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




 
                  PHYSICIAN-OWNED SPECIALTY HOSPITALS

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 8, 2005

                               __________

                           Serial No. 109-37

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
ROB PORTMAN, Ohio                    WILLIAM J. JEFFERSON, Louisiana
PHIL ENGLISH, Pennsylvania           JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
JERRY WELLER, Illinois               LLOYD DOGGETT, Texas
KENNY C. HULSHOF, Missouri           EARL POMEROY, North Dakota
RON LEWIS, Kentucky                  STEPHANIE TUBBS JONES, Ohio
MARK FOLEY, Florida                  MIKE THOMPSON, California
KEVIN BRADY, Texas                   JOHN B. LARSON, Connecticut
THOMAS M. REYNOLDS, New York         RAHM EMANUEL, Illinois
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         SUBCOMMITTEE ON HEALTH

                NANCY L. JOHNSON, Connecticut, Chairman

JIM MCCRERY, Louisiana               FORTNEY PETE STARK, California
SAM JOHNSON, Texas                   JOHN LEWIS, Georgia
DAVE CAMP, Michigan                  LLOYD DOGGETT, Texas
JIM RAMSTAD, Minnesota               MIKE THOMPSON, California
PHIL ENGLISH, Pennsylvania           RAHM EMANUEL, Ilinois
J.D. HAYWORTH, Arizona
KENNY C. HULSHOF, Missouri

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               Page______
Advisory of March 1, 2005 announcing the hearing.................     2

                               WITNESSES

Medicare Payment Advisory Commission, Glenn M. Hackbarth, 
  Chairman.......................................................     5
Centers for Medicare and Medicaid Services, Center for Medicare 
  Management, Tom Gustafson, Ph.D., Deputy Director..............    16

                                 ______

Saint David's Healthcare Partnership, Jon Foster.................    36
American Medical Association, William G. Plested III, M.D........    41
Cedars-Sinai Medical Center, William W. Brien, M.D...............    49
MedCath Corporation, Jamie Harris................................    53
Baylor Healthcare System, Gary Brock.............................    61

                       SUBMISSIONS FOR THE RECORD

Bettis, Richard, Texas Hospital Association, Austin, Texas, 
  letter.........................................................    77
Calkins, D.J., Guadalupe Valley Hospital Board of Managers, 
  Seguin, Texas, statement.......................................    83
Castle, James, Ohio Hospital Association, Columbus, Ohio, letter.    84
Coyle, Carmela, American Hospital Association, statement.........    86
Dauphine, Damien, North Texas hospital, Lewisville, Texas, letter    91
Fetter, Trevor, Tenet Healthcare Corporation, Dallas, Texas, 
  statement......................................................    92
Friesen, Shawn, American College of Surgeons, statement..........    95
Grant, James, American Surgical Hospital Association, San Diego, 
  statement......................................................    97
Johnston, Jr., Ben, Focus on Therapeutic Outcomes, Knoxville, 
  Tennessee, letter..............................................   130
Jones, Steven, Little Rock, Arkansas, statement..................   134
Kerrigan, Karen, Small Business & Entrepreneurship Council, 
  statement......................................................   135
Orient, Jane, Association of American Physicians & Surgeons, 
  Tucson, Arizona, statement.....................................   136
Strayer III, John, National Center for Policy Analysis, statement   137


                  PHYSICIAN-OWNED SPECIALTY HOSPITALS

                              ----------                              


                         TUESDAY, MARCH 8, 2005

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 4:07 p.m., in 
Room B-318, Rayburn House Office Building, Hon. Nancy L. 
Johnson, (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
March 8, 2005
No. HL-2

    Johnson Announces Hearing on Physician-Owned Specialty Hospitals

    Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Health of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on physician-owned specialty 
hospitals, following the release of the 2005 report of the Medicare 
Payment Advisory Commission (MedPAC). The hearing will take place on 
Tuesday, March 8, 2005, in B-318 Rayburn House Office Building, 
beginning at 4:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include Glenn Hackbarth, Chairman of MedPAC, and 
representatives from groups affected by Medicare's payment policies. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    In recent years, there has been increasing growth of specialty 
hospitals owned, in part, by physicians. Such facilities focus 
primarily on the performance of cardiac, surgical and orthopedic 
procedures. Proponents contend that these facilities provide a range of 
benefits, including increased efficiency, competition, better medical 
outcomes, and improved patient satisfaction. Critics of specialty 
hospitals contend that physician owners at these facilities select more 
profitable patients and procedures, which adversely impacts the 
resources of community hospitals. Critics also believe physician 
ownership creates conflicts of interest and may increase utilization 
and spending of services. Medicare payments for inpatient procedures at 
hospitals are determined by grouping medical procedures into more than 
500 diagnosis-related groups (DRGs), with the goal of providing 
appropriate payments based on the type of medical condition and 
resources required to treat the condition.
      
    The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA) (P.L. 108-173) responded to questions surrounding the 
growth of these facilities by imposing a moratorium until June 8, 2005, 
that prohibits the opening of new facilities in which a physician 
maintains an ownership interest. The MMA permitted existing specialty 
hospitals to operate. Also, the MMA requires MedPAC to issue a report 
by March 8, 2005, on cost differences, the financial impact of 
specialty hospitals on community hospitals, patient selection, and 
recommendations to update the DRG structure. In addition, the MMA 
requires the Secretary of the U.S. Department of Health and Human 
Services to issue a report by March 8, 2005, on in part, quality and 
differences in uncompensated care between specialty and community 
hospitals.
      

FOCUS OF THE HEARING:

      
    The hearing will focus on physician-owned specialty hospitals, 
identification of potential problems and an examination of potential 
solutions. The MedPAC will present findings from its report to Congress 
on physician-owned specialty hospitals. The second panel will provide 
input from affected parties, including testimony from witnesses with 
experience in specialty hospitals, community hospitals and physician-
referral issues.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
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encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman JOHNSON. Welcome everyone. We gather today to 
discuss the serious issue of physician-owned specialty 
hospitals. We will begin to explore today the results of the 
Medicare Payment Advisory Commission's (MedPAC), the report to 
Congress on physician-owned specialty hospitals. We will also 
hear from a representative of the Centers for Medicaid and 
Medicare Services regarding their preliminary results and the 
perspectives of various interested parties.
    In recent years there has been increasing growth in the 
specialty hospital area. Such facilities focus on the 
performance or cardiac, surgical and orthopedic procedures. 
Proponents contend that these facilities provide a wide range 
of benefits, including increased efficiency, competition, 
better medical outcomes, improved patient and provider 
satisfaction.
    Critics of specialty hospitals contend that physician 
owners at these facilities select more profitable patients and 
procedures which adversely impacts the resources of community 
hospitals. Critics also believe physician ownership creates a 
conflict of interest and may increase utilization and spending 
on services. These issues are important, and given the nature 
of the facilities and treatments at issue, compel us to 
consider the manner in which Medicare pays for inpatient 
procedures at hospitals and whether changes to the payment 
system are needed to provide accuracy and prevent waste. The 
Medicare Prescription Drug Improvement and Modernization Act of 
2003 imposed a moratorium until June 8th, 2005 that prohibits 
the opening of new specialty hospitals while allowing existing 
specialty hospitals to operate, and allowing those under 
development to apply for a waiver. The moratorium expires and 
is something we must consider soon.
    We appreciate the efforts of MedPAC in issuing its timely 
report on physician-owned hospitals. MedPAC makes a variety of 
findings and recommendations which we will explore today. On 
our first panel we are happy to have MedPAC's Chairman, Mr. 
Glenn Hackbarth, here today with us to discuss the findings set 
forth in MedPAC's report. In addition, although we have been 
advised that the Secretary's report on specialty hospitals is 
not yet available, we are pleased to hear comments from Mr. 
Thomas Gustafson, who is the Deputy Director of the Center for 
Medicare Management and for the Centers of Medicaid and 
Medicare Services, who will provide limited testimony on their 
preliminary research data. His testimony will not and is not 
intended to provide any conclusions about the data, and is not 
to be considered a substitute for the Secretary's report, which 
we anticipate to be issued in the near future.
    On our second panel we are pleased to hear from 
representatives from the physician hospital and specialty 
hospital communities. They will provide varied perspectives on 
physician-owned specialty hospitals, the Medicare payment 
structure and potential improvements to the system for the 
benefit of Medicare beneficiaries, providers and taxpayers. Mr. 
Stark, I now welcome you.
    Mr. STARK. Thank you, Madam Chair. You are quite right, it 
is an important topic. My concern is that the growth of 
specialty hospital phenomena or whatever you choose to call it, 
could impact the structure of our medical care delivery system. 
In essence these facilities are pulling profit centers out of 
community hospitals and over time could cause a real disruption 
in the financing and the fiscal health, financial health of 
these hospitals.
    There aren't many of these specialty hospitals now, but if 
financial incentives are motivating a lot of for-profit 
corporations and physicians to team up and create heart 
hospitals, orthopedic hospitals, surgery hospitals, and the 
moratorium we passed has stalled this, but I do not think we 
have much time to act. The industry publications indicate there 
could be 100 institutions waiting in the wings to jump if in 
fact the moratorium expires, and I expect we would have trouble 
putting that genie back in the bottle once it opened. The 
specialty hospitals generate huge returns for their investors, 
mostly doctors, the other half by the people who have organized 
them. The question is, I do not know if there is any 
information that they are any better for patients. The food I 
understand is better, but that is hardly the issue. And are 
they good for the medical care delivery system as a whole? That 
I think is the real question.
    We enacted the Physician Self-Referral Laws because of 
overwhelming evidence that health care providers who personally 
profit from referrals will increase the number of such 
referrals, not surprising I don't suppose to any of us. When 
those laws were enacted physician-owned specialty hospitals 
basically did not exist. We included the whole hospital 
exception in the law because of the broad based entities in 
which it would be hard to prove that ownership caused 
inappropriate referral patterns, but we explicitly prohibited 
ownership in a subdivision of that hospital, as we say, a 
hospital within a hospital, and because it would cause just 
such a conflict. I submit to you that today's physician-owned 
specialty hospitals are nothing more than freestanding 
subdivisions of a hospital.
    I would like to go on record in support of the petition by 
the Federation of American Hospitals urging Health and Human 
Services to update their regulations to make clear that these 
physician-owned specialty hospitals do not meet the whole 
hospital exception. Today we will hear from MedPAC about their 
recommendations. I believe their proposal to readjust the 
payment system to eliminate the obvious financial incentives 
that encourage these specialty hospitals make good sense. But I 
still believe that realigning the payment system won't be 
enough to solve the inherent problem of self-interest, and it 
is a positive change and one we should proceed with.
    MedPAC has also recommended and extension of the 
moratorium. At a minimum it is vital that we extend this 
moratorium until we have a legislative solution to the very 
real problems posed by the physician-owned specialty hospitals. 
Finally, I would like to note that we have a wide breadth of 
groups in agreement that something should be done to curb the 
growth of these physician-owned specialty hospitals. I would 
like to point to page 145 of the President's Budget, where it 
states, quote, ``The Administration will seek to refine the 
inpatient hospital payment system and related provisions of 
regulations to ensure a more level playingfield between 
specialty and non-specialty hospitals.''
    On the day when Pete Stark, Chip Kahn and President Bush 
all agree that something needs to be done, I think we can 
create a policy that Congress can pass, and I look forward to 
hearing from the witnesses today. Thank you, Madam Chair.
    Chairman JOHNSON. Thank you, Pete. Mr. Hackbarth?

   STATEMENT OF GLENN M. HACKBARTH, J.D., CHAIRMAN, MEDICARE 
                  PAYMENT ADVISORY COMMISSION

    Mr. HACKBARTH. Chairman Johnson, Mr. Stark, other members 
of the Subcommittee, it is good to see you again and I 
appreciate the opportunity. Chairman Johnson well summarized 
the basic issues here, the view of the proponents of physician-
owned specialty hospitals as well as the opponents.
    Our findings on the performance of physician-owned 
specialty hospitals are based on data drawn from 2002. That was 
the most recent data available when we began our study. In the 
2002 data there were 48 hospitals that met our test for 
specialization and minimum Medicare volume. In addition to 
looking at that data, we also conducted site visits to Austin, 
Texas, Wichita, Kansas, and Sioux Falls, South Dakota.
    The data that we have before us are limited in three 
important respects. First of all we have a small number of 
hospitals, 48 hospitals, and many of those hospitals are very 
small institutions. Second, 2002 was at an early stage in the 
development of the specialty hospital phenomenon. Third, MedPAC 
did not look at any data on quality of care in specialty 
hospitals since that assignment was given to CMS under the MMA 
mandate.
    As was alluded to earlier, we also make recommendations on 
refining the payment system for hospitals overall. I want to be 
clear that those recommendations are not based on this limited 
data set, but rather on a broader analysis of Medicare claims 
and cost reports, so the foundation for those recommendations 
we think is very strong indeed. As I proceed with my comments 
if it is okay I will make reference to a couple of figures that 
are in the testimony that I hope everybody has in front of 
them. On page 3 of my testimony, there is a map that shows you 
where specialty hospitals are located, both the ones that we 
studies in 2002 and ones that we know of that have been 
developed since 2002. In 2002 almost 60 percent of the 
specialty hospitals were in four States, South Dakota, Kansas, 
Oklahoma and Texas, so they were quite concentrated. Even if 
you look at the hospitals that have been developed since they 
are still quite geographically concentrated. You can see many 
States have no physician-owned specialty hospitals for a 
variety of reasons.
    Today we estimate that there are more than 100 physician-
owned specialty hospitals, and more, as Mr. Stark pointed out, 
may be in the wings. Our findings were as follows. Heart 
hospitals tend to focus on diagnosis-related groups (DRGs), 
with a greater than average expected profit. On the other hand, 
orthopedic and surgical specialty hospitals tend to focus on 
DRGs that have a slightly less than average expected profit. 
All three types of specialty hospitals, heart, orthopedic and 
surgical, however, tend to treat patients within those 
diagnosis categories that are less severe cases, and as a 
result have higher expected profits.
    If you turn to page 7 in my testimony, you will find Table 
1 that summarizes the data that we found on this issue, and 
pardon me for how detailed and complicated it is. But the basic 
point is that the column labeled DRGs has a factor that 
describes the expected profitability based on the diagnosis of 
the patient. So, if you look at heart hospitals and then 
specialty, under the DRG column it says 1.06. So, that means if 
the hospital had an average level of cost just based on the 
diagnosis of the patients, the DRGs they are in, the expected 
profitability would be 6 percent above average.
    The next column over labeled ``Patient severity'' says that 
if you look at the patients within any given DRG and the 
severity of their illness, what is the effect of that on 
expected profitability. So, in the case of specialty heart 
hospitals the patient severity factor is another 3 percent 
above average expected profit. And then you combine those two 
in the last column to get 109 or 9 percent higher than average 
expected profitability. So, all three types of hospitals, as 
you look down that last column, have better than average 
expected profitability when you take into account both the DRGs 
and the severity of illness of the patients involved. So, that 
was one set of findings. A second is that in 2002, the year 
that we looked at, specialty hospitals tended to draw their 
patients from community hospitals as opposed to increasing the 
amount of services provided overall. So, they were taking 
patients that otherwise would have gone for their surgery to a 
community hospital, treating them in a specialty hospital, as 
opposed to increasing the overall amount of surgery in the 
community.
    Now, we did find some evidence, some indications, that 
there might be increased utilization, but there were not enough 
data to allow us to draw conclusions, statistically significant 
conclusions. So, this is something that we think is worth 
watching and further study. Another finding is that the 
community hospitals competing with specialty hospitals are able 
to recover relatively quickly from the impact of losing 
patients to the specialty hospital through a combination of 
strategies, lowering costs, adding new services and the like, 
although that might be more difficult for hospitals, community 
hospitals that are in smaller communities.
    Next we found that the cost of specialty hospitals are not 
lower than those of community hospitals, although the average 
length of stay for the patients is in fact lower in specialty 
hospitals than in community hospitals. In fact, the data showed 
that the cost of specialty hospitals were higher than community 
hospitals, but again, the differences were not statistically 
significant. So, you ask yourself, how can it be that they have 
higher cost per case and lower average length of stay? There 
might be a variety of reasons for that, more staff per patient, 
higher salaries for staff, high start up costs and the like 
could possibly explain that combination.
    Finally, we found that specialty hospitals serve 
proportionately fewer Medicaid patients than community 
hospitals do. Based on those findings we have the following 
recommendations. First of all, we recommend that the DRG 
payment system be refined to better match payments with the 
expected cost of care for different types of patients. We have 
several specific recommendations on how to do that, several of 
which are directed at how the DRG weights are calculated. The 
weights are the factors that determine how the payments vary 
based on DRG. And then another recommendation is that we 
incorporate a severity adjustment in the system so that 
patients that are more severely ill, have more complicated 
illness, carry with them higher payments from the Medicare 
Program.
    If you turn to page 8 of my testimony and Figure 2, a 
series of bar graphs, this graph illustrates the impact of 
proposed payment reforms. On the far left-hand side of the 
graph you see current policy, and what that signifies is that 
if you look at the middle bar over current policy, about 35 
percent of the dollars paid out in the Medicare Program are in 
DRGs currently, where the expected profitability is between 
plus and minus 5 percent of the average. So, that is the status 
quo. That is where we are today. The different sets of bars 
indicate various proposed refinements to the system. If you go 
all the way to the far right-hand side that is the cumulative 
effect of all of our proposed changes, and you see that there, 
as a result of the payment reforms, 86 percent of the payments 
would be for categories where the profitability, expected 
profitability is within plus or minus 5 percent of the average. 
So, there would be a much more accurate payment system.
    We think these are very, very important changes. Indeed 
these are changes that we would recommend be made in Medicare 
even if physician-owned specialty hospitals did not exist. They 
make the payment system fairer to hospitals and ultimately 
therefore better we believe for patients. Because these changes 
shift dollars around in the system there are winners and 
losers. We recommend that they be implemented with a transition 
period. The winners and losers are interesting. You are 
familiar with how in our regular reports to Congress we analyze 
the impact of various proposals, and we often look at how urban 
hospitals are affected or rural hospitals are affected or 
teaching and non-teaching hospitals are affected. Well, what we 
find in analyzing the impact of these changes is that there 
would be winners and losers that cut across those categories. 
In other words, some urban hospitals would benefit from these 
changes, but some would lose Medicare dollars as a result of 
these changes. Some rural hospitals would benefit and some 
would lose. Some teaching hospitals would benefit and some 
would lose.
    Obviously, the reason that we are proposing them is that 
the winners deserve more money because they are caring for 
patients that have higher expected cost. The ones that would be 
losing Medicare dollars would lose because they are carrying 
patients that are not expected to be as costly and so they 
should be receiving lower payments. Our next recommendation is 
that the Congress authorize the Secretary of Health and Human 
services to permit and then regulate what we refer to as gain-
sharing arrangements between physicians and hospitals. We 
believe it is very important for physicians and hospitals to 
have the opportunity to work together and mutually benefit from 
successes in reducing cost and improving quality. we believe 
that is particularly true in that we and others are 
recommending that Medicare begin incorporating payment 
adjustments for quality. Those gains can be best accomplished 
through collaboration of physicians and hospitals, but right 
now the rules prevent them from sharing in gains in efficiency 
or gains in quality improvement. We think that is a barrier, an 
impediment to improvement, and we think that Congress ought to 
authorize the Secretary to permit that gain sharing, albeit 
within clearly-defined set of rules that would protect quality 
of care and prevent the dollars from being used to reward 
inappropriate increases in admissions and the like. This too we 
would recommend even if specialty hospitals did not exist.
    Finally, we recommend an extension of the current 
moratorium on the development of specialty hospitals so 
Congress has ample opportunity to consider our recommendations 
and CMS then has ample opportunity to implement them. In 
addition, the extension of the moratorium would give us 
additional time to analyze the cost and quality of specialty 
hospitals. Even after our recommended changes, MedPAC has 
residual concerns about self-referral by physicians to 
hospitals in which they have an ownership interest. Our concern 
is that that ownership interest could have an undue impact on 
clinical decisionmaking about who gets what care at what 
location. Rather than rule out physician-owned specialty 
hospitals, however, based on that alone, we think would do well 
to carefully examine, continue to examine whether these 
institutions can help us lower cost and improve quality. If in 
fact they were able to do that, then we would weigh those 
potential gains against the concerns raised by self-referral, 
and then make a judgment.
    Right now we are concerned that the data available to reach 
a definitive judgment about physician-owned specialty hospitals 
is too limited to make a final judgment, and we could benefit 
from some more information. Thank you very much, and I look 
forward to your questions.
    [The prepared statement of Mr. Hackbarth follows:]

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

    Chairman Johnson, Congressman Stark, 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 afternoon 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.

[GRAPHIC] [TIFF OMITTED] T6371A.001


Motivations for forming physician-owned specialty hospitals and critic 
        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.

[GRAPHIC] [TIFF OMITTED] T6371A.002


    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.
    a Significantly different from peer hospitals using a 
Tukey mean separation test and a p<.05 criterion.
    b Significantly different from nonpeer community 
hospitals using a Tukey mean separation test and a p<.05 crition.

    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.

[GRAPHIC] [TIFF OMITTED] T6371A.003


    Note: DRG (diagnosis-related group), APR-DRG (all-patient refined 
diagnosis-related group).
    Source: MedPAC analysis of Medicare hospital inpatient claims and 
cost reports from CMS, fiscal year 2000-2002.

    These payment system refinements would affect all hospitals--both 
specialty hospitals and community hospitals--and many would see 
significant changes in payments. 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.

                                 

    Chairman JOHNSON. Thank you very much. Dr. Gustafson?

STATEMENT OF THOMAS A. GUSTAFSON, PhD, DEPUTY DIRECTOR, CENTER 
   FOR MEDICARE MANAGEMENT, CENTERS FOR MEDICARE & MEDICAID 
                            SERVICES

    Mr. GUSTAFSON. Thank you, Mrs. Johnson, Mr. Stark and 
distinguished Members of the Committee. I appreciate the 
invitation to testify today. I am here to present preliminary 
results from the technical analysis that will underlie the CMS 
report mandated by MMA that we expect to send to you shortly. I 
must emphasize that the quantitative findings that I will 
discuss here are tentative. The technicians are in the back 
room continue to twiddle the dials on this and the numbers may 
move around a little bit. But we believe that the qualitative 
nature of the results will not change materially, and the 
Administration will proceed to develop policy recommendations 
once this analysis is in hand.
    Our study conducted a considerable amount of new data 
relative to the performance and impact of specialty hospitals. 
We made site visits to six market areas around the country. 
Included in these were 11 of the 59 cardiac, surgery and 
orthopedic specialty hospitals that were paid by Medicare at 
the end of 2003. These market areas were selected to represent 
a range of circumstances in which specialty hospitals now 
operate.
    Within each market area we interviewed specialty hospital 
managers, physician owners, staff. We also talked with 
representatives of community hospitals in the area to assess 
patient satisfaction which is one of the measures that Congress 
asked us to look at. We looked at patient focus groups of those 
beneficiaries who had been treated in specialty hospitals. We 
also examined referral patterns for all specialty hospitals, 
not just those that were in the six market areas I described, 
but all of the 59, using Medicare claims data for 2003, so it 
was a little bit later than the analysis, so the data was a 
little bit later than the analysis that MedPAC embarked on. And 
we also drew on information on financial relations based on 
information we acquired from the individual hospitals and for 
tax records.
    One major conclusion which I think comports very well with 
what MedPAC discovered is that there are very clear differences 
between cardiac hospitals on the one hand and surgery and 
orthopedic hospitals on the other. Cardiac hospitals are 
larger, have a higher average daily census, about 40. They tend 
to have emergency rooms and other features that are usually 
associated with a community hospital such as community outreach 
programs. About two-thirds of the patients treated in these 
facilities were Medicare beneficiaries, which is higher than 
what you would expect in a community hospital. And in the 
hospitals in the study the ownership by physicians as a group 
averaged about 34 percent. Typically a national corporation or 
a not-for-profit hospital in the area owns the majority share 
of these hospitals. The average ownership share by an 
individual physician was about 1 percent. So, in other words, 
34 percent in the aggregate, about 1 percent for each 
individual physician.
    Turning now to surgical and orthopedic hospitals. These 
tended to more closely resemble ambulatory surgical centers. 
Their primary business appeared to be with outpatient services. 
They are much smaller than the other hospitals. Their average 
daily census is about 5. And physicians together generally own 
a comparatively large share. Our average showed that to be 
about 80 percent, and the average share for an individual 
physician was a little over 2 percent.
    Medicare patients account for about 40 percent of the 
inpatient days in these facilities, which is more typical of 
the community hospital average. Unfortunately, the small number 
of inpatient cases at these hospitals, the surgery and 
orthopedic hospitals, prevented us from drawing very robust 
conclusions about this group on several of the dimensions that 
we were asked to look at. Turning to our preliminary results we 
discovered that the majority of Medicare patients in most 
specialty hospitals are referred or admitted by a physician 
owner. These physicians do not, however, refer their patients 
exclusively to the specialty hospitals in which they 
participate in the ownership. They also refer a similar, 
although slightly lower proportion of their patients to local 
community hospitals. Overall, the Medicare cardiac patients 
treated in community hospitals were more severely ill than 
those treated in the cardiac specialty hospitals in most of the 
study sites. There was a little bit of variation here.
    Now, these results, the results I just described, held 
generally for patients admitted both by physicians with 
ownership in specialty hospitals and by other physicians in the 
area, indicating that we could discover no difference here in 
the referral patterns by physician owners and non-owners. There 
was a little bit of variation again with cardiac hospitals in 
some areas having higher average severity than the community 
hospitals, but the general picture was of more severely ill 
patients in the community hospitals and no difference in 
referral pattern.
    For surgery and orthopedic hospitals the number of cases 
involved was too small to draw definitive conclusions, but the 
preliminary results are suggestive of a similar pattern. We 
then turned to claims analysis. This involved all of the 
hospitals that I mentioned earlier, the 59 hospitals, not just 
the 11 in the study areas. And we examined the claims from 
these hospitals against a set of quality indicators from the 
AHRQ and their methodology. Our preliminary findings showed 
that the measures of quality at cardiac hospitals were 
generally at least as good and in some cases better than at 
local community hospitals. Complications and mortality rates 
were lower at the cardiac specialty hospitals, even when 
adjusted for the severity of the caseload in the two different 
hospitals. We were unable to make a statistically valid 
assessment, or at least have not yet been able to make a 
statistically valid assessment because of the small number of 
discharges relating to surgical and orthopedic hospitals.
    We examined patient satisfaction, as I mentioned earlier. 
This was through focus groups of the patients at the specialty 
hospitals. This was extremely high for all of the hospitals in 
questions. The Medicare beneficiaries that we talked with 
enjoyed large private rooms and a number of other amenities, 
and seemed to enjoy their experience at the hospitals. We did 
not do a comparison group with the community hospitals in the 
same areas. We used proprietary financial information we had 
acquired from the specialty hospitals in the study to examine 
the taxes that they paid and the uncompensated care as a 
proportion of net revenues. This was again something that we 
were asked to do by the MMA. And discovered that relative to 
their net revenues, specialty hospitals only provide about 40 
percent of the share of uncompensated care that the local 
community hospitals provided. Balancing this, however, the 
specialty hospitals paid significant real estate and property 
taxes as well as income and sales taxes. The nonprofit 
community hospitals--most of the hospitals in the communities 
we were looking at were nonprofit--of course did not pay these 
taxes.
    If you added this up, the total proportion of net revenue 
that specialty hospitals devoted to the sum of uncompensated 
care and taxes significantly exceeded the proportion of net 
revenue that community hospitals devoted to uncompensated care. 
You have just heard from Mr. Hackbarth about the MedPAC report. 
I think it would be fair to summarize our reading of it so far. 
It is that we don't see any particular inconsistency. I think 
we are finding much the same, the same underlying reality. We 
are looking at some different things than they were, but I 
think the Congress can take some comfort that we are finding 
things that are very, very similar. We have MedPAC's 
recommendations under review and will be considering those as 
we form the administration's recommendations. That concludes my 
remarks and I look forward to your questions.
    [The prepared statement of Mr. Gustafson follows:]

Statement of Tom Gustafson, Ph.D., Deputy Director, Center for Medicare 
         Management, Centers for Medicare and Medicaid Services

    Chairwoman Johnson, Representative Stark, 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 have important 
impacts on quality and medical costs, for our beneficiaries and for 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 redirected to improve quality. 
To that end, Section 507 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 preliminary results from the technical analysis that 
will underlie the CMS report for Section 507.
CMS Study
    Specifically, MMA 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 to conduct the 
technical analysis. At this time, we are reporting on the factual 
findings of the RTI analysis. Any policy recommendations on this issue 
will have to be developed once the report on the analysis is finalized.
    While national data were used for some aspects of this analysis, 
some questions related to quality, cost, and community impact as 
mandated by the MMA required the detailed analysis of data that have 
not been previously available. Consequently, the analysis involved the 
collection of a considerable amount of new data related to the 
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. To conduct 
this detailed analysis, site visits were made to 6 market areas 
(Dayton, OH; Fresno, CA; Rapid City, SD; Hot Springs, AR; Oklahoma 
City, OK; and Tucson, AZ) around the country These markets included 11 
of the 59 cardiac, surgery, and orthopedic specialty hospitals that 
were in operation as approved Medicare providers by the end of 2003. 
These market areas were selected because they were thought to represent 
a range of the circumstances in which specialty hospitals operate. 
Within each market area, specialty hospital managers, physician owners, 
and staff were interviewed. Executives at several local community 
hospitals also were interviewed, in order 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, and 
orthopedic hospitals.
    Referral patterns for all specialty hospitals were analyzed using 
Medicare claims data for 2003. The inpatient hospital quality 
indicators developed by the Agency for Health Research and Quality 
(AHRQ) were used to assess quality of care at the study hospitals and 
local community hospitals in the 6 study sites. Data obtained from 
Internal Revenue Service (IRS) submissions and financial reports, as 
well as from the hospitals themselves, were used to estimate total tax 
payments and uncompensated care for these hospitals.
Cardiac Hospitals Differ from Surgery and Orthopedic Hospitals
    The empirical evidence clearly shows that cardiac hospitals differ 
substantially from surgery and orthopedic hospitals. Compared to 
surgery and orthopedic hospitals, cardiac hospitals tend to have a 
higher average daily census, an emergency room, and other features, 
such as community outreach programs. The average daily census of the 16 
cardiac hospitals nationwide was 40 patients. All the cardiac hospitals 
that were operational in 2003 reported that they were built exclusively 
for cardiac care. Cardiac hospitals treated 34,000 Medicare cases in 
2003, and Medicare beneficiaries account for a very high proportion 
(about two-thirds) of inpatient days in those hospitals nationwide. In 
aggregate, within our sample, physicians own about a 49 percent share 
in cardiac hospitals; typically, a corporation such as MedCath or a 
non-profit hospital owns the majority share. In the study hospitals, 
the aggregate physician ownership averaged approximately 34 percent for 
the cardiac hospitals in the study. The average ownership share per 
physician in those hospitals was 0.9 percent, with individual ownership 
share per physician ranging from.1 percent to 9.8 percent, with a 
median of 0.6 percent and an average per physician share of 0.9 
percent.
    Surgery and orthopedic hospitals more closely resemble ambulatory 
surgical centers, focusing primarily on outpatient services. Their 
aggregate average daily census of inpatients is only about 5 patients. 
Physicians generally own a large share of the interest, averaging 80 
percent in aggregate for the surgery and orthopedic hospitals in the 
study. 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. The balance is typically 
owned by a non-profit hospital or national corporation. Medicare 
patients account for about 40 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.
Preliminary Results
    At this time, we would like to present the preliminary findings of 
our technical analysis. While we are still finalizing some aspects of 
the study, we do not expect the results to change significantly.
    Our findings on physician-owner referral patterns indicate that the 
majority of Medicare patients in most specialty hospitals are referred 
or admitted by a physician owner, but that these physicians do not 
refer their patients exclusively to the specialty hospitals that they 
own. They also refer a similar but slightly lower proportion of their 
patients to the local community hospitals.
    Overall, the Medicare cardiac patients treated in community 
hospitals were more severely ill than those treated in cardiac 
specialty hospitals in most of the study sites. This generally was true 
for patients admitted both by physicians with ownership in specialty 
hospitals and by other physicians without such ownership, indicating no 
difference in referral patterns for physician owners and non-owners. 
However, there was some variation, 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 surgery and orthopedic patients, the difference in the 
proportion of severely ill patients treated in community hospitals was 
greater for the surgery and orthopedic patients than for the cardiac 
patients.
    The analysis of patients transferred out of cardiac hospitals did 
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 patients transferred 
from cardiac hospitals to community hospitals who were severely ill was 
similar to patients in the same diagnosis related group (DRG) who were 
transferred between community hospitals. The number of cases 
transferred from surgery and orthopedic hospitals was too small to 
derive meaningful results on this type of analysis.
    Based on claims analysis using the AHRQ quality indicators and 
methodology, preliminary findings show that measures of quality at 
cardiac hospitals were generally at least as good and in some cases 
were better than the local community hospitals. Complication and 
mortality rates were 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. Patient satisfaction was extremely high in both 
cardiac hospitals and surgery and orthopedic hospitals, as Medicare 
beneficiaries enjoyed large private rooms, quiet surroundings, adjacent 
sleeping rooms for family members if needed, easy parking, and good 
food. Patients also had very favorable perceptions of the clinical 
quality of care they received at the specialty hospitals.
    We also used proprietary financial information provided by the 
specialty hospitals in the study that allowed the calculation of their 
taxes paid and their uncompensated care as a proportion of net 
revenues. Relative to their net revenues, specialty hospitals provided 
only about 40 percent of the share of uncompensated care that the local 
community hospitals provided. However, the specialty hospitals paid 
significant real estate and property taxes, as well as income and sales 
taxes, while non-profit community hospitals did not pay these taxes. As 
a result, the total proportion of net revenue that specialty hospitals 
devoted to both uncompensated care and taxes significantly exceeded the 
proportion of net revenues that community hospitals devoted to 
uncompensated care.
Medicare Payment Advisory Commission (MedPAC) Report
    The MMA also required a complementary MedPAC study of certain 
issues related to the payments, costs, and patient severity at 
specialty hospitals. Based on our initial review of their report, there 
are several preliminary findings in our analysis that are consistent 
with their results:

      Both analyses found specialty hospitals generally treat 
less severe cases than community hospitals. The CMS analysis found this 
difference did not appear to be related to referrals by physician 
owners of less severe patients compared to referrals by other community 
physicians.
      Additionally, MedPAC's analysis of the payer shares for 
specialty and community hospitals is consistent with the CMS finding 
that specialty hospitals provide less uncompensated care than community 
hospitals as a whole. In addition, the CMS analysis found that 
specialty hospitals pay a substantial proportion of their net revenues 
in taxes, so that total payments for uncompensated care plus taxes are 
a higher proportion of total revenues at specialty hospitals.
      MedPAC's analysis also found large differences in 
relative profitability across severity classes within DRGs, which 
create financial incentives to select low severity patients. MedPAC has 
recommended refining the DRGs to reduce these incentives and we are 
currently evaluating their recommendations.
Conclusion
    Madame Chair, thank you for this opportunity to discuss the 
technical findings that will be incorporated into our report on 
physician-owned specialty hospitals. We have been thoroughly studying 
this important topic, with extensive collection and analysis of new 
data, as part of our ongoing efforts to provide a strong factual 
foundation for implementing policy decisions that help patients get the 
high quality health care possible at the lowest cost. We will act 
expediently to incorporate these findings to complete our study and 
prepare our final results and recommendations for your review. As part 
of our careful evaluation of this multi-dimensional issue, we are also 
assessing what authority we have in this area to assure the best 
possible alignment of Medicare's financial incentives with our goal of 
improving 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.

