patients as a substantial part of his or her medical 
practice, we believe that the ASC serves a bona fide business purpose 
and that the risk of improper payments for referrals is relatively 
low.'' For these reasons, ambulatory surgery was not included as a 
designated health service under the Stark law nor were ASCs included in 
the hospital moratorium.
    In conclusion, ASCs provide cost-effective care for Medicare 
beneficiaries and other patients. Policy makers have recognized the 
appropriateness of physician ownership of ASCs. Because ASCs' costs 
continue to rise every year, though their payments are frozen, Medicare 
beneficiaries access to ASCs is threatened. Congress should eliminate 
the onerous payment freeze in the context of modernizing the ASC 
payment system by transitioning it to one based on the HOPD system. 
FASA looks forward to working with Congress and CMS to implement a new 
ASC payment system that allows Medicare beneficiaries full access to 
the benefits of ASCs while saving beneficiaries and the program money.
                                 ______
                                 
Prepared Statement of Thomas C. Howard, President, McBride Clinic, Inc.

    Thank you for the opportunity to testify. I am Thomas C. Howard, 
M.D., and an Orthopedic Surgeon practicing in Oklahoma City. I serve as 
President of the McBride Clinic, Inc. Our medical group is developing a 
specialty hospital in Oklahoma City. I am submitting this testimony to 
provide information regarding the quality of care made available to 
patients, including Medicare beneficiaries, at specialty hospitals.
    McBride Clinic is a medical group with 24 physicians who specialize 
in orthopedics, arthritis and physical medicine. Physicians who are 
members of McBride Clinic comprise substantially all the active medical 
staff of Bone & Joint Hospital, which is an orthopedic specialty 
hospital that has been in operation in Oklahoma City since 1924. 
McBride Clinic physicians account for over 99% of the patient's 
admitted, treated, and discharged at Bone & Joint Hospital.
    McBride Clinic physicians have practiced at Bone & Joint Hospital 
since 1924, when Bone & Joint Hospital began operations. Bone & Joint 
Hospital consistently satisfies patients and performs impeccably when 
tested by quality measurement standards, patient satisfaction, and 
clinical outcomes. With McBride Clinic physicians, Bone & Joint 
hospital serves patient needs on a community, statewide and regional 
basis for orthopedic and arthritis care. Bone & Joint Hospital 
maintains the state-of-the-art medical technology. For a variety of 
reasons--demographics, population aging and growth--more specialty beds 
are needed in our service area.
    There are a number of quality of care factors associated with 
specialty hospitals, and I'm happy to provide examples for you today. 
Specialty hospitals provide excellent patient outcomes. Our physicians 
provide care for patients with acute problems at Bone & Joint Hospital. 
Specialty hospitals maintain specialized equipment and technology. Our 
experience is that state-of-the-art implants are available to patients 
without restrictions or barriers to care that might be imposed at other 
hospitals. At specialty hospitals, physicians can rely on ancillary 
support personnel--nurses, technicians, rehabilitation techs, and 
physical therapists--and can entrust their patients to these 
professionals with the utmost confidence. Clinician preferences and 
satisfaction are also high. Physicians find ease in scheduling patients 
for admissions and surgery. Operating efficiencies allow physicians to 
concentrate on delivering excellent patient care with a complete focus 
on the patient, as well as improved productivity in the delivery of 
care to patients. Specialty hospitals also allow focused peer review. 
Our facility facilitates specialized training and education in patient 
care for physicians, residents, medical students, nurses, and ancillary 
support personnel. Bone & Joint Hospital, as a specialty hospital, 
provides direct care for orthopedic emergencies and does not compromise 
the evaluation of other systems. Significantly, specialty hospitals 
provide patient choice.
    McBride Clinic, which has used Bone & Joint Hospital for patient's 
hospital services, has been a victim of its own success. Patients 
needing specialized orthopedic and arthritis care overwhelms the Bone & 
Joint capacity. Delays in scheduling, cancellations of admissions, 
cancellation of procedures, prolonged waiting time for admissions, and 
diversion of patients to other facilities have caused patients 
unnecessary discomfort and inconvenience. These concerns have arisen as 
a result of the success, not shortcomings of Bone & Joint Hospital. 
They are evidence that additional specialty care facilities--not 
general acute care facilities--are needed.
    To meet the demands of the ever-increasing aging and rural 
populations in our state, McBride Clinic will open an orthopedic 
hospital in Oklahoma City. McBride physicians intend to continue to 
provide care and treatment to patients at Bone & Joint Hospital. 
However, due to the lack of capacity of Bone & Joint Hospital, McBride 
Clinic determined several years ago that additional specialized 
orthopedic and rehabilitation inpatient beds were needed.
    McBride Clinic physicians expect to continue the tradition of 
providing high quality care at the new hospital, which is scheduled to 
open in August 2005. The McBride Clinic Orthopedic Hospital will have 
40 inpatient beds and 40 rehabilitation beds, in addition to an 
emergency department that will be available to provide comprehensive 
emergency care and treatment for all patients with an emergency 
orthopedic condition. McBride Clinic physicians, through McBride Clinic 
Orthopedic Hospital, which has been in the process of development since 
2002, will address the increasing orthopedic care needs of patients, 
including the elderly and rural populations throughout Oklahoma and 
neighboring states.
    If you or your child or grandchild had an emergency orthopedic 
condition--a fracture, a dislocation, a significant soft tissue 
injury--would you prefer to seek emergency care at a general community 
hospital or at a specialized orthopedic hospital?
    If you or a loved one have the choice of a hospital that 
concentrates on cardiac care, would you go there for chest pain, 
evaluation, or surgery? Or, would you choose a facility that provides 
heart catheterization and surgery procedures without assurance of the 
care and support from professionals who have specialized training, 
patient concerns, care, and passion for your special needs?
    Recent studies have criticized utilization in specialty hospitals. 
Physician utilization is not our motive. The reason we are building a 
specialty hospital is because there is increased patient demand and 
increased patient need. The very number of patients we treat and 
provide care for has and will continue to increase as our population 
ages. In reflecting and self-assessing, our group has been and will 
continue to be extremely cautious that we do not extrapolate data and 
reach inappropriate conclusions based on information that is biased 
against our patient population needs. I suppose a simpler way of saying 
this is that more patients are going to need more medical care. 
Therefore, the number of patient encounters, surgeries, procedures, and 
diagnostic studies will necessarily increase, unless something happens 
that restricts patients from access to care.
    McBride Clinic and the McBride Clinic Orthopedic Hospital 
appreciate the opportunity to present this testimony.
                                 ______
                                 