                                 

    Chairman JOHNSON. Thank you very much, both of you. I 
appreciate your testimony and the thoughtfulness of it and the 
data you have been able to develop. It does leave holes, and my 
conclusion is we are well down the road but we have a lot of 
work to do. Mr. Hackbarth, I am very interested int refining of 
the DRGs that you propose. I do think that we need to know more 
about the winners and losers, and I wonder whether MedPAC had 
discussed or thought through the issue of budget neutrality?
    Mr. HACKBARTH. Since these are changes in the DRG weights 
and the severity adjustment, these would be budget neutral 
changes. They redistribute payments within the system in a 
budget neutral way to better match payments to expect a cost 
for different types of patients. So, yes, it is budget neutral.
    Chairman JOHNSON. It is my recollection that MedPAC has 
commented on the growing number of negative margin hospitals or 
low margin hospitals, and I personally am watching a lot more 
very ill medical patients stay in the hospital longer, Medicare 
medical patients. And I hate to see yet another mechanism that 
attributes more money to something we can calculate and takes 
it from these longer-held patients who are sick but are not 
having operations, procedures, you know, the kind of thing that 
attract dollars. I think we really have to look at that as we 
move forward.
    Mr. HACKBARTH. Could I just make a comment on that? One of 
the types of problems that we see in the current system is that 
since the DRG weights are based on charges, we think we are 
overpaying for services, DRGs, where there are lots of 
ancillary services involved. And surgical cases would be one 
example of that, where we think that there might be a pattern 
of overpayment. By the same token we may be underpaying for 
patients that have a different mix of services, medical 
patients of various types. So, we think that there are 
obviously some mistakes in the system and some types of 
patients aren't carrying enough dollars with them, and the 
purpose of these refinements is to level out that playingfield, 
again, not just for specialty hospitals, but even among 
community hospitals.
    Chairman JOHNSON. I think that could be very useful. It 
just has to be done with a lot of thought and I am not sure 
budget neutrality is fair or right. Your testimony, however, 
appears to me not to address the other half of the problem 
which is selection by payor, and there is some evidence that 
these hospitals do select not only the payors, the people who 
pay, as opposed to the people who don't, but the payors that 
pay better than the payors who pay worse. I don't see anything 
in your proposals that really well addresses this aspect of the 
disparity, because as we have talked about a number of times, 
occupancy is crucial to a hospital's profitability and 
occupancy by paying patients is crucial to a community 
hospital's well-being.
    Mr. HACKBARTH. Consistent with our statutory assignment, 
MMA, we looked at how Medicare pays these institutions, and 
also at the number of Medicaid patients they treat. And as I 
reported, we found that they do care for disproportionately 
fewer Medicaid patients. We did not look specifically at 
uncompensated care, nonpaying patients, because that assignment 
was given to CMS.
    Chairman JOHNSON. Do you have any comment on that, Dr. 
Gustafson?
    Mr. GUSTAFSON. Yes. We did discover some information about 
uncompensated care. I summarized the point a few minutes ago, 
and the report will go into this in greater detail.
    Chairman JOHNSON. Thank you. Now, did either of you look at 
selection amongst payors, not the government, private payors, 
and the variation amongst payors? There is some indication that 
organizations are sensitive to who are the good payors and who 
are the bad payors.
    Mr. HACKBARTH. We did not look at that. Given the amount of 
time available and the resources, we focused on the narrow 
statutory mandate.
    Chairman JOHNSON. And also I am not so sure that this was 
common in 2002. It may have been some enrichment in the art.
    Mr. GUSTAFSON. I think we examined it only to the extent 
that we looked at the Medicare share and consequently the 
complement of that is that provided by either Medicaid or 
private payors or by uncompensated care. So, I believe our 
report will provide some detail on that, but we didn't go into 
it in depth.
    Chairman JOHNSON. This issue of the length of stay and the 
failure to show any reduction in cost is a concern because if 
competition is to improve quality and reduce costs, and the 
quality jury, I will be interested to see your report in 
greater detail. But I would have to say that in extensive talks 
with thoracic surgeons, which I hope to share with the 
Subcommittee Members in a seminar setting. It was very 
interesting the tremendous progress they have made in quality, 
and they can make it in a community hospital setting just as 
easily in a brandnew facility. Which I think leads us to the 
question of if investing in this new capital from our point of 
view does not result in a reduction in costs, the what are the 
implications of that for the overall cost of the Medicare 
system?
    Mr. HACKBARTH. Well, because unfortunately the limited data 
at our disposal, the small number of hospitals and so on, as I 
said, we couldn't draw definitive conclusions about how costs 
compared. We did find that the costs were higher, not lower, 
but that was not a statistically significant result. So, that 
is the sort of question that with more time and more data we 
might be able to provide a more compelling answer.
    Chairman JOHNSON. And last, very briefly, did you look at 
whether or not there were waiting lists at the existing cardiac 
programs that the specialty hospital then served, or was it--it 
is a little hard to look at this in 2002 because there was not 
much time--but you are saying that the community hospital 
recovered from the blows. There are two things that it seems to 
me we don't know. We don't know whether they recovered from the 
blow by substituting higher cost services that we will now pay 
for, and dropping services to low income pieces that were--we 
don't know whether they lost their ability to cross-subsidize 
Ob/Gyn wards or particularly OB wards of pediatric wards. So, I 
think we need to look at lot more. Did you look at that at all, 
Dr. Gustafson?
    Mr. GUSTAFSON. I am not aware that we did, although the 
site visits I believe were fairly comprehensive. I didn't go on 
any of them myself.
    Chairman JOHNSON. I think we do need more information about 
what happened at these community hospitals. I think we need 
more information about whether there were waiting lists for 
current services, whether this was a need induced response or 
whether this was a profit induced response. Thank you. And I 
have taken too much time, so you do not need to respond to 
that. Mr. Stark?
    Mr. STARK. Mr. Hackbarth, has MedPAC closed the door on a 
future recommendation that the whole hospital exemption be 
eliminated, or is that still open?
    Mr. HACKBARTH. No, we haven't closed that door. We would 
like to make a final recommendation as it were on that based on 
more definitive evidence on cost and quality in specialty 
hospitals.
    Mr. STARK. Specialty hospitals that are fueled by self-
referral or specialty hospitals in which----
    Mr. HACKBARTH. Here I am talking specifically about the 
physician-owned specialty hospitals.
    Mr. STARK. Do you have a concern or do you share my concern 
about allowing the moratorium to expire before Congress passes 
or CMS acts without legislation and payment changes are 
recommended?
    Mr. HACKBARTH. Very much so.
    Mr. STARK. So, you think we should keep the----
    Mr. HACKBARTH. We think it is very important to extend the 
moratorium.
    Mr. STARK. Until such time as we resolve the issue?
    Mr. HACKBARTH. Yes.
    Mr. STARK. Is MedPAC still concerned in general about self-
referral to physician-owned facilities or these diagnostic 
facilities or whatever? Is there still some evidence that 
ownership tends to encourage higher utilization?
    Mr. HACKBARTH. Yes. We are concerned about that. We are 
open to the possibility that specialization and the sort of 
engagement that you get through ownership could help improve 
efficiency and quality, and we don't think that we had 
sufficient information to reach definitive judgments on those 
issues. And as we have discussed often in these hearings, our 
view of the status quo is that it is not all that great. There 
is a lot of inefficiency in the system and a lot of unevenness 
in quality, so we don't want to definitively rule out a 
development that may help us on those fronts unless we have 
really compelling information to do so.
    Mr. STARK. There has been some discussion in somebody's 
testimony about the fact that the specialty hospitals do 
better, and they perhaps have equivalent mortality. Dr. 
Gustafson, you only looked at four heart hospitals, right?
    Mr. GUSTAFSON. On the quality measures we looked at all 15, 
sir.
    Mr. STARK. All 15 what?
    Mr. GUSTAFSON. All 15 heart hospitals.
    Mr. STARK. There are only 15 of them?
    Mr. GUSTAFSON. There were only 15 in 2003, sir. Actually, 
let me correct that. There were 16.
    Mr. STARK. Did you look, Mr. Hackbarth, at the, I guess the 
invasiveness of the procedures? Has there been any study about 
whether more invasive procedures were used for somebody with 
the same diagnosis in one hospital or another?
    Mr. HACKBARTH. What we did, Mr. Stark, was look at 
different types of patients, and we broke them in--we looked at 
all heart surgeries in general, and then we looked at three 
particular categories, one that we identified as a high profit 
type of case, and then a medium profit and a low profit, and 
tried to see whether the patterns of care differed in the 
communities where there were physician-owned specialty 
hospitals. And with one exception, we did not find a 
statistically significant difference.
    Mr. STARK. I am going to ask you to comment on Mr. 
Gustafson's study here, but you are suggesting the mortality 
rate--Mr. Gustafson suggested that the mortality rate between 
cardiac and community hospitals was similar when adjusted for 
severity, but that the readmission rate for cardiac specialty 
hospitals was higher on average I gather.
    Mr. GUSTAFSON. That is correct.
    Mr. STARK. So, if we already know that you are putting the 
more complex sicker patients in the community hospitals and the 
healthier patients in the cardiac hospitals, wouldn't you 
expect that they would have lower readmission rates in the 
specialty hospitals if their quality of service is as good? I 
mean there is something here about doing your callbacks, for 
which I suspect they get to charge again. They do not do 
callbacks free like my Ford dealer, do they? You go back a 
second time, you pay a second time, right? So, I know that 
maybe they didn't put the drain plug in properly, so you can 
come back and get another oil change, but I mean, is it--did 
you take that into account, Dr. Gustafson?
    Mr. GUSTAFSON. Well, I mean, we think the admissions would 
be a source of concern, certainly.
    Mr. STARK. Okay. But, so you still think that all the 
readmissions for healthier patients didn't make the care worse 
in the cardiac hospital----
    Mr. GUSTAFSON. Well, I mean, it is a complex set of 
measures that were employed here insofar as the mortality seems 
to be one you would want to pay particularly close attention 
to, and so we did. Readmission is a different nature of 
problem. And I would say that the differences we are talking 
about here are not startling. They are significant, but not 
necessarily startling. And community hospitals vary a fair bit 
in some of these factors as well.
    Mr. STARK. Mr. Hackbarth?
    Mr. HACKBARTH. I just want it to be clear, the reason that 
I wasn't responding to your question is that the quality piece 
of the work was assigned to CMS. So, we did not specifically--
--
    Mr. STARK. No, I was asking you about readmissions, though, 
from a cost basis. I mean, if you have some guy coming back two 
and three times, and they are healthier, it sounds to me like 
that could be more cost----
    Mr. HACKBARTH. That is unquestionably a problem if that 
happens. The extent to which it does happen, I don't know, 
since we didn't look at that issue.
    Mr. STARK. Thank you.
    Chairman JOHNSON. Mr. McCrery.
    Mr. MCCRERY. Thank you, gentlemen, for your testimony, 
although I must say it doesn't really tell us exactly where to 
go on this issue. And I hear you saying that you need more time 
and more resources to give us more definitive guidance--which 
is fine. And you are suggesting that we keep the moratorium in 
place until we can act on your recommendations, I suppose with 
respect to the DRG changes. How long do you anticipate keeping 
the moratorium in place? Is it totally dependent on 
congressional action, on the DRG front?
    Mr. HACKBARTH. Our proposal is to extend it to January 1, 
2007. Some of the changes that we propose could be done under 
existing statutory authority. One of the refinements that we 
propose requires new legislative authority, as we read the law. 
So, on some of them, as soon as CMS has the opportunity to 
review our work and reach conclusions about it, they could 
begin on today, tomorrow, whenever that point it. In terms of 
when we might know more, we used 2002 data because that was the 
most recent available when we began our study. As Tom reported, 
CMS, because they started a little bit later, had 2003 data. 
Before the end of this calendar year, we should have 2004 data, 
which would give us, obviously, a more significant database to 
look at some of these questions. So, I am not just saying 
somewhere out in the distant future. I think it need not be 
that far in the distant future.
    Mr. MCCRERY. So, you are saying that the moratorium ought 
to be in place at least until we make the DRG changes and you 
have more time and more data to examine to report back to us 
once again on this issue.
    Mr. HACKBARTH. In particular we are emphasizing that we 
think the moratorium ought to stay in place until we can refine 
the payment system so there is not an opportunity to profit 
simply from patient selection. That is the most important 
point. So, long as it is extended, that will also give us time 
to look at some additional data on these cost and quality 
issues while we are waiting. I want to be clear--the fact that 
we might have 2002, 2003, and 2004 data doesn't necessarily 
mean that we will be able to provide the absolute right answer 
to these questions, but we will be able to answer them with a 
bit more confidence than we can today.
    Mr. MCCRERY. Well, one thing that I hope you will focus on 
with the new data is this issue of self-referral. Because the 
data that you have presented to us today, at least to me, 
doesn't indicate that self-referral is a problem with these 
specialty hospitals, with physician ownership averaging, I 
think your study says 4 percent on an individual basis and, Dr. 
Gustafson, yours says 2 percent or 1 percent, depending on the 
type of specialty hospital. That doesn't seem to me to be a 
huge problem in terms of self-referral.
    Mr. HACKBARTH. Well, as I said in response to Mr. Stark's 
question, we are concerned about self-referral.
    Mr. MCCRERY. In general.
    Mr. HACKBARTH. Yes, as a matter of principle. We have not 
seen the CMS data, and so we are eager to see the information 
that they have developed on self-referral and quality. So, that 
is very much a question in our mind.
    Mr. MCCRERY. But you did look at utilization rates.
    Mr. HACKBARTH. We did, yes.
    Mr. MCCRERY. And what were your findings there between the 
two?
    Mr. HACKBARTH. Well, what we did was compare rates of 
utilization for particular procedures in communities that have 
physician-owned specialty hospitals and those that do not. And 
what we found was that the general pattern was what you would 
expect consistent with the physician-owned hospitals doing more 
high-profit things, but the differences were not statistically 
significant--except in one case for one procedure, we did find 
a statistically significant difference.
    Mr. MCCRERY. Well, Madam Chair, it would be interesting to 
know if the percentage of physician ownership, the average 
percentage of physician ownership has gone up since 2002. That 
to me would be a very interesting piece of data for you to 
retrieve from your ongoing study.
    Mr. GUSTAFSON. Well, if I could comment just on that 
briefly, the moratorium introduced by the MMA has effectively 
prevented that from happening.
    Mr. MCCRERY. Well, but that wasn't in effect in 2003 and 
2004.
    Mr. GUSTAFSON. It started in--it became effective with the 
passage of the MMA in late 2003.
    Mr. MCCRERY. All right. But you are going to have a lot 
more--well, was the MMA in 2003?
    Mr. GUSTAFSON. December 8, 2003. Right?
    Mr. MCCRERY. So, you got one more year of data, 2003, 
without a moratorium.
    Mr. GUSTAFSON. That is correct.
    Mr. MCCRERY. And it would be interesting to see the 
proliferation of these hospitals in that intervening year and 
if there has been any change in physician ownership, average 
physician ownership. Because the data that you have, so far to 
me, doesn't day anything negative about physician ownership, 
self-referral, utilization rates, any of that--any of the 
bugaboos that we were supposed to be on the watch for. So, let 
us see if increased data puts the lie to the data that you 
already have, the conclusions, at least, that can be reached 
based on the data you have. Thank you.
    Chairman JOHNSON. To that point, though, the charts that 
you showed do show that these hospitals do attract less 
severely ill patients in their category. So, what you have to 
know is what is the referral mechanism here and is the referral 
mechanism influenced by ownership. And you don't actually 
comment on that in particular.
    Mr. HACKBARTH. We did not look at the effect of ownership. 
CMS did look at that issue.
    Chairman JOHNSON. Do you want to repeat your comments on 
that?
    Mr. GUSTAFSON. The basic picture is that when we examined 
physician ownership patterns and referral patterns related to 
physician ownership, we discovered no significant difference 
between the behavior of physicians that were owners of the 
specialty hospitals and physicians that were not owners of the 
specialty hospitals. So, there was no there there.
    Mr. HACKBARTH. You might imagine that there are at least 
two different types of forces at work in determining where the 
patients go. One theory is that they are getting less sick 
patients because of the ownership incentive. There are other 
possibilities, one of which is that specialization itself 
inherently means that you are going to get a different 
selection of patients. Because, for example, patients that have 
lots of co-morbidities that need services beyond the cardiac 
service would more naturally go to the community hospital, 
where there are those other services. In fact, that may be the 
patient's preference. Whereas if they are a pure cardiac case, 
the patient might say I want to go to the cardiac hospital. So, 
that has nothing to do with the physician's ownership, but 
rather how patients sort themselves out across a system where 
you have different types of institutions.
    Chairman JOHNSON. I hope to come back to this subject. We 
will turn next to Mr. Doggett.
    Mr. DOGGETT. Thank you, Madam Chair. Just referring back, 
Dr. Gustafson, to a portion of the President's budget that was 
already referenced in an earlier statement, where the 
Administration says that it will refine the payment system and 
related provisions to ensure a more level playingfield between 
specialty and non-specialty hospitals. Does that mean that the 
Administration believes that the playing field at present is 
not level or even or fair between the two?
    Mr. GUSTAFSON. I would say that would be a fair 
characterization, sir.
    Mr. DOGGETT. Is the Administration fully committed to not 
permitting the moratorium to expire before you have an 
opportunity to complete all your technical work and make 
appropriate recommendations and changes?
    Mr. GUSTAFSON. We have not arrived at a position on the 
moratorium yet, sir.
    Mr. DOGGETT. Well, if the playingfield is not level or even 
fair at present, and you let the moratorium expire, what will 
be the immediate effect?
    Mr. GUSTAFSON. That is a speculative question, sir. I think 
that it would be likely that nascent hospitals that are now 
expecting to enter this market may proceed to do so; on the 
other hand, they may be deterred by the possibility of our 
action or your action, and that might have a chilling effect.
    Mr. DOGGETT. Well, you would expect that there would be 
some additional hospitals that would take advantage of the 
uneven playing field, wouldn't you?
    Mr. GUSTAFSON. That could very well happen, sir.
    Mr. DOGGETT. Why is the Administration, given its 
statements, not fully committed to the extension of the 
moratorium?
    Mr. GUSTAFSON. All I can tell you is that we have not--
beyond the statement that you were just citing, we have not 
reached any policy conclusions relative to what our 
recommendations will be to the Congress. As my remarks earlier 
indicated, we are waiting until the analysis is complete. We 
expect to have a report that we are able to deliver to you 
within a matter of weeks. We are very cognizant that June 8th 
is the expiration of the moratorium and we appreciate the 
problem that presents us all in terms of addressing that 
question.
    Mr. DOGGETT. Well, not only that it is the expiration date, 
but that the Congress needs to act to pass a law before that 
time.
    Mr. GUSTAFSON. Yes. I appreciate that, sir.
    Mr. DOGGETT. And as slow as things move around here 
sometimes, if we started this afternoon it wouldn't be unusual 
that it could take near that time if there were any dispute 
over this matter.
    Mr. GUSTAFSON. I quite agree, sir.
    Mr. DOGGETT. I am interested as well in the findings that 
either of you have made at this point about any differences 
that exist in these types of hospitals and their delivery of 
services--particularly uncompensated care and Medicaid care, 
because I have a lot of poor people in my district. Can you 
comment on that further?
    Mr. HACKBARTH. The piece of that that we were asked to look 
at was Medicaid, and then CMS was asked to look at 
uncompensated care. And what we found on Medicaid is that the 
specialty hospitals treat proportionally fewer Medicaid 
patients.
    Mr. DOGGETT. Can you quantify that?
    Mr. HACKBARTH. Not off the top of my head. But the 
differences were quite substantial.
    Mr. DOGGETT. And with reference to the uncompensated care, 
Dr. Gustafson?
    Mr. GUSTAFSON. Yes, we did look at that, sir. And our 
conclusion, again preliminary here, was that specialty 
hospitals provided about 40 percent of the share of 
uncompensated care that we saw in local community hospitals in 
the same area.
    Mr. DOGGETT. About 40 percent.
    Mr. GUSTAFSON. That is correct.
    Mr. DOGGETT. So, it is a pretty substantial difference.
    Mr. GUSTAFSON. Yes, sir.
    Mr. DOGGETT. Thank you very much.
    Mr. HACKBARTH.--which table to look at. And what we found 
was that heart specialty hospitals had on average 4 percent 
Medicaid--this is share of hospital discharges--whereas 
community hospitals in the same market had an average of 15 
percent of their discharges being Medicaid. In the case of 
orthopedic hospitals, specialty hospitals had 1 percent 
Medicaid versus 16 percent for the community hospitals.
    Mr. DOGGETT. One percent versus 16 percent.
    Mr. HACKBARTH. That is right. And then for the surgical, I 
think they were too small and there were too few discharges to 
really have a meaningful result.
    Mr. DOGGETT. So, while there may be some notable exceptions 
to that with hospitals, the playingfield for poor people 
between these hospitals is very different.
    Mr. HACKBARTH. Yes, and I think we did, in fact, find that 
there was some significant variation in some cases. So, there 
were some individual specialty institutions that had much 
higher Medicaid caseloads than these. But this is the average.
    Mr. DOGGETT. I think I have one of those as well, where a 
specialty hospital is really reaching out trying to include 
poor people, but for the survey as a whole it looks like a 
rather stark disparity.
    Chairman JOHNSON. Mr. Johnson.
    Mr. JOHNSON. Thank you, Madam Chairman. Well, I think you 
all are waffling all over the place. Thank you for being here 
today. I am concerned about the extension of the moratorium. It 
is my understanding that of the 100 or so specialty hospitals, 
they have 1 percent of the cardiac market, 2 percent of the 
orthopedic market. Is that correct?
    Mr. HACKBARTH. Are you talking about on a nationwide basis 
or within----
    Mr. JOHNSON. Yes.
    Mr. HACKBARTH. I don't know.
    Mr. GUSTAFSON. I can confirm your figure on cardiac. It is 
about, in fact, .95 percent of the national market. I don't 
have comparable figures on the others.
    Mr. JOHNSON. Well, it seems to me, you know, according to 
your little chart, the bulk of your specialty hospitals are 
around the middle of the country. How do you account for that?
    Mr. HACKBARTH. I think that a significant factor in that is 
State law.
    Mr. JOHNSON. Is what?
    Mr. HACKBARTH. State law. If you look at the map, I think 
we show on here States that have certificate of need. They are 
the shaded States. And there are relatively few, if any--just a 
couple specialty hospitals in States that have certificate of 
need laws. Another factor is State licensing laws. Some of the 
States where in fact there are a lot of specialty hospitals 
have basically made accommodation for them in their licensing 
requirements, making it easier to develop the sort of smaller 
institution that may not have all of the capabilities of a 
full-service hospital. Then there are some States that 
explicitly prohibit physician ownership of hospitals. So, there 
are a variety of State laws that influence this pattern.
    Mr. JOHNSON. Then why does the Federal Government need to 
get involved? You know, it begs the question why do we need a 
government-mandated extension of a moratorium that the States 
are handling pretty well, it looks like to me, themselves. 
Seems like you didn't talk to, but the patients pick hospitals, 
too. You know that.
    Mr. HACKBARTH. Yes.
    Mr. JOHNSON. And especially in the area I am from, the 
Dallas area, you know there is a ton of them in that area. And 
they will choose a hospital, it doesn't matter whether it is a 
specialty hospital or a community hospital. They are going to 
go where the best docs are. I do. And I think most people do. 
So, I don't think that the Federal Government can prescribe how 
specialty hospitals operate. I mean, if you have a cardiac 
hospital or an orthopedic hospital or some other form of 
specialty hospital out there and it is competing with a larger 
hospital that has multiple services, and people choose to go 
there, what is wrong with that? This is America.
    Mr. HACKBARTH. Well, the table, Table 1 on page 7, 
indicates why we think this is an issue for the Medicare 
Program. These institutions are consistently treating patients 
that are healthier, less severely ill, with consequences for 
the Medicare Program. So, what we are saying is that, at a 
minimum, allow the time to level the playingfield so that there 
aren't undue profit opportunities. At a minimum, that is what 
we think ought to be done through an extension of the 
moratorium regardless of how you come down on the issues of 
self-referral and whether that is good or bad.
    Mr. JOHNSON. Well, if you think changing the DRG will help, 
you know, it seems to me you don't need a moratorium to do 
that. We just change the DRG and it fixes it, according to you.
    Mr. HACKBARTH. I am sorry, I didn't follow that. What we 
are saying is that the competition ought to occur on a level 
playingfield----
    Mr. JOHNSON. I heard you.
    Mr. HACKBARTH.--that does not exist today. It will take 
time to accomplish that, and hence an extension of the 
moratorium is appropriate, from our perspective.
    Mr. JOHNSON. Okay. I happen to disagree with you. Do you 
have a comment on that subject?
    Mr. GUSTAFSON. No, sir.
    Mr. JOHNSON. Thank you very much.
    [Laughter.]
    Mr. JOHNSON. Thank you, Madam Chair.
    Chairman JOHNSON. Mr. Thompson.
    Mr. THOMPSON. Mr. Hackbarth, you had mentioned in a summary 
that there is limited fiscal impact on community hospitals from 
the specialty hospitals, but you qualified it by saying ``at 
this time'' or ``thus far.'' Is that qualifier in there because 
you see something coming down the road in the not-too-distant 
future that could in fact fiscally impact the communities?
    Mr. HACKBARTH. Well, the qualifier, again, is because we 
are analyzing such a limited amount of data. So, what we did in 
this particular instance was look at the profitability of 
hospitals, community hospitals that face competition from 
specialty hospitals, as compared to community hospitals that 
don't face that kind of competition, and compare their 
financial results. And in doing that, what we found was that 
they looked pretty similar. The bottom line financial 
performance, in other words, of the hospitals facing specialty 
hospital competition was about the same as those that were not 
facing that competition. But we have a relatively small number 
of data points.
    Mr. THOMPSON. Do you anticipate that changing?
    Mr. HACKBARTH. I honestly do not know. The second 
qualification, you recall, that I mentioned was that it may be 
more difficult for a community hospital in a smaller community 
to respond to the competition. Because among the strategies 
used are, well, we lost some of our cardiac cases, we might 
develop other services to help offset that loss. And if you 
have a small population to work with, those opportunities may 
be fewer.
    Mr. THOMPSON. So, will you bifurcate any recommendations 
that might be forthcoming? Small community versus larger 
communities?
    Mr. HACKBARTH. I don't know, Mr. Thompson. Ideally what we 
would have is some more information to work from.
    Mr. THOMPSON. Do you have any idea--I think Mr. Doggett 
started on this, but if the moratorium were to expire, do you 
have any idea or give us any idea of what would happen in 
regard to the construction of additional facilities?
    Mr. HACKBARTH. I don't know. I assume an important factor 
would be what the specialty hospital potential investors 
thought about the likelihood of changes might be. So, if they 
were convinced that, for example, these payment changes were 
going to be made that would take out a lot of the additional 
profitability of the business, that might reasonably affect 
their willingness to invest, their expected return on the 
investment. If on the other hand they saw the changes as being 
unlikely, then there might be a great influx. They might say, 
oh, we are over this hurdle, now is the time to rush in. So, a 
lot depends on how they read your actions and HHS's potential 
actions.
    Mr. THOMPSON. Thank you. And Dr. Gustafson, you had 
mentioned this link between the amount of taxes that the 
specialty hospitals pay vis-a-vis the uncompensated care that 
they provide. What is the link?
    Mr. GUSTAFSON. We were asked to look at both of those 
factors. It----
    Mr. THOMPSON. But the taxes don't somehow offset the care 
that the community facilities provide--property tax and local 
taxes. How do they--what is the relationship between the two?
    Mr. GUSTAFSON. Well, I can only speculate that the drafters 
of this provision were interested in the total return to the 
community as a whole from these hospitals, and so wanted to 
look at both of these factors.
    Mr. THOMPSON. Thank you.
    Mr. HACKBARTH. Mr. Thompson, could I just add one 
additional point? I mentioned that future investment might 
depend on what they thought was likely to happen with the 
payment refinements. You know, another factor is the gains-
sharing proposal. What we heard in our site visits was that--
from physicians who invested in these hospitals, we often heard 
that they did it because they felt frustrated with their 
existing circumstances in the community hospital. And what they 
wanted was an opportunity, A, for change and, B, to participate 
in the benefit from that. And if we offered an alternative path 
of gains-sharing sanctioned by the program within a defined set 
of rules to protect quality, we might create an alternative 
path that would then affect decisions among physicians about 
whether to engage in this sort of activity.
    Mr. THOMPSON. Thank you.
    Chairman JOHNSON. Mr. Hayworth.
    Mr. HAYWORTH. Madam Chairman, thank you. It is an honor to 
be on the Subcommittee and to open with this clearly non-
controversial topic for us now.
    [Laughter.]
    Mr. HAYWORTH. Mr. Hackbarth, let me return to the topic my 
colleague from Texas was dealing with and try to get more 
amplification of your testimony. You discussed extending the 
moratorium until the DRG payments are reformed. But after that 
point, do you envision lifting the moratorium?
    Mr. HACKBARTH. As I said, I think before you came in, Mr. 
Hayworth, even with those payment reforms in place, the 
Commission has some residual concern about the issue of self-
referral to institutions with a physician as an ownership 
interest--whether that is in the interest of the patient or 
whether clinical decisions could be inappropriately influenced. 
So, that is a concern. What we would like to be able to do, on 
the other hand, is weigh that potential risk against whether 
these hospitals can improve quality and reduce costs, so that 
we have the pluses and minuses in a more definitive way to 
judge. And in order to make that definitive judgment, we think 
there is more information required. We have not as yet seen any 
of the quality information that CMS has developed. We are 
hearing about it for the first time today. Obviously, that is a 
critical factor in assessing whether this is a form of delivery 
that ought to be accepted or whether it is one that ought to be 
ruled out.
    Mr. HAYWORTH. Dr. Gustafson, anything you would care to 
amplify from the findings that might be of interest to MedPAC 
and all of us assembled here in that regard?
    Mr. GUSTAFSON. I don't really have too much more to say 
about the quality findings. We are hastening to complete our 
report and will have that to you as quickly as possible. I will 
note that we are already examining the recommendations that the 
Commission has put forward about revising the DRGs. We have our 
analysts at work on this. There are a number of complexities 
within that sphere that we are going to have to examine and 
will take us a while not only to reach conclusions about the 
desired direction, but to do the technical work necessary to 
implement that in the system. So, that you can see the 
statement in the President's budget indicated our receptivity 
to these ideas. We will probably not be able to push it too far 
for the next cycle of rulemaking, but would be anticipating it 
at a process level, assuming the policy will is there to be 
able to move more energetically for fiscal year 2007.
    Mr. HAYWORTH. Gentlemen, for both of you, this question. As 
the community hospital attracts patients with more co-
morbidities, what do you see as the most equitable way to 
compensate for that?
    Mr. HACKBARTH. Two points. First of all, I want to be clear 
that not all community hospitals are alike. You know, we are 
always talking about averages and there is a tendency to say, 
well, everybody in that average is the same. Community 
hospitals differ significantly in the mix of patients, 
including the severity of illness. That is why we believe that 
these payment changes we are talking about are important to 
make, even if physician specialty hospitals didn't exist. Then 
in direct response to your question, we think that these 
payment changes will directly address that question. If 
patients are sicker, they will come with more dollars attached 
to them, under our proposals. If they are less sick, the amount 
that the hospital is paid would go down relative to today. The 
system would be much more accurate in matching payments to the 
expected costs of different types of patients.
    Mr. HAYWORTH. Dr. Gustafson, any thoughts on that?
    Mr. GUSTAFSON. I have nothing to add, sir.
    Mr. HAYWORTH. Okay. I thank you. Madam Chairman, I thank 
you for the time.
    Chairman JOHNSON. Thank you. Mr. Stark has a follow-on 
question?
    Mr. STARK. Yes, I wanted to direct this to Mr. Hackbarth 
just to see if you would speculate for us a little bit. Set 
aside the kickback or the referral thing, which I think is a 
separate issue, almost, from the specialty hospitals. They are 
combined in much of this, but they can be separate issues.
    If you take the specialty hospital's pitch to its end 
point, you are basically deconstructing--or cannibalizing, 
depending on what you think about it--a community hospital. If 
you took that to its extreme, you might hear some of that from 
Baylor, but you might find that our community hospitals become 
a series of--you know, free-standing emergency room, a block 
away from the rest of it, but a free-standing emergency with 
its own kitchen, its own laundry. And a free-standing--there 
are some free-standing birthing hospitals, basically what 
Columbia used to be. And a free-standing--so you get a whole 
bunch of these little pods around town, each with its own--I 
see some overhead problems there. They each have to have their 
own kitchen, their cleaning crew, their landscaping crew. But 
this would be a sea change in how hospitals operate and how 
they are financed. And I am not sure the hospitals are ready 
for that. And I am not sure we are ready to, in effect, suggest 
that or allow it to happen without some concern.
    So, I guess what I want to know is, do you see just in the 
overall financial survival of all hospitals, whether it is 
teaching hospitals or little 10-bed rural hospitals, that have 
been built over the years on cost-sharing or cost-shifting--and 
they have, just like the profit guy has gone out and started 
other services to bring in extra revenues to help carry the 
hospital. Now, if we deconstruct them, are we going to cause a 
whole bunch of problems that maybe we are better off not doing? 
And I just see, you know, if one group could pull out, another 
can pull out. And then pretty soon ought we not to, if that is 
going to happen, do it with some foresight so it just doesn't 
accidentally end up costing us a lot more or cause a lot of 
problems for, say, inner-city community hospitals that deal 
mostly with the poor? What would happen to them? Do you have 
any sense--forget about the referrals--just on what--is this a 
good trend?
    Mr. HACKBARTH. Well, I am not sure that it logically goes 
to that end, where every full-service hospital is taken apart 
into component parts--for the reasons that you mention. I do 
know that there are some economies of scale. Patients present 
not always with one illness, but maybe multiple illnesses that 
require convergence of different services. And so I can more 
readily envision a world where we have a mixture of full-
service and specialty institutions. In that world, the key to 
determining whether it is a harmful development or a positive 
development is, is the payment system fair? So, when the full-
service hospital treats that patient that has not just heart 
disease but also diabetes and, you know, multiple things, are 
they fairly compensated for that difficult case? Our concern is 
that in the current Medicare payment system, they are not, and 
that is why we want to refine the system to more accurately 
pay. If you have more accurate payment in place, then I think 
that the potential for full-service to compete evenly with 
specialized institutions is much greater. If you don't have 
that in place, it could be harmful. That is why we recommend 
extending the moratorium until we can improve the payment 
system.
    Mr. STARK. Thank you. Thank you, Madam Chair.
    Chairman JOHNSON. Mr. McCrery has a follow-on.
    Mr. MCCRERY. Well, just to underscore that point, you 
stated that you would be in favor of changing the DRG even if 
it weren't for the existence of specialty hospitals.
    Mr. HACKBARTH. That is right.
    Mr. MCCRERY. And it seems to me that among all of your 
conclusions that you have been able to draw, based on the data 
you have been able to retrieve, that is really the only problem 
that stuck out to you, was the disparity in the severity of 
cases between the specialty hospitals and the community 
hospitals.
    Mr. HACKBARTH. Yes. And part of the reason that we can be 
so much more definitive about that issue is, as I said at the 
outset, when we were looking at the DRG refinement, the payment 
refinement, we are not looking just at a database of 48 
hospitals in 2002. We are looking at the overall Medicare 
claims in a cost report database. And so we can say with great 
conviction that the system needs improvement.
    Mr. MCCRERY. Thank you.
    Chairman JOHNSON. All right, to follow up on their two 
comments--I appreciate and understand the gains-sharing 
recommendation and the enrichment of the DRGs. But all you are 
talking about in enrichment of the DRGs is a level playingfield 
in orthopedic surgery or heart problems. I am interested in 
equal responsibilities. What do you do if the community 
hospital has bigger responsibilities for which we don't pay? 
How are you going to fix your DRGs to take into account 
hospital delivery of non-Medicare services on which the 
community depends? OB is a big loser, usually; pediatrics is a 
loser; psychiatric is a loser. The emergency rooms often are a 
loser. LifeStar is a loser. So, if we fix that in one area but 
we don't notice that we rely on our community hospitals for a 
lot more, I have thought a lot about how could we compensate 
the big community hospitals for their larger responsibilities. 
I haven't found any way, actually, to do that accurately.
    Now, if you are going to leave them with higher overhead 
for all these things that the community depends on them for, 
then they are never going to be competitive. With the managed 
care payers, you know, they are never going to be competitive; 
they will always be able to undercut, do a better deal. So, I 
think the long-term implications of not being able to create a 
competition that is fair is very serious and, in the end, will 
be an access issue for us.
    Mr. HACKBARTH. I understand and share your concerns. Two 
reactions to it. First of all, I think it is critically 
important to keep coming back to the fact that not all 
community hospitals are alike. That is sort of a catch-all 
category.
    Chairman JOHNSON. Right.
    Mr. HACKBARTH. It is not uncommon, setting aside physician-
owned specialty hospitals, for there to be debates within the 
community-hospital community, as it is here defined, about who 
is caring a disproportionate share of these public-good 
burdens--for-profit community hospitals against not-for-profit 
community hospitals, or one not-for-profit community hospital 
in the suburbs compared to one in the inner city. These issues 
are important issues, but they long predate physician-owned 
specialty hospitals. Stopping physician-owned specialty 
hospitals won't solve those problems.
    Chairman JOHNSON. No, but allowing any--I mean, this was a 
problem with surgery centers. Allowing someone to pull out the 
high profit does have a consequence for everybody else. I won't 
pursue that, but I do think that is a big issue that we need to 
know about because access is reduced. There is some indication 
that overall demand increases quite substantially as you create 
more opportunities for service, and we had that from Wenberg 
and others. So, if we just let all these opportunities for 
service develop, we can expect to pay a lot more for a lot more 
services. But I wanted to ask you, Dr. Gustafson, because as I 
understand it, these specialty hospitals do not have to reveal 
who their investors are. I was interested that you seem to have 
figured out who the investor/doctors were. And do you also know 
whether or not the other doctors were allowed to invest? I 
mean, are we seeing something in which only the doctors who 
could bring referrals are allowed to invest, or are all doctors 
allowed to invest?
    Mr. GUSTAFSON. The information we had on ownership of these 
hospitals was derived from our case studies. We don't have any 
regular reporting mechanism that provides that information to 
us. We basically had to go and ask the folks what the answers 
were. And they were generally forthcoming on that subject. I 
don't know if we have nay information on the second matter you 
raised about who was allowed to invest.
    Chairman JOHNSON. The sort of word on the street is that 
only those who can bring referrals are allowed to invest, and I 
needed to know whether that is true or not true. Thank you very 
much, gentlemen. I hope you will pursue some of the issues that 
we have been unable to get complete information on. Thank you 
very much. Very interesting.
    Chairman JOHNSON. The next panel, please. Next and last 
panel. Jon Foster, President and Chief Executive Officer of St. 
David's HealthCare Partnership, Austin, Texas; Bill Plested, 
American Medical Association; William Brien, Cedars-Sinai 
Hospital, Los Angeles; Jamie Harris, MedCath Corporation, 
Charlotte, North Carolina; Gary Brock, Chief Operating Officer 
of Baylor Health Care System.
    Gentlemen, we are going to proceed right through all of 
your testimony so we will be able to hear it all before we have 
to go vote, and then we will invite questions. So, we will 
start with Mr. Foster, the CEO of St. David's HealthCare 
Partnership in Austin, Texas.

STATEMENT OF JON FOSTER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
       ST. DAVID'S HEALTHCARE PARTNERSHIP, AUSTIN, TEXAS

    Mr. FOSTER. Thank you, Madam Chairman and Mr. Stark, 
members of the Subcommittee. My name again is Jon Foster. I am 
the President and CEO of the St. David's HealthCare 
Partnership, which is a four-hospital system providing high-
quality care to the 1.4 million residents of Austin and central 
Texas. I am pleased to be here today to discuss one of the most 
critical issues, I believe, facing community hospitals, which 
are physician-owned specialty hospitals. My remarks will focus 
on four key points: First, physician-owned specialty hospitals 
operate more like subdivisions or departments of full-service 
hospitals. Second, physician ownership of subdivisions or 
departments of hospitals are already illegal. Third, physician 
ownership coupled with their ability to self-refer represents a 
conflict of interest and it is anti-competitive. And, fourth, 
Medicare payment adjustments are not a solution to this problem 
but, rather, closing the legal loophole that allows for these 
facilities is.
    Specialty hospitals largely limit their care to just one 
type of service, often cardiac, orthopedic, or surgical 
services, which guarantee high profit margins while avoiding 
essential but unprofitable community services such as emergency 
rooms. Studies by the GAO and MedPAC found that a majority of 
specialty hospitals do not have fully functioning, fully 
staffed, 24-hour emergency rooms. The reason, of course, is 
because emergency rooms are the primary portal through which 
indigent and Medicaid patients get admitted to most hospitals. 
In 2003, 41 percent of the 200,000 patients seen in St. David's 
emergency departments were indigent or Medicaid patients. 
Clearly, specialty hospitals are not whole hospitals but, 
rather, more like subdivisions or departments of hospitals that 
focus on the most profitable patients.
    Under current law, physicians are permitted to have an 
ownership interest in an entire whole hospital but not a 
subdivision of a hospital. The regulatory theory here is that 
any referral by a physician who has a stake in an entire 
hospital would not financially benefit as directly from the 
referrals he or she makes to that hospital, and as such, it 
would dilute the potential conflict of interest that exists.
    However, a physician's ownership in a subdivision of a 
hospital is deemed to be illegal due to the ability of the 
owning and referring physician to more directly control the 
financial results of that subdivision. In my professional 
opinion, specialty hospitals are not whole hospitals; rather, 
they are more like subdivisions of hospitals, essentially 
cardiac, surgical, or orthopedic wings that have been removed 
from full-service hospitals. As such, I believe physician 
referral to specialty hospitals in which they have an ownership 
interest is as much a violation of the anti-referral laws as 
would be physician ownership in a hospital subdivision.
    Let me be clear. As a business leader in central Texas, 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 medical 
technologies. However, true competition requires a level 
playingfield. The business model of a physician-owned specialty 
hospital depends upon the control of referrals by its physician 
owners. Highly lucrative specialty hospital investment 
opportunities are typically granted only to physicians able to 
refer patients and not to investors from the general public. 
Not long ago, I came across one such deal in an offering to 
physician investors for a specialty facility in Austin, Texas. 
The offering suggested that physician investors investing an 
initial amount of $4 million could project to earn $55 million 
over 6 years, and that is an astounding 1,400-percent return on 
their investment.
    It eludes me how there can be free and fair competition 
when under Federal law St. David's is prohibited from offering 
physician ownership in specialty wings of hospitals, but 
specialty hospitals can do so and induce patient referrals 
through physician ownership. MedPAC was certainly correct in 
recognizing the problems inherent in physician ownership of 
specialty hospitals. However, its policy response, which 
focuses exclusively on refinements to DRG payment systems, is, 
I believe, inadequate. I would like to State again that as 
President and chief executive officer of the fifth largest 
employer in Austin, where we employ over 5,000 people 
throughout central Texas, I welcome competition. However, the 
underlying economics of these facilities which rely upon 
referrals from physician owners would not change materially 
simply because of refinements to the DRG payments. I fear that 
a wholesale refinement of the DRG system could have the 
unintended consequence of doing more damage to full-service 
hospitals, even hospitals in markets where currently no 
specialty hospitals exist. As such, it is my belief that not 
only should the current specialty hospital moratorium be 
extended, but it is also my hope that Congress will close the 
loophole in the anti-referral law that allows for the 
exploitation of the whole-hospital exception, which is, of 
course, the very behavior that anti-referral laws were 
attempting to prevent. Thank you for your time, and I would be 
happy to answer any questions.
    [The prepared statement of Mr. Foster follows:]

 Statement of Jon Foster, President and Chief Executive Officer, Saint 
             David's Healthcare Partnership, Austin, Texas

    Good afternoon. My name is Jon Foster, and I am the President and 
CEO of St. David's HealthCare Partnership [the ``Partnership'' or ``St. 
David's'']. The Partnership is an affiliation between the not-for-
profit St. David's HealthCare System and the Hospital Corporation of 
America, the nation's largest provider of health care. We are proud to 
provide high quality, compassionate care through four full-service 
acute-care hospitals, ranging in size from 150 to 500 beds, in Austin, 
Texas--St. David's Medical Center, North Austin Medical Center, South 
Austin Hospital, and Round Rock Medical Center. We are a regional 
system with an eighty-year history of serving the more than 1.4 million 
residents of Central Texas. Recognizing the importance of our role in 
the community, not only do we provide a vital charity care program, but 
we also have made significant investments in essential state-of-the-art 
health care services, such as transplant, open heart, neurosurgery, 
rehabilitation, psychiatric care, and neonatal intensive care.
    I am delighted to be here this afternoon 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 decisions.
    Within the past several years, physician-owned specialty hospitals 
have emerged to capitalize on an unintended loophole in the anti-
referral laws. The business model of a physician-owned specialty 
hospital depends upon the control of referrals by its physician owners. 
More to the point, these arrangements tilt the competitive playing 
field by providing 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 the local community hospitals.
    Physicians owning a financial interest in a specialty hospital tend 
to direct to their facilities only the most attractive patients--those 
with private health insurance and those who are less sick. However, 
those same specialists tend to refer underinsured or uninsured 
patients, as well as those with higher acuity, to full-service 
community hospitals for treatment, which is administered with little to 
no reimbursement of costs. Full-service hospitals then are left without 
adequate resources to treat the sickest patients. The unethical 
practice of patient selection does not serve the American health care 
system, it does not serve community hospitals, and most importantly, it 
does not serve the best interests of the patients in our care.
    I believe that the only way to solve this problem is to close the 
loophole in federal law 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 anti-referral laws are 
attempting to prevent.
    Being the 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 insurance premiums, 
pressures of managed care, demanding regulatory burdens, and on-call 
requirements, just to name a few. 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 aiming to reform 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.

                         Self-Referral At Issue

    As the CEO of four full-service community hospitals in a vigorous 
healthcare market, I am committed to supporting free and fair 
competition. True competition, however, requires a level playing field. 
St. David's, 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 service--often cardiac, orthopedic, or surgical care--which 
guarantees high profit margins, while avoiding essential but 
unprofitable community services, such as emergency rooms and burn 
units.
    Ownership interest in these facilities is typically granted only to 
physicians who are able to refer patients, not to any investors from 
the general public. Referring physicians are given sweetheart equity 
arrangements at bargain basement rates. For example, in a proposal 
offered to potential physician investors in Austin Surgical Hospital, 
referring specialists with an initial investment of $4 million were 
projected to earn $55 million over six years--an amazing 1,400 percent 
return on investment.
    By contrast, full-service hospitals, like those in the Partnership, 
are prohibited by federal laws from offering physicians an ownership 
interest in the specialty wings or subdivisions of our hospitals. In 
fact, offering a physician any ``inducement'' for referrals would land 
me in jail. These laws prohibit me from giving specialists at my 
hospital more than $300 in gifts per year, none of which could be given 
in exchange for a referral. Fair competition under the interpretation 
of existing rules simply would be impossible.
    The ``whole hospital'' loophole in the anti-referral laws permits 
specialty hospitals to cherry pick only the most profitable patients, 
leaving high-cost patients, individuals on Medicaid, and the uninsured 
to community hospitals. The Government Accountability Office (``GAO'') 
and the Medicare Payment Advisory Commission (``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.

                        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 our capacity to provide emergency care and other 
vital health services over time.
    St. David's believes that maintaining a fully functioning and fully 
staffed twenty-four hour emergency department is part of our commitment 
to the community. In 2003, we received 204,023 visits to our emergency 
department. From what I have witnessed in Austin, and from what I have 
seen nationwide, 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.
    As the Members of this Committee are well aware, America's hospital 
emergency rooms 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 rooms must 
provide medical evaluation and required treatment to everyone, 
regardless of their ability to pay. Since the advent in recent years of 
these physician-owned specialty hospitals, which skim profitable 
service areas for low-risk patients, this burden has grown even 
heavier. 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 St. David's, 41 percent 
of patients that visited our emergency department in 2003 were 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.
    A 2003 study by the GAO 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 rooms. The GAO study reveals that 
while nine in ten of all full-service community hospitals maintain an 
emergency department to address any medical concern that walks or is 
carried through its doors, half of 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. For example, at the 
Heart Hospital of Austin, only six percent of those admitted through 
their ``ED'' in 2003 were Medicaid or indigent patients; in contrast, 
25 percent of those admitted through St. David's ED were Medicaid or 
indigent patients. This practice is highlighted in a recent quote from 
Patricia Porras, President and CEO of Austin Surgical Hospital who 
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.

          Fiscal Impact on St. David's HealthCare Partnership

    The loss of specialists willing to cover on-call responsibilities 
poses a significant cost to community hospitals nationwide. Prior to 
the development of physician-owned specialty hospitals within the 
Austin area, our specialists largely accepted on-call responsibilities 
as a pro-bono commitment to their community. However, the development 
of these facilities has further forced the Partnership to pay certain 
of our specialists $1,000 per night for their emergency on-call 
services, even though we have already lost their profitable referrals 
to one of the three physician-owned specialty hospitals.
    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. 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. At St. David's 
alone, the cost of lost patient volume, the cost of recruiting 
additional specialists and nurses, and the cost of on-call coverage 
will total a staggering $20.3 million per year. These health care 
resources would better have been spent to meet other essential 
community healthcare needs.

Physician-Owned Specialty Hospitals Are Diverting Needed Resources from 
                    Full-Service Community Hospitals

    Full-service community hospitals long have used funds generated by 
profitable services to subsidize the losses suffered by unprofitable 
services. Only by maintaining the successful product lines are full-
service hospitals able to subsidize other critical but less profitable 
services, such as trauma and burn centers, as well as fund special 
programs for delivering care to uninsured and underinsured patients. By 
removing the most profitable 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.

                Solution: Self-Referral Loophole Closure

    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 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 owner and referral 
relationship that creates patient selection. The underlying economics 
of these facilities, which relies upon referrals from physician owners, 
would not change materially. Furthermore, while some modifications 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 St. David's and for 
hospitals nationwide demands an amendment to the anti-referral laws. 
These laws generally prohibit physician referrals for services to 
entities in which the physician has an ownership interest. The intent 
of this prohibition was to establish and maintain 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 inpatient 
hospital, but not a subdivision of a hospital. 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.
    The ``whole hospital'' exception was intended to allow physician 
ownership in a comprehensive health facility, as long as that ownership 
interest is in the entire facility, not merely a subdivision. Congress 
never contemplated the emergence 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 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 violation of the anti-referral laws 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 anti-referral legislation 
that allows for self-referral to these facilities. 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, and I'd be glad to answer any questions.

                                 

    Chairman JOHNSON. Dr. Plested?

  STATEMENT OF WILLIAM G. PLESTED III, M.D., AMERICAN MEDICAL 
                 ASSOCIATION, CHICAGO, ILLINOIS

    Dr. PLESTED. Thank you, Madam Chair. Madam Chair, Mr. 
Stark, and Members of the Committee, my name is Bill Plested. I 
am the immediate past Chair of the Board of Trustees of the 
American Medical Association and a practicing thoracic and 
cardiovascular surgeon in Santa Monica, California. The AMA 
would like to express our appreciation to you for calling this 
hearing. Recently, several factors have led to an increase in 
physicians' desire to invest in specialty hospitals. In 
particular, many physicians are frustrated with hospital 
control of management and investment decisions that directly 
affect quality of patient care. Physicians too often have 
little or no involvement in governance and management, control 
over how to reinvest profits, and influence over scheduling and 
staffing needs.
    Physicians need more control over the care their patients 
receive. Investing in specialty hospitals enables physicians to 
increase productivity, improve scheduling of procedures for 
patients, maintain desired staffing levels, increase nurse-to-
patient ratios, and purchase state-of-the-art equipment, all of 
which improve the quality of patient care.
    Studies support the premise that focusing on a specific 
area of service can lead to higher quality and lower cost as a 
result of more expert and efficient care. By performing high 
volumes of specific services, specialty hospitals perfect those 
tasks, increase accountability for the quality of patient care, 
lower fixed costs, quickly respond to patient needs, and re-
engineer the delivery process as necessary. The bottom line is 
that patient satisfaction with specialty hospitals is extremely 
high. The recent growth in the number of specialty hospitals 
has led to concern among general hospitals, and that concern is 
competition. Although some hospitals have started their own 
specialty hospitals, the hospital industry has responded mainly 
by attacking physician ownership of the hospitals in an attempt 
to eliminate competition. General hospitals claim that 
physicians have a conflict of interest when they invest in 
specialty hospitals where they refer patients. They claim that 
such referrals amount to channeling patients to these 
hospitals. Ironically, hospitals are the one that channel 
patients because they cannot refer patients.
    They channel patients in several ways: by purchasing 
physician practices and directing physician referrals to the 
hospital; by operating health plans with network referral 
requirements; and by adopting policies that force physicians to 
only refer patients to their facilities. We have provided 
examples of these channeling practices as an exhibit to our 
written statement. There is no data to support the claim that 
physician ownership of and referrals to specialty hospitals 
conflicts with the best interests of their patients. Physicians 
are ethically and legally permitted to own a hospital and to 
refer patients there if they treat patients at that hospital.
    General hospitals also claim that competition from 
specialty hospitals will hurt them financially by reducing 
their most profitable services, which they use to subsidize 
unprofitable services. The data does not support this claim 
either. MedPAC's analysis found that general hospitals that 
compete with specialty hospitals have demonstrated financial 
performance that is comparable to other general hospitals. Even 
if a hospital could prove financial harm, the answer is not to 
eliminate competition and support cross-subsidization of 
services. The answer is exactly the opposite: to support 
competition and to eliminate cross-subsidization.
    The Federal Trade Commission and the Department of Justice 
share this view. They recommend the elimination of this cross-
subsidization. The AMA supports the changes in the DRG payments 
to more accurately reflect the relative costs of hospital care 
and eliminate the need for cross-subsidization of services by 
general hospitals. We strongly support and encourage 
competition as a means of promoting high-quality, cost-
effective health care. Therefore, the AMA believes that the 
moratorium on physician referrals to specialty hospitals should 
not be extended. Patients should continue to benefit from 
increased choice and the competition that results from 
specialty hospitals. Thank you again for the opportunity to 
provide our views.
    [The prepared statement of Mr. Plested follows:]

Statement of William G. Plested III M.D., American Medical Association, 
                           Chicago, Illinois

    Chairman Johnson and Members of the Subcommittee, the American 
Medical Association (AMA) appreciates the opportunity to provide our 
views today regarding physician owned specialty hospitals.
    The AMA would like to take this opportunity to commend you, 
Chairman Johnson, for holding this hearing on physician owned specialty 
hospitals. 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 
has grown significantly. This growth has led to concern among general 
hospitals who must compete with these facilities.
    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 AMA Council on 
Ethical and Judicial Affairs Opinion E-8.032, we support health 
facility ownership and referral by physicians 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.
    The AMA also supports changes 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. In addition, we support policy changes that would help 
ensure the financial viability of safety-net hospitals so they can 
continue to provide adequate access to health care for indigent 
patients. Together, these changes would ensure the continued financial 
stability of general and safety net hospitals. Therefore, the AMA 
believes there is no need to extend the moratorium on physician 
referrals to specialty hospitals.

                               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--hospitals that focus on cardiac, orthopedic, women's 
medicine, or on surgical procedures. 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. 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).
---------------------------------------------------------------------------

       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 or technical component payments 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.
      Availability of business partners to provide capital and 
management expertise.

              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.\3\
---------------------------------------------------------------------------
    \3\ 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.\4\
---------------------------------------------------------------------------
    \4\ A Comparative Study of Patient Severity, Quality of Care and 
Community Impact at MedCath Heart Hospitals, The Lewin Group, February 
2004.
---------------------------------------------------------------------------
    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 tend to 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.
    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.\5\ Patient satisfaction with specialty hospitals has been very 
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.
---------------------------------------------------------------------------
    \5\ Editorial, In the (Specialty) Hospital, Wall Street Journal, 
Jan. 3, 2005.
---------------------------------------------------------------------------

          HOSPITAL INDUSTRY 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.\6\ 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.\7\
---------------------------------------------------------------------------
    \6\ A Comparative Study of Medicare Payments Per Episode of Cardiac 
Care for Patients at MedCath Heart Hospitals and Other Hospitals With 
Open Heart Surgery Programs, The Lewin Group, July 2002.
    \7\Impact of MedCath Heart Hospitals on MSA Cardiology Inpatient 
Utilization Rates, The Lewin Group, August 2001.
---------------------------------------------------------------------------
    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 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 total loss of the service.
      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).

    The hospital industry has engaged in numerous focused strategies to 
prohibit physicians from opening a competing facility. At the state 
level, hospitals have initiated several different types of legislative 
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 implemented a variety 
of strategies and tactics to discourage members of their medical staff 
from investing in competing physician-owned specialty hospitals. These 
initiatives include, but are not limited, to the following (See also 
Exhibit A):
      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.
      Requiring subspecialists to utilize the hospital/
vertically integrated delivery systems facilities for all of their 
medical group's referrals, for specified services such as outpatient 
surgery and procedures, all imaging and laboratory work, therapy, and 
inpatient admissions.
      Hiring in-house specialists to build ``centers of 
excellence'' or service lines, sometimes intentionally competing with 
its own medical staff members.
      Limiting access to operating rooms and cardiac 
catheterization labs of those physicians that have a financial interest 
in a competing entity.
      Removing competing physicians from extra assignments at 
the hospital, such as directors of departments 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, physicians are ethically and legally permitted to invest in 
and refer patients to health facilities.
    Current public policy generally prohibits physicians from profiting 
from their referral decisions absent a legitimate justification for the 
referral. 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.\8\
---------------------------------------------------------------------------
    \8\ 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, physician self-referral laws and 
other fraud and abuse laws, such as the federal anti-kickback statute, 
permit physician ownership of treatment facilities and referrals to 
such facilities under various circumstances.\9\ The physician self-
referral law, for instance, permits physician ownership and referral of 
patients to hospitals where the physician is authorized to perform 
services at that hospital. The hospital associations refer to this 
exception as a ``loophole'' to bolster their efforts to eliminate the 
ability of physician owned facilities to compete with their member 
hospitals. Yet, the exceptions and safe harbors have been carefully 
enacted and promulgated over the years. There is no data to support 
hospital industry claims that physicians are inappropriately referring 
their patients to specialty hospitals.
---------------------------------------------------------------------------
    \9\ See generally 42 U.S.C. 1395nn., 42 CFR 411.350-411.361, 42 
U.S.C. 1320a-7b, and 42 CFR 1001.952.
---------------------------------------------------------------------------
    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.'' \10\ 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. (See Exhibit 
A)
---------------------------------------------------------------------------
    \10\ 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.
    Hospital efforts to control referrals would pose as much a concern 
as would physician self-referral if it were proven that such referrals 
led to an inappropriate increase in utilization. Worse yet, by 
dictating to whom physicians may refer, the hospital governing body or 
administration takes medical decision-making away from physicians. This 
runs counter to patient expectations, 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.
    The AMA is very concerned about efforts by hospitals and health 
systems to control physician referrals and believes they pose a number 
of significant concerns. To reduce the 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. The Medicare Payment Advisory 
Commission (MedPAC) found no evidence that overall utilization rates in 
communities with specialty hospitals rose more rapidly than 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.\11\ Therefore, the vast majority of physicians who admit 
patients to specialty hospitals receive no additional 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.
---------------------------------------------------------------------------
    \11\ 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. Most 
nonprofit hospitals also receive Medicare and Medicaid DSH payments.
    On the whole, the impact of specialty hospitals has not proven to 
be harmful to patients or to general hospitals. Specialty hospitals 
represent about two percent of all short-term, acute care 
hospitals.\12\ The most recent Medicare discharge data indicate that 
the 80 specialty hospitals in existence in 2001 accounted for slightly 
less than one percent of Medicare spending for inpatient services. 
MedPAC also found that the financial impact on community hospitals in 
the markets where physician owned specialty hospitals are located has 
been limited. These hospitals have managed to compensate for any losses 
of patients and revenues and demonstrate financial performance 
comparable to other community hospitals. 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.\13\ 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.
---------------------------------------------------------------------------
    \12\ Id.
    \13\ 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. If general inefficiencies exist 
in the hospital industry, this type of market response will create an 
incentive for general hospitals to increase efficiencies to compete. If 
the cross-subsidies that hospitals use from profitable services are 
truly enabling them to provide unprofitable services, these cross-
subsidies should be eliminated by making payments adequate for all 
services.
    The Center for Studying Health System Change, Professor Ted Frech 
(Department of Economics, University of California at Santa Barbara), 
the Federal Trade Commission (FTC) and the Department of Justice (DOJ) 
believe there are inherent problems in using higher profits in certain 
areas of care to cross-subsidize uncompensated care and essential 
community services. Recommendation 3 of the July 2004 FTC/DOJ Report on 
Competition and Health Care 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.\14\
---------------------------------------------------------------------------
    \14\ 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, Congress should change the Medicare 
Hospital Prospective Payment System to minimize the need for cross-
subsidization and accurately reflect relative costs of hospital care.
    MedPAC is expected to recommend 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 will also recommend that 
Congress give the Secretary the authority to adjust the DRG relative 
weights to account for differences in the prevalence of high cost 
outlier cases. Finally, MedPAC will recommend that Congress and the 
Secretary should implement the case mix measurement and outlier 
policies over a transitional period.
    The AMA supports such recommendations and believes that such 
payment changes will go a long way towards leveling the playing field 
and promoting full and fair competition in the market for hospital 
services. Consistent with Council on Ethical and Judicial Affairs 
Opinion E-8.032, the AMA supports health facility ownership by 
physicians if they directly provide care or services at the facility. 
The AMA also supports competition between and among health care 
facilities because it promotes the delivery of high-quality, cost-
effective health care.
    In addition, the AMA 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 adequate 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 and FTC/DOJ recommendations and the limited 
data currently available on physician ownership of specialty hospitals, 
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. After 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 Congress to consider the recommendations 
we have discussed today. We are happy to work with the Subcommittee and 
Congress as it considers these important matters.

                                 

    Chairman JOHNSON. Thank you very much, Dr. Plested. Dr. 
Brien?

   STATEMENT OF WILLIAM W. BRIEN, M.D., CEDARS-SINAI MEDICAL 
                CENTER, LOS ANGELES, CALIFORNIA

    Dr. BRIEN. Madam Chairman, Mr. Stark, Members of the 
Subcommittee, I am Dr. William Warren Brien, director of 
orthopedic surgery and the clinical chief of the Department of 
Surgery at Cedars-Sinai Medical Center in Los Angeles. I am 
here today to share my concerns about the impact physician-
owned, limited-service hospitals can have on patient access to 
essential medical services.
    As an orthopedic surgeon, I have a unique perspective on 
today's topic. Several of the physician-owned, limited-service 
hospitals were started by orthopedic surgeons. But let me be 
clear. Many physicians do not agree with the practices of some 
of our colleagues who own these hospitals and exploit a 
loophole in the Federal law by referring carefully selected 
patients to their own facilities. This raises serious concerned 
about conflicts of interest, a physician's own financial 
interest versus the best care for patients. Of equal concern is 
the impact on our broader health care system, in particular, 
how these practices threaten the Los Angeles' already fragile 
emergency and trauma care system.
    Cedars-Sinai Medical Center is a 900-bed, not-for-profit, 
full-service hospital that serves as a local community 
hospital, a tertiary regional referral center for complex 
patient care, a Level I trauma center, and a major research, 
education, and training hospital. Each year we provide about 
$100 million in charity care. As a Level I trauma center, we 
are required to have physicians on call 24 hours a day, 7 days 
a week in all of our departments. Last year, we treated more 
than 75,000 people in our emergency Department and handled an 
additional 1,500 trauma cases, half involving uninsured 
patients.
    Los Angeles' physician-owned, limited-service hospitals 
offer no trauma care and only severely limited emergency 
services, if at all. In my opinion, they should not even be 
called ``hospitals'' but, rather, be called ``limited-access 
facilities.'' The physicians who own them carefully select and 
refer only those patients with private, commercial, or Medicare 
health coverage. The only services they offer are high-revenue-
producing surgical procedures. In the last 2 years, nine 
community hospitals in the Los Angeles area closed. Last year, 
the county closed the Level I trauma center at the Martin 
Luther King, Jr., Medical Center. These losses have created a 
significant strain on the Los Angeles County trauma system and 
the Cedars-Sinai participation in this trauma system and raised 
serious access-to-care issues that will only worsen if limited-
access facilities are allowed to proliferate.
    Some existing community hospitals will close their high-
cost emergency rooms. Others will close altogether because they 
cannot remain financially solvent. Our area's trauma system 
would face a complete collapse as fewer hospitals are left to 
handle an increased number of emergency cases. Fewer 
operational trauma centers mean more patients will die 
needlessly during longer transports in search of the available 
trauma centers. limited-access facilities also jeopardize 
general emergency care for everyone. Physicians who own them 
often refuse to participate in emergency on-call duty at other 
community hospitals, leaving full-service hospitals struggling 
to maintain specialty coverage in their emergency departments. 
And Los Angeles is not the only place in the country where this 
is a problem.
    As a physician, I also worry about the safety of some of 
our patients treated by limited-access facilities which often 
treat only single conditions. When patients suffer 
complications following surgeries at these facilities, such as 
blood clots or heart attacks, they must transfer them to full-
service hospitals for treatment. Both the GAO and MedPAC have 
found disturbing patterns in the operation of physician-owned, 
limited-access facilities that reflect exactly what Congress 
feared: physician owners refer only healthier patients with 
good health insurance, were less likely to offer emergency 
services while focusing on well-paying medical procedures. And 
MedPAC found that these facilities are not less expensive than 
full-service community hospitals.
    Despite what our opponents say, full-service hospitals do 
not take issue with the formation of limited-access facilities 
when supported by community need, and we do not take issue when 
physicians own them. It is when physicians refer their patients 
to the facilities that they own. This creates a conflict of 
interest with serious health and economic repercussions for 
communities everywhere. Madam Chairman, I respectfully urge 
Congress to protect health care access for all patients by 
extending the current moratorium on these limited-access 
facilities until a permanent ban on physician self-referral to 
physician-owned, limited-access facilities can be put into 
place. Thank you, and I will be happy to respond to your 
questions.
    [The prepared statement of Mr. Brien follows:]

 Statement of William Brien, M.D., Cedars-Sinai Hospital, Los Angeles, 
                               California

    Good afternoon, Madam Chairman. I am Dr. William Warren Brien, 
director of orthopedic surgery and the clinical chief of the department 
of surgery at Cedars-Sinai Medical Center in Los Angeles. I also serve 
as a state commissioner on the California Health Policy and Data 
Advisory Commission. I appreciate the opportunity to testify today on 
the issue of limited-service hospitals.
    In many communities, certain physicians are exploiting a loophole 
in federal law, and own limited-service hospitals to which they refer 
their own patients. This activity raises serious concerns about 
conflict of interest, fair competition, and whether the best interests 
of both patients and communities are being served.
    To protect patients and the health care safety net, Congress should 
close the loophole in the federal Stark law by continuing the ban on 
the ability of physicians to self-refer to limited-service hospitals.
    As an orthopedic surgeon, I may bring a unique perspective to this 
debate. Many of the physician-owned limited service hospitals operating 
today were opened by orthopedic surgeons. I would like to be clear. 
Many physicians do not agree with the practices of some of our 
colleagues. Physicians who own these limited services hospitals and 
refer their patients there have potential conflicts of interest--their 
own financial interests with the interest of the best care for 
patients. And government data shows this to be the case. Of equal 
concern, is the impact on our broader health care system.
    My testimony will focus on concerns related to patient access to 
essential health care services and the adverse consequences that would 
surely result if the current moratorium on physician self-referral of 
Medicare patients to new limited-service hospitals were permitted to 
sunset in June. If the continued growth of these limited service 
hospitals is allowed, it will have a profound impact on overall patient 
access to life-saving hospital care.
The Situation in Los Angeles
    Cedars-Sinai Medical Center is a 900-bed, not-for-profit, full-
service hospital that serves as a local community hospital, a tertiary 
regional referral center for complex patient care, a Level I Trauma 
Center for the County of Los Angeles, as well as a major research, 
education and training hospital. Our mission has always centered on 
providing quality patient care and community service.
    The medical center annually provides about $100 million of charity 
care. We deliver primary health care services directly to inner-city 
children and adults through mobile units. We offer community clinics to 
uninsured patients and those covered by Medi-Cal--the state's Medicaid 
program--with more than 29,000 clinic visits annually. In fact, Cedars-
Sinai is one of the top five Medi-Cal providers among private hospitals 
in L.A. County and is one of the largest Medi-Cal providers in the 
state of California.
    As a Level I Trauma Center, we are required to have physicians on 
call 24-hours a day, seven days a week in all of our departments. In a 
major urban area like Los Angeles, trauma injuries affect everyone from 
the wealthy, the poor and the insured to the uninsured. Last year, we 
treated more than 75,000 people in our emergency department and we 
handled an additional 1,500 trauma cases. Approximately half of those 
trauma cases involved uninsured patients.
    In sharp contrast, the physician-owned limited-service hospitals 
currently operating in Los Angeles offer no trauma care and only 
severely limited emergency services if anything at all. In my opinion, 
they should not even be called hospitals--but rather limited-access 
facilities. The physicians who own these limited-access facilities 
carefully select only patients with the right type of health insurance 
coverage--private or commercial insurance or Medicare--and then refer 
them to those facilities that they own. Poor patients covered by Medi-
Cal or those without insurance at all are not welcome. These limited-
access facilities also offer only high-revenue-producing surgical 
procedures. They do not offer the many services that we and other full-
service community hospitals do that are seldom self-supporting, such as 
pediatric and obstetrical care, mental health programs, or services 
specifically targeting care for the poor and the elderly.
    Meanwhile, the full-service community hospitals provide those 
services and more--emergency services for all of the area's patients, 
including the poor, the uninsured and those in need of costly, 
intensive care.
The Effects of limited-access Facilities
    During the last two years, nine community hospitals in the Los 
Angeles area closed their doors forever. In 2004, the County of Los 
Angeles closed the Level I Trauma Center at Martin Luther King Jr. 
Medical Center. The loss of those nine hospitals and their emergency 
departments combined with the closure of the Martin Luther King Trauma 
Center has created a significant strain on the Cedars-Sinai trauma 
system and raises a serious access-to-care issue for the people of Los 
Angeles.
    Our already fragile health care system in Los Angeles will only be 
made worse if physician-owned, limited-access facilities are allowed to 
proliferate. Some existing community hospitals will certainly close 
their high-cost emergency rooms. Other, smaller community hospitals 
will likely not be able to maintain their financial solvency and will 
fold. Both scenarios would inevitably lead to a complete collapse of 
our area's trauma system as fewer remaining hospitals are left to 
handle an increased number of emergency cases.
    Imagine being involved in a serious traffic accident at 5 p.m. on a 
Friday in Los Angeles' notoriously bad rush hour traffic. Rather than 
arriving at a trauma center within 10 to 20 minutes, the trip now takes 
30 minutes to an hour because the closest emergency rooms have since 
closed up shop for good. I am not an alarmist, but in trauma cases 
where every second counts, that scenario means that patients will die 
unnecessarily. That is a risk that we cannot afford to take.
    limited-access facilities also jeopardize general emergency care 
available to everyone in Los Angeles. Physicians who own limited-access 
facilities often refuse to participate in emergency ``on call'' duty at 
other community hospitals, leaving the full-service hospitals 
struggling to maintain specialty coverage in their emergency 
departments. This means that a patient who needs emergency surgery in 
the middle of the night, may not get it because the needed specialists 
will not care for the broader needs of the people of Los Angeles. It 
could also mean that emergency patients must be transported much 
farther away to get access to care.
    And this isn't just happening in L.A. Struggles to maintain 
specialty coverage in the emergency department are jeopardizing care 
across America. In Oklahoma City, for example, specialty physicians 
practicing in limited-access facilities reduced or eliminated their 
participation in emergency on call duty at Oklahoma University Medical 
Center, bringing their trauma center--the state's only Level 1 Trauma 
Center--to the brink of closure. And in Rapid City, South Dakota, the 
neurosurgeon owners of the limited-access facility in the community 
stopped providing emergency coverage at the full-service hospital, 
causing significant access problems for the region for emergency 
neurosurgery.
    Because limited-access facilities often treat only a single 
condition, I worry as a physician about the safety of some patients 
treated there. Patients are placed at an increased risk when they 
suffer complications following surgeries at limited-access facilities, 
such as blood clots and heart attacks, and must be transferred to the 
full-service hospitals for treatment. Care for those patients cannot be 
well-managed and coordinated.
    If limited-access facilities are permitted to expand in number, 
they will certainly have significant adverse consequences for the 
ability of Cedars-Sinai and other community hospitals to continue to 
provide the high quality of patient care that we provide today to the 
Los Angeles community. Patient access will inevitably suffer.
Government Concerns
    Both the Government Accountability Office (GAO) and the Medicare 
Payment Advisory Commission (MedPAC) in separate studies revealed 
disturbing patterns in the operation of physician-owned, limited-access 
facilities. Specifically, they found that physician owners do exactly 
what Congress feared--they selectively refer only healthier patients 
with good health insurance coverage to those limited-access facilities 
they own, refusing to treat others. As a result, full-service hospitals 
are left to treat a greater number of poor and uninsured patients with 
more serious health conditions. Further, the GAO and MedPAC also found 
that the limited-access facilities were much less likely to offer 
emergency services and tend to offer only highly profitable services. 
And MedPAC found that limited-access facilities are not less expensive.
    Based on its concerns over the rapid growth of physician-owned, 
limited-access facilities and potential conflicts of interest posed by 
physician-ownership of the facilities, Congress implemented in 2003 a 
moratorium prohibiting physicians from referring Medicare patients to 
new, physician-owned limited-service hospitals as part of the Medicare 
Modernization Act. That moratorium is set to expire in June, but based 
on their findings, MedPAC has recommended that the moratorium be 
extended to Jan. 1, 2007.
This Is Not About Competition--It's about Conflict of Interest
    Our opponents have argued that full-service hospitals do not want 
limited-access facilities to exist in our market-driven health care 
system. Let me set the record straight. Full-service hospitals do not 
take any issue with the formation of limited-access facilities, where 
supported by community need. Nor do they take issue with physician 
ownership in a hospital that the physician does not refer to. Rather, 
full-service community hospitals strongly oppose the conflict of 
interest that results when a physician is an owner and controls patient 
referrals. Those two elements--ownership and patient referral--lead to 
very serious concerns about the health and economic interests of a 
community, including higher health care costs, duplication of services, 
patient cherry-picking, reduced emergency care coverage, inappropriate 
use of procedures, patient selection, and more.
Conclusion
    In closing, Madam Chairman, I respectfully urge Congress to extend 
the moratorium until the permanent solution of banning physician-self-
referral to physician-owned limited-access facilities is in place. I 
firmly believe that these limited-access facilities have significant 
adverse consequences on the health care that patients expect and 
deserve. And their negative impact will be felt by everyone.

                                 

    Chairman JOHNSON. Thank you, Dr. Brien. Mr. Harris?

 STATEMENT OF JAMIE HARRIS, EXECUTIVE VICE PRESIDENT AND CHIEF 
   FINANCIAL OFFICER, MEDCATH CORPORATION, CHARLOTTE, NORTH 
                            CAROLINA

    Mr. HARRIS. Madam Chairwoman, Mr. Stark, and Committee 
members, my name is Jamie Harris. Thank you for the opportunity 
to testify today. I am Executive Vice President and CFO for 
MedCath. We operate fully licensed acute-care hospitals that 
focus on cardiovascular care. All of our hospitals are owned in 
partnership with physicians, and in two cases a local community 
hospital system.
    Each of our hospitals operates a staffed emergency 
Department which is open 24 hours per day, 7 days per week. Our 
hospitals include approximately 175 to 300 physicians who are 
not cardiovascular doctors and who are not owners of the 
hospital. As a result, we are capable of treating a broad range 
of patients, regardless of their ability to pay or their 
condition.
    In fact, in the last year alone, we treated more than 
60,000 patients in our emergency departments; 63 percent of 
these patients were not cardiovascular patients. We do not 
believe the evidence suggests a conclusion that any financial 
incentive associated with physician ownership determines 
patient or payer mix. Our internal data shows a small amount of 
our patients come to our hospitals from physician owners. As 
the chart that we have put up illustrates, in 2002, our 
internal statistics show that approximately 69 percent of our 
patients came to our hospitals through sources that were not 
directly from a physician referral: 31 percent came from the 
emergency departments at our hospitals; 24 percent came from 
transfers from other hospitals, many of which were from rural 
communities; and 14 percent came from non-owner physicians. 
Only approximately 30 percent came directly from physician 
owners.
    We believe that patients and physicians use MedCath 
hospitals because we achieve better outcomes, with fewer 
complications, and have earned the confidence of our 
communities. In fact, the Lewin Group found that our hospitals, 
when compared to peer hospitals, have a 16-percent lower in-
house mortality rate for Medicare cardiac cases and 
approximately 25 percent more of our patients are discharged 
directly to their home versus a skilled or other care facility. 
The Lewin Group estimates this saves Medicare approximately 
$1.5 million per facility per year. Imagine the billions of 
dollars that we could save Medicare if these results were the 
standard of care across the country.
    We believe physician ownership is the key contributor to 
these quality outcomes. Physicians become owners because of 
dissatisfaction with the quality of care, the efficiency, and 
much of the bureaucracy of community hospitals. Ownership and 
their role in governance motivates them to help design and 
operate our hospitals in a manner which has a direct, positive 
impact on patient care and patient satisfaction. Community 
hospitals in our markets have improved services as a result of 
our competitive presence. MedPAC concluded that physician-owned 
specialty hospitals serve as a wake-up call for the community 
hospitals to improve services and efficiencies. They also 
concluded that specialty hospitals have little impact on the 
profitability of community hospitals. They found that community 
hospitals were able to make up lost cardiac revenue from other 
sources or by reducing their costs, and they also concluded 
there was no significant increase in utilization after the 
entry of a specialty heart hospital into a market.
    We do also provide care to the Medicaid and uninsured 
patients. We believe there are three important reasons, 
however, why our hospitals receive fewer Medicaid patients. 
First, 42 percent of the Medicaid discharges are for 
obstetrics; only 9 percent are for cardiac care. Second, the 
volume of Medicaid patients is not uniformly distributed across 
all hospitals, regardless of whether they are community 
hospitals or specialty hospitals. In fact, in most communities 
only one or two hospitals primarily serve all the Medicaid--a 
primary amount of the Medicaid patients. And, third, several 
States that we operate in administer their Medicaid programs 
through a capitated payer arrangement which we do not have 
access to. Further, the Lewin Group found that in all markets 
with comparable data, our hospitals ranked in the top half of 
volume for cardiac care provided to indigent patients. The 
MedPAC study found that our costs were not lower. However, we 
believe a more thorough analysis is required. The Lewin Group 
replicated and has expanded on this particular study and found 
the following factors:
    First, our hospitals are new facilities and, thus, our 
depreciation costs are substantially higher. Second, because we 
are new, they have higher interest costs in the early stages of 
development. And, third, our hospitals are not tax-exempt; 
therefore, we are required to pay significant levels of 
property, real estate, and income taxes. After accounting for 
these differences, this study found that our average operating 
cost per discharge was about 6 to 7 percent lower. A growing 
number of not-for-profit hospital systems are also embracing 
physician ownership as well. For example, our partner Avera 
McKennan in South Dakota and Carondelet in Tucson, Arizona, are 
good examples of not-for-profit systems that recognize the 
benefits of an innovative model with physician owners.
    In conclusion, the advantages of competition to the health 
care sector are essential to meet the growing demand for 
cardiovascular services. The moratorium merely endorses the 
failings of the status quo and should be allowed to expire in 
order to stimulate the much needed competition. We agree that 
CMS should focus on revising the DRG pricing system to be more 
aligned with actual costs of certain procedures and diagnoses, 
as long as it is done fairly and comprehensively. The public 
policy issue here is not about limiting specialty hospitals 
through a moratorium even if it is temporary. The public policy 
issue is about the need to meet the emerging health care 
requirements of our population. We believe our model is an 
innovative approach to meet those needs. I thank you for the 
time and welcome questions.
    [The prepared statement of Mr. Harris follows:]

Statement of Jamie Harris, Executive Vice President and Chief Financial 
        Officer, MedCath Corporation, Charlotte, North Carolina

                              INTRODUCTION

    My name is Jamie Harris. I currently serve as Executive Vice 
President and Chief Financial Officer for MedCath Corporation 
(MedCath). Thank you for the opportunity to speak on behalf of our 
company, our physician partners, our nurses, our professional staff, 
and the patients who have utilized MedCath's hospitals. Based in 
Charlotte, North Carolina, MedCath is a national provider of 
cardiovascular services. We build and operate fully licensed acute care 
hospitals, and other clinics and centers focusing on cardiovascular 
care. All of our 12 hospitals are owned in partnership with physicians 
and, in certain instances, a local community hospital.
    We have established an outstanding reputation for innovation and 
for our focus on providing high-quality cardiovascular care. We believe 
that patients with cardiovascular disease in the communities we serve 
receive better care as a direct result of the presence of our hospitals 
in those communities.
    As part of my written statement, I review the recent findings by 
the Medicare Payment Advisory Commission (MedPAC) concerning physician-
owned specialty hospitals, and note where we agree and disagree with 
their analytic results. For the most part, MedCath-sponsored studies 
confirm MedPAC's results. There are several important instances, 
however, where we disagree with their conclusions and study inferences. 
As an example, in assessing physician behavior, the MedPAC analysis 
fails to completely investigate and understand the source of referrals 
and the patient selection process at specialty hospitals.

           THE NEED FOR HIGH-QUALITY CARDIOVASCULAR SERVICES

    According to the American Heart Association, cardiovascular disease 
is one of the leading killers in America, especially among women. While 
the current health care system is already feeling the stress from this 
demand, the aging baby boomer population is expected to place increased 
pressure on the system. Yet, of the more than 6,000 hospitals that 
exist across the United States, only approximately 18 percent have an 
open-heart surgical program.
    Furthermore, according to the American College of Cardiology, by 
2010, the shortage of cardiologists could become a serious public 
health problem if the supply of high-quality cardiology care cannot 
meet the demands of the population--particularly from the aging baby 
boomers. It is imperative that we make the current population of 
cardiologists more productive in their professional lives if we are to 
meet this demand; something MedCath hospitals are designed to do.