Prepared Statement of Karen Kerrigan, President and CEO, Small Business 
                      and Entrepreneurship Council

    Chairman Deal, Ranking Member Brown and Members of the House Energy 
and Commerce Committee, I am pleased to provide this written testimony 
with respect to physician-owned specialty hospitals on behalf of the 
Small Business & Entrepreneurship Council (SBE Council) and its 
nationwide membership of small business owners and entrepreneurs.
    The SBE Council is a nonpartisan small business advocacy 
organization with more than 70,000 members nationwide. For more than 
ten years the SBE Council (formerly the Small Business Survival 
Committee) has worked to advance policies that protect small business 
and promote entrepreneurship. We are proud to count physician owners/
investors of specialty hospitals among our diverse members. My name is 
Karen Kerrigan and I serve as President & CEO of the SBE Council.
    As you know, the Medicare Payment Advisory Commission (MedPAC) 
recently presented a report to Congress on the costs, utilization 
rates, and practice patterns of physician-owned specialty hospitals as 
compared to full-service general hospitals. While MedPAC made some 
positive recommendations, including changes to the diagnostic related 
group (DRG) payment system, they also recommend the extension of the 
18-month moratorium on physician-owned specialty hospitals. Such an 
extension is pointless and would be a serious mistake.
    On behalf of the SBE Council, we urge Committee members to reject 
legislative efforts that would hamstring these innovative hospitals 
from fully providing the health care services that patients need and 
want. Patients deserve quality health care, not needless meddling by 
government.
    Opponents of specialty hospitals, including the American Hospital 
Association (AHA) and the Federation of American Hospitals (FAH), have 
unfortunately resorted to spreading misinformation in an effort to 
suppress the healthy competition provided by specialty facilities.
    Opponents of competition have made numerous, inaccurate accusations 
regarding specialty hospitals. These fallacious claims were addressed 
by Dr. John C. Nelson, president of the American Medical Association 
(AMA), in a recent letter-to-the-editor in The Washington Times. As Dr. 
Nelson points out, the hospital industry is offering ``a blizzard of 
skewed statistics'' yet conveniently ignores straightforward economic 
principles with respect to the benefits of specialty hospitals--namely, 
that ``. . . Competition works. And in the hospital industry, the 
addition of specialty hospitals to the mix gives patients more choice, 
forcing existing hospitals to innovate to keep patients coming to them. 
This is a win-win situation in providing better quality of care.'' 
1
---------------------------------------------------------------------------
    \1\ Dr. John C. Nelson, ``Competition works'', The Washington 
Times, 2/10/05
---------------------------------------------------------------------------
    The Wall Street Journal editorial board also expressed its 
forthright assessment when it wrote, ``what the critics really want is 
to take away consumer choice, forcing patients into treatment at less-
optimal facilities for no reason other than to prop up the current 
system. But the other side of the equation is ensuring that consumers 
have a choice of places to spend those dollars, which means competition 
among hospitals.'' 2
---------------------------------------------------------------------------
    \2\ Editorial, ``In the (Specialty) Hospital'', Wall Street 
Journal, 1/3/05.
---------------------------------------------------------------------------
    Not only are specialty hospitals important to the marketplace 
because they provide competition to incumbents, but they are well 
regarded by patients, who give them high marks. Specialty hospitals 
have a very high rate of successful procedures; higher nurse-to-patient 
ratios; and with their innovative care and extra attention to customer 
service they serve as a welcome development for health care consumers. 
Furthermore, physicians are attracted to specialty hospitals because 
they provide faster, surer access to operating rooms with fewer 
bureaucracy-induced delays, quality nursing staffs, readier access to 
the latest medical and information technologies, and well-trained 
support personnel.
    Communities are welcoming specialty hospitals with open arms 
because of their exceptional patient care and economic development 
attributes such as good jobs, property and sales tax revenues, as well 
as the care they give to indigent patients. Specialty hospitals often 
offer emergency services and attract patients from afar who are drawn 
by the specialty services.
    Specialty hospitals succeed because, as part owners, physicians not 
only treat patients, but they also make sure facilities operate 
efficiently. Physician partners are true small business owners, 
weighing cost-effectiveness, return on investment and quality and 
efficiency along with traditional factors relative to patient care. 
They take an active part in decision-making on issues such as capital 
expenditures on medical/surgical equipment, patient billing and 
protocols of care.
    The entrepreneurial physician owners behind specialty hospitals are 
working hard to take health care delivery in a new and refreshing 
direction. An extension of the federal government's moratorium on 
specialty hospitals would be, at its core, an act of protectionism that 
stifles progress and innovation.
    ``Tweaking'' and micromanaging health care delivery by the 
government has already proven to be expensive and inefficient, littered 
with unintended consequences for consumers. Industrial planning has 
failed at every attempt--there is absolutely no reason to believe that 
the government will be successful in this modern day initiative to 
micromanage what is a very positive development in the hospital 
industry.
    Again, we thank you Chairman Deal for hosting this important 
hearing. I urge you to give every consideration to legislation that 
would hamper the ability of specialty hospitals to deliver their 
innovative, efficient and live-saving services to patients. As The 
Washington Times editorial board recently advocated, ``In the new 
Congress, the Republican leadership should make sure choice and 
competitiveness in health care trump special interests like the AHA's . 
. . We hope to see a law that keeps specialty hospitals going and 
ignores MedPAC's advice.'' 3
---------------------------------------------------------------------------
    \3\ Editorial, ``Bolstering specialty hospitals'', The Washington 
Times, 1/24/05
---------------------------------------------------------------------------
    We couldn't agree more, and the SBE Council urges you, and 
committee members, to oppose the extension of the moratorium on 
specialty hospital development.
                                 ______
                                 
 Prepared Statement of Sean Parnell, Vice President-External Affairs, 
                        The Heartland Institute

                              INTRODUCTION

    The issues surrounding specialty hospitals and the soon-to-expire 
moratorium on the development of new physician-owned medical facilities 
1 are many and complex. Over the past several months, I have 
researched and written on this subject for Health Care News, a monthly 
newspaper covering public policy. I have attached to my written 
testimony excerpts from the three articles published in the October and 
December 2004 as well as the January and May 2005 issues of Health Care 
News.
---------------------------------------------------------------------------
    \1\ Technically, the moratorium is only on referral of Medicare 
patients to facilities in which a physician has an ownership interest. 
However, since the effective result is that no new facilities are 
likely to be developed due to Medicare representing a substantial share 
of potential patients, it is generally referred to as a moratorium or 
even a ``ban'' on all new development of such facilities.
---------------------------------------------------------------------------
    These four articles focus on issues relating to quality of care, 
the historical development of specialty hospitals, the charges leveled 
against specialty hospitals by industry rivals, and the potential 
benefits of allowing specialty hospitals to resume their expansion.
    In my written testimony, I would like to focus on two particular 
areas relevant to the moratorium: the argument that specialty hospitals 
create what is known as ``induced demand,'' and arguments that 
Certificate-of-Need legislation is an appropriate policy to keep 
specialty hospitals from competing with general hospitals. Nearly all 
of my research is based on publicly available documents, including 
several produced or commissioned by the federal government and state 
governments.