       WE ARE FULL SERVICE HOSPITALS THAT PROVIDE EMERGENCY CARE

    Each of our hospitals operates a staffed emergency department that 
is open 24 hours a day, 7 days a week, equipped with an average of 
eight Intensive Care Unit beds, in addition to the inpatient beds to 
which patients can be transferred. As a result, MedCath heart hospitals 
are capable of treating nearly every patient regardless of their 
condition or ability to pay.\1\ We are capable of doing this because 
each of our hospitals includes a medical staff of 175-300 specialists, 
sub-specialists, and primary care physicians (most of whom are not 
owners of the hospital) who are available to care for patients that 
walk through our doors, whether they are a patient with a heart problem 
or not.
---------------------------------------------------------------------------
    \1\ Hospitals with Emergency Departments must comply with the 
regulations required by the Emergency Medical Treatment and Labor Act 
(EMTALA) and provide services to anyone coming to our hospitals seeking 
emergency medical care, regardless of their condition and their ability 
to pay.
---------------------------------------------------------------------------
    In fact, in the most recent 12-month period ending September 30, 
2004, morethan 60,000 patients were treated in the emergency 
departments of MedCath's hospitals. Approximately 63 percent of those 
treated were non-cardiac patients. Only 2.84 percent of these non-
cardiac patients were transferred to another hospital--a common 
practice among hospitals across the United States as not every acute 
care hospital, not even the large systems, offers specialized services 
such as trauma, burn, or psychiatric care. Our hospitals admitted, 
treated, and/or released the remaining 97.16 percent of these 
patients.\2\
---------------------------------------------------------------------------
    \2\ Trendstar discharge-based data October 1, 2003--September 30, 
2004.
---------------------------------------------------------------------------

PATIENT SEVERITY AND PATIENT MIX ARE A RESULT OF APPROPRIATE COMMUNITY 
                           REFERRAL PATTERNS

    The MedPAC report found that specialty hospitals treat less severe 
patients than community hospitals. Our own internal data shows similar 
patient severity results, but the differences in patient severity 
across hospitals are not due, as MedPAC suggests, to the intentional 
selection of patients for financial gain. Rather, these differences are 
due to community referral patterns that place patients in the 
appropriate setting for their required treatment conditions. We do not 
believe the evidence supports a conclusion that any financial incentive 
associated with physician ownership is a key determinant of patient 
(and payor) mix.
    Ultimately, the MedPAC study fails to reflect a complete 
investigation and understanding of the source of our referrals and the 
patient selection process at our hospitals. While the critics of our 
model would have you believe that a significant majority of the 
referrals to our hospitals are from physician-owners, our internal data 
shows that these referrals actually represent a minority of the 
referrals to our hospitals. For the study year 2002, MedCath statistics 
show that:

      Only approximately 30 percent of our referrals are from 
physician-owners.
      Approximately 24 percent of MedCath's in-patient 
admissions came as referrals from other hospitals, particularly those 
located in rural areas. These referrals were from hospitals that either 
did not have the capacity or the expertise to treat the patients.\3\
---------------------------------------------------------------------------
    \3\ Trendstar admission source data October 1, 2003--September 30, 
2004.
---------------------------------------------------------------------------
      Approximately 31 percent of MedCath's hospital admissions 
arrived through our emergency departments.
      Approximately 14 percent of MedCath's referrals were from 
physicians who did not have an ownership interest in our hospitals, but 
who prefer to practice there.
      All totaled, approximately 69 percent of MedCath's 
patient admissions arrive at the hospital through sources other than 
our physician partners. Patients come to our hospitals for the quality 
of care, our expertise, and our efficiency.

    What the MedPAC study overlooked is that non-investor physicians, 
largely primary care physicians, are typically the first point of 
contact that a patient has with the physician community. Not only is 
the primary care physician the primary source of many services, he or 
she also coordinates the logistics of many specialists (i.e., 
cardiologists) for the patient. While MedPAC has suggested that the 
hospital selection is made by physicians for financial reasons, it is 
clear that our country's medical triage system is structured so that 
the first point of contact is with the primary care physician, and thus 
he or she becomes the most significant decision-maker in the hospital 
selection process. Ultimately, patients receive care from the provider 
or institution best suited for their medical needs.
    The most egregious cases of improper physician referrals and 
financial incentives are not occurring at hospitals with physician 
ownership, but from non-physician owners who are using ``professional 
fees'' and other questionable forms of remuneration as inducements to 
refer. We find it ironic that some of the for-profit hospitals who have 
been charged, in some cases criminally, with these practices are now 
leading a charge against physician ownership.

PHYSICIAN OWNERSHIP IS A KEY CONTRIBUTOR TO HIGHER QUALITY OUTCOMES AND 
                          IMPROVED EFFICIENCY

    Despite assertions by MedPAC that physicians become owners in 
specialty hospitals for financial gain, the reality is that physicians 
become owners because of dissatisfaction with the quality of care, 
efficiency, and bureaucracy of their local hospitals, and to have an 
opportunity to make dramatic improvements in the delivery of health 
care. With ownership in the facility and a significant role in the 
governance and operation of the hospital, physicians are motivated to 
design and operate highly efficient care delivery systems that have a 
direct, positive impact on patient care. This increased control over 
clinical protocols and the quality of care process naturally motivates 
physicians to send their patients to these facilities--where they have 
confidence in the care provided.
    The involvement of our physician partners in the governance and 
operations of our hospitals is a critical factor that contributes to 
quality patient care and is a logical by-product of their status as 
owners and board members. MedCath partners with local physicians who 
have established reputations for clinical excellence. We believe this 
alignment of interest between the physicians and the hospital operator 
is a primary reason MedCath hospitals have been able to improve the 
quality of care, reduce the average length of stay, save money for 
government payors, and achieve high levels of patient satisfaction.[4] 
MedCath has found that the economic commitment of physicians, under a 
physician ownership model, is in the best interest of the communities 
served and has resulted in the provision of a higher level of care and 
cost efficiencies.
    In the case of MedCath's partnerships, all investors must assume 
financial risk and accountability for the hospital and the care 
provided. As startup businesses, all of our hospitals experience 
significant early stage losses, and there is no assurance they will 
subsequently be able to turn profitable. For some of our doctors, this 
has led to a financial return on their investment. For others, it has 
led to no financial benefit and in the case of one of our hospitals, 
which we had to close due to the anti-competitive tactics of the 
surrounding general hospitals, a loss of almost all of their 
investment. Ownership also causes the physician to have a greater 
incentive to self-police their peers--ensuring their use of the 
facility is appropriate.
    The weight of the evidence contradicts any finding that our 
physicians become owners simply for financial gain. We find it 
hypocritical for community hospitals to criticize physicians for having 
ownership interests in hospitals because it may influence referrals, 
when it is commonplace for these same hospitals to own practices and 
employ physicians at least in significant part for the purpose of 
directing referrals to their facilities. We also find it ironic that 
the federal agency with responsibility for enforcing the anti-physician 
referral statute has issued several advisory opinions approving 
``gainsharing'' arrangements, which permit physicians, with no capital 
at risk, to receive distributions based on their ``personal cost-saving 
efforts.''

               A ``WAKE-UP'' CALL TO COMMUNITY HOSPITALS

    While competition, regardless of the industry, is not always 
welcomed, the communities where MedCath hospitals are located have 
benefited significantly from our competitive presence. As indicated by 
MedPAC's findings, physician-owned specialty hospitals often serve as a 
``wake-up call'' for the traditional acute care hospitals in a 
community to improve services and efficiencies. Specifically, MedPAC 
found that specialty hospitals focus community hospitals on the issues 
of hospital operations and physician relations. Community hospitals in 
these markets have made constructive improvements, including extended 
service hours, improved operating room scheduling, standardization of 
supplies in the operating room, and upgraded equipment. This is 
evidence that community hospitals are responding to the new competitive 
pressures from specialty hospitals in a way that benefits patients, 
doctors and the entire community.
    A recent report released by the Federal Trade Commission and the 
United States Justice Department's antitrust division similarly calls 
for vigorous competition in the health-care marketplace and elimination 
of protectionist policies that are preventing consumers from gaining 
access to high quality health care. Hardly a rush to judgment, this 
report was put together over a two-year period from 6,000 pages of 
transcripts, over 27 days of joint hearings and workshops, from the 
testimony of more than 250 panelists--including many hospital and 
health system executives and association leaders. The report found that 
``[e]ntry by single specialty hospitals [into the marketplace] has had 
a number of beneficial consequences for consumers who receive care from 
these providers.''
    A recent editorial in the Wall Street Journal also supports the 
concept of ``market-oriented health-care reform.''[5] Discussing 
specialty hospitals in particular, the article notes that their focused 
mission allows these hospitals to limit costs, increase quality, and 
give consumers greater choice over health decisions. Noting the recent 
attempts at limiting specialty hospitals, the article argues that 
critics of these hospitals want to limit consumer choice and ``forc[e] 
patients into treatment at less-optimal facilities for no reason other 
than to prop up the current system.''
    Furthermore, the independent Lewin Group reported that MedCath's 
eight hospitals that were open in 2002 on average saved Medicare 
between $12.2 million and $15.2 million per year. This is an average of 
$1.5 million to $1.9 million per hospital and resulted from our 
hospitals' ability to discharge more patients to their homes versus to 
sub-acute care facilities or skilled nursing facilities.[6] Imagine the 
billions of dollars that the national healthcare system could save if 
the higher quality of care and lower cost structure that our hospitals 
have achieved could be replicated by other hospitals. Yet some of the 
large hospital systems are insisting that Congress enact barriers to 
this type of innovation and competition.

     MEDCATH'S HOSPITALS DO NOT ADVERSELY IMPACT PROFITABILITY AND 
                              UTILIZATION

    Our own independent studies confirm MedPAC's significant finding 
that specialty hospitals have ``little impact'' on the profitability of 
community hospitals. In fact, MedPAC found that community hospitals 
were able to ``make up'' lost cardiac revenue from other sources or 
reduce their costs. MedPAC found, for instance, that community 
hospitals with a heart hospital in their market actually have a higher 
profit margin (3.4 percent) in 2002 than community hospitals without a 
heart hospital (2.7 percent) in their market. This is a critical point 
that we think is important for Congress to recognize.
    Our independent studies also confirm the MedPAC finding that there 
was no statistically significant increase in utilization after the 
entry of a specialty heart hospital into a market.\7\ In our opinion 
many of the markets where we have hospitals were significantly under 
served prior to our entry into the community and that we met a much-
needed demand, thus bringing the market up to parity with other 
markets. We believe that this unfulfilled need that our hospitals have 
met has had a very positive impact in the communities where we are 
located.
---------------------------------------------------------------------------
    \7\ Impact of MedCath Heart Hospitals on MSA Cardiology Inpatient 
Utilization Rates, The Lewin Group, August 2001.
---------------------------------------------------------------------------

 ANTI-COMPETITIVE TACTICS IN RESPONSE TO COMPETITION FROM OUR HOSPITALS

    Even though MedCath has experienced improvements in the level of 
cardiac care in communities served, this competition clearly draws many 
anti-competitive tactics by the community hospitals which obviously do 
not appreciate the entrance of a new competitor into their market. In 
many markets across the country, community hospitals are retaliating 
against physician-owners. Often, once a physician decides to invest in 
a hospital, he or she may be removed from reading panels and certain 
call rotations, fired from a medical director position, or given the 
least desirable times in the catheterization lab or surgery suite.
    Another example is the community hospitals engaging in economic 
credentialing or granting privileges based on financial reasons rather 
than qualifications. In Little Rock, Arkansas, six cardiologists filed 
suit against Baptist Health System (Baptist) alleging that the 
hospital's policy of economic credentialing violated state laws against 
Medicaid fraud and deceptive trade practices, and the federal anti-
kickback law. All six cardiologists are shareholders in Little Rock 
Cardiology Clinic, which holds a 14.5 percent ownership interest in the 
Arkansas Heart Hospital, a competitor of Baptist. Two of the doctors 
were told their medical staff privileges at Baptist would be terminated 
because of their clinic's stake in the Arkansas Heart Hospital, and the 
others are expecting similar notices.
    We believe this debate is clearly about competition. We believe the 
retaliatory actions in many of the markets demonstrate the anti-
competitive strategy of our competitors--to totally dominate the market 
place, rather than to provide patients with the opportunity to seek 
quality care from the provider of their choice.

     MEDCATH HOSPITALS HAVE BETTER OUTCOMES AND FEWER COMPLICATIONS

    The Lewin Group has confirmed that:

      MedCath hospitals provided better care on average (as 
measured by lower in-hospital mortality rates and lower rates of 
complications) in a shorter period of time than the peer community 
hospitals.
      After adjusting for risk of mortality, MedCath heart 
hospitals on average exhibited a 16 percent lower in-hospital mortality 
rate for Medicare cardiac cases compared to the peer community 
hospitals, including major teaching facilities.
      MedCath heart hospitals also had shorter average lengths 
of stay for cardiac cases (3.81 days) than the peer community hospitals 
(4.88 days) after adjusting for severity.
      Approximately 90% of our patients are discharged to their 
home instead of being discharged to a subacute care facility, home 
health agency, or skilled nursing facility. Not only is this better for 
the patient, the Lewin Group also estimates it saves Medicare 
approximately $1.5 million per facility per year.

    As evidence of our commitment to providing quality care, we 
advocate for a performance based payment system that provides 
incentives for delivering top quality health care.

   MEDCATH HOSPITALS CONTRIBUTE TO THE CARE OF THE UNINSURED AND OUR 
           LEVELS OF MEDICAID PARTICIPATION ARE NOT ATYPICAL

    While the MedPAC report suggests that a financial motive drives 
patient selection, the reality is vastly different. Acute care licensed 
facilities, such as MedCath's, are required by law to treat patients 
regardless of their ability to pay.\8\ While this may be the law, 
MedCath also believes it is a community responsibility to treat anyone 
who walks in our doors and needs medical care.
---------------------------------------------------------------------------
    \8\ See note 1 supra.
---------------------------------------------------------------------------
    In fact, a Lewin Group study found that in all four markets where 
comparable data was available, MedCath hospitals ranked in the top half 
of area hospitals for the volume of cardiac care provided to indigent 
patients.\9\ Approximately 75-85 percent of the self-pay/uninsured care 
is provided without compensation. Despite this large amount of 
uncompensated care, our hospitals and their services are available to 
all patients in need of quality cardiovascular care.
---------------------------------------------------------------------------
    \9\ A Comparative Study of Patient Severity, Quality of Care 
between MedCath Heart Hospitals and Peer Hospitals in The MedCath 
Market Area, The Lewin Group, March 2004.
---------------------------------------------------------------------------
    Similarly, allegations that we do not provide services to the 
Medicaid and self-insured populations are plainly incorrect. In fact, 
our payor mix for the 12-month period ending September 30, 2004 is as 
follows:

    Medicare                      51.2 %
    Medicaid                       4.0 %
    Self-pay/Uninsured              6.0 %
    Private insurance and other    38.8 %

    These percentages, especially the levels of Medicaid and self-
insured/uninsured, are very similar to the typical general acute care 
hospital's cardiovascular services. In terms of Medicaid in particular, 
MedPAC's findings are misleading for several reasons. First, the volume 
of Medicaid patients is not uniformly distributed across hospitals 
(including both general and specialty hospitals). In most communities, 
only one or two hospitals serve the vast majority of Medicaid patients 
with the other hospitals in the community serving the remainder. Based 
upon 2002 Medicare hospital cost report data, only 10 percent of 
hospitals provided nearly 60 percent of inpatient care for Medicaid 
patients.
    Second, heart hospitals are inherently less likely to draw Medicaid 
patients because these patients, comprised primarily of younger women 
and children, do not typically require cardiac care. In fact, only 
about 9 percent of total Medicaid discharges nationally are for cardiac 
care while 42 percent of Medicaid inpatient care is for obstetrics.
    Lastly, Medicaid programs in certain states in which we operate 
provide care for their beneficiaries through capitated arrangements 
with managed care plans. Because we are often blocked from 
participating by our competitors, we do not have contractual 
arrangements with these managed care plans in some of the areas that we 
operate. For example, in Arizona we have been involuntarily excluded 
from participation with these plans and, as such, our Medicaid levels 
are naturally comparatively lower.
    As MedPAC Chairman Hackbarth noted at the January 12, 2005 public 
meeting of the commission, ``. . . 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. Among community hospitals, some do a lot 
of uncompensated care, have a lot of Medicaid patients. Others do a 
few. So that's an important issue. But to address it you need measures 
that are appropriate to its scope. And it's huge.''

     START-UP COSTS AT MEDCATH'S HOSPITALS EXPLAIN COST DIFFERENCES

    The MedPAC study found costs at our hospitals to be higher than 
those of other community hospitals, although it was not statistically 
significant. The MedPAC study, however, fell short of investigating and 
presenting the factors that account for these differences. In a draft 
report, the Lewin Group has replicated and expanded on the MedPAC 
analyses, and found the following factors that account for cost 
differences between our hospitals and other community hospitals:

      Because most of our hospitals are relatively new 
facilities with most beds being intensive care beds and equipped with 
state-of-the-art medical equipment, our depreciation costs are 
substantially higher than that of the average community hospital. As 
our hospitals age, however, we believe depreciation expenses will 
become more aligned to those of community hospitals.
      Our newly-built hospitals require financing of working 
capital until they can become fully operational, which we refer to as 
``startup'' or ``ramp up'' costs. The interest cost on this debt and 
construction debt is very significant and substantially higher than the 
average community hospital. As our hospitals ramp up operations, repay 
this debt and become fully operational, however, these interest costs 
will become more aligned to those of community hospitals.
      MedCath hospitals are required to pay property and income 
taxes, which is not required of not-for-profit hospitals due to their 
tax exempt status, thus our cost per discharge is inherently higher.

    After accounting for differences in depreciation, interest, and 
taxes (i.e., capital costs) between our hospitals and other community 
hospitals in our market areas, the Lewin Group found that our average 
adjusted Medicare operating cost per discharge was 6-7 percent lower 
than community hospitals in our market areas. Finally, most of our 
hospitals are relatively new and have not yet reached their optimum 
occupancy rates. Once occupancy rates increase for our hospitals, 
average costs per discharge will decline.
    As a final point, we note that our diagnosis related group (DRG) 
payments from Medicare are the same irrespective of our costs.

  PHYSICIAN OWNERSHIP IS BEING EMBRACED BY NOT-FOR-PROFIT SYSTEMS AND 
                          COMMUNITY HOSPITALS

    A growing number of not-for-profit healthcare systems around the 
country have embraced the concept of physician ownership--seeing the 
opportunity for improving the quality of care and cost effectiveness 
within their own healthcare systems. For example, Baylor Health Care 
System (Baylor), located in Texas, is one of our nation's largest and 
most respected not-for-profit, faith-based systems. While not a MedCath 
partner, Baylor (along with other not-for-profit systems around the 
country) understands the importance of aligning physicians and their 
hospitals. As such, systems such as Baylor's are partnering with 
physicians who have ownership in order to provide higher quality 
healthcare services to their communities. Clearly, physicians must be 
an integral part of solving the nation's health care crisis.
    Indeed, two of MedCath's most successful hospitals are three-way 
partnerships between a community hospital, MedCath and the local 
physicians. Avera McKennan, MedCath, and local physicians in Sioux 
Falls, South Dakota, built and opened the Avera Heart Hospital of South 
Dakota in March 2001, which is currently delivering high quality 
cardiovascular care to the patients of South Dakota and surrounding 
states. Carondelet Health Network, MedCath and local physicians in 
Tucson, Arizona are partners in the Tucson Heart Hospital.
    Both of these partnerships embrace the collective expertise of each 
group and align all interests to deliver high-quality care to the 
community and to patients. We believe partnerships like these are 
critical to the future of delivering high-quality health care to a 
rapidly aging population.

                               CONCLUSION

    In conclusion, the advantages of competition to the health care 
sector provided by specialty hospitals are both undeniable and 
essential to meeting the growing demand for cardiovascular services as 
a result of the aging baby boomer population. The moratorium should be 
allowed to expire in order to further spur much needed competition and 
to address this growing demand. To ensure reimbursement rates are 
appropriate, CMS should focus on revising the DRG pricing system to be 
more aligned with the actual costs of certain procedures and diagnoses.
    While the community hospital providers are aggressively attempting 
to frame this debate about conflict of interest and ``limited service'' 
providers, we believe their real motive is about limiting competition 
from facilities that have spurred innovation while delivering high 
quality health care with significantly better quality results.
    In our view, the public policy issue here is not the necessity of 
curtailing specialty hospitals through a moratorium which effectively 
endorses the failings of the status quo, but rather the need to 
efficiently meet the emerging health care requirements of our aging 
population. We believe the MedCath hospital model is an innovative 
model that meets those needs.

                                 

    Chairman JOHNSON. Thank you. Mr. Brock?

  STATEMENT OF GARY D. BROCK, CHIEF OPERATING OFFICER, BAYLOR 
          HEALTH CARE SYSTEM, DALLAS-FORT WORTH, TEXAS

    Mr. BROCK. Thank you, Madam Chairman, Members of the 
Committee. My name is Gary Brock, and I am the chief operating 
officer of the Baylor Health Care System based in the Dallas-
Fort Worth region in Texas. I have been a hospital executive 
for 28 years, have a master's degree in public health from the 
University of Oklahoma. 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 8th, without renewal.
    Baylor Health Care System is the corporate sponsor of 13 
not-for-profit hospitals, with its flagship, Baylor University 
Medical Center, located in downtown Dallas, Texas. Baylor 
University Medical Center is a 1,000-bed quaternary teaching 
hospital, with a Level I trauma center that provides care to 
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 solid organ transplant programs in the United 
States. Baylor Health Care System is deeply committed to its 
mission as a not-for-profit hospital. Last year, we provided 
more than $240 million in community benefits, at cost, and this 
does not include bad debt. Charity care is provided under the 
most generous charity care/financial assistance policy among 
all Dallas-Fort Worth hospitals.
    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 at the same time 
improving quality, safety, and patient satisfaction. One of the 
most recent effective strategies Baylor has implemented is 
partnering with physicians economically and, more importantly, 
clinically in the design, development, governance, and 
operation of ambulatory surgery centers, surgical hospitals, 
and heart hospitals. Today, Baylor has an ownership interest in 
25 facilities partnered with physicians.
    Five of these facilities are affected by the moratorium. 
Three are surgical hospitals. Two are heart hospitals. Each is 
critically important to the mission of the Baylor Health Care 
System, and in each case we have followed the guidelines 
developed by IRS in Revenue Ruling 98-15 for partnerships 
between tax-exempt organizations like Baylor and for-profit 
organizations. The IRS requires the tax-exempt entity to have 
certain governance controls with respect to the partnership and 
for the partners to agree that charitable interests will 
prevail over for-profit interests. With respect to each of our 
surgical hospitals, a Baylor-controlled entity owns at least 
50.1 percent of the equity in a partnership that owns and 
operates the licensed hospital. For our two heart hospitals, 
the Baylor-controlled entity is actually the adjacent Baylor 
hospital.
    Thus, 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. Cardiologists and 
vascular surgeons own the remaining 49 percent of equity in the 
facility. In north Dallas, the Baylor Regional medical Center 
at Plano owns 51 percent of Texas Heart Hospital of the 
Southwest, and 83 cardiologists and cardio-thoracic surgeons 
owns the 49-percent interest. The governing board of each 
partnership has a majority of Baylor-appointed representatives, 
who are lay volunteers from the community, and if ever a 
conflict arises between the for-profit interests of the 
partners and Baylor's charitable mission, the board and 
partnership must defer to the charitable mission.
    The three surgical hospitals have a similar ownership 
structure, and all five facilities have adopted the charity 
care and financial assistance policy of Baylor. They all 
participate in Medicare and Texas Medicaid, and they all agree 
to take all patients regardless of their ability to pay. In our 
newest partnership, the Texas Heart Hospital of the Southwest, 
the 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 it is 
not subject to the law, which requires tax-exempt hospitals to 
provide charity care equal to 4 percent of net patient revenue.
    Madam Chairman, our model of partnering with physicians has 
now been in operation for over 6 years, with Baylor's downtown 
Dallas Heart Hospital open the last 3 years. The results have 
far exceeded expectations. By partnering with our physicians, 
Baylor delivers on its mission, and delivers to the patient 
better, safer care at a lower cost. Baylor's vision is to 
become the most trusted source of comprehensive health care 
services by the end of this decade. We urge you to allow the 
moratorium on physician ownership and development of specialty 
hospitals to end June 8th. This moratorium has affected our 
ability to meet our mission and vision due to the need to grow 
these services to meet the demands of the fast-growing 
population in the Dallas-Fort Worth region. Thank you.
    [The prepared statement of Mr. Brock follows:]

  Statement of Gary Brock, Chief Operating Officer, Baylor Healthcare 
                         System, Dallas, Texas

    Mr. Chairman, Members of the Committee, my name is Gary Brock, and 
I am the Chief Operating Officer of Baylor Health Care System, based in 
Dallas-Fort Worth, Texas. I have been a hospital administrator for more 
than 28 years and have a Masters in Public Health from Oklahoma 
University.
    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, with its flagship--BaylorUniversityMedicalCenter--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 DallasCounty'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.
    Five of these 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. The IRS requires the tax-exempt 
entity to have certain governance controls with respect to the 
partnership and for the partners to agree that ``charitable interests'' 
will prevail over for-profit interests.
    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.
    Thus, our flagship hospital, BaylorUniversityMedicalCenter, owns 
51% of the Baylor Jack and Jane Hamilton Heart and VascularHospital, 
located adjacent to and physically attached to BUMC. Cardiologists and 
vascular surgeons own the remaining 49% of the equity in the facility.
    In north Dallas the BaylorRegionalMedicalCenter at Plano owns 51% 
of the TexasHeartHospital of the Southwest, LLP, and 83 cardiologists, 
cardio-thoracic surgeons and vascular surgeons own the 49% interest. 
The governing board of each partnership has a majority of Baylor 
appointed representatives (lay-volunteers from the community), and if 
ever a conflict arises between the for profit interests of the partners 
and Baylor's charitable mission, the board and partnership must defer 
to Baylor's charitable mission.
    The three surgical hospitals have a similar ownership structure, 
and all five facilities have adopted the Baylor Charity Care/Financial 
Assistance Policy. They all participate in Medicare and Texas Medicaid 
and they all agree to take all patients regardless of their ability to 
pay. In our newest partnership, the TexasHeartHospital of the 
Southwest, the 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 it 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 downtown 
DallasHeartHospital open for almost three years. The results have far 
exceeded expectations. 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.
    Baylor's Vision is to become the most trusted source of 
comprehensive health care services by 2010. We urge you to allow the 
Moratorium on physician ownership and development of specialty 
hospitals to end June 8. This moratorium has affected our ability to 
meet our Mission and Vision, due to the need to grow these services to 
meet the demands of the fast growing population of Dallas-Fort Worth.
    Thank you.

                                 