                             INDUCED DEMAND

    One major concern of the American Hospital Association (AHA) is 
that because specialty hospitals are typically owned by doctors, there 
is an incentive for doctors to recommend treatment and refer patients 
to a specialty hospital in order to generate profits, regardless of 
what is in the best interest of patients.2
---------------------------------------------------------------------------
    \2\ ``Impact of Limited-service Providers on Community and Full-
service Hospitals,'' September 2004 issue of TrendWatch, published by 
the American Hospital Association, p. 2
---------------------------------------------------------------------------
    This problem is connected to the economic ideas of agency, 
asymmetric knowledge, and supplier-induced demand. Dr. Douglas Popp, 
Chair of the Department of Emergency Medicine at Advocate-General 
Lutheran Hospital in Chicago, described the problem as follows:
        . . . agency refers to . . . where one person with unique 
        knowledge (e.g. the physician agent) is given the authority to 
        make decision by, and for the less informed principal (patient) 
        . . . [The] physician can order expensive tests and/or 
        medications for the patient, based on asymmetric knowledge, 
        while transferring the financial risk to the patient or third 
        party payer (insurance company) for that decision . . . This 
        creates the opportunity for supplier induced demand where the 
        physicians is increasing the cost of care (e.g. ordering more 
        tests) with the ulterior motive presumably being to positively 
        impact their own wellbeing (e.g. personal income).3
---------------------------------------------------------------------------
    \3\ Macroeconomics of Healthcare, Dr. Douglas Propp, online at the 
IL College of Emergency, http://www.icep.org/edsurvival/documents/
HealthcareEconomics--000.doc.
---------------------------------------------------------------------------
    In layman's terms, the concern is that most patients don't have the 
medical knowledge necessary to know if medical treatment is needed or 
not, so doctors may order excessive and unneeded health care in order 
to generate more income for themselves. The American Hospital 
Association notes physician ownership of specialty hospitals ``can 
create an inherent conflict between the clinical needs of the patient 
and the financial interests of the physician.'' 4
---------------------------------------------------------------------------
    \4\ ``Impact of Limited-service Providers on Community and Full-
service Hospitals,'' September 2004 issue of TrendWatch, published by 
the American Hospital Association, p. 2.
---------------------------------------------------------------------------
    The risk of such a conflict, however, seems remote. Doctors earn 
their incomes almost entirely through fees charged for medical 
services, not profits at medical facilities they may have an ownership 
stake in. Whatever incentive exists for an unethical doctor to induce 
demand, the incentive is irrelevant to whether the surgery is performed 
in a general hospital or a specialty hospital.
    As recent GAO reports demonstrate, the potential profits from 
referring any one case to a specialty hospital are relatively small. 
Margins at for-profit specialty hospitals average about 12.4% for 
Medicare patients and about 9.7% for all payers. These margins are not 
significantly out of line with those of for-profit general hospitals, 
which average 14.6% for Medicare patients and 9.2% for all 
payers.5
---------------------------------------------------------------------------
    \5\ ``Specialty Hospitals: Geographic Location, Services Provided, 
and Financial Performance,'' October 2003, United States General 
Accounting Office, pp. 25--26.
---------------------------------------------------------------------------
    Also according to the GAO, 72.5% of physicians with admitting 
privileges at specialty hospitals had no financial interest in the 
hospital 6 and at 70.4% of hospitals the largest share owned 
by a physician was 6% or less.7 The median ownership share 
for an admitting physician with an ownership interest was 
2%.8
---------------------------------------------------------------------------
    \6\ ``Specialty Hospitals: Information on National Market Share, 
Physician Ownership, and Patients Served,'' April 2003, United States 
General Accounting Office, p. 10.
    \7\ Ibid.
    \8\ Ibid.
---------------------------------------------------------------------------
    Putting together the modest operating margins and the low physician 
ownership stakes typical of specialty hospitals, and factoring in the 