    Chairman JOHNSON. Is the physician ownership in your 
facilities public information? Both of you.
    Mr. HARRIS. No. It is private.
    Mr. BROCK. We are a Medicare participating hospital, and to 
the extent of what is consolidated, this controlled interest 
would be part of our Medicare cost report.
    Chairman JOHNSON. But I do not think that the investors' 
names are included as part of your cost report.
    Mr. BROCK. No.
    Chairman JOHNSON. I am asking are the investors' names 
public information.
    Mr. BROCK. No.
    Chairman JOHNSON. Then you referred to the cardiologists 
and vascular surgeons who own the remaining 49 percent. Are any 
of the other doctors of your large medical complex or doctors 
in the greater Dallas area allowed to invest?
    Mr. BROCK. We have, as I mentioned, surgical centers, and 
we have over 500 different investors in those facilities. So, 
we have surgeons of all types that invest.
    Chairman JOHNSON. Are any of your investors doctors who do 
not practice at your facilities?
    Mr. BROCK. Yes. Well, actually about half the cases done in 
the facilities are not physician investors.
    Chairman JOHNSON. And are they doing the specialized cases? 
In other words, are they doing surgical cases, or you are 
such----
    Mr. BROCK. Yes, they are doing----
    Chairman JOHNSON.--a big organization you could be doing 
other kinds of cases, like some of the heart hospitals do a 
great variety of cases. And in the heart hospital where you do 
a great variety of cases, have you offered physician ownership 
opportunities to all of the doctors in your organization or 
just the heart doctors?
    Mr. HARRIS. Typically our ownership structure is primarily 
around cardiovascular-focused physicians because we feel that 
they have the most expertise to be able to set up the care 
model. Many of our cases that are done outside of 
cardiovascular are patients who are received through the 
emergency Department. Many of those specialists are not owners.
    Chairman JOHNSON. So, the specialists that own and help 
operate get a return on their investment as well as their 
Medicare fee, correct?
    Mr. HARRIS. If there is profitability in the facility, yes, 
ma'am.
    Chairman JOHNSON. And the facility fee that Medicare pays, 
do you also split that with them? Or is there some broader use 
of that amongst all of the collaborative entities?
    Mr. HARRIS. In our case, the money that would come to the 
hospital from Medicare would come in--obviously all the costs 
would be incurred, and then at the end of a year or any given 
period of time, if there were a profit, there might be a 
distribution that is made.
    Chairman JOHNSON. I see. So, the facility fee would just go 
into the general pot, and if the costs of operating were less, 
then that would be distributed, along with any other profit.
    Mr. HARRIS. Possibly, yes, ma'am.
    Chairman JOHNSON. And do you know whether the opportunity 
was made available to the non-cardiac physicians to invest 
since they also practice there?
    Mr. HARRIS. Typically that is not the case. Again, in our 
case, at MedCath we are focused on cardiovascular care. And the 
care model is structured around those type of patients with 
cath labs or operating rooms specifically designed for a 
cardiac patient. So, the ownership and the governance in the 
hospital is really focused on that type of care. So, typically 
the ownership is not distributed outside of the group who gives 
input.
    Chairman JOHNSON. I appreciate the greater control that 
physicians have, but given all of the physician advantages to 
practicing in these circumstances, why wouldn't they just come 
without investing? I mean, if this is such a tremendous thing 
to do, why wouldn't they come without investing?
    Mr. BROCK. In our case, they are. We have physicians--as I 
mentioned, about half of the cases being done in our surgical 
centers are being done by physicians who are not investors 
because we are able to accommodate their schedules better, give 
them better block time. We exceed the patient satisfaction 
scores that we have set up. And so, I mean, it is the service 
that is driving a lot of physicians to work with us.
    Chairman JOHNSON. In this context, you know, the patient 
satisfaction surveys are a little difficult to evaluate in 
terms of their value to us in health care, because many 
patients would prefer to go to a brand-new facility. I mean, it 
is much nicer and they are often smaller, and you can drive up 
and park. So, you know, I am looking at--what interests me and 
what I am responsible for is access to care for everyone, and 
particularly for those facilities that have to provide services 
that cannot pay for themselves. It is nice to say, if you are 
interested in competition, have everything carry its weight and 
pay its own way. But you know and I know that just does not 
work in the real world. And nobody would be able to afford 
certain kinds of coverage if there was not an ability to cross-
subsidize. Of course, the ability to cross-subsidize is 
primarily because of the up and down demand of an OB or 
pediatric ward.
    So, there is a bigger picture here that I am concerned 
about. I would like to have anyone else who wants to comment on 
this issue of what happens to a community hospital, and whether 
or not these hospitals are lifting a Department or whether they 
are attracting physicians from outside. Are you taking your 
physicians from the existing Baylor cardiac capability or from 
the existing hospitals? Or are you bringing in new physicians? 
And if you are not bringing in new physicians, if you are 
hiring local physicians who are already in practice, then is 
the hospital from which you attracted those physicians hiring 
new physicians to create ultimately a higher capacity?
    Mr. FOSTER. Thank you, Madam Chairman.
    Chairman JOHNSON. This is my last question, so say what you 
want.
    Mr. FOSTER. I would be happy to address that. A lot of 
questions within the statement there that I would like to pick 
up on a little bit. Clearly, the model of physician ownership 
in specialty hospitals, if it were, in fact, that dynamic and 
that fantastic, you would see non-physician investors using the 
facility. Our experience in Austin is that, to the extent that 
there are physicians that are not investors that might use the 
facility, it is for outpatient surgery centers, not inpatient 
hospitals like we are discussing today.
    You tend to see in outpatient surgery centers a little bit 
more use of maybe some non-investing physicians, but not, at 
least in Austin, Texas, non-investors using the specialty-owned 
hospitals. Also, you know, we think that it is important to 
point out that, again, if this model was so powerful, then we 
would see more of them in development even during the 
moratorium. Currently there is no moratorium on the 
development, of course, of specialty hospitals. There is a 
moratorium on the development of physician-owned specialty 
hospitals, which I think underscores further this notion that 
the entire economic architecture of physician-owned specialty 
hospitals it dependent upon the physician ownership position 
and the self-referral of cases to those hospitals.
    And so we have seen in Austin, Texas, dramatically so, that 
as these specialty hospitals develop, there is a large transfer 
of patients from the full-service hospitals to the specialty 
hospitals. And the response typically is that we either have to 
cut our costs or we have to raise our prices to continue to 
cross-subsidize the unprofitable services. Obviously there is a 
fair amount of physician recruitment that occurs to try to 
back-fill for the physicians that left because we are obligated 
to provide 24/7 emergency Department services and have those 
specialists on call. And so there are a lot of unique variables 
that go on.
    The other thing that we have seen in Austin is that of some 
non-investor physicians that might see patients on a very 
infrequent basis in specialty-owned hospitals--physician-owned 
specialty hospitals, it might even be those specialists that 
really are available to consult in the hospital, that they have 
to chase after those patients to new venues or risk losing the 
business themselves. And so to the extent that there is 
practice that is occurring by non-owning physicians in 
hospitals, it is largely sometimes because they feel pressured 
to, either by the physicians that are investors that are in a 
position to refer to them, or consult them, or just because 
they feel that they have to chase the business all over town. 
These are some of the observations that are occurring in 
Austin, Texas, that I think touch on some of the issues that 
you raised, Madam Chairman.
    Dr. PLESTED. In response to similar questions, Madam 
Chairman, it is interesting how semantics plays into some of 
the things that we are talking about. Most general hospitals 
are interested in this thing that they call centers of 
excellence, which is essentially a specialty service in the 
hospital. It is interesting that for a community hospital that 
is a center of excellence, if it outside the community hospital 
and a competitor, it is a boutique specialty hospital. But it 
is really the same thing trying to localize service and provide 
the service better to patients.
    The other thing that we have a tendency to do here is to 
ascribe an awful lot of very complex problems to a very small 
portion of our whole health care milieu. All of these problems 
are not caused by specialty hospitals. The problems with 
emergency room care certainly aren't caused by specialty 
hospitals. I doubt if we could find an area where the closure 
of a community hospital or a community ER had anything to do 
with a specialty hospital. This has to do with community 
hospitals closing their services because they are not 
profitable. And I think the recurring theme that you mentioned 
that must be stressed is that we certainly must look at the 
payment of disproportional share hospitals and make sure that 
these payments go to the hospitals that are actually providing 
these services.
    Dr. BRIEN. Madam Chairman, in Los Angeles we face in and 
around the area of Cedars-Sinai Medical Center a little bit 
different issue. We, in fact, have specialty hospitals 
developing now. I am sure they are--in fact, they are waiting 
to see what happens with this moratorium, whether it is 
extended or not.
    The issue that we face is that the same doctors that are 
claiming they can provide better care at the specialty center 
are still practicing and on staff at our hospital. Also, as 
they move their practices over, they do not and they have 
refused to participate in our emergency room trauma panels. So, 
they have walked away from that, what I believe is a 
responsibility to the community in participation.
    The only difference in terms of the quality that seems to 
arise between our institution and these new institutions that 
are developing, it is the fact that the location is different, 
that the payer mix is different. They are looking for the 
better-paying patients. They are not signing Medicaid 
contracts. They do not want to take care of the uninsured. And 
the only other difference is that they are physician-owned and 
physician-run, and it is the conflict of interest that exists 
with regard to the physician referrals that is at issue. I do 
not think that we would be sitting here talking about physician 
ownership if they were not self-referring to the facilities 
that they own. And I think that that is really the crux of the 
issue. An example, although it is not a hospital, it was a 
surgery center, combined by two major Los Angeles hospitals, 
went in together, started a surgery center to serve the 
physicians' and the community's needs. It failed in a couple 
years. That facility then turned over and became a physician-
owned, self-referred surgery center, and the profits from that 
simple--I think it was a $25,000 investment in 1995 produces 
$20,000 to $25,000 a month in profit for the physicians.
    So, this is not about physician control or cost 
containment. This is about profiting, and the problem is it is 
at the expense of the major facilities, communities hospitals 
that have to provide the remaining care to those patients that 
do not have access to those facilities.
    Chairman JOHNSON. Thank you. Mr. Stark?
    Mr. STARK. Thank you, Madam Chair, and I thank all of you 
for taking the time to come and enlighten us. Mr. Harris, the 
Chair nibbled around the edge of this, but do your partnerships 
or joint ventures with physicians have an investment agreement 
the physician signs and you sign?
    Mr. HARRIS. Yes.
    Mr. STARK. Are they the same, basically the same for all 
your joint venture hospitals?
    Mr. HARRIS. Roughly.
    Mr. STARK. Okay. And you do not disclose who the physician 
owners are.
    Mr. HARRIS. Correct.
    Mr. STARK. Are the physician owners allowed to disclose to 
the public who they are?
    Mr. HARRIS. At their own choice.
    Mr. STARK. I beg your pardon?
    Mr. HARRIS. At their own choice.
    Mr. STARK. And are other individuals given an opportunity 
to invest in these joint ventures?
    Mr. HARRIS. We have a couple situations where we do have 
other individuals who have invested, but it is not normal.
    Mr. STARK. Is it allowed? Is it possible? Could I buy an 
interest in any one of your ventures?
    Mr. HARRIS. In certain cases, yes.
    Mr. STARK. What would be the----
    Mr. HARRIS. Our focus of the partnership is on physicians, 
in our case cardiologists, who can bring a real expertise to 
the clinical care and the clinical protocol.
    Mr. STARK. But they do not have anything to do with the 
clinical care. You say in your annual report that you run them. 
You are in substantive--the company exercises substantive 
control over the hospital. So, you guys are exercising control. 
What difference does it make who you sell the joint venture to?
    Mr. HARRIS. It actually is very important because our 
boards at an individual hospital is shared governance between 
the MedCath representatives and physicians.
    Mr. STARK. But you will not disclose who they are.
    Mr. HARRIS. According to the partnership agreement, that is 
correct.
    Mr. STARK. Okay. And they are at liberty to disclose it. Do 
you lend or cover the partners against loss over a certain 
amount?
    Mr. HARRIS. No, economically, the way that works is they 
invest a certain amount of money, we invest a certain amount of 
money. It is invested pro rata. If they lose that money, they 
lose it. We provide working capital.
    Mr. STARK. What if the loss exceeds their investment?
    Mr. HARRIS. If the loss exceeds their investment----
    Mr. STARK. You cover it?
    Mr. HARRIS. That is correct.
    Mr. STARK. That is a loan, isn't it?
    Mr. HARRIS. We loan it----
    Mr. STARK. You get it back, don't you?
    Mr. HARRIS. We do get it back.
    Mr. STARK. I just want to ask Dr. Plested, in your 
principles of medical ethics, just to cut to the chase here, 
you say that physicians should disclose their investment 
interest to their patients when making a referral. You also say 
that individuals not in a position to refer patients to a 
facility should be given bona fide opportunity to invest in the 
facility, which obviously Mr. Harris' facilities do not meet. 
So, therefore, a doctor ethically should not be investing. Is 
that correct? Did you say that?
    Dr. PLESTED. That is correct, and I was trying to point 
that out.
    Mr. STARK. So, we have got all these unethical guys in his 
facilities. You ought to punish them. I don't know what you 
could do to them. And then you also say the entity should not 
loan funds or guarantee a loan for physicians in a position to 
refer to the entity. That is them, isn't it? And I don't know 
what you and I would call a loan. I am not a chief financial 
officer. But what I am getting at is when you cut below zero--
we just did a bankruptcy thing on this. If somebody covers your 
losses below zero and you are going to pay them back later, 
that kind of smells like a loan to me. Doesn't it to you? 
Wouldn't you call that--an advance, maybe?
    Dr. PLESTED. Let me comment. You said that they are dealing 
with a bunch of unethical physicians. He said that he----
    Mr. STARK. You said they are unethical. I didn't.
    Dr. PLESTED. He said that he does not disclose their 
ownership interest. The AMA Code of Ethics suggests that the 
physician----
    Mr. STARK. But nobody else----
    Dr. PLESTED.--their patient.
    Mr. STARK. It says here individuals not in a position to 
refer should be given a bona fide opportunity to invest in the 
facility.
    Dr. PLESTED. That is our opinion, yes.
    Mr. STARK. And they cannot. In his facilities they cannot. 
So, that makes them unethical, right. According to your----
    Dr. PLESTED. They are not complying----
    Mr. STARK. I would like to make your ethics a part of the 
record here. But I guess that we did this many years ago, and I 
am not unfamiliar with all these physician agreements. And as a 
practical matter, they do not work very well if you let the 
general public in because you brought the physicians there to 
refer patients and make a lot of money from it. And whether or 
not your hospitals are any good and hurt the other hospitals, 
as Mr. Foster and Dr. Brien would suggest they do, there is a 
real problem, it seems to me, in physician ownership. And that 
is about as close as the AMA and I ever get to agreeing in over 
30 years, but that is not bad. So, I guess that on those issue, 
Madam Chair, I think there are some problems of ownership and 
referral and separating them, and I think as our witnesses have 
presented to us today, there are some problems brought up. And 
I guess I would just conclude from that--and my time is up--
that perhaps before we allow this to mushroom and become a 
problem that we or the Administration cannot change with 
regulation, we ought to come to a conclusion what our long-
range plan should be. And I don't think we disadvantage anybody 
by waiting another 12 months to work this out, because I think 
there are some real problems that could arise, and I don't know 
if there are--certainly hospitals are not overcrowded these 
days, I don't believe. Mr. Foster, Dr. Brien, you guys are not 
running 110 percent occupancy.
    Mr. FOSTER. There are seasons of time where we run high.
    Mr. STARK. Okay. So, I thank the witnesses, and I think the 
case has been made for some further study, and I appreciate the 
Chair's having this hearing.
    Chairman JOHNSON. Mr. McCrery?
    Mr. MCCRERY. Mr. Brock, do you disagree with Mr. Stark's 
statement that another 12 months or so moratorium wouldn't hurt 
anybody?
    Mr. BROCK. Well, we are actually moving forward with the 
development of a heart hospital today with the moratorium in 
place. So----
    Mr. MCCRERY. You are doing that without physician 
ownership?
    Mr. BROCK. No. Physicians will be an owner in that if the 
moratorium is lifted.
    Mr. MCCRERY. Oh, if it is lifted. Well, my point is: Do you 
disagree with Mr. Stark's statement that no one will be hurt? 
Will you be hurt if the moratorium stays in place?
    Mr. BROCK. We are asking that the moratorium be lifted, be 
done away with, yes.
    Mr. MCCRERY. Okay.
    Mr. BROCK. We are in a very growing market in the Dallas-
Fort Worth region, so we are moving toward 9 million population 
in a 10-county area over the next 15 years. So, these are very 
cost-effective access models for us to use to serve a growing 
population. We did not get into this as a defensive measure. We 
got into it as an offensive strategy to give access, greater 
access to the public, and we bring additional capital partners 
to the table with us, with physicians bringing their dollars 
in, which reduces our capital burden, and it also puts--the 
physicians have upside but they also have downside risks. So, 
it really makes them get real focused around helping us operate 
these facilities and to pay attention to the costs that we are 
incurring within the facility, both in our operating supplies, 
our labor, as well as our capital costs. But Baylor and all of 
the competitors in the Dallas-Fort Worth area cannot generate 
enough capital to provide access to the growing population that 
we have today.
    Mr. MCCRERY. So, you are not asking physicians to be 
investors in your new facilities so that they will feed you 
patients through self-referral?
    Mr. BROCK. No. I mean, we are looking for physicians to be 
there to be a partner with us, to develop quality, competitive 
programming for the community.
    Mr. MCCRERY. Well, it does kind of make sense, doesn't it, 
that if a physician has an ownership in a facility, he is going 
to want to refer patients to that facility. That is human 
nature, isn't it?
    Mr. BROCK. Well, definitely they would because they are 
going to have more involvement, more operating knowledge about 
that facility. All of these facilities that we operate in 
partnership with our physicians, they also retain active staff 
privileges on our other hospitals. So, they are extensions of 
their practice. They are extensions of our hospitals.
    Mr. MCCRERY. Dr. Brien or Mr. Foster, what is wrong with 
that? What is wrong with physicians referring patients to a 
facility in which they have an ownership interest?
    Mr. FOSTER. Well, I have seen situations with people I know 
where you might be a patient that needs surgery, you might even 
be in one of the St. David's hospitals. And a surgeon might be 
consulted to come see you to decide whether you need surgery or 
not. And what we have seen happen--and not just on one 
occasion--where a surgeon who is consulted is an investor in a 
hospital that they own will say to the patient, ``You know, you 
need surgery, but I am just not completely comfortable with 
doing the surgery here. I am a little bit more comfortable with 
the staff and the equipment,'' you know, and all that at this 
other hospital. ``So, what I work to do is discharge you and 
let's schedule that surgery for another time.''
    The problem with that is that it in essence leverages or 
plays upon the implicit relationship of trust that exists 
between the patient and the physician, because the patient 
cannot judge whether or not the facility has all the right 
technical equipment and all the right staff and all that. But 
they trust their physician. And you sure, if you are having 
surgery, do not want your physician uncomfortable. Right? So, 
what do you do? You, of course, go to where the physician is 
directing you to go. And we are seeing that happen. And we 
think it is an exploitation of the relationship that is 
implicit, that trust relationship between the patient and their 
physician. We have some big concerns about that. We really do.
    Also, this whole issue of the unlevel playingfield, because 
I believe that we have physicians that can be fully aware of 
the services that we offer, fully familiar with the surgery 
centers and the operating rooms and all the things that we 
offer, without having to be an owner. At the St. David's 
Healthcare Partnership, our board is made up of 35 percent 
physicians. We have physician involvement and governance. And 
there are 2,000 doctors on our medical staff that are fully 
familiar and fully aware and participated in the process, you 
know, within our facilities, and do not have to be a physician 
owner to get that. So, you know, I think it is a little bit 
disingenuous to say that you have to be a physician owner to be 
familiar with the facility or comfortable with it or anything 
like that. That would be my response.
    Dr. BRIEN. I would agree. I think that the issue again, is 
physician ownership. I do not see an issue with physicians 
being partners in design of a complex, being partners in the 
development of a program, being partners in marketing the 
program, as long as they are not receiving money for referring 
their patients there. Because in the end, they do--I mean, the 
patients are coming from somewhere, and they are taking the 
healthy patients, they are taking the Medicare patient who 
needs a total hip replacement who doesn't have any co-
morbidities, and taking them to their specialty facility.
    Mr. MCCRERY. But the change in the DRG system, at least for 
Medicare, would solve that problem, wouldn't it?
    Dr. BRIEN. To some degree for the inpatient. It obviously 
doesn't deal with the outpatient, which in orthopedics in 
particular and some of the surgical centers are also trying to 
bring in their outpatient patients because they actually get a 
better return from Medicare if they are doing them in a 
hospital-based facility than in an outpatient surgery center. 
So, those are still issues. The issue is the conflict of 
interest. The issue is the physician ownership and the self-
referral.
    And I just want to say, you know, it makes it sound like 
the existing community hospitals are not doing anything to 
improve the quality of patient care. And, in fact, compared--I 
mean, I look at this from my role in peer review, which is 
assessing quality and performance by the physicians. The focus 
truly is to educate physicians when errors have been made, to 
educate the system that we then try to fix to prevent those 
errors from occurring in the future, whether it is medication 
errors, wrong-side surgery errors. We work hard to fix those 
problems.
    I look at a facility, though, where the physicians have 
ownership interests, and if I am now peer reviewing somebody 
who does more cases, brings in more volume, and more revenue 
for the hospital, for themselves, and for me, it makes it very 
hard for me to critically look at them on an independent basis 
and peer review them, and currently that peer review process 
does go on, at least in our facility at this point.
    And just to go back on what we do at Cedars, we are 
reinvesting. We are reinvesting our moneys in building a brand-
new, six-story critical care tower to bring in state-of-the-art 
critical care equipment and refurbish, all brand-new ICUs. We 
are refurbishing all of our operating rooms over the course of 
the next several years. We are building more operating rooms 
because our goal is not about the money that I make because I 
make it for my professional component only. It is about 
providing care for patients. These ICUs are for everybody, 
whether they are uninsured or they are Medicaid or they are 
insured or Medicare. We are providing the service to everyone, 
but there is a cost. And if we lose our best-paying patients, 
it makes it very difficult obviously to maintain and continue 
to refurbish and modernize our institutions to provide the 
best-quality care and access for everybody.
    Mr. MCCRERY. Is your concern that physicians are referring 
patients to their hospital, so to speak, their physician-owned 
hospital, and that takes a patient away from you? Or is your 
concern that physicians are referring patients to their 
hospitals that do not really need the treatment?
    Dr. BRIEN. No, I don't think it is a matter of referring 
for unnecessary treatment.
    Mr. MCCRERY. Okay.
    Dr. BRIEN. I think it is a matter of cherry picking the 
patients that are best for them to make money and leaving the 
other patients that do not make money for their institution at 
the community hospital. If it does not make money for their 
institution, it is certainly not going to make money for the 
community hospital. And that jeopardizes all the other 
programs, including trauma services and community services that 
we provide for the community.
    Mr. MCCRERY. I understand that argument.
    Mr. Foster, I would like to get a copy, if you can provide 
us one, of that flyer that you saw from Austin Surgical 
Hospital saying if you invest $4 million, you can get $55 
million in 6 years. That is very interesting.
    Mr. FOSTER. I will follow up on that.
    Mr. MCCRERY. If I had $4 million, I----
    [Laughter.]
    Mr. FOSTER. Again, I don't know whether it has actually 
done that or not, but that was the marketing pitch.
    Mr. MCCRERY. Yes, I would like to see that, Madam Chair, so 
we can maybe follow up on that and see what the experience has 
been.
    Chairman JOHNSON. I also think you need to clarify the 
answer to Mr. McCrery's question. You talked about the doctor 
who comes in and consults and then has a way of moving the 
patient. Does that doctor also perform operations at your 
hospital? And do you see evidence that the patients he chooses 
to move are more complex and so on?
    Mr. FOSTER. Yes, I mean, we have situations where doctors 
practice----
    Chairman JOHNSON. The same doctor.
    Mr. FOSTER. The same doctor would practice at both 
locations, one he owns, one he does not, where there is a 
proactive attempt to steer the more profitable patients away 
from our hospital.
    Chairman JOHNSON. Do you see that?
    Dr. BRIEN. Yes, I do, and I think the other point, in fact, 
is that the hospitals that are opening, you have heard cardiac 
hospitals, orthopedic hospitals, surgical hospitals. We do not 
see AIDS hospitals opening, Medicaid hospitals opening, managed 
care hospitals opening, seniors with pneumonia hospitals 
opening. These are very specialized procedures that have the 
highest reimbursement.
    Chairman JOHNSON. Thank you.
    Mr. Doggett.
    Mr. DOGGETT. Thank you, Madam Chairman.
    Mr. Brock, I want to be sure I understand. I got 
interrupted during part of your testimony. You have the Baylor 
University Medical Center and then attached to it is the 
physician-invested Hamilton Heart and Vascular Hospital.
    Mr. BROCK. That is correct.
    Mr. DOGGETT. And your belief is that you can get better 
patient--I believe it is better, safer care at a lower cost in 
the physician-owned attachment.
    Mr. BROCK. I know that to be the fact.
    Mr. DOGGETT. Do you have data comparing the two?
    Mr. BROCK. Yes.
    Mr. DOGGETT. Do you treat any cardiac patients at the 
portion of the hospital that is the University Medical Center?
    Mr. BROCK. When we opened this hospital, we moved all of 
our cardiac programming into this hospital.
    Mr. DOGGETT. What portion of Medicaid patients do you have 
there?
    Mr. BROCK. I mean, all cardiac is done in that hospital.
    Mr. DOGGETT. Including Medicaid?
    Mr. BROCK. Yes, Medicaid, Medicare, uncompensated.
    Mr. DOGGETT. There has been no decline in the portion of 
Medicaid patients since you did that?
    Mr. BROCK. No. Our payer mix reflects the payer mix of the 
main hospital. That facility has the highest quality scores. We 
follow the CMS core measures. They rank 92 to 100 percent in 
all of those measures. So, they are higher than any of our 
facilities. Their patient satisfaction scores are higher than 
in any of our facilities. The first year that facility was in 
operation, the physicians reduced the cost of care $12 million 
for that service over the way we were running it before they 
were involved with us. And the way they did that was through 
development of teams and councils that worked on 
standardization of equipment, supplies, and plannables, 
capital, purchases that were being made, care paths working 
with each other on how they can most effectively treat the 
patients that were going through there. We have data before and 
data after, so we can look at it. And we have shared that with 
CMS, and we would be glad to share it with this Committee as 
well.
    Mr. DOGGETT. Mr. Foster, I hear a number of physicians 
saying we can get the very benefits that Mr. Brock just talked 
about, that Dr. Plested talked about, expressing concern about 
corporations that are not from the local area and do not 
understand it. Aren't there some benefits to be had by having 
physicians involved in this manner in the hospital?
    Mr. FOSTER. I think very clearly, to the extent that you 
can involved physicians in helping you in trying to lower costs 
and other things, that is a very good thing to do. I think the 
question is what is the vehicle that he is to do that. And that 
is why we are intrigued with the notion of the gain-sharing 
idea that was mentioned earlier, where you can, in fact, share 
with physicians the benefits of their efforts to reduce costs, 
but not do so to the extent that you create a system that 
induces them to self-refer. And so that is where gain-sharing I 
think does good with respect to aligning some of the incentives 
between providers and physicians, but stops short of creating 
an inducement to self-refer to facilities that they own.
    Mr. DOGGETT. And what effect do you believe it will have if 
the moratorium is allowed to expire in 3 months?
    Mr. FOSTER. I would also echo what was said earlier. We 
know that there are many of them in the queue, and Texas is 
sort of ground zero for these things, as you know. And there 
are many of them in the queue, and whether or not facilities 
decide to proceed or not will be dependent upon how they read 
the tea leaves about whether there might be some subsequent 
action or regulation that would outlaw those. And so it is hard 
to predict, but my guess is that there would be a fair number 
of them that would roll the dice and go ahead and build on the 
hopes that they would be grandfathered in any kind of future or 
subsequent legislation.
    Mr. HARRIS. To that point, we have 12 heart hospitals, and 
I have heard this statement from Mr. Foster that there is a lot 
in the queue. We do not have any physician-owned heart 
hospitals in the queue. We are working with a number of 
community hospitals to do some joint ventures. That doesn't 
include physician ownership, but we don't see that queue being 
lined up that he is speaking of. And if I could comment just 
briefly on the physician ownership?
    Mr. DOGGETT. Sure.
    Mr. HARRIS. Because I think we actually have a hospital in 
your district. One of the things we believe strongly in 
physician ownership is that physicians, you know, care deeply 
about the community. The statistics that we gave in terms of a 
high number of the patients arriving at our hospital from the 
emergency Department, a high number of the patients coming from 
outlying central Texas, and if we go to South Dakota, we get 
folks from all over the eastern part of South Dakota. And those 
are areas that previously were underserved, and we have a 
program where a patient has a problem out 2 hours from the 
hospital in the middle of the night. They make one phone call, 
and they can be in our hospital immediately. And the physicians 
embrace the community aspect of that. And, Madam Chairman, to 
the point you asked me about disclosure, I want to make sure I 
clarify that correctly. Disclosure is not made publicly in 
terms of the physician as an investor like we would a public 
company. But we embrace very strongly disclosure to the patient 
that the physician is an owner in the facility. So, anytime 
there is a patient referral made, we embrace that very 
strongly. And we find that the patient likes that a lot because 
they feel that inside the hospital--we have probably all be in 
the hospital where we have complained to the doctor, and the 
doctor says, ``Go talk to the administrator about it.'' The 
doctor is--he owns the hospital, he or she owns the hospital. 
They can do something about it immediately. So, the gain-
sharing piece, while it has some advantages, it stops short of 
putting the physician at risk if things do not go right.
    Chairman JOHNSON. Mr. Harris, we have a vote coming up, so 
I want to be sure that Mr. Hulshof has a chance to question.
    Mr. HULSHOF. Thank you, Madam Chairman. You know, listening 
to the difference of opinion on this panel brings to mind the 
ancient conundrum where two women claim to be the mother of the 
same child. And, unfortunately, I don't think anybody, with all 
due respect to my colleagues, I don't think anybody on this 
side possesses the wisdom of Solomon.
    I would say, Mr. Foster, that, you know, reading the tea 
leaves, I am not sure that I would want to be one out there 
trying to do that, because as you know, the moratorium was a 
compromise. Our counterparts over in the Senate had a very 
different point of view about what should happen with specialty 
hospitals. That is my editorial comment. Let me use the couple 
of minutes I have.
    Dr. Plested, let me ask you this, because I am going 
directly to your conclusion, the last paragraph of your 
testimony that says this: ``Based on the MedPAC and [Federal 
Trade Commission/Department of Justice] recommendations and the 
limited data currently available''--the limited data, my 
emphasis, but your words--currently available on physician 
ownership of specialty hospitals, the AMA believes that 
patients would be better served if we allowed the moratorium to 
expire and then come back and review what impact, if any, this 
has on communities. In other words, let me just--with the 
limited data available, would we not be better served allowing 
the moratorium to continue rather than let the genie out of the 
bottle and then trying to come back afterward, if, in fact, 
there is a dramatic impact on community hospitals, and then 
trying to undo what has already occurred if we allow the 
moratorium to expire.
    Dr. PLESTED. I believe that the testimony from CMS and 
MedPAC was that the moratorium went into effect on the 8th of 
December of 2003 and they have data through 2002, so that the 
amount of data that would be added to what they already have 
would be limited as well. So, we would still have limited data 
with a limited amount added to it, but the data that they do 
have doesn't support a lot of these conclusions.
    Mr. HULSHOF. Well, let me ask you this, and again, just to 
kind of cut to the quick, as we have this vote pending, Mr. 
Hackbarth's written this--and I am just going to sort of 
summarize in his testimony what MedPAC found. Does the AMA 
agree or disagree with this following conclusion of MedPAC: 
Physician-owned specialty hospitals treat patients who are 
generally less severe cases and concentrate on particular 
diagnosis-related groups, some of which are relatively more 
profitable? Do you agree or does your organization agree or 
disagree with that conclusion?
    Dr. PLESTED. I think that is the data that they had, and we 
would agree that that is what that data showed.
    Mr. HULSHOF. Do you agree or disagree with MedPAC's 
conclusion that they, meaning specialty hospitals, tend to have 
lower shares of Medicaid patients than community hospitals?
    Dr. PLESTED. Absolutely, yes, sir.
    Mr. HULSHOF. And I presume you would most assuredly agree 
with the conclusion that the financial impact on community 
hospitals in the markets where physician-owned specialty 
hospitals--that that impact was limited in 2002?
    Dr. PLESTED. Yes, but these relationships do not really 
prove anything. They are interesting observations, but they do 
not prove that there is a problem with physician ownership of a 
specialty hospital because there are many, many other reasons 
why MediCAL patients go someplace else, Medicaid, MediCAL in my 
instance, that do not have anything to do with ownership of the 
hospital.
    Mr. HULSHOF. And I appreciate this hearing very much, and 
our vote is going on. Missouri is interesting in that we are a 
certificate-of-need State, and so we do not have specialty 
hospitals per se. And yet the certificate of need is an 
interesting discussion to follow in our State legislature, as 
you know. But I do appreciate the diverse opinions that have 
been shared with us today. Madam Chairman, thank you very much.
    Chairman JOHNSON. Thank you very much, and I appreciate 
your pointing out the certificate-of-need issue. It is an 
interesting one. I think it is Dr. Brien that mentioned in your 
testimony that poor patients covered by MediCAL and those 
without insurance are all not welcome. Is that your testimony? 
Because if you can give us any backup on that statement about 
what is going on in Los Angeles, that would be very helpful.
    Dr. BRIEN. We will work to gather that information.
    Chairman JOHNSON. And then I am just interested in a very 
quick response. Was there a waiting list in your hospital 
before the new hospital was built? Was it a response to under-
capacity demonstrated by a waiting list?
    Mr. FOSTER. There was no waiting list in Austin.
    Chairman JOHNSON. Okay. I am very interested in the Baylor 
experience. I do consider it a little different since the 
hospital continues to benefit from the surgeries that are done 
there. If any of you can shed light on this facility fee issue, 
it is interesting to me. And in Baylor's sub-hospital, you 
would have the same facility fee as in your big hospital, but 
very many fewer costs. So, it seems to me it would add to the 
profitability of that sector and not be available to the bigger 
hospital to deal with, its responsibility to cross-subsidy and 
so on. So, I have only 3 minutes left until the vote, so now I 
do have to go. But the facility fee issue and how that works at 
all, this is important for us to understand better and also 
what the hospitals that are in the community, where boutique 
hospitals have been developed, what they are doing now in terms 
of recruiting. Because if they are recruiting, now you have an 
overall greater capacity in the town where there was not a 
waiting list, and capacity breeds usage. So, those are concerns 
that we did not get on the record earlier. Thank you very much 
for your testimony and your discussion of what is a difficult 
issue. Thank you. Members who have further questions may put 
them in the record.
    [Whereupon, at 6:48 p.m., the Subcommittee was adjourned.]
    [Submissions for the record follow:]

                                         Texas Hospital Association
                                                Austin, Texas 78761
                                                      March 8, 2005
The Honorable Nancy L. Johnson
Chair, Subcommittee on Health
House Committee on Ways and Means
U.S. House of Representatives
1136 Longworth House Office Building
Washington, DC 20515

Dear Congresswoman Johnson:

    On behalf of its 421 member hospitals, the Texas Hospital 
Association (THA) welcomes this opportunity to provide information and 
comments on the dramatic growth of physician-owned specialty hospitals 
in Texas, and the impact these specialty hospitals have had on full-
service hospitals in effected markets. THA appreciates the 
subcommittee's interest in this issue and urge you and your colleagues 
to take prompt action on the recommendations being presented by the 
Medicare Payment Advisory Commission (MedPAC).
    Over the last year, THA has reviewed physician investment in 
specialty hospitals and other types of health care facilities in Texas 
and has assessed the impact this physician investment has had on the 
health care delivery system generally and on full-service hospitals 
specifically. Consistent with the reports previously issued by the 
General Accounting Office on specialty hospitals and confirmed by 
MedPAC in its review of this issue, the THA study found that physician-
owned hospitals and other types of physician-owned facilities: (1) 
specialize in well-reimbursed services, such as cardiology, orthopedics 
and diagnostic imaging; (2) provide a lower acuity level of services; 
(3) serve relatively few uninsured and Medicaid patients; and (4) 
provide significantly less emergency care. THA's study also revealed 
that physician investment in hospitals in Texas has grown dramatically 
over a very short period of time. Since 2000, the number of physician-
owned hospitals has more than doubled, and Texas leads the nation with 
47 such facilities. With an additional 29 physician-owned hospitals 
under development in Texas, the potential long-term impact on full-
service hospitals and the delivery of health care in the state could be 
significant.
    While the long-term impact of physician investment and self-
referral is uncertain, it is clear from the national studies as well as 
THA's report that the development of physician-owned limited service 
facilities has been very detrimental to full-service hospitals, 
particularly in smaller urban or rural markets. Across Texas, the 
ability of full-service hospitals to continue to provide high cost, 
lower margin services (trauma, more complex medical or surgical cases) 
is jeopardized by the loss of revenues to physician-owned hospitals and 
other facilities that do not provide these essential services. This 
loss of revenues also makes it more difficult for full-service 
hospitals to cross-subsidize the costs of care to uninsured patients 
and other non-profitable services. Key findings from the THA study are 
attached for your information and review.
    THA supports the MedPAC recommendations being presented to the 
Subcommittee on Health at your hearing on March 8, 2005. The 
recommended changes to the Medicare hospital payment are appropriate 
and should help reduce the financial incentives that have prompted 
physician investment in hospitals and their referral of the more 
profitable cases to these facilities. THA also supports the 
recommendation that would allow the Secretary of Health and Human 
Services to regulate gain-sharing arrangements between physicians and 
hospitals. If properly structured, such arrangements can promote 
collaborative relationships between physicians and hospitals and can 
reduce health care costs without impacting the quality of care 
provided.
    While THA supports the MedPAC recommendation to extend the 
moratorium on physician-owned specialty hospitals, THA urges the 
subcommittee to deal with this issue in a more substantive manner by 
eliminating the ``whole hospital'' exception. As you know, the 
legislative intent of this exception was to allow for physician 
ownership in general hospitals that offer a full spectrum of health 
care services, where a single referral would produce little personal 
economic gain. In contrast, most of the newly developed physician-owned 
hospitals are much smaller in size, provide a more limited scope of 
services and the potential for personal financial gain to influence 
physician referral is more likely. This exception also allows physician 
investors to refer patients to their hospital for the performance of 
outpatient services, such as laboratory and diagnostic imaging, without 
violating the prohibition on self-referral applied to these types of 
health care services.
    THA also supports the elimination or narrowing of the ``rural 
area'' exception that allows self-referrals by physicians in a rural 
area if the physicians provide most of any designated services to 
patients who reside in such a rural area. This exception is extremely 
broad and provides little impediment to physician self-referrals in 
rural areas. There is a growing number of rural hospitals in Texas that 
have been negatively impacted by the establishment of a physician-owned 
ambulatory surgical center or outpatient imaging center in their 
community. Further, to address the ethical and financial issues 
associated with physician investment and referral of patients to 
ambulatory surgical centers, THA recommends that legislative action be 
undertaken to extend the prohibition on self-referral to ambulatory 
surgical centers.
    Thank you for the opportunity to provide comments on this important 
issue. Should you or your staff have questions concerning these 
comments or the THA study on physician ownership and self-referral of 
patients, please contact me or Gregg Knaupe on the THA staff at 512/
465-1000.
            Sincerely,
                                             Richard A. Bettis, CAE
                                                      President/CEO
                                   ----------

     Texas Hospital Association Report on Limited Service Providers

FEBRUARY 2005

    Texas leads the nation in the number of physician-owned limited 
service hospitals with 47 such facilities, and there are an additional 
29 limited service hospitals under development.\1\ Texas has 300 
ambulatory surgical centers in operation and an additional 59 
facilities are under development.\2\ Diagnostic testing facilities and 
other outpatient facilities are not required to be licensed or 
certified in Texas, and it is difficult to determine the actual number 
of these facilities. However, with changes in medical technology and 
the associated shift to outpatient settings, there is no question that 
there also has been a dramatic increase in the number of outpatient 
facilities in the state that provide diagnostic and therapeutic 
services.
---------------------------------------------------------------------------
    \1\ Texas Department of State Health Services, Facility Licensing 
Group (2004)
    \2\ Texas Department of State Health Services, Facility Licensing 
Group (2004)
---------------------------------------------------------------------------
    The proliferation of physician-owned limited service facilities in 
Texas in the last several years is a result of a number of factors. As 
noted in the 2003 GAO report, all of the specialty hospitals under 
development and 96 percent of those that opened since 1990 are located 
in states without a certificate of need process that requires state 
review and approval of additional hospital beds or new facilities.\3\ 
The Texas certificate of need review process was discontinued by action 
of the Legislature in 1985.
---------------------------------------------------------------------------
    \3\ GAO-04-167 (Oct. 22, 2003), pg. 4
---------------------------------------------------------------------------
    To assess the proliferation and impact of physician-owned specialty 
hospitals and other types of limited service providers on full-service 
hospitals, THA evaluated financial and utilization data that are 
available on these providers from the Texas Department of State Health 
Services and the Texas Health Care Information Council.\4\ THA also 
conducted a series of meetings with hospital representatives in various 
cities across the state, including: Abilene, Amarillo, Austin, 
Brownsville, Bryan, El Paso, Huntsville, Lubbock, Midland, Odessa, 
Plano, San Angelo, and San Antonio.
---------------------------------------------------------------------------
    \4\ Publicly available financial and utilization data were obtained 
and reviewed on inpatient and outpatient hospital services; no public 
data are available on ambulatory surgical centers, diagnostic testing 
facilities or other types of outpatient health care facilities.
---------------------------------------------------------------------------
    An analysis of the health care facilities, utilization of services 
(admissions, births, emergency room visits, inpatient and outpatient 
surgeries), payer mix (percentage of Medicare, Medicaid, commercial and 
indigent patients) and amount of uncompensated care was compiled for 
those markets across the state for which data was available. This 
analysis also provides information on the financial and operational 
impact that physician-owned limited service hospitals have had on full-
service hospitals. The following is a summary of the findings from the 
THA study:

      The proliferation of limited service providers has 
occurred more frequently in urban markets and primarily in more 
affluent, high population growth markets. The highest concentration of 
physician-owned limited service hospitals is in Austin, the Dallas-Fort 
Worth area (Collin, Dallas and Tarrant counties), Houston and San 
Antonio.
      In smaller urban markets and rural areas, limited service 
providers have focused on outpatient services, such as outpatient 
surgery and diagnostic imaging. Due to the high costs associated with 
the building of a hospital and the volume of services needed to make 
the hospital's operations financially viable, there has been fewer 
physician-owned limited service hospitals developed in smaller urban or 
rural areas. However, physician-owned hospitals have been built in 
Amarillo, Brownsville, Bryan, Edinburg, Harlingen, Lubbock, Midland, 
Odessa, Tyler and Wichita Falls.



------------------------------------------------------------------------
                                                Existing      Proposed
                    City                        Hospitals     Hospitals
------------------------------------------------------------------------
Abilene                                                               1
------------------------------------------------------------------------
Amarillo                                                2
------------------------------------------------------------------------
Arlington                                               1
------------------------------------------------------------------------
Austin                                                  3             1
------------------------------------------------------------------------
Baytown                                                               1
------------------------------------------------------------------------
Beaumont                                                              1
------------------------------------------------------------------------
Bellaire                                                              1
------------------------------------------------------------------------
Bridgeport                                                            1
------------------------------------------------------------------------
Brownsville                                             1
------------------------------------------------------------------------
Bryan                                                   1
------------------------------------------------------------------------
Clear Lake                                                            1
------------------------------------------------------------------------
Dallas                                                  3             1
------------------------------------------------------------------------
Denton                                                                1
------------------------------------------------------------------------
Edinburg                                                2
------------------------------------------------------------------------
El Paso                                                 3             1
------------------------------------------------------------------------
Fort Worth                                              1             1
------------------------------------------------------------------------
Frisco                                                  1
------------------------------------------------------------------------
Garland1                                                1
------------------------------------------------------------------------
Harlingen                                               1
------------------------------------------------------------------------
Houston                                                 7             6
------------------------------------------------------------------------
Humble                                                                1
------------------------------------------------------------------------
Hurst                                                   1
------------------------------------------------------------------------
Irving                                                  1
------------------------------------------------------------------------



------------------------------------------------------------------------
                                                Existing      Proposed
                    City                        Hospitals     Hospitals
------------------------------------------------------------------------
Jasper                                                  1
------------------------------------------------------------------------
Keller                                                                2
------------------------------------------------------------------------
Kingwood                                                1
------------------------------------------------------------------------
Lubbock                                                 2
------------------------------------------------------------------------
Midland                                                 1
------------------------------------------------------------------------
Nederland                                               1
------------------------------------------------------------------------
Odessa                                                  2
------------------------------------------------------------------------
Paris                                                                 1
------------------------------------------------------------------------
Pasadena                                                1
------------------------------------------------------------------------
Pearlman                                                              1
------------------------------------------------------------------------
Plano                                                                 2
------------------------------------------------------------------------
Port Author                                             1
------------------------------------------------------------------------
Red Rock                                                              1
------------------------------------------------------------------------
Richardson                                                            1
------------------------------------------------------------------------
Roanoke                                                               1
------------------------------------------------------------------------
San Antonio                                             3
------------------------------------------------------------------------
Southlake                                               1
------------------------------------------------------------------------
SugarLand                                               1
------------------------------------------------------------------------
The Woodlands                                           1             1
------------------------------------------------------------------------
Trophy Club                                             1
------------------------------------------------------------------------
Tyler                                                   1
------------------------------------------------------------------------
Webster                                                               1
------------------------------------------------------------------------
Wichita Falls                                           1
========================================================================
Total Hospitals                                        47            29
------------------------------------------------------------------------


      Physician-owned limited service providers tend to 
specialize in well-reimbursed services, such as cardiology, orthopedics 
and diagnostic imaging. While a limited service facility may specialize 
in cardiology or orthopedics, it typically does not provide the full 
range of cardiac services (e.g., heart transplant and pediatric cardiac 
procedures) or orthopedic services (e.g., bone marrow transplants, 
major joint replacements, trauma and patients requiring tracheotomy), 
but tend to provide services that do not require a longer length-of-
stay or intensive care unit service.
      Physician-owned limited service hospitals tend to provide 
a lower acuity level of services.\5\ An analysis of hospital discharge 
data indicates that statewide across all DRGs and conditions, the 
physician-owned hospitals treat a smaller percentage of patients in the 
higher severity levels (15.7 percent for physician-owned as compared to 
21.5 percent for non-physician-owned hospitals). An analysis of 
diseases of the musculoskeletal system reveals that only 5.3 percent of 
patients treated at physician-owned hospitals fall into the higher 
severity levels, whereas 15.9 percent of the patients treated at non-
physician-owned hospitals fall into those same categories. The trend is 
less marked in treatment of circulatory diseases.
---------------------------------------------------------------------------
    \5\ Texas Health Care Information Council, Hospital Inpaient 
Discharges Public Use Data File 2003, December 2004
---------------------------------------------------------------------------
      Physician-owned limited service hospitals serve 
relatively few uninsured patients and, with the exception of a small 
number that provide a significant level of services to Medicaid 
recipients, physician-owned hospitals treat a lower percentage of 
Medicaid patients.An analysis of financial data submitted to the Texas 
Department of State Health Services by hospitals shows that full-
service hospitals provide more than twice as much uncompensated care 
(charity and bad debt) as compared to physician-owned limited service 
hospitals.\6\
---------------------------------------------------------------------------
    \6\ Texas Department of State Health Services, Center for Health 
Statistics, Annual Servey of Hospitals (2003)
---------------------------------------------------------------------------
      Physician-owned limited service hospitals provide 
significantly less emergency care, and access to the emergency 
department and emergency personnel is more restrictive when compared to 
full-service hospitals. Full-service hospitals had 14,760 emergency 
room visits per year as compared to 480 emergency room visits per year 
for physician-owned limited service hospitals.\7\ Heart hospitals 
typically provide more comprehensive emergency services and have 24/7 
physician coverage of the emergency department. In contrast, limited 
service orthopedic or surgical hospitals tend to have very limited 
emergency capabilities and physician coverage of the emergency 
department is provided on an on-call basis.
---------------------------------------------------------------------------
    \7\ Texas Department of State Health Services, Center for Health 
Statistics, Annual Survey of Hospitals (2003)
---------------------------------------------------------------------------
      With the proliferation of limited service hospitals, 
full-service hospitals have experienced more difficulty in securing 
physician on-call coverage of their emergency departments and in some 
instances, physicians with an investment interest in a limited service 
facility have resigned their privileges at the full-service hospital or 
have reduced significantly their on-call coverage. Full-service 
hospitals have been required to recruit new physicians or increase the 
compensation paid on-call physicians to assure coverage of the 
emergency department.
      Physician investment in a health care facility poses a 
conflict of interest between physician investors and patients. Some 
patients are being strongly encouraged to use the facility in which the 
physician has an ownership interest, and it is uncertain whether the 
physicians are disclosing their ownership interest to patients. In some 
instances, these referrals to the physician-owned facility will result 
in a health insurer and patient paying more for the services rendered 
because the facility is not a participating provider in the health plan 
network.
      Some referrals of patients to a physician-owned limited 
service facility raise quality of care concerns:

        o  Patients stabilized at a full-service hospital and then 
transferred to a physician-owned limited service facility for surgical 
procedures;
        o  Patients with cardiac problems stabilized at a full-service 
hospital and then transferred to a physician-owned heart hospital for 
pacemaker insertion;
        o  Delays in treatment after patients have post-surgical 
complications or a limited service hospital does not have the 
appropriate medical staff, equipment or ICU beds available to meet 
patient needs and patients are transferred to full-service hospital; 
and
        o  Delays in treatment when patients are admitted to limited 
service facilities that do not provide the required care (a patient 
with suspected cardiac condition is transported to a heart hospital by 
EMS and is discovered to have suffered a stroke, or a woman presents to 
a limited service hospital in active labor).

      Physician investment in a limited service hospital often 
results in a significant and almost immediate movement of patients from 
the full-service hospital to which the physician previously admitted 
patients to the facility in which the physician has an ownership 
interest. For example, physician investors in the Lubbock Heart 
Hospital began moving patients to their facility as soon as it was 
opened and over a period of eight months reduced their performance of 
cardiac services at Covenant Health System hospitals by 71 percent.\8\
---------------------------------------------------------------------------
    \8\ Covenant Health System Internal Utilization Data

    A similar movement of patients occurred with the opening of the 
Austin Heart Hospital in late 1998. There were significant reductions 
in the number of cardiac services performed at the St. David's 
HealthCare Partnership hospitals by physician investors in the heart 
hospital after that hospital opened.\9\
---------------------------------------------------------------------------
    \9\ Texas Hospital Association, Patient Data System and St. David's 
Medical Center Internal Data

   Reductions in Inpatient/Outpatient Procedures at SDHC Partnership 
                               Hospitals

      This movement of patients to a physician-owned limited 
service hospital soon after it opens does not appear to be based on any 
quality of care concerns the physicians may have had with the full-
service hospitals in the community because the physician investors 
continue to admit patients into those facilities. However, the patients 
admitted into the full-service hospitals by the physician investors 
tend to have more complex medical conditions or are Medicaid or 
uninsured patients.
      The financial impact of limited service providers has 
been detrimental to full-service hospitals, particularly in smaller 
urban or rural markets where there has not been much population growth. 
Full-service hospitals have experienced significant reductions in 
revenues for outpatient surgery and diagnostic services. The impact on 
revenues for inpatient surgeries and other inpatient services has been 
less because limited service providers tend to provide more outpatient 
services and inpatient services with a lower acuity level.
      The ability of full-service hospitals to continue to 
provide high cost, lower margin services (trauma, more complex medical 
or surgical cases) is jeopardized by the loss of revenues to limited 
service facilities. This loss of revenues also makes it more difficult 
for full-service hospitals to cross-subsidize the costs of care to 
uninsured patients and other non-profitable services.
      Full-service hospitals have lost key physicians and other 
professional staff to limited service providers and have had to recruit 
new physician specialists and other personnel to replace them.

                                 

Statement of D.J. Calkins, Guadalupe Valley Hospital Board of Managers, 
                             Seguin, Texas
    My name is D.J. ``Dave'' Calkins, and I am a board member on the 
Guadalupe Valley Hospital, Board of Managers, in Seguin, Texas. 
Guadalupe Valley Hospital is a 117-bed full service medical facility 
and the sole full service medical facility in Guadalupe County, Texas 
with a population of approximately 90,000. The proliferation of 
physician-owned specialty hospitals and limited service facilities are 
having a devastating impact on the ability of full service hospitals, 
such as Guadalupe Valley Hospital, to remain fiscally-viable and to 
provide access to a broader range of services needed in the community, 
especially rural communities with limited full-service healthcare 
options.
    The dramatic increase of physician-owned specialty hospitals and 
limited service medical facilities, coupled with the practice of 
physicians self-referring patients to their physician-owned facilities, 
raises serious public policy concerns. Left unchecked, the 
proliferation of these facilities will continue to drive up healthcare 
costs and will put many smaller, rural community hospitals at 
significant financial risk of closure and will undermine the ability of 
full-service urban hospitals to subsidize unprofitable, but essential 
services.
    Physicians with ownership interests have the ability and the 
financial incentive to shift well-reimbursed services and patients to 
their facilities and are exercising this practice. This practice drains 
essential resources from full-service hospitals, which rely on a cross-
section of patients to subsidize unprofitable, but essential services. 
The loss of patients, and associated revenues, from physician-owned 
facilities has a dramatic impact. In addition, reimbursement rate 
structures make it more favorable for insurance companies to direct 
beneficiaries to these facilities hindering the ability of full-service 
hospitals to obtain needed provider contracts to enhance patient access 
to hospital services.
    In the case of Guadalupe Valley Hospital, a group of physicians 
with privileges at the hospital recently opened an Ambulatory Surgical 
Center (ASC) just down the street from the hospital. Since the ASC 
opened, the hospital's outpatient surgical revenues have declined 
approximately 40%. This is a substantial loss for a rural hospital with 
limited population to garner market share. The hospital's Chief 
Financial Officer projects an eventual loss of approximately $180,000 
in revenue monthly due to patients being self-referred by physicians 
that own the ASC, yet practice out of the hospital. This is unfair 
competition and a blatant conflict of interest. In addition, a number 
of medical insurers recently restricted their beneficiaries from 
obtaining certain services at the hospital and began forcing the 
beneficiaries to travel to another community 15 miles away; in another 
county to obtain the same services they could receive in their own 
community. Insurers are doing this, because of the more favorable 
reimbursement rates received from stand alone facilities compared to 
full-service hospitals for the identical service; the only difference 
being location. This is absurd.
    I urge legislation to close loopholes allowing physician self-
referrals to physician-owned specialty hospitals and limited service 
facilities, such as Ambulatory Surgical Centers. While I understand the 
desire by physicians to enhance their income, this should not come at 
the expense of full service medical facilities and the communities, 
which so dearly depend on them for access to the full spectrum of 
medical services. Physicians should be working in collaboration with 
hospitals to maintain the community's health care infrastructure and to 
serve all patients, rather than contributing to the demise of the very 
institutions, which allow them privileges in which to practice medicine 
and only serving the well-insured few. Close the loopholes and adopt 
sound public policies, which allow physicians and hospitals to both 
benefit.
            Sincerely,
                                                       D.J. Calkins

                                 

                                          Ohio Hospital Association
                                               Columbus, Ohio 43215
                                                     March 10, 2005
The Honorable Nancy Johnson
Chair, Subcommittee on Health
U.S. House Ways and Means Committee
Washington, DC 20515

Dear Congresswoman Johnson:

    On behalf of the Ohio Hospital Association (OHA), we thank you for 
the opportunity to submit comments for the record regarding your 
hearing on limited-Service, Physician-Owned Hospitals, held on March 8, 
2005.
    The OHA is the oldest state hospital association in the nation, 
representing the more than 170 acute-care hospitals and health systems 
across Ohio. Our governing Board of Trustees is comprised of 
representatives from the whole gamut of providers in Ohio; from large, 
urban teaching facilities to small, rural hospitals, and from every 
corner of the State. Each of our members is dedicated to providing 
their communities the highest-quality health care service all day, 
every day. But the emergence of limited-service, physician-owned 
hospitals threatens their ability to remain successful.
    According to a recent report by the Medicare Payment Advisory 
Commission (MedPAC) \1\, limited-service, physician-owned hospitals 
(often nicknamed ``specialty hospitals'') harm their communities and 
local full-service, community hospitals by treating primarily cases 
that are relatively well-reimbursed by government and private 
insurance, and generally not treating patients with conditions that are 
poorly-reimbursed. Studies by the Centers for Medicare and Medicaid 
Services (CMS) \2\ corroborate these findings. This anticompetitive 
cherry-picking allows limited-service facilities to make significant 
profits while expecting the community hospital to handle the most 
difficult and least profitable cases, as well as provide all of the 
community's graduate medical education, emergency care, and other 
ancillary services.
---------------------------------------------------------------------------
    \1\ MedPAC, Report to Congress: Physician-Owned Specialty 
Hospitals, March, 2005
    \2\ CMS, House Ways and Means Health Subcommittee Testimony of Tom 
Gustafson, Deputy Director, March 8, 2005
---------------------------------------------------------------------------
    Under Section 507 of the Medicare Modernization Act of 2003, 
Congress enacted a moratorium that effectively froze the growth of new 
limited-service, physician-owned hospitals. The eighteen month 
moratorium, due to expire in early June of this year, was intended to 
give MedPAC and the Department of Health and Human Services time to 
study the practices and impact of limited-service hospitals. In 
response, the subsequent report from MedPAC recommends various changes 
to the Medicare system.
    The report also recommends Congress extend the current moratorium 
until January, 2007, to allow Congress and the administration time to 
gather additional information and make the necessary changes to the 
payment system. Conversations with CMS staff, however, prove beyond 
doubt the federal government will need far more time to implement the 
broad scope of regulatory and legislative changes necessary to 
thoroughly and properly address the situation. Given the slow pace with 
which structural changes are made at the federal level, and rather than 
forcing the Congress in eighteen months to revisit the question of 
whether the needed policies have been implemented, it makes far more 
sense to continue the current moratorium permanently to allow adequate 
time to thoroughly address the issue. Therefore, OHA urges Congress to 
enact a permanent extension to the moratorium before it expires on June 
8.
    We are not alone in our position. The American Hospital Association 
has been a leader in this effort, along with the Federation of American 
Hospitals and numerous other State hospital associations. The American 
Academy of Family Physicians (AAFP) recently voted \3\ to extend the 
moratorium until ``the AAFP is convinced by evidence of their benefit 
on the health and well-being of our communities.'' And in a February 
16, 2005 editorial (attached), The Columbus Dispatch said:
---------------------------------------------------------------------------
    \3\ AAFP, ``Extend Moratorium on Specialty Hospitals, Says Board,'' 
online news story, February 17, 2005
---------------------------------------------------------------------------
    ``. . . Specialty hospitals will sprout. If the moratorium expires, 
experts say, the current number of 100 nationwide could double in just 
a few years. With each of them taking a bite out of the market, full-
service hospitals' bottom lines eventually will suffer; hospitals can 
do only so many things to become more efficient. And when a hospital 
goes under, the entire community suffers.''
    It is ironic that current federal law will sanction a physician for 
referring an inexpensive test to a laboratory in which she or he has a 
financial interest, but will allow another physician to refer a costly 
orthopedic surgical case to a ``specialty'' hospital. Beyond the 
enormous--but necessary--task of addressing the payment system as 
MedPAC recommends, Congress must take further action, such as 
revisiting the ``whole hospital'' exception to the physician self-
referral law. Eighteen months will not likely be a sufficient span of 
time for all of the needed changes to happen.
    The time for legislative action is now. While much needs to be done 
to address the dangers to the health care delivery system posed 
limited-service, physician-owned hospitals, the first step Congress 
must take should be to make permanent the current moratorium.
            Sincerely,
                                                    James R. Castle
                                                  President and CEO
                                   ----------
                         Extend the moratorium
   Freeze on specialty hospitals necessary for further study of ill 
                         effects on communities
    WEDNESDAY, FEBRUARY 16, 2005
    The 18-month moratorium on the building of specialty hospitals is 
to expire in June, but the problems presented by such businesses are 
far from resolved.
    Congress should extend the moratorium.
    The Medicare Payment Advisory Commission was charged by Congress in 
2003 to study specialty hospitals, and its preliminary report has 
reaffirmed what The Dispatch has contended all along: Specialty 
hospitals cherry-pick the most lucrative patients, while leaving the 
expensive-to-treat patients to nonprofit, full-service hospitals.
    They do this through a loophole in the law that allows doctors to 
refer patients to hospitals in which they own an interest, even though 
they would be prohibited from referring patients to other facilities 
they own, such as labs, pharmacies and home health-care services.
    This shady self-referral is good for specialty hospitals. It 
provides them a steady stream of the kind of patients that will ensure 
high profits. But it is a drain on full-service community hospitals, 
which are forced to take the complicated cases, the expensive cases and 
the uninsured and indigent cases, while at the same time losing an 
important source of revenue. That revenue from lucrative specialties, 
such as cardiac care and orthopedics, helps to finance a community 
hospital's money-losing services, such as emergency rooms, burn units 
and trauma re units.
    But when that revenue goes to specialty hospitals, those vital 
services suffer. This allows a few doctors to unjustly enrich 
themselves at the expense of the community.
    The commission found that the Medicare reimbursement system favors 
specialty hospitals. They get the same reimbursements as full-service 
community hospitals even though they have less overhead.
    In return for this sweet deal, the commission found, specialty 
hospitals treat fewer poor people, handle fewer complicated cases and 
transfer patients to other hospitals more frequently than do full-
service community hospitals. Those patients transferred by the 
specialty hospitals were more severely ill and more costly to care for 
than patients transferred by community hospitals.
    And, in spite of handling less complicated cases for shorter stays, 
physician-owned specialty hospitals actually cost more per patient than 
full-service community hospitals and even other surgical hospitals.
    The commission says that specialty hospitals do, indeed, take 
market share from full-service community hospitals. Community hospitals 
have, for the most part, been able to weather the storm financially by 
becoming more efficient and more competitive. But as specialty 
hospitals sprout, that will become more and more difficult.
    And specialty hospitals will sprout. If the moratorium expires, 
experts say, the current number of 100 nationwide could double in just 
a few years. With each of them taking a bite out of the market, full-
service hospitals' bottom lines eventually will suffer; hospitals can 
do only so many things to become more efficient.
    And when a hospital goes under, the entire community suffers.
    The commission recommends that the Department of Health and Human 
Services revise the method of payment for Medicare services.
    It also recommends that full-service hospitals be allowed to share 
the savings from cost-cutting measures with doctors, to try to minimize 
doctors' referrals of patients to their own specialty hospitals.
    Congress should go further. It should bar physicians from referring 
patients to hospitals in which the doctors own an interest.
    As the commission itself noted, when physicians can earn income on 
a patient twice, as a doctor and as a hospital owner, the incentive to 
recommend surgery is great. Such a situation casts even good doctors in 
a bad light.
    Next month, the commission will issue its final report to Congress. 
Unfortunately, a ban on self-referrals isn't likely to be part of its 
recommendations. It is, however, expected to recommend an extension of 
the moratorium for another 18 months. Congress should grant that 
extension.

    Copyright  2005, The Columbus Dispatch
    (Reprinted with the permission of the newspaper by the Ohio 
Hospital Association)

                                 

       Statement of Carmela Coyle, American Hospital Association
    On behalf of the American Hospital Association's (AHA) 4,700 member 
hospitals and health care systems and our 31,000 individual members, we 
are pleased to present our views on the critically important issue of 
physician-owned limited-service hospitals, which is having a serious 
impact on health care access, use and cost across the country.
    Certain physicians are exploiting a loophole in federal law that 
allows doctors to own limited-service hospitals where they then refer 
their carefully selected patients to perform highly reimbursed 
procedures. This raises serious concerns about conflict of interest, 
fair competition, and whether the best interests of patients and 
communities are being served.
    In order to preserve care in communities, prevent conflict of 
interest and promote fair competition, AHA strongly urges Congress to 
act quickly to close the loophole in federal law by permanently banning 
physicians from referring patients to new limited-service hospitals 
they own.

The History of Self-Referral

    ``Self-referral''--the practice of physicians referring patients to 
a facility they own--has been of concern to the Congress for many 
years. Laws to regulate these referrals grew out of a rapidly changing 
health care environment, in which new technologies made it possible for 
physicians to perform a variety of services and procedures in settings 
outside the traditional hospital. As a result, it became increasingly 
common for physicians to invest in and own a health care facility--a 
clinical laboratory, for example--and also refer their patients to that 
facility.
    Physicians' ability to refer patients to facilities they owned 
raised questions about the potential for conflict of interest. Were 
physicians' referral decisions in the best clinical interests of the 
patient, or the best economic interest of the physician-owner? Research 
in 1989 by the Department of Health and Human Services' Office of the 
Inspector General found that physicians, in fact, ordered more services 
when they owned the facility that provided the service.

      Medicare patients of physicians referring to entities in 
which they had an investment interest received 34% more laboratory 
services than the general Medicare population. (U.S. Department of 
Health and Human Services, Office of the Inspector General: Financial 
Arrangements Between Physicians and Health Care Businesses, 1989b.)

    As a result, this practice was limited by a new law, the Ethics in 
Patient Referrals Act of 1989, which created a strict prohibition on 
physician conflicts of interest and self-referral to clinical 
laboratories--the area studied in 1989. Research continued looking at 
other services, and since that time additional findings show that self-
referral increases the use and cost of health care services.
    Patients of physicians referring to entities in which they had an 
investment interest:

      Got imaging exams 4.0 to 4.5 times more often than 
patients of physicians referring to independent radiologists (Hillman 
et al, 1990)
      Received physical therapy at rates 39% to 45% higher than 
patients referred to independent practitioners (Mitchell and Scott, 
1992)
      Had higher overall costs for medical care covered by 
workers' compensation (Swedlow et al, 1992)
      Were substantially more likely to receive referrals for 
imaging services (GAO, 1994).

    These studies led to an expansion of the 1989 law to apply to many 
other services, including:

      inpatient and outpatient services;
      physical therapy services;
      occupational therapy services;
      radiology, including magnetic resonance imaging, 
computerized axial tomography scans and ultrasound services;
      radiation therapy services and supplies;
      durable medical equipment and supplies;
      parenteral and enteral nutrients, equipment and supplies;
      prosthetics, orthotics and prosthetic devices; home 
health services and supplies; and
      outpatient prescription drugs.

    However, exceptions were created in the law to allow what Congress 
thought, at the time, to be a narrow set of arrangements that would be 
free from conflict of interest. One is the so-called ``whole hospital'' 
exception for self-referrals for inpatient and outpatient hospital 
services when a physician has an ownership stake in a ``whole 
hospital.'' This exception was created based on the reasoning that a 
single physician's ownership in and referral to a whole hospital was 
diffused across so many different departments in the hospital that it 
would limit any financial gain that might result to the physician. And 
Congress expressly prohibited physician self-referral to individual 
departments or subdivisions within a hospital to protect against 
conflicts of interest.
    But at the time the self-referral laws were passed, policy makers 
did not foresee that specific departments or specialties within a 
hospital (e.g., cardiac care, orthopedics, surgery) would become stand 
alone hospitals. Because of concerns with this practice, the Medicare 
Modernization Act of 2003 (MMA) imposed a temporary moratorium on 
physician self-referrals under Medicare to new limited-service 
providers. The moratorium is set to expire June 8, 2005.

This is Not About Competition

    Some suggest that full service community hospitals are just afraid 
of competition from these limited-service hospitals. Some have also 
suggested that consumer choice might somehow be limited without these 
facilities. That is absolutely not the case.
    Full service hospitals are more than willing to compete based on 
cost, quality and efficiency. They compete with other providers in 
their market areas every day. But when physician owners of limited-
service hospitals can pick and choose the services they provide, and 
when they can pick and choose the patients--often the healthier, well-
insured patients--they refer to the facilities they own, they have 
unfair advantages. And that's anti-competitive.
    As to patient choice, most patients rely almost exclusively on the 
advice of their physicians when deciding where to have a surgical 
procedure performed. Real choice means not having to worry that the 
motivation for referring a patient to a limited-service hospital is 
anything other than what is in the best interest of the patient.
    Full service community hospitals welcome competition and patient 
choice--as long as it is free from the physician ownership and self-
referral that create an un-level competitive playing field.

The Facts

    According to the Centers for Medicare and Medicaid Services (CMS), 
59 physician-owned, limited-service cardiac, orthopedic and surgical 
hospitals were open and operating at the end of 2003 as a result of 
this federal loophole. Many more have opened since then and many more 
are waiting to open their doors.
    These physician-owned, limited-service hospitals raise concerns 
about conflict of interest and fair competition in the health care 
market place. In October of 2003, the Government Accountability Office 
found that, when compared to full service hospitals, physician-owned 
limited-service hospitals:

      treated patients that tended to be less sick;
      treated smaller percentages of Medicaid patients;
      are much less likely to have emergency departments;
      derive a smaller share of their revenue from inpatient 
services;
      have higher margins; and
      had physician ownership that averaged slightly more than 
50 percent.

    In March 2005, the Medicare Payment Advisory Commission (MedPAC) 
issued its report to Congress on the topic. They found, when compared 
to full service hospitals, physician-owned limited-service hospitals:

      Tend to treat lower shares of Medicaid patients;
      concentrate on certain diagnoses (diagnostic related 
groups (DRGs))
      treat relatively low-severity patients within those DRGs; 
and
      do not have lower Medicare costs per case.

    In March 2005, CMS shared with the Congress preliminary findings 
from their research on this topic. Their work showed that, when 
compared to full service hospitals, physician-owned limited service 
hospitals:

      generally treat less severe cases; and
      provide less uncompensated care.

    These findings, from all three sources, describe some of the ways 
in which physician ownership creates unfair competition in the health 
care market place. But all of these advantages accrue to physician-
owned limited-service hospitals because of procedure, service and 
patient selection--all driven by self-referral.

Why Physician Conflict of Interest is a Serious Problem

    Self-referral, and the conflict of interest it creates, is 
dangerous for patient care. When physicians own, even in part, the 
facilities to which they refer patients, their decisions are subject to 
competing interests--what's in the best clinical interest of the 
patient and what's in the best financial interest of the physician. 
Studies have shown that when physicians self-refer, these competing 
interests lead to increased use of services and higher spending.
    Self-referral allows physician-owners to reward themselves in 
several ways.
    Patient selection. Physician owners have at least three ways in 
which they can financially reward themselves by selectively referring 
or ``cherry picking'' patients. First, physician-owners can simply 
avoid treating uninsured, Medicaid and other patients for whom 
reimbursement is low. They can do this by opening facilities that have 
no emergency departments, by locating in upper income areas, and by not 
treating patients with certain insurance coverage in their daily 
practices. All of these activities create barriers for uninsured, 
underinsured and other patients.
    Second, physician-owners can selectively refer patients to 
different facilities. Because patients trust and follow the advice of 
their physician, most will seek care and treatment in the facility 
recommended by their physician. Physician-owners, through their 
referral practices, can refer well-insured patients to the facilities 
they own, and poorly insured or uninsured patients elsewhere, often to 
the local full service community hospital.
    And third, as physician-owners selectively refer, they can refer 
healthier, lower cost, lower risk patients to facilities they own, 
leaving more severely ill patients to be treated by local full service 
community hospitals.
    Service selection. Physician-owned limited-service hospitals, by 
definition, limit the care they provide to a select group of services. 
As MedPAC research has shown, physician-owners reward themselves by 
opening facilities that target only profitable diagnoses and 
procedures--cardiac care, orthopedic surgery, and other surgical 
procedures. There are no limited-service burn hospitals, limited-
service neonatal care hospitals, or limited-service pneumonia 
hospitals.
    Quality oversight concerns. Physician ownership and self-referral 
can also lead to serious conflict of interest in the area of quality 
oversight. Oversight for the quality of care in America is performed 
through a ``peer review'' process--groups of physicians who review, 
evaluate and oversee the quality of the care provided by their 
physician colleagues and specialists. Challenging as peer review is, 
quality oversight is fraught with conflict of interest when the 
physician doing the review is an owner/partner with the physician being 
reviewed. The arrangement raises concerns about whether quality could 
be compromised because of financial interests.

The Impact on Care

    These conflicts of interest that create patient selection, service 
selection and quality oversight concerns are jeopardizing our health 
care safety net. Community hospitals are committed to serving all 
patients, regardless of their health status or ability to pay. But the 
conflict-of-interest practices of physician-owned limited-service 
hospitals are robbing community hospitals of their ability to serve 
their communities and placing health care services in many communities 
at risk.
    As physician-owned limited-service hospitals pull out from the 
community hospitals profitable services and healthier elective 
patients, full service community hospitals are challenged to:

      Continue providing essential services that are seldom 
self-supporting, such as emergency departments, burn units, trauma 
care, and care for the uninsured.
      Maintain specialty ``on-call'' coverage in their 
emergency departments, as physician-owners of limited-service hospitals 
no longer want to participate in this broader community commitment. 
Lack of specialty coverage in our nation's emergency departments can 
jeopardize a hospital's trauma level status and cause emergency 
patients to be transported much farther to access needed specialty 
care.
      Overcome growing inefficiencies, such as more downtime 
and less predictable staffing needs, that result from a higher 
proportion of emergency admissions at full service hospitals. These 
result as physician-owners move more and more elective admissions to 
their own limited-service hospitals.
      Coordinate care for patients in their community when more 
and more are being treated for a single condition by a limited-service 
hospital. Also, complications unrelated to the condition being treated 
(for example, a heart attack or a blood clot during or following 
surgery) result in last-minute emergency transfers to full-service 
hospitals, increasing the risk to patients.

    In a recent study by McManis Consulting, researchers went in to 
four communities to assess the impact of physician-owned limited-
service hospitals on the full service hospitals and the communities 
they serve. The findings show that the self-referral that results from 
physician ownership creates an un-level competitive playing field for 
hospitals.
    The study shows that when physician-owned limited-service hospitals 
open in an area, the financial health of the full service hospitals 
decline. Because the patient selection tactics of the physician-owned 
limited-service hospitals were not available to the full service 
hospitals, revenues from the ``best'' services, payers, and elective 
cases plummeted and costs increased. Operating rooms and staffing at 
the full service hospital were now less efficient, recruiting costs 
rose to replace departing physicians and staff, higher salaries and 
other incentives were required to retain staff in services targeted by 
limited-service hospitals and lower bond ratings increased borrowing 
costs for full service hospitals. The net income from Wesley Medical 
Center's Heart Program in Wichita, Kansas fell by $16 million after the 
opening of the limited-service Galichia Heart Hospital in 2001. In 
Rapid City, South Dakota, the Black Hills Surgery Center's net income 
grew and the full service Rapid City Regional Hospital's net income 
fell by the same amount--about $18 million.
    At the same time, self-referral creates an un-level playing field 
for the services offered and access to care provided by full service 
hospitals. The McManis study documents that in two communities, patient 
access to emergency and trauma care was put at risk. In the Black 
Hills, South Dakota region and in Oklahoma City, a critical mass of 
physician-owners in key specialties opted out of community emergency 
call obligations. The lead organizers of the Black Hills Surgery 
Center, who were the most active neurosurgeons in the region, no longer 
provide emergency coverage at the full service hospital. And no 
emergency service is offered at the surgical hospital.
    Oklahoma faced a statewide crisis in trauma coverage as a result of 
so many physicians opting out of emergency call coverage. As 
neurosurgeons, anesthesiologists and other critical specialties removed 
themselves from call coverage, the Level II trauma hospitals could no 
longer meet state standards for coverage. And the withdrawal of 
specialists from on call coverage placed a greater burden on physicians 
at inner city hospitals with busy emergency departments. This has 
caused some of the surgeons remaining at the full service hospitals to 
leave, and has made it difficult to recruit replacements.
    The loss of net income from key services forced cutbacks in under-
reimbursed services such as behavioral health, trauma and subsidized 
services for the poor in all four areas of the study: the Black Hills 
region of South Dakota, Lincoln, Nebraska, Oklahoma City, Oklahoma, and 
Wichita, Kansas. And in each case, the total resources (physicians, 
staff, facilities and equipment) devoted to providing the procedures 
targeted by the limited-service hospitals increased in the community 
overall.
    These are serious implications for all patients served--for 
everyone who relies on an emergency department when they are in need of 
urgent care or a hospital to be there to meet a wide range of health 
care community needs.

The Solution--Ban Physician Self-Referral to Limited Service Hospitals

    This conflict of interest created by physician ownership and self-
referral is easily addressed. To protect patients and the health care 
safety net in America, Congress should close the current loophole in 
federal law now--amend the Ethics in Patient Referrals Act of 1989 to 
permanently ban physician self-referral to new limited-service 
hospitals. Nothing short of banning self-referral will do.
    Why is this a federal concern? Some have suggested that the growth 
in limited-service hospitals might be stemmed through state laws. But 
this approach misses the heart of the problem. The problem is not 
limited-service hospitals. There may be a role for ``focused 
factories'' within our health care system. The problem is not physician 
ownership. If a physician in California wants to invest in a limited-
service hospital in Kentucky, conflict of interest wouldn't exist. The 
problem is self-referral--physician-owners who refer patients to 
facilities they own. Self-referral is a federal issue, and Congress has 
acted, beginning in 1989 and in years since, to limit self-referral at 
the federal level.
    Payment changes alone are not enough. MedPAC has recommended a 
number of changes to the Medicare hospital inpatient payment system 
designed to rebalance payments and remove financial incentives for 
physicians to target certain, more-financially-rewarding Medicare 
services. While this may appear to be a viable option for addressing 
the issue, these changes alone won't solve the problem. Even if 
Medicare inpatient payments were revised, it would do nothing to 
address incentives for physician-owners of limited-service hospitals to 
increase use of outpatient care and ancillary services (e.g., lab and 
imaging services) for which self-referral under the whole hospital 
exception loophole is currently permitted. And changing Medicare 
inpatient payments does nothing to change physician-owners' incentives 
to select the most well-insured patients, avoid Medicaid patients, and 
avoid uninsured patients.

Many Others are Concerned

    Full service community hospitals are concerned about the impact of 
physician ownership and self-referral on health care. But hospitals are 
not alone. The American Academy of Family Physicians, representing more 
than 94,000 physicians and medical students specializing in primary 
care, and the National Rural Health Association, representing 
practitioners and organizations that share a common interest in rural 
health, are among those supportive of continuing the moratorium on 
self-referral to limited-service hospitals.
    And the U.S. Chamber of Commerce, also concerned about physician 
self-referral, supports extension of the current moratorium. In their 
recent letter to Congressman Bill Thomas, the U.S. Chamber stated that 
the ``business community is concerned about the potential for physician 
owners to refer the most profitable patient cases to entities in which 
they have a financial interest, while referring more complicated and 
poorly reimbursed cases to general hospitals serving the community at 
large.'' Their letter goes on to say that the Chamber ``believes 
further evaluation of this topic is warranted, and thus urges an 
extension of the current moratorium.''
    In conclusion, physician ownership and patient referral lead to 
very serious concerns about the health and economic interests of a 
community, including higher health care costs, duplication of services, 
patient and service selection, reduced emergency room coverage, 
inappropriate use of procedures, and more. We strongly urge Congress to 
close the loophole in federal law by permanently banning physician 
self-referral to new limited service hospitals. By doing so, Congress 
can help to prevent conflict of interest between physicians and 
patients, preserve care for everyone's emergent and urgent health care 
needs, and promote fair competition in today's market place.

                                 

                                               North Texas Hospital
                                            Lewisville, Texas 75067
                                                      March 7, 2005
Ways and Means Committee

    My name is Dr. Damien Dauphine. I am a reconstructive foot and 
ankle surgeon with North Texas Hospital which is a surgical hospital in 
Denton, Texas. I am writing in reference to the Ways & Means Committee 
meeting tomorrow. As you know, the percentage of the national budget 
devoted to healthcare continues to rise. We believe that increasing 
competition in the healthcare arena while providing superb patient care 
is a win-win situation for Americans.
    I'm sure you have heard from the American Hospital Association and 
their stance on specialty or surgical hospitals. The fact remains, that 
the AHA is determined to squelch competition to preserve their 
monopolies all over America. The bureaucratic corporate hospital 
companies are the reason physicians like me have created these new 
facilities for healthcare delivery.
    The surgical hospital industry must continue to exist. Employees of 
nearly 100 facilities would be in danger of losing jobs. Whole 
communities are at risk. But most importantly, the citizens of our 
communities are at risk. Please do not allow the moratorium on 
specialty hospitals to continue. Patients must be allowed to have a 
choice in health care. We feel our opponents have misrepresented our 
industry. The facts are:

      The so-called ``cherry picking'' of profitable patients 
can be eliminated more appropriately by DRG reform
      The American Surgical Hospital Association (ASHA) is not 
aware of any facilities that are planning to open within a year of the 
expiration of the moratorium this June
      Surgical hospitals serve both Medicare and Medicaid 
patients
      Truth! There are currently 40 specialty hospitals that do 
not have ER's. Also True! There are 400 general hospitals that do not 
have ER's
      Physician investment averages 2% in specialty hospitals, 
according to the Government Accounting Office--hardly a conflict of 
interest
      Studies done in the 80's show no inappropriate referrals 
by surgeons and over 85% of our cases are outpatient Take a look at the 
general hospitals in your area, more than likely they are expanding, 
not closing departments or closing their doors altogether
      The Wall Street Journal and The Washington Times have 
both supported the industry with opinion pieces.

    To further the argument that competition is a necessary component 
of price control, the Federal Trade Commission and the Department of 
Justice have examined the ``Certificate of Need'' programs in various 
states. The FTC and the DOJ's aim was to determine if they (state's 
CON's) were effective in protecting the healthcare needs of their 
citizens. The following is a brief synopsis of their conclusions 
regarding certificate of need programs:
    ``States should consider the following steps to decrease barriers 
to entry into provider markets:
    a. Reconsider whether Certificate of Need Programs best serve their 
citizens' health-care needs. On balance, the FTC and DOJ believe that 
such programs are not successful in containing health care costs, and 
they pose serious anticompetitive risks that usually outweigh their 
purported economic benefits.''
    At North Texas Hospital we offer expertise in emergency medicine, 
hyperbaric medicine, general surgery, vascular surgery, podiatric 
surgery and peripheral nerve reconstruction, orthopedic surgery, 
plastic surgery, gastroenterology, eye surgery, pain management, ear-
nose-throat surgery, spine surgery, breast reconstruction, and 
gynecologic surgery. We can compete in the Denton marketplace because 
we provide efficient and high quality care and our patient satisfaction 
response has been overwhelmingly positive. We offer services and 
procedures that many of the surrounding hospitals do not offer. We 
treat patients regardless of ability to pay and will be treating 
Medicare and Medicaid patients for many years to come.
    Please consider these factors as you debate the issues before you.
            Sincerely,
                                            Damien M. Dauphine, DPM
                                                             Fellow

                                 

Statement of Trevor Fetter, Tenet Healthcare Corporation, Dallas, Texas
    I am Trevor Fetter, CEO of Tenet Healthcare Corporation. Through 
its subsidiaries, the company owns and operates acute care hospitals 
and related health care services. Tenet's 83,259 employees proudly 
provide high quality, compassionate care at 74 full-service acute-care 
hospitals in 13 states. Recognizing the importance of our role in the 
community, not only do we provide a vital charity care program through 
our industry-leading Compact With Uninsured Patients, but we also make 
significant investments in essential state-of-the-art health care 
services, such as transplant, open heart, neurosurgery, pediatrics, and 
neonatal intensive care. In addition, as an investor-owned health care 
company, our hospitals contribute to the economic development of each 
of the communities in which they operate through payment of state and 
local taxes.
    I am pleased to offer comments to the House Ways and Means 
Subcommittee on Health about 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. Physician-owned specialty hospitals, sometimes called limited 
service providers, undermine and complicate the delivery of 
responsible, effective health care decisions by injecting self-referral 
into the clinical process.
    Within the past several years, physician-owned specialty hospitals 
have emerged to capitalize on an unintended loophole in the anti-
referral laws. The success of a physician-owned specialty hospital 
depends upon referrals by its physician owners. Succinctly, these 
arrangements tilt the competitive playing field by providing 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 the 
local community hospitals.
    Physicians owning a financial interest in a specialty hospital tend 
to direct to their facilities only the most attractive patients--those 
with private health insurance and those who are less sick. However, 
those same specialists tend to refer underinsured or uninsured 
patients, as well as those with higher acuity, to full-service 
community hospitals for treatment, which is administered with little to 
no reimbursement of costs. Full-service hospitals then are left with 
inadequate resources to treat the sickest of patients. The practice of 
patient selection does not serve the American health care system, it 
does not serve community hospitals, and most importantly, it does not 
serve the best interests of the patients in our care.
    The only way to solve this problem is to close the loophole in 
federal law to permanently ban physician ownership of and self-referral 
to specialty hospitals. The relationships required by such ownership/
referral patterns are exactly what the anti-referral laws are designed 
to prevent.
    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 insurance premiums, pressures of managed care, demanding 
regulatory burdens, and on-call requirements, just to name a few. 
Within this demanding environment, it is understandable that some 
physician specialists would be intrigued by a specialty hospital's 
promise of incomparable personal financial gain. However, I believe 
that each of these challenges requires a comprehensive solution aiming 
to reform 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.
    As the CEO of multi-state hospital operating company, I support 
free and fair competition. True competition, however, requires a level 
playing field. Tenet hospitals, 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 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 service--often cardiac, orthopedic, or surgical care--which 
guarantees high profit margins, while avoiding essential but 
unprofitable community services, such as emergency services.
    Ownership interest in these facilities is typically granted only to 
physicians who are able to refer patients, not to any investors from 
the general public. Referring physicians are often given sweetheart 
equity arrangements at bargain basement rates. By contrast, full-
service hospitals, like those owned and operated by Tenet Healthcare, 
are prohibited by federal laws from offering physicians an ownership 
interest in the specialty wings or subdivisions of our hospitals. In 
fact, offering a physician any ``inducement'' for referrals is 
expressly against federal laws. These laws prohibit Tenet from giving 
specialists at our hospitals more than $300 in gifts per year, none of 
which can be given in exchange for a referral. Fair competition under 
the interpretation of existing rules simply would be impossible.
    The ``whole hospital'' loophole in the anti-referral laws permits 
specialty hospitals to cherry pick only the most profitable patients, 
leaving high-cost patients, individuals on Medicaid, and the uninsured 
to community hospitals. The Government Accountability Office (``GAO'') 
and the Medicare Payment Advisory Commission (``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.
Commitment to Community
    In this anti-competitive environment, full-service community 
hospitals struggle to achieve the level of care that they desire to 
provide and that their communities expect. When specialty hospitals 
drain essential resources from full-service community hospitals, they 
particularly harm our capacity to provide emergency care and other 
vital health services over time.
    As the Members of this Committee are well aware, America's hospital 
emergency rooms are quickly becoming the de facto public health care 
system, the primary point of access to quality health care services for 
the nation's uninsured. Hospitals equipped with emergency rooms must 
provide medical evaluation and required treatment to everyone, 
regardless of their ability to pay, as required by federal law. Since 
the advent in recent years of these physician-owned specialty 
hospitals, which skim profitable service areas for low-risk patients, 
this burden has grown even heavier. 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.
    A 2003 study by the GAO 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, 24-hour emergency rooms. The GAO study reveals that while nine 
in 10 of all full-service community hospitals maintain an emergency 
department to address any medical concern that comes through its doors, 
half of 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.
    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 24-hour emergency 
services.
    Full-service community hospitals long have used funds generated by 
profitable services to subsidize the losses suffered by unprofitable 
services. Only by maintaining the successful product lines are full-
service hospitals able to subsidize other critical but less profitable 
services, such as trauma and burn centers, as well as fund special 
programs for delivering care to uninsured and underinsured patients. By 
removing the most profitable 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.
    In Slidell, Louisiana, Tenet operates North Shore Regional Medical 
Center. In 2002 North Shore had 723 cardiac admissions. After a 
physician-owned limited access facility specializing in cardiac care 
opened in 2003, the North Shore cardiac admissions had dropped to 359 
in 2004. However, North Shore continues its community service of 
providing a full complement of critical emergency department services 
to all patients in need. In 2003, NorthShore received 23,570 visits to 
its emergency department, and 30 percent of those patients were self-
pay and Medicaid. From what Tenet has witnessed in Slidell, and from 
what we have seen nationwide, physician-owned specialty hospitals 
simply do not share in the full complement of critical ED services to 
all patients, which full-service hospitals consider as a responsibility 
and commitment to their communities.
Solution: Self-Referral Loophole Closure
    Allowing for the continuation of these 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 policy response, which focused 
on refinements of Medicare's DRG payment system, is inadequate. As an 
operator of acute care hospitals, Tenet operators can assure the 
Committee that simply adjusting the DRG's will only marginally reduce 
the profitability of self-referral. It is the owner and referral 
relationship that creates patient selection. The underlying economics 
of these facilities, which relies upon referrals from physician owners, 
would not change materially. Furthermore, while some modifications 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 is an amendment to the 
anti-referral laws. These laws generally prohibit physician referrals 
for 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 inpatient hospital, but not a subdivision of a hospital. 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.
    The ``whole hospital'' exception was intended to allow physician 
ownership in a comprehensive health facility, as long as that ownership 
interest is in the entire facility, not merely a subdivision. Congress 
never contemplated the emergence of specialty hospitals, which 
essentially have turned the entire concept of the ``whole hospital'' 
exception on its head. Specialty hospitals are not whole hospitals; 
rather they are subdivisions of hospitals--essentially cardiac, 
surgical, or orthopedic wings--that have been removed from the full-
service hospital. As such, physician referral to specialty hospitals in 
which they have an ownership interest is as clear a violation of the 
anti-referral laws 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 
the hospital industry's hope that Congress will close the loophole in 
anti-referral legislation that allows for self-referral to these 
facilities. The whole hospital exception loophole is not in the best 
interest of patients, and it will continue to undermine the vital 
health care services communities expect from their full-service 
community hospitals.
    Thank you for your attention to this critical issue negatively 
impacting access to care of all services to patients across the 
country.

                                 

        Statement of Shawn Friesen, American College of Surgeons
    The American College of Surgeons is pleased to submit a statement 
for the record of the Subcommittee on Health's hearing on physician 
ownership of 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 1 report to Congress and repeated 
today in its report on specialty hospitals.
    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 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 call 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 College of 
Surgeons. Questions and comments may be directed to the College's 
Washington Office.

                                 

 Statement of James Grant, American Surgical Hospital Association, San 
                           Diego, California
    The American Surgical Hospital Association (ASHA) is pleased to 
have the opportunity to submit this statement for the record of the 
Subcommittee's hearing on specialty hospitals and the reports and 
recommendations of the Medicare Payment Advisory Commission and the 
Centers for Medicare and Medicaid Services. ASHA is the national trade 
organization representing 75 physician owned hospitals that specialize 
in surgical care, the vast majority of such hospitals in the United 
States.