relative income potential from surgeon's fees vs. hospital profits, the 
incentive created by physician ownership of specialty hospitals to 
induce is extremely small.
    Consider the case of a relatively expensive surgical procedure, 
coronary bypass surgery. There are two primary DRG's for Medicare 
reimbursement of coronary bypass, 107 and 109. According to MedCath, a 
national chain of 12 specialty hospitals focusing on cardiac care, the 
average reimbursement for DRG 107 is $26,434 and represents 
approximately 64% of bypass surgeries performed in their hospitals, and 
the average Medicare reimbursement for DRG 109 is $23,499, representing 
the remaining 34% of procedures performed.9
---------------------------------------------------------------------------
    \9\ Information from Alanna Porter, MedCath Inc., received March 3, 
2005 via e-mail.
---------------------------------------------------------------------------
    MedCath also reports that the reimbursement for participating 
surgeons under DRG 107 is $3,622 and for DRG 109 it is 
$2,910.10
---------------------------------------------------------------------------
    \10\ Ibid.
---------------------------------------------------------------------------
    By applying the information on operating margins and physician 
ownership of specialty hospitals to the data on reimbursement, we can 
get an idea of what the potential increase in income would be for a 
surgeon who is recommending unneeded treatment. Performing an 
unnecessary DRG 107 coronary bypass, a for-profit specialty hospital 
could expect an operating margin of $3,277.82 (12.4% avg. operating 
margin x $26,434). If the surgeon performing the procedure owns 2% (the 
median ownership share), their share of that would be $65.66. These raw 
figures are before taxes and other expenses--the actual amount of 
profit is even less than these numbers might indicate.
    Comparing the surgeon's expected fee of $3,622 to the potential 
profits from an ownership share of a specialty hospital, it is hard to 
imagine that these few extra dollars would be sufficient incentive to 
induce demand.The case of Richard Mathews 11, an executive 
at a benefits consulting company in Michigan, is a real life example of 
how the induced demand argument made against specialty hospitals does 
not stand up in the real world.
---------------------------------------------------------------------------
    \11\ Based on interview with Richard Mathews on 2/15/05.
---------------------------------------------------------------------------
    Mathews had reconstructive knee surgery in February of 2004 at the 
Beaufort Surgical Center, a specialty orthopedic hospital in Beaufort, 
South Carolina. His insurance company paid the entire bill, 
approximately $1,227 for hospital charges and $2,059 for the surgeon's 
and anesthesiologist's fees plus other expenses. Reviewing the hospital 
bill, Mathews noted that ``There is simply no way that there is any 
huge profit in using his hospital. There may be a little--but the real 
advantage is for better patient service and excellence.''
    Even if the surgeon operating on Mathews was one of the very few in 
the country who has an ownership interest of 15% or more in a specialty 
hospital 12, the potential income gains are too small to 
realistically think a doctor would recommend unnecessary treatment. 
Assuming a 9.7% margin on this procedure, a doctor with a 15% stake in 
the hospital would gain less than $18 in income through that ownership, 
minuscule compared to their share of the nearly $2000 in doctors fees. 
A doctor with the average 2% ownership stake would stand to gain less 
than $2.38. Again, these potential gains are before taxes and other 
expenses.
---------------------------------------------------------------------------
    \12\ ``Specialty Hospitals: Information on National Market Share, 
Physicians Ownership, and Patients Served,'' April 2003, United States 
General Accounting Office, p. 10.
---------------------------------------------------------------------------
    Mathews also described the strict disclosure standards that his 
surgeon followed. As a patient, he had to sign a disclosure 
acknowledging he was aware of the surgeon's financial interest in the 
hospital.
    Adding to his description of his surgery, Mathews said ``My doc 
told me straight out that he and [his] peers started their specialty 
hospital solely for access to excellence ``. . . they control the 
entire surgical team and every part of the process. They simply cannot 
get the excellence they need to have and offer to patients from local 
area hospitals.''
    Plainly, the charge that physician ownership of specialty hospitals 
create incentives for doctors to abuse their position and recommend 
unneeded treatment is not supported by the facts.

                          CERTIFICATE OF NEED

    The issue of Certificate-of-Need (CON) laws is relevant to the 
issue of specialty hospitals for two reasons:

 The American Hospital Association, one of the main advocates for 
        extending the moratorium on specialty hospitals, noted that 
        what they call ``limited service providers'' 13 are 
        mostly located in states without CON laws.14 A 
        reasonable assumption is that should the moratorium end as it 
        is scheduled to, the AHA and other opponents of specialty 
        hospitals will turn their lobbying efforts to enacting CON laws 
        at either the federal or state level in order to impede 
        competition.
---------------------------------------------------------------------------
    \13\ ``Limited-service provider'' is the AHA's term which they (and 
others) apply to both specialty hospitals, which generally require 
overnight stays, and ambulatory surgical centers, which do not.
    \14\ ``Impact of Limited-service Providers on Community and Full-
service Hospitals,'' September 2004 issue of TrendWatch, page 2, 
published by the American Hospital Association.
---------------------------------------------------------------------------
 The history of CON laws demonstrates succinctly how attempts to limit 
        or prevent competition between health care facilities does not 
        benefit patients or control costs, and more often only protects 
        the market share and profits of existing providers.
    CON laws were first enacted in 1964 in New York as a response to 
rising health care costs driven in part by what was then a common 
health insurance reimbursement system known as retrospective 
reimbursement, also called ``cost-plus.'' Under retrospective 
reimbursement, insurers would pay hospitals an amount equal to their 
costs, plus a certain percentage above cost for profit and overhead.
    With the cost-plus system, there was little if any incentive for 
medical providers to become more efficient or for patients to be price 
sensitive. CON was a clumsy way to try to stop the inevitable spending 
binge the system created.
    In 1972, Congress voted to require states review and approve all 
capital expenditures of $100,000 or more, as well as changes in bed 
capacity or what they termed a ``substantial change'' in services. By 
1980, all 50 states had imposed CON laws
    By 1986, it was evident that CON laws were not succeeding in 
keeping health care costs down, and by limiting competition were even 
contributing to rising costs. Congress repealed the federal CON 
requirement. Since then, fourteen states have followed by repealing CON 
entirely, and six more have repealed it for everything except nursing 
homes and long term care services.
    Some of the most extensive research on CON laws has been done by 
Christopher Conover, Ph.D., and Frank Sloan, Ph.D., with Duke 
University's Center for Health Policy, Law, and Management. Their 
research, originally done for the Delaware Health Care Commission in 
1996, was published in a June 1998 article in the Journal of Health 
Politics, Policy and Law.15
---------------------------------------------------------------------------
    \15\ ``Does Removing Certificates-of-Need Regulations Lead to a 
Surge in Health Care Spending?'' Christopher Conover, Ph.D., and Frank 
Sloan, Ph.D., June 1998 Journal of Health Politics, Policy and Law, pp. 
455
---------------------------------------------------------------------------
    Conover and Sloan found that CON laws had no effect on overall 
health care spending. While they found a modest reduction in hospital 
costs, this decline was offset by an increase in physician 
costs.16 They also note that CON laws ``result in a slight 
(2 percent) reduction in bed supply but higher costs per-day and per 
admission, along with higher hospital profits.'' 17
---------------------------------------------------------------------------
    \16\ Ibid, p. 463
    \17\ Ibid, p. 466.
---------------------------------------------------------------------------
    In a later study prepared for the Michigan Department of Community 
Health, Conover and Sloan confirmed their earlier findings. Among their 
major conclusions was that repeal of CON laws does not ``lead to a 
`surge' in either acquisition of new facilities or medical 
expenditures.'' 18 They also found evidence to suggest that 
CON results in an increase in costs, contrary to the goal of these 
laws.19
---------------------------------------------------------------------------
    \18\ ``Evaluation of Certificate of Need in Michigan,'' by 
Christopher Conover, Ph.D. and Frank Sloan, Ph.D, May 2003 report to 
the Michigan Department of Community Health, p. 74.
    \19\ Ibid, pp. 30.
---------------------------------------------------------------------------
    Another study, prepared by the University of Washington's school of 
public health for the state legislature, had similar findings. The 
authors found ``strong evidence that CON has not controlled overall 
health care spending or hospital costs.'' 20
---------------------------------------------------------------------------
    \20\ ``Effects of Certificate of Need and Its Possible Repeal,'' 
Health Policy Analysis Program of the University of Washington's School 
of Public Health and Community Medicine, January 8 1999 report to the 
State of Washington Joint Legislative Audit and Review Committee, p. 9.
---------------------------------------------------------------------------
    The Federal Trade Commission (FTC) and U.S. Department of Justice 
(DOJ) have also weighed in on the impact of CON laws. In a July 2004 
report jointly prepared by the two agencies, they concluded that there 
is ``considerable evidence that [CON laws] can actually drive up prices 
by fostering anticompetitive barriers to entry.'' 21
---------------------------------------------------------------------------
    \21\ ``Improving Health Care: A Dose of Competition,'' July 2004 
report prepared jointly by the Federal Trade Commission and the U.S. 
Department of Justice, p. 302.
---------------------------------------------------------------------------
    This is only a sampling of the literature available on the failure 
of CON laws to restrain health care costs. CON today is little more 
than a shield that protects incumbent providers from competition, 
allowing entrenched interests to maintain market share and profits. 
Congress rightly repealed this law in 1986, although it remains on the 
books in many states.