THE VALUE OF SPECIALTY HOSPITALS

    ASHA members 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. The fact that patients have the option of choosing where 
their surgery is to be performed gives them a much greater sense of 
control, which is very important to maintaining patient well-being. 
Choice is a fundamental attribute of our society, and there is no 
reason it should not be an equal part of our healthcare system. The 
preliminary information from the report of the Centers for Medicare and 
Medicaid Services bears out both the quality of our services and the 
satisfaction of our patients.
    ASHA particularly wants to emphasize the excellent patient outcomes 
our members achieve. The average nurse to patient ratio in our 
hospitals 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 is being challenged by California general hospitals. On 
all measures of quality, surgical hospitals excel, including lower 
infection rates, few medically related 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 and its functions. The 
second is the very fact of specialization that allows physicians and 
staff to develop a high level of skill 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 important point 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. In addition to the information that CMS 
will provide to Congress on quality of care, ASHA also encourages the 
Committee to look at HealthGrades.com, an independent service that 
evaluates hospital quality for specific procedures. Using Medicare data 
and other resources, this service calculates an expected complication 
rate for each hospital. Actual performance is then measured and 
compared to the projected rates. Physician owned surgical hospitals 
score very well.
    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.
MEDPAC'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 
complete reports from the Government Accountability Office (GAO) and 
the Medicare Payment Advisory Commission (MedPAC) that shed more light 
on the issues in the debate. The preliminary report of the Centers for 
Medicare and Medicaid Services (CMS) provides important information on 
quality of care, patient satisfaction and physician referral patterns.
    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 bottom line is 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 
the experience of our members throughout the country. 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.
    ASHA wants to make an important observation about the current 
moratorium. 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 false 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 and our 
physicians has been eroded. Another moratorium would only exacerbate 
this situation.
    ASHA also believes that none of MedPAC's findings would justify any 
change to the current law governing physician ownership of hospitals. 
We are pleased that MedPAC decided against including any 
recommendations on the whole hospital exemption to the Stark law. CMS' 
analysis of referral patterns supports this conclusion, finding ``no 
difference in referral patterns for physician owners and non-owners.'' 
This finding indicates that financial gain is not the basis for a 
physician's decision on where a patient will have surgery.
    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 Congress and CMS to act on 
them this year. The Administration's budget also supports these payment 
changes. We also urge adoption of MedPAC's recommendations on 
gainsharing to encourage hospitals and physicians to work in concert to 
improve the quality and efficiency of healthcare. Finally, ASHA 
encourages the Committee to act on MedPAC's recent proposals on pay for 
performance measures in the hospital setting.
    ASHA also supports full disclosure of ownership, consistent with 
the ethical standards of the American Medical Association.
THE WHOLE HOSPITAL OWNERSHIP EXEMPTION IN STARK II
    The Federation of American Hospitals has called 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 general-based hospitals.'' As previously 
noted, ASHA believes that no evidence exists that should cause Congress 
or the Department to modify the current hospital ownership exemption.
    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. It is 
important to note that 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, if you examine the variation in 
services provided by general hospitals across the country, you quickly 
see that there are many differences among those facilities that we 
might think are ``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?
    As previously noted, 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. It 
is obvious that there is no clear line that easily distinguishes 
physician ownership of one hospital versus another. HHS should not 
accept the recommendations of the FAH.
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, ASHA has 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, we are 
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. We 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. The emergency services offered by most general hospitals are 
not of that caliber. 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. ASHA is 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 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 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 StanislausSurgicalHospital 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. Stanislaus arose out of this unresolved 
conflict.
    Fresno Surgery Center is a similar case. Physicians in Fresno 
believed that they could provide a better model for elective surgical 
care. They could not persuade the hospitals to go along with their 
ideas, so they built their own facility. They continue to care for 
patients at the other hospitals in Fresno, as do their colleagues in 
Modesto. In fact, they require their physicians to maintain privileges 
at one of the other general hospitals in town. That means, of course, 
that they 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, the physicians all must have privileges at multiple 
facilities if they are to meet the medical and financial needs of their 
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.
    One of the most interesting facets of the national debate over 
physician owned specialty hospitals is the fact that the distribution 
of specialty hospitals varies widely according to state law and 
regulation. States historically have determined what kinds of 
facilities can be licensed as hospitals and have established various 
kinds of 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 in 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 for itself 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
    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 
Medical Center 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. In Fresno there is a specialty heart hospital, the 
Fresno Heart Hospital, that is a joint venture between the largest not 
for profit hospital and local physicians.
RESPONSES TO CRITICS OF PHYSICIAN OWNED SPECIALTY HOSPITALS
    ASHA would like to turn to the main criticisms of physician owned 
specialty hospitals and address them. Fundamentally these are 
allegations 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.
    We will 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 general 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 
that experience confirms the MedPAC conclusions. All Fresno hospitals 
have expanded since the debut of Fresno Surgery Center. This pattern is 
repeated in other communities where specialty hospitals operate.
    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.
    The Subcommittee needs only to look at the level of hospital 
expansion and construction in this country to determine that most 
general hospitals are financially healthy, with good access to capital. 
These are not the signs of an industry in distress. 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 surgical schedule. 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.
    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. 
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 higher Medicare rates, while hospitals 
specializing in other kinds of surgery have lower levels of Medicare. 
In addition the average specialty hospital paid nearly $2 million in 
federal, state and local taxes. CMS has reported that the total of 
specialty hospital charity care and taxes exceeds the average amount of 
charity care provided by not for profit general hospitals.
    According to MedPAC, there was wide variation in Medicaid 
admissions among specialty hospitals, although on average the rate of 
Medicaid was lower in such facilities when compared to general 
hospitals. Several factors may 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.
    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. 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.
    ASHA will 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 take market share 
from other hospitals and 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. No information has 
been provided that would contradict that finding. This outcome is 
exactly what one would expect in a competitive environment
    ASHA 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. ASHA believes 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 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 ASHA urges the Subcommittee to 
look at as it considers 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. Virtually 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. Specialty hospitals are the next logical step and 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.
    In summary, after thorough study the allegations against specialty 
hospitals have not been proven. Therefore, ASHA urges the Committee to 
allow the moratorium to expire as scheduled in June. The reforms to 
Medicare's inpatient payment system and the hospital pay for 
performance recommendations 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 or any other operational limitation during the period these 
needed changes are implemented.
    ASHA appreciates the opportunity to submit this statement for the 
record and looks forward to working with Congress as it addresses this 
issue.
2004 MEMBERSHIP SURVEY RESULTS
    During the summer of 2004 the American Surgical Hospital 
Association (ASHA) distributed a questionnaire to the entire hospital 
membership. The purpose of the survey was twofold--to gather basic 
descriptive information about the nation's surgical hospitals and to 
test the accuracy of some of the allegations made against surgical 
hospitals by their opponents.
    All 71 member hospitals received the questionnaire, distributed by 
email from ASHA headquarters. Forty four facilities provided usable 
data, for a response rate of 62%. Since a number of surgical hospitals 
are new, they had not completed the full year of operations needed to 
respond to all of the questions. The data are self reported, but are 
readily available in any hospital, so response accuracy should not be a 
factor.
    According to the survey results, the average ASHA member hospital 
had the following characteristics in 2003. The facility had 21 
inpatient beds, with 8 operating and procedure rooms. Six surgical 
specialties (orthopedics, urology, ENT, plastic surgery and general 
surgery were frequently identified) were offered at the hospital and 
5343 procedures were performed. Of these, outpatient procedures 
accounted for 90 percent of the total, with the balance being inpatient 
surgical services. Hospitals also provide necessary ancillary services, 
like imaging and lab. Forty three percent of facilities reported having 
an emergency department. The balance did not, reflecting the fact that 
they only performed elective surgical procedures and were located in 
states that do not require hospitals to have emergency departments.
    While only a few ASHA members are cardiovascular hospitals, they 
are a breed apart from the typical surgical hospital. They focus on 
heart care and do not provide other surgical specialties. In addition, 
they tend to be much larger, usually over 50 beds, and provide ICU and 
CCU services consistent with the needs of their patient population. 
These facilities are much more likely to have emergency departments, 
again a reflection of the type of patients they treat.
    All ASHA member hospitals have physician investors. The average 
number is 31. However, the business arrangements varied greatly, with 
joint ventures being the most common model at 68 percent. Thirty two 
percent of surgical hospitals are owned exclusively by physicians.
    The type of joint venture varied widely, with 46 percent of 
hospitals reporting that they had a corporate partner. One third of 
joint ventures were with local community not for profit hospitals, and 
20 percent were a hybrid with both hospital and corporate partners.
    However, investors are not the only physicians to use ASHA member 
hospitals. The typical member has 92 physicians with admitting 
privileges, far in excess of the number of investors. This is 
consistent with the findings of the Government Accountability Office in 
its 2003 reports on surgical hospitals.
    The average ASHA member employs 119 full and part time staff. The 
nurse to patient ratio is 1:3.5, far better than the requirement of 1:6 
mandated by California. It is well established that the ratio of nurses 
to patients is not only an indicator of hospital quality, but also a 
driver of high quality patient care. Other quality indicators were the 
low post operative infection rates, 0.57 percent; a low rate of 
emergency transfers to other facilities, 0.22 percent; and a low 
medication error rate of 0.56 percent.
    One consistent accusation has been that surgical hospitals do not 
accept Medicare or Medicaid patients and fail to provide charity care. 
The ASHA survey refutes this allegation. Medicare revenue averaged 29 
percent, with Medicaid making up 6.5 percent of earnings. The level of 
charity and uncompensated care was reported as 5.3 percent. According 
to the Medicare Payment Advisory Commission (MedPAC), in 2002 for all 
U.S. hospitals, Medicare was 32 percent of revenue. Medicaid accounted 
for 12 percent. MedPAC and other studies found that charity/
uncompensated care averaged slightly more than 5 percent for all 
hospitals. Both the level of Medicaid and charity care depends largely 
on the location of the hospital. Inner city facilities usually have 
higher levels of both, while many suburban hospitals do not. Also, most 
Medicaid programs are based on managed care that limits the number of 
hospitals involved in the program. Unless a specialty hospital has a 
contract with Medicaid, it will not see those patients.
    The ASHA membership survey presents a very different view of 
surgical hospitals than the one popularized by their opponents. It 
establishes that surgical hospitals provide high quality care in a 
variety of specialties, not just a select few. They treat all kinds of 
patients, regardless of the type of health insurance they may, or may 
not, have. It also demonstrates that the surgical hospital model 
appeals to physicians, whether or not they have an investment interest.
Economic and Policy Analysis of Specialty Hospitals *
    John E. Schneider, PhD 1,2
    Robert L. Ohsfeldt, PhD 1,2
    Michael A. Morrisey, PhD 3
    Bennet A. Zelner, PhD 4
    Thomas R. Miller, MBA 1

    1 Department of Health Management and Policy, University 
of Iowa
    2 Health Economics Consulting Group, LLC
    3 Department of Health Care Organization and Policy, and 
ListerHillCenter for Health Policy, University of Alabama Birmingham
    4 McDonough School of Business, Georgetown University

    February 20, 2005

    Project Director:
    John E. Schneider, Ph.D.
    Health Economics Consulting Group, LLC

    * This project received support from the American 
Surgical Hospital Association and the South Dakota Association of 
Specialty Care Providers. The authors would like to thank Martin Gaynor 
(Carnegie Mellon University), James C. Robinson (University of 
California Berkeley), Regina Herzlinger (Harvard Business School) and 
Steve Culler (Emory University) for their helpful comments. The views 
expressed in this report are those of the authors and do not 
necessarily reflect the views of the manuscript reviewers or funding 
organizations.
Economic and Policy Analysis
EXCUTIVE SUMMARY
    This study examines the economic theory and published evidence 
related to specialty hospitals, including a review of evidence on 
efficiency, demand, case mix, and quality. We conduct a statistical 
analysis of profit margins of acute care general hospitals in markets 
with and without specialty hospitals. We also analyze the merits of two 
policy options: limiting specialty hospital entry and physician self-
referral. The major findings of the study can be summarized as follows:
Demand
    Demand for services provided at specialized inpatient and 
outpatient facilities has been growing rapidly in the past decade due 
to a combination of factors, including increased incidence of specific 
diseases, new treatment processes and technologies, and changes in 
consumer preferences. An important factor contributing to the growth of 
specialty hospitals is that some procedures or specialized services are 
more profitable than others, given existing Medicare and private 
payment rates. Not surprisingly, there has been little or no entry by 
specialty hospitals targeted at unprofitable services.
Efficiency
    There appear to be economic advantages associated with 
specialization, due mainly to process redesign, learning, avoidance of 
diseconomies of scope, and focus on core competencies. However, the 
literature does not consistently suggest that either form--specialized 
or diversified--is superior in terms of economic efficiency. In 
addition, specialty hospitals appear to have equal or better patient 
outcomes compared to their general hospital counterparts. Hence, there 
is no direct evidence to suggest that specialty hospitals should be 
barred from entering acute inpatient care markets on the basis of 
economic efficiency or quality of care.
Quality
    There is comparatively little evidence on the quality of care 
delivered in specialty hospitals. The literature we have reviewed 
indicates that the care provided by specialty hospitals is, at the very 
least, equivalent to that provided by general hospitals. However, since 
specialty hospitals tend to exhibit high volumes of specific procedures 
usually performed by high volume surgeons, to the extent there is a 
relationship between higher volume and superior clinical outcomes, one 
might expect better outcomes at high volume specialty hospitals 
compared to lower volume general hospitals. More generally, our review 
of scores from HealthGrades data indicate that there are no significant 
differences in mortality rates between specialty hospitals and general 
hospitals in the same geographic area. Finally, our survey results 
suggest that the intensity and quality of services are likely to be 
higher in specialty hospitals.
Effects on General Hospital's Finanical Stability
    Specialty hospitals, like their ambulatory surgery center 
predecessors, compete with general hospitals in some product line 
markets, particularly in states without certificate of need (CON) 
regulation. There is no evidence, other than anecdotal, to suggest that 
general hospitals have been financially harmed by such competition, or 
that such competition is undesirable from a societal perspective.
    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. General hospitals in less 
competitive markets (i.e., those with fewer competitors) had higher 
profit rates than general hospitals in more competitive markets. 
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. 
These findings are also consistent with economic theory, which suggests 
that firms will enter markets in which extant profit margins are 
comparatively higher.
Effects on Access to Care
    One potential result of an increase in competition between 
specialty and general hospitals is the alleged attenuation of a general 
hospital's ability to provide indigent care by internally cross-
subsidizing loses from indigent care with profits from ``high margin'' 
procedures. Rather than limit market competition, the economically 
optimal public policy approach for reimbursing indigent care would be 
to directly subsidize any hospital for providing such care, to the 
extent that current subsidies (tax-exempt status, disproportionate 
share payments, etc.) are inadequate. Nonetheless, even in the absence 
of such reform in the financing of indigent care in the U.S. health 
care system, our analysis of Medicare cost reports fails to find any 
indication that entry by specialty hospitals has adversely affected the 
overall profitability of general hospitals in the same market area. 
Thus, some combination of current subsidies and profits on other ``high 
margin'' product lines appears to be sufficient to offset any possible 
adverse effect of specialty hospital competition on the ability of 
general hospitals to offer indigent care or other specific unprofitable 
services.
Physicians Self Referral
    There is no evidence to support the contention that physician self-
referral to specialty hospitals has any adverse effect on patient or 
societal welfare. The literature on self-referral generally shows 
higher rates of service utilization associated with physician ownership 
of ancillary services. However, any inference of causality in this 
association is problematic at best, because those physicians most 
likely to use such ancillary services most intensively also have the 
most to gain from increased control over the availability of such 
services, independent of any incentive associated with a return on 
investment in the facility itself. Thus, it is extremely difficult to 
quantify the impact of the financial incentive associated with 
physician ownership per se on the volume of self-referrals.
    More importantly, the existence of an association between physician 
ownership of self-referral for ancillary services provides no evidence 
that ownership of acute care facilities would result in similar 
differences in utilization. The direct financial incentive for 
physician self-referral associated with physician investment in 
specialty hospitals is unlikely to play a major role in a physician's 
use of a specialty hospital, for four reasons: (1) the extent of 
investment for the vast majority of physicians with ownership interests 
in specialty hospitals is small compared to the extent on physician 
ownership of ancillary services; (2) there is no direct evidence that 
physician self-referral is motivated primarily or disproportionately by 
financial incentives associated with physician ownership; (3) there is 
no evidence that self-referrals result in worse outcomes than other 
types of referral; and (4) in the case of physician ownership of acute 
care facilities, it is likely that the magnitude of financial 
incentives is small relative to the more direct financial incentive 
associated with fee-for-service payment for physician services.
Economic and Policy Analysis of Specialty Hospitals

    1.  INTRUCTION

    Hospital specialization has become a controversial topic in recent 
years, culminating in a moratorium issued in 2003 by Congress directing 
the Center for Medicare and Medicaid Services (CMS) to cease 
reimbursements to new physician-owned specialty hospitals for those 
Medicare and Medicaid patients referred by physicians with a financial 
interest in the facility.\1\ The moratorium, which comes in addition to 
existing laws in many states prohibiting the operation of some types of 
specialty hospitals, is in part a response to the concern among 
incumbent general hospitals that specialized facilities may harm the 
community by undermining the ability of general hospitals to internally 
cross-subsidize unprofitable services, many of which may be considered 
essential to the community.
---------------------------------------------------------------------------
    \1\ The moratorium was enacted by Congress as part of the Medicare 
Prescription Drug, Improvement and Modernization Act of 2003 (MMA). It 
became effective when the law was signed on December 8, 2003, and will 
expire June 8, 2005. However, the Medicare Payment Assessment 
Commission (MedPAC) recently recommended that the moratorium be 
extended to December 2006 in order to allow for more time to study the 
effects of specialty hospitals on general community hospitals.
---------------------------------------------------------------------------
    This report focuses on two interesting and important economic 
questions raised by the moratorium. First, are there meaningful 
economic advantages associated with hospital specialization, such as 
lower costs or higher quality? Second, does the presence of specialty 
hospitals reduce the ability of general hospitals to provide necessary 
but unprofitable services, such as emergency care and other services 
disproportionately provided to low-income groups? Each of these 
questions has policy implications. If specialty hospitals are more 
efficient or higher quality or both, economic theory and prevailing 
competition policy in the U.S. generally support allowing free market 
entry. That is the argument made recently by a Federal Trade Commission 
report and an opinion essay in the Wall Street Journal (Federal Trade 
Commission and U.S. Department of Justice 2004; Wall Street Journal 
2005). On the other hand, if specialty hospitals interfere with the 
ability of general hospitals to provide unprofitable services, separate 
policy concerns arise.
    This report is divided into five sections. Section 2.0 provides a 
brief overview of the structure of the specialty hospital industry. 
Section 3.0 examines the first question--whether there are meaningful 
economic advantages associated with hospital specialization, such as 
lower costs or higher quality. The primary methodologies for the 
analysis presented in Section 3.0 are (a) published studies and reports 
and (b) observations from our case studies of five surgical hospitals, 
two in central California and three in South Dakota.\2\ Section 4.0 
reviews the evidence on the quality of care and case mix severity at 
specialty hospitals. The analysis presented in Section 4.0 relies on 
published studies, reports, and our own analysis of published quality 
data from HealthGrades. Section 5.0 offers guidance from economic 
theory on assessing the pros and cons of the current policy debates 
over specialty hospitals. Section 5.0 includes an in-depth statistical 
analysis of the effect of specialty hospital market entry on the 
average profit margins of general hospitals. The analysis combines data 
from several sources, including Medicare Cost Reports and the Bureau of 
Health Profession's Area Resource File. Rather than make explicit 
policy recommendations, we discuss some of the salient economic issues 
relevant to the debate. Concluding remarks follow in Section 6.0.
---------------------------------------------------------------------------
    \2\ These states were chosen due to the relatively high proportion 
and maturity of specialty hospitals. Site visits generally involved 
question and answer sessions with all levels of the management team 
(including physician owners) at each facility, followed by tours. Also 
provided were documents on management strategy, quality assurance, 
consumer satisfaction, physician ownership, and cost management.

---------------------------------------------------------------------------
    1.1  Methodology

    This report is based on data from four different sources. All 
sections rely on data drawn from published studies and reports. For 
some of the arguments and analyses we undertake, there is limited 
relevant published literature and reports, primarily because the 
debates over pros and cons of specialty hospitals are a relatively new 
occurrence. In cases where there is an insufficient supply of published 
data and analyses, we conducted analyses based on data collected from 
(1) site visits, (2) secondary data sources, and (3) our own survey of 
specialty hospitals. The secondary data sources used for this analysis 
include Medicare Cost Reports (HCRIS), quality data from Health Grades, 
and market area data from the Bureau of Health Profession's Area 
Resource File (ARF). These datasets are described in greater detail in 
Section 5.1.1.
    Throughout the report, we describe some of the findings from case 
studies of five surgical hospitals, two in central California and three 
in South Dakota. These states were chosen due to the relatively high 
proportion and maturity of specialty hospitals. Site visits generally 
involved question and answer sessions with all levels of the management 
team (including physician owners) at each facility, followed by tours. 
Also provided were documents on management strategy, quality assurance, 
consumer satisfaction, physician ownership, and cost management. The 
main goal of the site visits was to improve our understanding of the 
layout and functioning of specialty hospitals. Thus, rather than focus 
this report on the findings from the site visits, we report the main 
findings relevant to each section of the report. For some of the 
discussions, the site visits did not directly provide any relevant 
insights.
    In addition to secondary data and site visits, we conducted a 
survey of the 70 specialty hospitals belonging to the American Surgical 
Hospital Association. The survey achieved a 50 percent response rate, 
but incorporating existing data from ASHA resulted in item-level 
response rates ranging from 50 to 90 percent. Descriptive statistics 
from the survey are provided in Table 2 and the survey instrument is 
provided in Appendix A.

Table 2

    Survey of ASHA Member Hospitals:1 Means for Selected 
Survey Items



                        Variable                               Mean

Q6-8: Accreditation (%)                                            67.0
Q11: Bed capacity                                                  24.6
Q12: Staffed inpatient beds                                        19.3
Q13: Operating rooms                                                5.2
Q14: Intensive care beds                                            4.0
Q15: Recovery beds                                                 17.2
Q16: Percent with ER (%)                                           42.1
Q18: Number of owners                                              32.7
Q19: MD owners                                                     31.6
Q20: MD owners admit  5 patients/year                              20.6
Q21: Q20 with 0-1% ownership stake                                 13.0
Q22: Q20 with 2-5% ownership stake                                 11.7
Q23: Q20 with 6-9% ownership stake                                  1.4
Q24: Q20 with  10% ownership stake                                  0.8
Q25: Inpatient discharges                                         835.1
Q26: Inpatient days (overnight stay)                            2,269.6
Q27: Inpatient days (observation days)                            884.2
Q28: Surgeries (overnight stay)                                   717.7
Q29: Outpatient surgeries (no overnight stay)                   3,105.5
Q30: Total gross patient care revenue2                      $39,300,000
Q32: Percent Medicare revenue (%)                                  32.4
Q33: Percent Medicaid revenue (%)                                   3.7
Q34: Percent Commercial revenue (%)                                46.4
Q35: Percent other revenue (%)                                     18.1
Q38: Percent revenue as charity care (%)                            2.1
Q39: State income tax paid, previous tax year                  $830,661
Q40: Federal income tax paid, previous tax year                $994,082
Q41: Property tax paid, previous tax year                      $221,463
Q44: Full-time equivalent (FTE) RNs                                52.1
Q45: Patient to RN ratio                                            3.4
Q48: Percent collect patient satisfaction data (%)                 92.1
Q50: Annual number of inpatients transferred                        7.6
Q51: Percent with transfer arrangement (%)                         92.1


    2 Sources: Survey of ASHA membership; see section 1.1 for 
description and Appendix A for survey instrument. Notes: (1) based on 
responses from 35 specialty hospitals supplemented with data from the 
American Surgical Hospital Association; item-level response rates range 
from 50 to 90 percent; (2) includes inpatient and outpatient.

    2.  OVERVIEW OF HOSPITAL MARKET

    During the latter half of the twentieth century, industries began 
exploring new ways to organize production. One of the most prominent of 
these changes was the adoption of lean production, flexible 
specialization, and focused factories (Skinner 1974; Womack, Jones, and 
Roos 1990; Essletzbichler 2003), which resulted in many business 
establishments becoming less diverse and more focused (Gollop 1991). 
The hospital industry appears to be following a similar path with the 
growth of free-standing specialty hospitals and specialized units 
within general hospitals (Myers 1998; Eastaugh 2001; Robinson 2005).
    Demand for specialized inpatient and outpatient services has been 
growing rapidly in the past decade (General Accounting Office 2003a). 
The increase in demand is most likely due to a combination of factors, 
including increased incidence of specific diseases, new treatment 
processes and technologies, and changes in consumer preferences. 
Analogous to non-health care industries, the hospital industry has been 
the subject of renewed emphasis on quality of care and customer 
satisfaction. In response, general and specialty hospitals alike have 
developed consumer-oriented centers of care focused on providing a 
limited range of services tailored to the specific needs of patients 
(Baum 1999; Romano and Kirchheimer 2001; Eastaugh 2001; Smith 2002; 
Urquhart and O'Dell 2004; Herzlinger 2004a; Lo Sasso et al. 2004).
    Specialty hospitals are typically defined as those that treat 
patients with specific medical conditions or are in need of specific 
medical or surgical procedures.\3\ The former describes hospitals 
specializing in psychiatric care, cancer care, rehabilitation, women's 
care, children's care, and certain chronic diseases; the latter 
describes hospitals specializing in cardiac, orthopedic, and general 
surgery. As of 2002, there were a total of more than 1,000 specialty 
hospitals in the U.S. (Table 1). These estimates exclude specialized 
``distinct part'' units of general hospitals, a large segment of the 
specialized facility market. For example, Schneider, Cromwell, and 
McGuire (1993) reported that there are more than 900 distinct 
psychiatric units and more than 500 distinct rehabilitation units 
within general acute care hospitals.
---------------------------------------------------------------------------
    \3\ For example, focusing on core competencies has been associated 
with improved supply chain management (primarily through 
standardization), simplified human resource management, and streamlined 
production scheduling.
---------------------------------------------------------------------------
    The recent political controversies surrounding specialty hospitals 
have focused primarily on facilities specializing in cardiac, 
orthopedic surgery and general surgery, and to a lesser extent 
obstetrics and gynecology. There are approximately 100 to 120 of these 
hospitals currently operating in the U.S. Growth in surgical hospitals 
ranged from 33 percent (orthopedic and general surgery) to 70 percent 
(cardiac surgery) during the seven-year period from 1995 to 2002. Most 
of these facilities are located in states without Certificate-of-Need 
(CON) programs, which regulate the construction and augmentation of 
health care facilities. States with the highest concentrations of 
surgical specialty hospitals are South Dakota, Kansas, Oklahoma, Texas, 
Louisiana, Arizona, and California.

    Table 1

    Trends in Numbers of Specialty Hospitals, 1990-2003



                                                               % Change,
             Facility Type                  1995       2002    1995-2002

Psychiatric 1,2                              675        488       -27.7%
Rehabilitation 1,2                            NA        216         ----
Extended Stay 1,2                             NA        270         ----
Obstetrics and Gynecology 1,5                 12         18       +41.7%
Orthopedic and General Surgery3,5             60         80       +33.3%
Cardiac Surgery 4,5                           10         17       +70.0%
Other 6                                       96        100        +4.2%



    Notes and sources: (1) American Hospital Association Hospital 
Statistics (1996/97 and 2004 editions); (2) Centers for Medicare and 
Medicaid Services; (3) American Surgical Hospital Association; (4) 
MedCath Corporation; (5) General Accounting Office (2003a); (6) 
includes hospitals specializing in children, cancer, respiratory 
diseases, and ear/nose/throat.