                 GENERAL HOSPITALS FACE REAL CHALLENGES

    The final issue I would like to address, if only briefly, is the 
condition many general hospitals find themselves in.
    Although I do not find most of the American Hospital Association's 
charges against specialty hospitals to be either credible or relevant, 
I recognize that they face real and pressing challenges. Competition 
from smaller specialty hospitals, which often provide superior care at 
a lower overall cost, is just one of the challenges that general 
hospitals must deal with. Some of these challenges are self-inflicted, 
while others are largely imposed by a dysfunctional health care market 
burdened by excessive regulation, third-party payment, bureaucratic 
central planning, price controls, and monopsony power.22
---------------------------------------------------------------------------
    \22\ Monopsony power exists where there is a single or dominant 
purchaser of a good or service. Just as monopoly power allows a single 
seller of a good or service to demand higher prices than would exist in 
a competitive market with multiple sellers, monopsony power allows the 
buyer to dictate lower prices than would exist in a competitive market 
with multiple buyers.
---------------------------------------------------------------------------
    Many procedures hospitals perform are reimbursed at less than cost 
by both private insurers and government payers like Medicare and 
particularly Medicaid. To a limited extent this can be offset by 
generous margins for other procedures, reimbursed well above cost. 
However, many of the financial difficulties experienced by hospitals 
today are the result of a mix of patients where profitable procedures 
do not make up for losses caused by unprofitable procedures.
    Another challenge facing many hospitals is a series of lawsuits 
stemming from a pricing system that bears little resemblance to 
reality.23 These lawsuits have been filed against both non-
profit and for-profit hospitals over pricing practices that frequently 
charge the highest prices to uninsured patients while large insurers 
and government programs get substantial ``discounts'' from ``list 
prices'' for the same procedures. These pricing practices are difficult 
to defend, since they often impose large bills on low-income 
individuals.
---------------------------------------------------------------------------
    \23\ ``6 More Class Action Lawsuits Filed Against Nonprofit 
Hospital Systems and Hospitals By Uninsured Patients,'' August 27, 
2004, MedicalNewsService.com
---------------------------------------------------------------------------
    Congress would be wise to review and examine policies imposed on 
hospitals that contribute to these challenges. The reality of these 
challenges and others, however, should not justify preferential 
treatment from Congress or state legislatures that would shield them 
from competition and protect their market share and profits.

                    CONCLUSIONS AND RECOMMENDATIONS

    On the two points I specifically address two conclusions are 
warranted:

 Physician ownership of specialty hospitals does not create a 
        significant incentive for physicians to perform unnecessary 
        procedures.
 The history of Certificate-of-Need laws demonstrates that polices 
        that restrict or prevent competition among health care 
        providers do not benefit patients or lower costs, and 
        unnecessarily protect the profits and market share of incumbent 
        firms.
    On the broad question of whether to continue the moratorium on 
physician ownership of new specialty hospitals, I would urge the 
Congress to take the following steps:

1. Allow the moratorium to expire in June 2005, as it is presently 
        scheduled to do.
2. Monitor and take action where needed to ensure the U.S. Department 
        of Justice is examining potential anti-competitive actions by 
        existing providers attempting to use Certificate-of-Need laws 
        to restrain trade in violation of anti-trust laws.
3. Continue to collect, examine, and make available information 
        regarding the quality of care provided by specialty hospitals, 
        ambulatory surgical centers, and general hospitals.
4. Review and consider revising laws and regulations imposed on health 
        care providers, particularly general hospitals that create 
        unneeded burdens and financial difficulties.
    I believe that if Congress takes these actions, the result will be 
increased excellence and lower costs for health care.
                                 ______
                                 
 Prepared Statement of John W. Strayer III, National Center for Policy 
                                Analysis

    Mister Chairman and Members of the Subcommittee: Placing a 
moratorium on physicians referring patients to specialty hospitals is 
the latest example of a negative third party influence. Physician-owned 
specialty hospitals are innovative centers of medical care that 
increase the quality of care, without jeopardizing access, while 
striving to keep costs competitive and affordable.
    Physician-owned specialty hospitals are a major force for 
introducing greater competition and innovation into the American health 
care system. Just as greater competition has served us well in so many 
other sectors of the American economy, free-market solutions can be a 
force for delivery of more benefits in the health care field as well.
    Because of their very nature, physician-owned specialty hospitals 
are designed to maximize efficiency and quality of care, resulting in 
better patient outcomes. At a time when the U.S. Congress is debating 
``performance pay'' based on patient outcomes, an easing of the 
moratorium on physician referrals to physician-owned specialty 
hospitals would seem most appropriate in helping to attain better 
outcomes.
    At physician-owned specialty hospitals, physicians choose to 
practice in an environment where sound medical decisions can be made 
without third-party second guessing due to bottom line considerations. 
The unique atmosphere of a specialty hospital offers physicians the 
opportunity to work where they can be most effective and where they 
have access to cutting edge technology and specialized support staff.
    The growth of specialty hospitals is an example of how new and 
innovative entrants in an existing market help fuel competition for 
cost, quality and access. When a superior product or service goes into 
existing markets, competitors are forced to raise quality and re-
examine costs. The final result is a higher rate of productivity, 
translating to lower costs and better quality to the patient. That 
point cannot be overemphasized. And the specialty hospitals are the new 
market entrants that make it possible.
    Patients should be afforded the choice of facility with the newest 
equipment, and best record of results. They deserve the best treatment 
available. That is why patients in increasing numbers are choosing a 
facility with the best outcomes and quality of care. That is why they 
are choosing specialty hospitals.
    With a majority of specialty hospital staff dedicated to a specific 
field and focused on efficient methodology, time between operative 
procedures and post-procedure turnaround is reduced, resulting in 
increased productivity in all aspects of the hospital.
    Such productivity is one of the hallmarks of specialty hospitals.
    The General Accountability Office (GAO) looked at specialty 
hospitals and the impact that they had on neighboring general and 
community hospitals. The GAO found that the cost effectiveness and the 
rate of high positive outcomes at specialty hospitals outweigh any 
perceived disadvantages experienced by general and community hospitals.
    A study by the Lewin Group compared MedCath facilities, a group of 
12 heart hospitals across the country, to peer hospitals which conduct 
open-heart surgery and found MedCath hospitals measured better in a 
broad range of categories. According to the Lewin Group, MedCath 
patients experienced shorter stays and were more often discharged to 
home, rather than to short-term care facilities. This is important 
because it means reduced costs to Medicare and Medicaid. In turn, with 
the decrease in Medicare/Medicaid costs, taxpayers are less apt to 
subsidize treatment at specialty hospitals.
    At a time when the federal budget deficit requires the U.S. 
Congress to vigorously pursue any and all avenues of potential savings, 
Congress must revisit the onerous regulations that increase the cost of 
health care, discourage improvements in patient outcomes, and place an 
undue burden on precious taxpayers' dollars.
    Given the many benefits that specialty hospitals are delivering to 
patients, I believe our laws and government related enabling 
regulations must be written to allow for an expansion of the physician-
owned specialty hospitals network. On behalf of those in need of 
medical care in America today, I ask that you act accordingly.

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