    The distinction between surgical specialty hospitals and all other 
specialty hospitals is an important one because the current debates and 
controversies refer exclusively to surgical hospitals. There are two 
likely reasons for the concentration on surgical hospitals. First, 
although reliable evidence is lacking, it is possible that the average 
operating margins associated with surgical procedures are higher than 
those associated with, for example, psychiatric and rehabilitation 
care. Second, 70 percent of surgical hospitals have at least some level 
of physician ownership (General Accounting Office 2003a), which is a 
concern to some policy makers. Some additional discussion of these 
issues is provided in Section 5.0.
    Another important aspect of the specialty hospital industry is the 
motivation for market entry. Site visits and published literature 
identify several important motivating factors (Walker 1998; MedPAC 
2003; Casalino, Pham, and Bazzoli 2004; Casey 2004; Rohack 2004; 
Iglehart 2005). Motivations include the ability of physicians to (1) 
directly control quality of care; (2) optimally schedule operating room 
time (e.g., allow more choice in operating room block time and minimize 
schedule disruptions caused by emergent cases); (3) select patients 
that are clinically appropriate for the specialized setting; (4) 
maintain greater decision-making authority over equipment and supply 
purchases; and (5) capture a portion of the facility fee as additional 
entrepreneurial earnings. An additional motivation for market entry is 
likely to be the existence of above-average profit margins on certain 
procedures. As is the case in any industry, it is the exception to 
observe market entry into products and services for which profit 
margins are unusually low or negative.
    Some of the other factors identified relate to physicians freeing 
themselves from contract restrictions and other bureaucratic apparatus 
common to larger general hospitals. Interestingly, many of the comments 
recorded during the site visits mirror those expressed by physicians in 
single-specialty medical groups. Casalino, Pham, and Bazzoli (2004) 
report that one of the motivating factors for single-specialty groups 
was to ``avoid the complicated governance and operational issues 
engendered by having primary care and specialty physicians in the same 
organization'' (p.86).
3    EFFICIENCY
    An important question concerning the efficiency of specialty 
hospitals is whether there are distinct economic advantages or 
disadvantages to specialization. Embedded in this question is whether 
there are advantages or disadvantages associated with the dominant 
hospital organizational structure, which consists primarily of full-
service diversified general hospitals. This section reviews the theory 
and evidence on four aspects of efficiency that are relevant to 
specialization: (1) economies of scale, (2) economies of scope, (3) 
competencies and learning, and (4) volume-outcome effects.
3.1  Economic of Scale
    Economies of scale exist if the average costs of producing a 
product or service decline as the volume of production increases. The 
evidence on economies of scale in the production of hospital services, 
while highly variable, indicates that U.S. general hospitals typically 
experience scale economies up to approximately 10,000 discharges per 
year (Cowing 1983; Vita 1990; Gaynor and Anderson 1995; Keeler and Ying 
1996; Dranove 1998; Li and Rosenman 2001). However, the same evidence 
suggests that scale economies vary significantly by product and service 
line. In order to asses the potential role of scale economies in 
specialty hospital efficiency, scale economies for specific services 
(e.g., total knee replacement) in specialty hospitals versus general 
hospitals would need to be compared. We are not aware of any study that 
does so. However, for many specific surgical procedures, the volume of 
these specific services performed at specialty hospitals typically 
exceeds that performed at general hospitals within the same market area 
(Cram, Rosenthal, and Sarrazin 2004). Thus, to the extent economies of 
scale exist in these specific procedures, they are likely to be 
realized to a greater degree in specialty hospitals compared to general 
hospitals.
3.2  Economic of Scope
    In some cases the joint production of two or more products or 
services can be accomplished at lower cost than the combined costs of 
producing each individually. This is often the case when production 
relies on common resources, such as technology, workers, inputs, and 
general overhead. Cases where the costs of joint production are lower 
than the costs of separate production are said to exhibit economies of 
scope (Panzar and Willig 1981). The decision to specialize will depend 
in part on the extent to which firms' existing scope of products and 
services exhibit diseconomies of scope (i.e., where joint production is 
more costly than separate production). Conversely, the decision to 
diversify will in part be based on the extent to which joint production 
costs are less than separate production costs.
    Evidence on economies of scope in the U.S. hospital industry is 
inconclusive. Menke (1997) found limited evidence of inpatient-
outpatient scope economies in chain and non-chain hospitals. Similarly, 
Fournier and Mitchell (1992) found significant scope economies among 
select outpatient services and surgery services, but their study is 
based on 20-year old data from one state. Sinay and Campbell (1995) 
examined 262 merging acute care hospitals in the U.S. during the period 
1987 to 1990. Of the service pairings studied, evidence of economies of 
scope was found between acute care and sub-acute care (in merging 
hospitals) and between intensive care and outpatient visits (in control 
hospitals); all other pairings showed either diseconomies of scope 
(e.g., acute care and outpatient care; intensive care and sub-acute 
care) or were statistically insignificant. Rozek (1988) failed to 
observe scope economies in general hospital diversification into 
psychiatric services, and Li and Rosenman's (2001) study of hospitals 
in the state of Washington reached inconclusive findings on scope 
economies. The lack of consistent findings on economies of scope 
suggests that it is probably not a significant source of production 
economies for general hospitals. Thus, it would be difficult to argue 
that specialty hospitals are less efficient than general hospitals due 
to the absence of scope economies.
3.3  Learning and Competencies
    Skinner (1974) stressed that ``simplicity, repetition, experience, 
and homogeneity of tasks breed competence.'' Learning occurs as the 
experience of production in one time period influences the production 
in a later time period; that is, the production process is assumed to 
have some degree of flexibility and can change over the relevant range 
of output (March 1996; Nooteboom 2000; Greve 2003). The implication is 
that the costs of producing the first batch of output are greater than 
the costs of the producing a subsequent batch due to the learning that 
occurred during the production of the first batch. Assuming that 
experiences of producing the first batch can be applied to the second 
batch (and other subsequent batches), the average costs of production 
are expected to decline as output cumulates over time. The learning 
effect will depend on the ability of the firm to process information 
during the production process and then apply that information 
appropriately.
    The learning process is critical to the formation and adaptation of 
organizational routines, which include rules of thumb, guidelines, 
templates, and protocols (Nelson and Winter 1982). Specialized routines 
are the subcomponents of organizational ``know how'' and ``core 
competencies,'' and are often sources of comparative advantage and 
production economies (Chandler 1992; Wruck and Jensen 1994; Greve 
2003). Core competencies refer to firms' existing stock of knowledge 
assets (including tacit knowledge and know-how), skills, and resources. 
By diversifying and expanding into activities that are related to core 
competencies, firms are typically able to take better advantage of the 
learning process and improve managerial efficiency (Teece et al. 1994; 
Teece and Pisano 1994; Hill 1994; Danneels 2002).\4\ In addition, 
limiting expansion into related business lines is likely to minimize 
some of the negative tradeoffs associated with growth in firm size, 
such as influence costs and other forms of incentive attenuation 
(Milgrom and Roberts 1990). Consistent with Skinner's emphasis on the 
value of repetition, concentrating on core competencies is believed to 
enhance the learning process by assuring that decision-making 
situations are repeated in sufficiently large numbers. According to 
Teece et al. (1994, p.17), ``If too many parameters are changed 
simultaneously, the ability of firms to conduct meaningful quasi 
experiments is attenuated.'' Given the complexities of the learning 
process, the costs of learning in some cases may be lower for smaller 
specialized firms. Smaller firms may have the advantage of being able 
to allocate the majority of the resources available for learning and 
adaptation to a relatively small set of related production process 
(Almeida, Dokko, and Rosenkopf 2003).
---------------------------------------------------------------------------
    \4\ For example, focusing on core competencies has been associated 
with improved supply chain management (primarily through 
standardization), simplified human resource management, and streamlined 
production scheduling.
---------------------------------------------------------------------------
    Learning and core competencies have been shown to be important 
determinants of the performance of health care organizations. In health 
care setting the learning process is to some extent evident in the 
positive association between procedure volume and outcomes (discussed 
in greater detail in the next section). During our site visits, we 
consistently observed a culture supportive of coordination and 
cooperation aimed at achieving ongoing improvements in efficiency and 
quality. Specialty hospital managers generally attributed their success 
in process adaptation to three factors: (1) relatively small size, 
which enables more rapid and efficient decision making; (2) flat 
hierarchical structures, which allow decision making and process 
improvement to migrate to the most appropriate level; and (3) focused 
and consistent management goals, which make it easier for team members 
to learn and their roles. Managers also emphasized the importance of 
performance feedback, mainly through surveys of customer satisfaction. 
Again, managers indicated that their relatively small size allowed them 
to spend more time collecting, analyzing and acting on customer 
feedback. While it is possible that diversified general hospitals are 
able to achieve similar learning effects, the smaller scale of 
specialty hospitals may lower the costs associated with learning.
    In health care settings, there also appear to be distinct 
advantages to focusing production within core competencies.\5\ 
Shortell, Morrison, and Hughes (1989), in their three-year case study 
of eight large hospital systems, found that the best performing systems 
and hospitals were the ones that avoided diversification into unrelated 
activities, thereby minimizing diseconomies of scope and maximizing 
efficiencies associated with learning. Eastaugh (2001) examined a panel 
of 219 U.S. acute care hospitals from 1991 to 2000, finding that a 31 
percent increase in specialization over the time period was associated 
with an eight percent decline in costs per admission. Douglas and Nyman 
(2003) review the theory of core competencies in hospitals and test the 
theory using data from the 32 largest hospital markets in the U.S. They 
found that the degree to which hospitals focused on core competencies 
was positively related to hospital financial performance.
---------------------------------------------------------------------------
    \5\ The relationship between core competencies and hospital 
efficiency is relatively under-studied. General discussions are 
provided by Eastaugh (2001; 1992); Snail and Robinson (1998); Douglas 
and Ryman (2003); Coddington, Palmquist, and Trollinger (1985), Porter 
and Teisberg (2004), Herzlinger (2004c), Moore (1990), and Walker and 
Rosko (1988).
---------------------------------------------------------------------------
    In terms of core competencies, our site visits reached similar 
conclusions. When asked why their facility performed one set of 
procedures or services and not another, managers consistently indicated 
that they had a strong desire to not venture too far from the core of 
their collective knowledge. Managers and owners emphasized that the key 
decision makers are typically physician owners, most of whom are likely 
to feel most comfortable focusing on the delivery of services in their 
specialty field. One chief executive officer and physician owner 
stressed that specialty hospitals often attract the most highly trained 
and skilled physicians in the community by allowing them to essentially 
redesign the care process based on the state of the art in their field. 
We found corroborating anecdotal evidence in the trade press (Walker 
1998; Baum 1999; Daus 2000; Casey 2004; Wolski 2004; Zuckerman 
2004).\6\
---------------------------------------------------------------------------
    \6\ MedCath's description of their facilities is apposite: 
``Externally, MedCath's heart hospitals appear typical; however, a step 
inside reveals important differences: Physicians empowered to make 
decisions about hospital operations; state-of-the-art operating rooms; 
cutting-edge equipment and technology; centrally located services such 
as radiology, pharmacy and laboratories; nursing stations strategically 
positioned to allow better patient monitoring; and large, single-
patient, fully equipped rooms that avoid unnecessary patient moves and 
permit family members to remain overnight. Above all, physicians and 
nurses freed from bureaucratic and administrative chores so they can 
devote a majority of their time and energy directly to caring for their 
patients.'' (MedCath Corporation 2001)
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3.4  Volume-Outcome Effect
    Several studies have found a positive association between the 
volume of services a hospital performs and the quality of the outcomes 
(Hillner, Smith, and Desch 2000; Halm, Lee, and Chassin 2002; Shahian 
and Normand 2003). One potential criticism of specialty hospitals is 
that the volume of cases may be too low to capture the positive effects 
of volume on patient outcomes. There are, however, five important 
limitations to these findings. First, the magnitude of the relationship 
is highly sensitive to case mix adjustment (Halm, Lee, and Chassin 
2002). Second, there is considerable debate over how much volume is 
necessary to improve outcomes. For example, a common belief is that 
outcomes for percutaneous coronary interventions are better in 
hospitals that perform more than 400 such procedures per year. However, 
Epstein et al. (2004) found that there were no significant mortality 
differences between hospitals with medium volume (200-399 cases per 
year) and high volume (400-999 cases per year). Third, many studies do 
not differentiate between individual physician effects and hospital 
effects. It is possible that the volume-outcome relationship reflects 
differences in experience levels of individual physicians, most of whom 
maintain admitting privileges at multiple institutions (Robinson et al. 
2001). Fourth, volume-outcome relationships are likely to be procedure 
specific. Again, on average specialty hospitals have higher procedure-
specific volumes than their general hospital counterparts (Cram, 
Rosenthal, and Sarrazin 2004).
    The fifth limitation is that the causal relationship between volume 
and outcome is unclear: do patients treated at high-volume hospitals 
achieve better outcomes because of learning and practice (the 
``practice makes perfect'' hypothesis), or do hospitals with better 
quality reputations attract higher volumes of patients (the ``selective 
referral'' hypothesis) (Hughes et al. 1988)? Some recent studies have 
used instrumental variable techniques to disentangle these effects; one 
such paper found strong evidence of the ``practice makes perfect'' 
hypothesis for coronary artery bypass graft surgery.\7\ There is some 
evidence that both hypotheses explain differences in outcomes but, 
nonetheless, taken together these two hypotheses explain a relatively 
small proportion of the overall variation in patient outcomes (Luft 
1980; Luft, Hunt, and Maerki 1987).
---------------------------------------------------------------------------
    \7\ Unpublished working paper: Seider H, M Gaynor, and WB Vogt 
(2004) ``Volume-Outcome and Antitrust in U.S. Health Care Markets'' 
Carnegie-Mellon University.
---------------------------------------------------------------------------
3.5  Summary
    The preceding discussion suggests that there are several areas in 
which specialty hospitals achieve production economies. First, 
specialty hospitals are able to take advantage of economies of scale 
and scope by producing relatively high volumes of a limited scope of 
services, and by lowering fixed costs by reengineering the care 
delivery process. Second, the site visits consistently found evidence 
of learning and core competencies. Managerial and clinical staff 
indicated a strong desire to focus on a relatively narrow array of 
tasks, and indicated a commitment to perfecting those tasks. The 
evidence on scale and scope economies and core competencies suggests 
that there are efficiency reasons for some degree of diversification, 
but that expansion into unrelated activities can result in diminished 
financial performance. Specialty hospitals also may in some cases 
possess a technological advantage or resource that is unique in the 
market. This is likely to be the case for many entering specialty 
hospitals, as most have had the opportunity to redesign care delivery 
processes from the ground up.
    Perhaps as a result of these efficiencies, specialty hospitals 
appear to be capable of offering more intensive services for the same 
price. Specialty hospitals tend to have substantially higher nurse-
patient ratios \8\ and tend to place greater emphasis on ancillary 
services identified by patients as important, such as comfortable 
family-friendly rooms, more attention from administrative and clinical 
staff, and the mitigation of common inconveniences (e.g., appropriately 
located elevators and convenient parking). Specialty hospitals also 
appeal to physicians by offering newer equipment, more staff 
assistance, and more flexible operating room scheduling. These are 
costly services, yet specialty hospitals must compete for contracts 
with the same managed care organizations that general hospitals do; 
similar to general hospitals, they must also accept the Medicare fee 
schedule as payment in full.
---------------------------------------------------------------------------
    \8\ Kovner et al. (2002) found that the median number of RN hours 
per adjusted patient day was 6.43 for the study's 534 general 
hospitals. For the five specialty hospitals we visited, RN hours per 
adjusted patient day ranged from 10 to 15 hours per patient day. 
Ideally, however, the appropriate comparison would be between cardiac 
and orthopedic units of specialty hospitals and cardiac and orthopedic 
units of general hospitals. We know of no such studies, and we were not 
able to identify a source of data on nurse staffing ratios within 
specific units of general hospitals.
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4.   CASE MIX AND QUALITY
4.1  Case Mix
    There is some evidence that, on average, specialty hospitals treat 
patients with lower acuity compared to general hospitals (General 
Accounting Office 2003a, 2003b; Cram, Rosenthal, and Sarrazin 2004).\9\ 
These findings are consistent with the observed case mix differences 
between ambulatory surgery centers and general hospitals (Winter 2003). 
The focused nature of specialty facilities may be better suited to 
patients whose care involves relatively little uncertainty, or whose 
condition is reasonably well defined. General hospitals may be more 
efficient in treating complex cases, particularly cases that allow them 
to exploit scope economies across service lines. In sum, it is possible 
that the apparent cost advantage of specialty hospitals is in part 
attributable to a healthier average case mix.
---------------------------------------------------------------------------
    \9\ Dobson (2004), in a study conducted by Lewin Group for the 
MedCath Corporation, found case-mix results counter to the GAO study 
and Cram et al. (2004). The Lewin Group found that MedCath cardiac 
hospitals have a 21 percent higher case mix severity for cardiac 
patients compared to their community general hospital peers. The 
differences in findings are likely attributable to differences in the 
sample and the measurement of severity or complexity. For example, the 
Lewin Group study used DRG weights to measure severity, whereas Cram et 
al. used a predicted mortality model based on age and presence of seven 
comorbid conditions. However, the Lewin Group findings are consistent 
with anecdotal and empirical evidence that admitting physicians may 
perceive specialized facilities as being more appropriate for 
complicated cases, due in part to the positive volume-outcome 
relationship (Baum 1999; Magid et al. 2000).
---------------------------------------------------------------------------
    It should also be noted that prospective administered pricing 
mechanisms create incentives for general and specialty hospitals alike 
to focus on diagnosis categories and procedures where the administered 
price exceeds facilities' average costs. Medicare's administered 
pricing system (PPS) has been shown to affect the scope of services 
offered by acute care hospitals. The PPS system employs a fee schedule 
based on approximately 500 diagnosis related groups (DRGs); each DRG is 
mapped to a price, with some hospital-specific adjustments. Payment by 
DRG provides strong incentives to hospitals to specialize in those DRGs 
for which they have relatively low production costs (Dranove 1987). In 
the context of specialty hospitals, Robinson (2005) posits that ``The 
success enjoyed by the specialized firms reflect astute selection of 
services and markets as much as efficiency in delivering care.''
4.2    Quality
    Empirical evidence on the quality of care provided by specialty 
hospitals is limited to two studies, one by the Lewin Group (2004) and 
another by Cram et al. (2004) from the University of Iowa. The Lewin 
study used Medicare Part A (MedPAR) data to compare eight MedCath heart 
hospitals to 1,056 peer general hospitals that perform open-heart 
surgery in the U.S. After adjusting for risk of mortality, MedCath 
heart hospitals on average exhibited a 16 percent lower in-hospital 
mortality rate for Medicare cardiac cases compared to peer general 
hospitals.
    Cram, Rosenthal, and Vaughan-Sarrazin (2004) found no significant 
differences in mortality for cardiac patients treated at specialty 
hospitals and general hospitals, after adjusting for lower severity and 
higher procedure volume at specialty hospitals.\10\ Similar results 
have been found when comparing ambulatory surgery centers and general 
hospitals (e.g., Warner, Shields, and Chute 1993; Mezei and Chung 
1999). Data gathered from our site visits mirror these findings. 
Managers of specialty hospitals consistently reported two factors they 
believed to have been critical to achieving high quality patient 
outcomes: high volume and high nursing intensity. Consistent with the 
Cram et al. findings of higher procedure volume, managers of specialty 
strongly believed that they were improving care through ongoing 
learning and improvement. Specialty hospitals also reported nurse-
patient ratios higher than the national average,\11\ which suggests 
that they may be able to capture some of the positive quality and 
outcome effects associated with richer nurse staffing (Kovner et al. 
2002; Lang et al. 2004; Stanton and Rutherford 2004; Mark et al. 2004).
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    \10\ In this respect the Cram et al. study and the Lewin Group 
study found similar results, although the Lewin study found that risk-
adjusted in-hospital mortality rates in cardiac hospitals were 16 
percent lower on average than the mortality rates of community hospital 
peers.
    \11\ Kovner et al. (2002) found that the median number of RN hours 
per adjusted patient day was 6.43 for the 534 hospitals studied. For 
the five specialty hospitals we visited, RN hours per adjusted patient 
day ranged from 10 to 15 hours per patient day. However, these data 
comparisons are limited; ideally, nurse staffing ratios should be 
compared only within particular product and service lines (e.g., 
orthopedic).
---------------------------------------------------------------------------
    Limited scope is also likely to increase accountability associated 
with the smaller set of procedures. For example, a specialty hospital 
leader at one of the visited hospitals remarked that ``four procedures 
account for seventy percent of our business; if we develop any kind of 
quality problem in one or more of those procedures it's a huge problem 
for our organization.'' In addition, specialty hospitals typically 
engage in extensive collection of data on quality and patient 
satisfaction, and use these data to modify care processes (Walker 1998; 
Fine 2004; Iqbal and Taylor 2001). Among the ASHA member hospitals 
surveyed, 92 percent reported that they engage in regular assessments 
of customer satisfaction. Finally, there is consistent anecdotal 
evidence that the kind of care delivered by the typical specialty 
hospital is consistent with the general trend toward ``consumer-
driven'' health care (e.g., O'Donnell 1993; Baum 1999; Leung 2000; 
Urquhart and O'Dell 2004; Hoffer Gittell 2004; Herzlinger 2004b).
4.2.1  HealthGrades Analysis
    HealthGrades is a national organization that produces hospital 
quality reports for over 5,000 U.S. acute care hospitals.\12\ We merged 
membership data from ASHA and MedCath to publicly available quality 
data published on the HealthGrades website. There were 22 matched 
hospitals, representing approximately 31 percent of the ASHA hospital 
sample. For those hospitals, we examined the mean quality score (based 
on a 1-5 Likert scale) for the most common sets of procedures performed 
by the 22 hospitals. Consistent with the Lewin Group study and Cram et 
al., the results show that specialty hospitals typically performed at 
least as well as general hospitals in the same geographic region. Based 
on measures of in-hospital mortality (including 1 and 6 month post-
discharge mortality rates), the mean score for the 22 specialty 
hospitals was a 3.86 out of 5, which was not statistically different 
from the mean scores for general hospitals in the same market areas.
---------------------------------------------------------------------------
    \12\ Health Grades quality measures are based on data from Medicare 
Part A (hospital) discharge abstracts for the time period 2001-2003. 
For more information on methodology and analysis, refer to 
www.HealthGrades.com and the Health Grades report entitled ``The 
Seventh Annual Health Grades Hospital Quality in America Study'' Health 
Grades Inc. 2004)
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5.    POLICY ISSUES
    The debate over specialty hospitals has raised several policy 
questions, two of which have received a high level of attention. First, 
do specialty hospitals harm the ability of general hospitals to provide 
indigent care? Some argue that specialty hospitals take profitable 
business away from general hospitals, and as general hospitals lose 
market share, particularly in high-margin product lines, they are 
hampered in their ability to provide low-margin services and meet their 
implied obligations to serve the community. Second, does having an 
ownership stake in the facility create financial incentives for 
physicians to provide inappropriate and unnecessary treatment? What are 
the optimal policy options to address these questions? Rather than make 
explicit policy recommendations, we discuss some of the salient 
economic issues concerning these two policy problems.
    In this section policies are discussed in terms of their 
effectiveness in accomplishing intended objectives. In order to assess 
the net effect of a policy, ideally it is necessary to take into 
account all direct and indirect effects attributable to the policy. The 
sum of these effects is analogous to what economists refer to as change 
in net social welfare; that is, the extent to which the policy effects 
aggregate well-being. For example, the Federal Trade Commission 
recently emphasized that health care policies intended to mitigate some 
of the less desirable side effects of competition must be weighed 
against the losses normally resulting from restrictions on market entry 
and competition (Federal Trade Commission and U.S. Department of 
Justice 2003, 2004).
5.1     Indigent Care and Cross-Subsidization
    The indigent care issue has several components. The first issue has 
to do with the practice on the part of general hospitals to meet their 
implicit obligation to serve the community\13\ by cross-subsidizing 
low-margin services with high-margin services combined with other 
government subsidies. Many of the former state rate regulation programs 
were explicitly designed to help acute care hospitals meet these 
obligations (Fournier and Campbell 1997; Schneider 2003); however, all 
but one of the state rate regulation programs were dismantled during 
the 1990s. In the absence of state rate regulation, hospitals have 
relied on six other mechanisms to pay for unprofitable services: (1) 
tax-deductible donations, (2) tax-exempt bond financing, (3) exemption 
from income and property taxes, (4) internal cross-subsidization, (5) 
Medicaid disproportionate share payments (additional payment for 
treating a disproportionate share of Medicaid patients), and (6) state-
administered charity care risk pools\14\ (Figure 1).
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    \13\ Acute care hospitals' implicit obligation to serve the 
community is based on two policies: the Hospital Survey and 
Construction Act of 1946 and non-profit tax exemption. The nominal 
intent of the Hospital Survey and Construction Act of 1946 (commonly 
known as the Hill-Burton Act) was to bolster the relatively under-
developed postwar hospital industry by requiring states ``to develop 
programs for the construction of such public and other non-profit 
hospitals as will, in conjunction with existing facilities, afford the 
necessary physical facilities for furnishing adequate hospital, clinic, 
and similar services to all their people'' (Hospital Survey and 
Construction Act 1946).
    \14\ See generally Lewin and Altman (2000).
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Figure 1
Non-Profit General Hospital Methods for Funding Indigent Care

    Tax exemption is perhaps the most widespread subsidy provided to 
non-profit general hospitals. non-profit tax status allows hospitals to 
avoid property and income tax in exchange for an obligation to serve 
the community. However, Kane and Wubbenhorst (2000) found that the 
amount of charity care provided by hospitals is significantly less than 
the amount of tax benefit accrued through non-profit status.\15\ Thus, 
even if tax exemption were the only means for hospitals to fund 
indigent care, the amount of the benefit on average appears to be more 
than sufficient to fund prevailing levels of indigent care. Although 
specialty hospitals generally provide less charity care (approximately 
2.1 percent of gross patient care revenues; Table 2), per facility they 
contribute on average approximately $2 million annually in state and 
federal taxes. This represents an additional 5.1 percent of gross 
patient care revenues. The combined 7.2 percent of gross patient care 
revenues exceeds the average charity care provision of tax-exempt 
general hospitals, which is approximately 5 to 6 percent of revenues 
(American Hospital Association 2005).
---------------------------------------------------------------------------
    \15\ A summary of these issues can also be found in Nancy Kane's 
recent testimony to the Subcommittee on Oversight of the U.S. House 
Committee on Ways and Means (Kane 2004).
---------------------------------------------------------------------------
    Hospital internal cross-subsidization is to be distinguished from 
the popular notion that hospitals shift costs between third-party 
payers; that is, ``one group pays more because another pays less'' 
(Morrisey 1994). In this case, hospitals cross-subsidize low-margin 
indigent services with the proceeds from high-margin services. Under 
normal circumstances, hospital internal cross-subsidization would not 
be sustainable, mainly because sustained high margins on some services 
would encourage market entry, and as firms entered the excess profits 
would be competed away.\16\ In order for cross-subsidization to work, 
government must restrict market entry, either through certificate of 
need (CON) or some other means. Indeed, that is how many states 
currently approach the problem, and an important reason why Congress 
has resorted to the specialty hospital moratorium.
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    \16\ This is a common occurrence in most industries. In the 
language of the current debate, this would be considered cream 
skimming. An important question is whether it is optimal policy to 
discourage triaging of care across settings according to intensity, 
given the extensive literature on the cost and quality benefits 
associated with moving patients from inpatient to outpatient settings 
following the implementation of Medicare's PPS.
---------------------------------------------------------------------------
    There at least two problems with policies encouraging cross-
subsidization of this kind. First, the policy relies on CON to limit 
market entry, and there is a large volume of research critical of 
CON.\17\ Studies of the impact of CON programs have consistently found 
the programs to be ineffective at controlling costs and enhancing 
access. Sloan and Steinwald (1980) found that mature CON programs had 
an insignificant effect on hospital costs, and immature CON programs 
actually increased hospital costs. Lanning, Morrisey and Ohsfeldt 
(1991) and Antel, Ohsfeldt, and Becker (1995) also conclude that CON is 
associated with higher inpatient costs and expenditures per capita. A 
possible explanation is that the CON constraint prevents hospitals from 
employing the least-cost combination of inputs to produce inpatient 
services, resulting in allocative inefficiency.\18\ Further, there is 
no evidence that the repeal of CON was associated with an increase in 
hospital expenditures (Conover and Sloan 1998).\19\ As a result of the 
apparent failure of CON to achieve its stated goals, many state CON 
programs have been either terminated or significantly reformed since 
the repeal of the Health Planning Act in 1986 (Conover and Sloan 1998). 
It would be more difficult in theory for hospitals located in 
competitive markets in non-CON states to engage in internal cross-
subsidization; instead, such hospitals would have to rely on tax 
exemption, disproportionate share payments, and charity care risk pools 
to fund indigent care.
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    \17\ Currently, 14 states have no CON program and another six 
states maintain CON programs only for long-term care (Conover and Sloan 
2003).
    \18\ The poor performance of CON is attributed to four factors: the 
administrative burden associated with determining appropriateness of 
new investments, the potential for CON laws to create and maintain 
hospital cartels by erecting barriers to new hospital entrants, the 
susceptibility of the CON process to industry influence (e.g., Payton 
and Powsner 1980), and the potentially sub-optimal input allocation 
induced by the CON constraint on the use of capital inputs.
    \19\ Some studies have found that CON programs can be used to 
enhance patient outcomes by concentrating services in high-volume 
facilities (e.g., Vaughan-Sarrazin et al. 2002). However, these studies 
are limited by the causality problem described in Section 3.4, and the 
lack of analysis of whether improvement in outcomes compensates for the 
net social welfare losses associated with barriers to market entry 
(Federal Trade Commission and U.S. Department of Justice 2004).
---------------------------------------------------------------------------
    Second, it is not clear whether the losses in net social welfare 
associated with restricting market entry exceed the costs of 
alternative means of assuring the provision of indigent care, such as 
direct subsidies. The Federal Trade Commission's recent report on 
health care competition integrated this point into one of their policy 
recommendations, emphasizing that ``[competition] does not work well 
when certain facilities are expected to cross-subsidize uncompensated 
care. In general, it is more efficient to provide subsidies directly to 
those who should receive them, rather than to obscure cross subsidies 
and indirect subsidies in transactions that are not transparent'' 
(Federal Trade Commission and U.S. Department of Justice 2004 p.23).
    The U.S. experience with airline regulation provides an excellent 
example. In order to develop air travel infrastructure, airline 
regulation required carriers to cross-subsidize unprofitable routes 
with profitable ones. Cross-subsidization appeared to contribute to 
infrastructure development in the early years of regulation, but 
eventually led to extraordinarily high costs (Morrison and Winston 
1986). Consumer welfare and producer surplus improved markedly 
following deregulation (Winston 1998; Peltzman and Winston 2000). If 
subsidizing indigent care is a policy objective, the economically 
optimal public policy would be to directly subsidize any hospital for 
providing indigent care.\20\ Protecting incumbent hospitals from 
competitive entry may be just as likely to allow incumbent firms to 
maintain higher prices and facilitate slack in organizational 
processes, rather than permit them to fund additional indigent care.
---------------------------------------------------------------------------
    \20\ One of the criticisms of specialty hospitals is that many do 
not provide 24-hour emergency services. But it is not clear whether any 
current means of funding emergency room services are optimal. From a 
societal perspective, it may be more economically efficient to fund and 
operate emergency rooms no differently than police and fire 
departments.
---------------------------------------------------------------------------
    A related concern is that specialty hospitals engage in unfair 
competition with general hospitals by treating only less severe and 
more profitable patients (i.e., cream skimming). As noted, there is 
some evidence that specialty hospitals, like their ambulatory surgery 
center predecessors, treat healthier patients with fewer comorbid 
conditions. However, from a policy perspective, treating healthier 
patients in less intensive settings is likely to improve patient 
welfare, given the extensive literature on the cost and quality 
benefits associated with triaging patients from inpatient to outpatient 
settings following the implementation of Medicare's PPS. Thus, the 
cream skimming issue, as others have observed, is predominantly a 
function of (1) variation in operating margins within DRG and (2) crude 
case-mix adjustments in current reimbursement rates. Case-mix 
adjustment methodology has improved dramatically in recent years, and 
CMS maintains the administrative data necessary for such adjustments 
(FitzHenry and Shultz 2000; Iezzoni 2003). Again, according to economic 
theory, establishing administered prices that are more closely aligned 
with average costs together with improvements in case-mix adjustment 
would be superior policy mechanisms compared to restrictions on market 
entry.
    In sum, there are significant drawbacks to the current four-part 
strategy to encourage the provision of indigent care. Tax exemption 
should in theory be sufficient compensation for indigent care, 
particularly when combined with disproportionate share payments and 
charity care risk pools. However, there are no explicit mechanisms in 
place to control how hospitals allocate the proceeds from tax 
exemption.\21\ Internal cross-subsidization would not be sustainable in 
competitive markets; therefore, costly entry-barrier regulations must 
accompany cross-subsidization. Both of these policies are sub-optimal 
insofar as they result in net losses in social welfare. Losses in net 
social welfare are likely to exceed the value of indigent care 
delivered. Policies such as direct subsidies for indigent care and more 
accurate case mix adjustment of payments would likely result in overall 
gains in net social welfare.
---------------------------------------------------------------------------
    \21\ Two recent law suits filed against large hospital chains have 
challenged the extent to which hospitals have been operating in 
accordance with the implicit contracts (Taylor 2004; Davies 2004). The 
suits allege that acute care hospitals, particularly those granted non-
profit status, have been failing in their implicit obligation to serve 
mostly through aggressive bad-debt collection processes and turning 
away consumers with outstanding balances due.
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5.1.1  Effects on General Hospital Profit Margins
    Were it the case that specialty hospitals erode profits of general 
hospitals in the same market, we should observe lower or at least 
declining profit margins among general hospitals in markets where there 
is at least one specialty hospital. In order to further examine this 
issue, we statistically analyzed the extent to which profit margins of 
general hospitals are affected by the presence of one or more specialty 
hospitals in the market. We obtained Medicare Hospital Cost Report Data 
for 1997 through 2003 for all U.S. acute care hospitals. For each 
hospital in the dataset, county and metropolitan statistical area (MSA) 
market areas were identified and additional market-level data from the 
Bureau of Health Profession's Area Resource File were merged. Mean 
general hospital profit rates\22\ were calculated for all county and 
MSA market areas in the U.S.
---------------------------------------------------------------------------
    \22\ Profit rates were calculated as the difference between gross 
patient care revenue and total patient care costs (i.e., net income 
from patient care activities), divided by gross patient care revenue. 
Mean profit margins reported here are somewhat lower than those 
reported elsewhere, for two reasons: (1) for the purposes of this study 
profit margins are based on patient care revenue rather than total 
revenue; and (2) profit margins are aggregated to the county or MSA 
level.
---------------------------------------------------------------------------
    The analytic approach was to estimate what economists refer to as a 
profit function--a mathematical expression of the likely relationship 
between profit margin, the dependent variable, and the factors expected 
to affect profit margin, referred to as covariates. We estimate a 
standard ``ad hoc'' profit function of the following basic linear form: 
MARGINit = a0 + a1Dit + 
a2Sit + a3Pit + 
a4Zit + eit. In this expression, 
MARGINit refers to the mean of the operating margins (profit 
rates) of general hospitals within the ith county (or MSA) 
in year t. It is hypothesized that the mean area-level general hospital 
profit rate is a function of demand factors (Dit), supply 
factors (Sit), input prices (Pit), a vector of 
market area characteristics (Zit), and an error term 
(eit) representing unexplained or unmeasured factors. The 
demand factors included in this model are per capita income, population 
density, the percent of the population at or below the poverty level, 
and the area unemployment rate. The latter two measures are included to 
capture the likely indigent care burden faced by general hospitals. 
Supply factors include output measures (inpatient days per population 
and outpatient visits per population) and the number of physicians per 
capita. Price measures include the mean area wage for hospital workers 
(from the U.S. Bureau of Labor Statistics) and the Medicare Part A 
(hospital) average adjusted price per capita (AAPCC).
    The main variables of interest are the specialty hospital indicator 
variables and the measure of market competition. We constructed two 
variables to measure the presence of specialty hospitals, each of which 
was based on our survey of ASHA membership. The first is a simple 
indicator variable (SCP) that equals 1 if the market area has one or 
more specialty hospital (most markets have only one). For example, if 
specialty hospital X opened in 1999, than SCP equals zero in 1997 and 
1998 and equals one thereafter. The second specialty hospital indicator 
is the total number of physicians admitting patients to the specialty 
care provider in the market area.
    The other main variable of interest is a measure of market 
concentration. Although not an ideal measure of market concentration, a 
standard method of measuring market concentration is the Herfindahl-
Hirschman Index (HHI). The HHI is calculated by summing the squares of 
each firm's market share in the county; that is, HHI = 
Si100*si2, where s denotes the market 
share of firm i. This method allows for firms with relatively large 
market share (e.g., 60 percent) to be more heavily weighted in the 
index. The HHI index equals 10,000 when an industry or market consists 
of a single seller. For the multivariate models of mean area profit 
rates, we assume the county or the MSA to be the relevant geographic 
market. In addition, since we are primarily interested in the effects 
of competition, we excluded from the analysis any county or MSA with 
only one acute care hospital (i.e., counties or MSAs with HHI = 
10,000).
    The model is specified as a fixed effects panel data regression, 
which is designed to estimate the impact of the covariates on profit 
rates both cross-sectionally (county or MSA) and over time (year). This 
allows for the effects of specialty hospital entry to accrue over time, 
effects that may not be observable looking only at a cross-sectional 
snapshot. The regression models are based on 933 counties and 299 MSAs.
    Descriptive trend comparisons of mean general hospital profit rates 
for counties and MSAs are shown in Figure 2 (counties) and Figure 3 
(MSAs). The results for counties and MSAs are similar. Mean general 
hospital profit margins in counties with at least one specialty 
hospital were greater in all years of analysis. In the county-level 
analysis, the year 2001 and 2003 differences were statistically 
significant (p  0.05). In the MSA-level analysis, the year 2001, 2002, 
and 2003 differences were statistically significant (p  0.05).\23\
---------------------------------------------------------------------------
    \23\ In addition, MSA-level year 2000 differences were significant 
at p  0.10.
---------------------------------------------------------------------------
    The regression results are consistent with the descriptive 
findings. The results of the regression model are shown on Table 3 
(counties) and Table 4 (MSAs). For each geographic level of analysis, 
three models are reported: (1) specialty hospital variables are limited 
to the indicator variable SCP; (2) specialty hospital variables are 
limited to the total number of physicians admitting patients to the 
specialty care provider in the market area; and (3) including both 
specialty hospital indicator variables.
    The estimated coefficients of the key variables have the 
anticipated sign.\24\ The key variables of interest are (1) the HHI 
market concentration measure, (2) an indicator variable for the 
presence of a SCP, and (3) the number of MDs admitting patients to the 
specialty care provider. Consistent with economic theory, the models 
consistently showed that market concentration had a positive effect on 
profits; that is, as markets become more concentrated, profits 
increase. Interestingly, we also found that both of the specialty 
hospital variables were positive and significant in four of the six 
models, without regard to the geographic unit of analysis. This 
relationship was remarkably stable, evident in all model specifications 
tested.\25\
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    \24\ Note that it is not uncommon in profit models for only a 
relatively small proportion of the variation in profit rates to be 
explained by the covariates; the best models often explain between 5 
and 20 percent of the variance in profit rates. Our models explain less 
of the variation because the unit of analysis is the market area rather 
than the hospital.
    \25\ The analysis included several variants of the linear equation. 
For each model tested, the coefficients did not differ significantly 
from what is reported here.
---------------------------------------------------------------------------
    The interpretation of this finding is that, 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. These findings 
are also consistent with economic theory, which suggests that firms 
will enter markets in which extant profit margins are comparatively 
higher.

    Table 3

    Multivariable Profit Function Regression Models, Dependent Variable 
is
    Market Area (County) General Hospital Profit Margin, 1997-2003



                  Independent variable 1                         County

                                                                         (1)               (2)               (3)
                                                                           -                 -                 -
Per capita income                                              -0.00000143**     -0.00000137**     -0.00000143**
Population density                                                0.00000218        0.00000203        0.00000219
Inpatient beds per capita                                       3.47753300**      3.55058200**      3.46631100**
MDs per 1000 pop.                                                -0.00400460       -0.00421430       -0.00401000
Inpatient days per 1000 pop.                                     -0.00000524       -0.00000545       -0.00000522
Outpatient visit per capita                                      -0.00126660       -0.00136540       -0.00126630
Medicare Part A AAPCC                                           0.00024970**      0.00024770**      0.00024970**
Unemployment rate                                                -0.00065720       -0.00067840       -0.00065280
Poverty rate                                                    0.00194070**      0.00193060**      0.00194040**
Annual wage (hospital staff)                                      0.00000017        0.00000023        0.00000017
HHI                                                             0.00000336**      0.00000329**      0.00000338**
1= SCP present                                                  0.03676190**                --      0.03464330**
MDs admitting to SCP                                                      --      0.00032730**        0.00006750
Constant                                                         -0.09486860       -0.09659210       -0.09488130
Number of observations                                                  6424              6424              6424
F                                                                       5.34              4.64              4.94
Prob. >F                                                              0.0000            0.0000            0.0000
Overall R-squared                                                     0.0111            0.0125            0.0110



    Sources:  Survey of ASHA membership, Medicare HCRIS Cost reports,

    Area Resource File, and Bureau of Labor Statistics; see section 
5.1.1 for description.

    Notes: *Significant at p  0.10 (t-test); **Significant at p  0.05 
(t-test)

    5.2    Physician Self Referral

    Multivariable Profit Function Regression Models, Dependent Variable 
is

    Market Area (MSA) General Hospital Profit Margin, 1997-2003




                  Independent variable 1                           MSA

                                                                         (4)               (5)               (6)
Per capita income                                                -0.00000073       -0.00000057       -0.00000072
Population density                                               -0.00002250       -0.00002380       -0.00002260
Inpatient beds per capita                                        7.56830900*       7.51012900*       7.52111000*
MDs per 1000 pop.                                                -0.01176980       -0.01183570       -0.01174600
Inpatient days per 1000 pop.                                      0.00000699        0.00000783        0.00000686
Outpatient visit per capita                                      -0.00283480       -0.00287550       -0.00286490
Medicare Part A AAPCC                                            0.0003083**      0.00031420**      0.00030700**
Unemployment rate                                                -0.00269240       -0.00274240       -0.00261580
Poverty rate                                                     -0.00127800       -0.00156110       -0.00131490
Annual wage (hospital staff)                                     -0.00000064       -0.00000061       -0.00000064
HHI                                                              0.00000395*        0.00000360       0.00000399*
1= SCP present                                                   0.0323107**                --      0.02809040**
MDs admitting to SCP                                                      --      0.00032330**        0.00013120
Constant                                                         -0.01532120       -0.01553810       -0.01475440
Number of observations                                                  1465              1465              1465
F                                                                       4.00              3.39              3.75
Prob. >F                                                              0.0000            0.0001            0.0000
Overall R-squared                                                     0.0454            0.0415            0.0462



    Sources: Survey of ASHA membership, Medicare HCRIS Cost reports,

    Area Resource File, and Bureau of Labor Statistics; see section 
5.1.1 for description.
    Notes: *Significant at p  0.10 (t-test); **Significant at p 5 
0.05 (t-test)

    5.2    Physician Self Referral

    The remaining policy issue is the potential effects of physician 
self-referral. The costs and benefits of physician self-referral has 
been debated for many years, mainly because the dominant physician 
payment mechanism in the U.S. has been and continues to be fee-for-
service, which creates financial incentives for self-referral. In the 
case of specialty hospitals, the general argument against physician 
self-referral is that physician ownership may result in financial 
incentives to admit patients to the facilities in which they have an 
ownership stake. These arguments are to some extent based on research 
that has found that utilization of ancillary services is higher when an 
ownership relationship exists between referring physicians and 
ancillary services (Mitchell and Sass 1995; Lynk and Longley 2002; 
Kouri, Parsons, and Alpert 2002; Zientek 2003; O'Sullivan 2004). 
However, there are at least four important limitations to applying 
these arguments to acute care hospitals.
    First, the vast majority of studies of higher utilization resulting 
from self-referral are based on physician ownership of ancillary 
services, rather than acute care hospitals. Mitchell and Sass (1995), 
in their frequently cited study of physician referral, failed to find 
higher utilization rates associated with self-referral to acute care 
hospitals. This lack of association has been one of the main reasons 
that the two phases of Stark anti-kickback legislation have exempted 
physician ownership of acute care hospitals (Stout and Warner 2003; 
Rohack 2004; O'Sullivan 2004). In addition, there is no direct evidence 
that the observed higher utilization rates resulting from self-referral 
to ancillary services represent inappropriate or unnecessary care 
(Kouri, Parsons, and Alpert 2002; Zientek 2003).
    Second, there is no direct evidence that physician self-referral is 
motivated disproportionately by financial incentives. Physician self-
referral is motivated by four factors: appropriateness, quality, 
efficiency, and financial returns. The relative magnitude of each of 
these incentives has been the subject of debate, but there is no direct 
evidence to suggest how, on average, physicians assign weights to each 
factor. Consistent with the empirical findings, anecdotal evidence 
suggests that physicians may disproportionately weight financial 
incentives when the referral is for standardized products or services 
(e.g., lab or pharmacy), and disproportionately weight appropriateness 
and quality when the referral is for more intensive procedures, such as 
surgery (Moore 2003).
    Third, there is no evidence that self-referrals result in worse 
outcomes than other types of referral (Kouri, Parsons, and Alpert 2002; 
Zientek 2003). A likely reason for these findings is the endogeneity of 
three factors: physician quality, the likelihood of self-referral, and 
the quality of patient outcomes. In the case of specialty hospitals, 
site visits and trade press literature indicate that physician 
investors in specialty hospitals tend to be those who highly value 
efficiency in quality and cost dimensions. Thus, for many physician 
investors, self-referral is likely to represent the most optimal 
referral in terms of quality and cost.
    Fourth, in the case of physician ownership of acute care 
facilities, it is likely that the magnitude of financial incentives is 
limited. The General Accounting Office (2003a) found that 30 percent of 
specialty hospitals surveyed had no physician investors. For half of 
the facilities with physician investors, the average individual 
physician ownership share was less than two percent. In the ASHA 
survey, virtually all physician investors owned only five percent or 
less (Table 2). Moreover, the entrepreneurial returns (i.e., the 
fraction of the facility fee considered operating margin) for any 
single case are likely to be substantially less than the professional 
fee charged by physicians. Given the order of magnitude difference 
between these two revenue streams, physician incentives are likely to 
be driven more by professional fees, which do not vary significantly by 
practice setting.\26\ Indeed, in this context the potential for a 
surgeon to enhance his or her own productivity is a more likely source 
of financial incentive for self-referral to a specialty hospital. In 
other words, the primary financial motivation may be to enhance the 
return on investment for the surgeon's investment in ``human capital'' 
(associated with the number of procedures performed) \27\ rather than 
any effort to assure a return on investment in the form of financial 
assets (associated with the overall financial performance of the 
hospital).
---------------------------------------------------------------------------
    \26\ It should also be noted that high variation in utilization and 
referral patterns exist without respect to physician ownership. For 
example, Weinstein et al. (2004) recently observed significant 
variation in utilization patterns for major surgery for degenerative 
diseases of the hip, knee, and spine in several South Florida hospital 
referral regions where there are no physician-owned specialty 
hospitals.
    \27\ Refer to section 3.4
---------------------------------------------------------------------------
    In terms of policy options, even if we were to assume that these 
limitations were not important, a more central question is whether 
creating barriers to market entry are the most appropriate means of 
addressing the issue. The net social welfare losses associated with 
barriers to market entry are likely to be greater than those 
attributable to physician referral incentives, particularly in light of 
the weakness of these incentives.

    6.    CONCLUDING REMARKS

    In this study we have reviewed the theory and evidence on some of 
the key characteristics of specialty hospitals, including efficiency, 
demand, case mix, and quality. These findings were supported by 
observations from five specialty hospital site visits. We also 
conducted statistical analyses of the effects of specialty hospitals on 
the profit margins of general hospitals. The main findings of the study 
can be briefly summarized in the following three points.
    First, there are economic advantages associated with 
specialization, due mainly to process redesign, learning, avoidance of 
diseconomies of scope, and focus on core competencies. Specialty 
hospitals appear to have equal or better patient outcomes compared to 
their general hospital counterparts. Hence, there is no evidence to 
suggest that specialty hospitals should be barred from entering acute 
inpatient care markets on the basis of efficiency or quality of care.
    Second, there is no evidence, other than anecdotal, to suggest that 
general hospitals have been financially harmed by competition from 
specialty hospitals, or that such competition is undesirable from a 
societal perspective. Specialty hospitals compete with general 
hospitals in the same manner in which general hospitals compete with 
each other. 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. General hospitals in less 
competitive markets (i.e., those with fewer competitors) had higher 
profits than general hospitals in less competitive markets. 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. These findings 
are also consistent with economic theory, which suggests that firms 
will enter markets in which extant profit margins are comparatively 
higher.
    Third, though often cited as a significant policy concern, there is 
no evidence that physician self-referral is a problem in specialty 
hospitals. Physician self-referral is likely to play a relatively minor 
role in specialty hospitals, for four reasons: (1) the vast majority of 
studies of higher utilization resulting from self-referral are based on 
physician ownership of ancillary services, rather than acute care 
hospitals; (2) there is no direct evidence that physician self-referral 
is motivated disproportionately by financial incentives; (3) there is 
no evidence that self-referrals result in worse outcomes than other 
types of referral; and (4) in the case of physician ownership of acute 
care facilities, it is likely that the magnitude of financial 
incentives is limited.

    APPENDIX A

    2004 Survey of Specialty Hospital

    Instruction:

    1.   These results will be kept strictly confidential. Under no 
circumstances will the data leave the control of ASHA and its principal 
contracted researcher, John Schneider. Only aggregate data will be 
presented publicly (e.g., means and standard errors).

    2.  All responses, unless otherwise noted, should refer to your 
previous full fiscal year. If your facility has not been open for an 
entire fiscal year, indicate so at the beginning of the questionnaire. 
Also, unless otherwise specified, responses should refer to the main 
patient care facility.
    3.  Please answer each question as accurately as possible. In the 
event that it is not possible to answer a question, use the following 
codes: Unknown = DK, Refused = RF, Not applicable = NA. Before 
resorting to these codes try to at least provide a reasonable estimate.
    4.  For technical questions contact John Schneider at john-
[email protected] or 319-331-2122.


----------------------------------------------------------------------------------------------------------------
                           Question                                                 Response
----------------------------------------------------------------------------------------------------------------
1. Name of facility:
----------------------------------------------------------------------------------------------------------------
2. Zip code (main patient care facility)
----------------------------------------------------------------------------------------------------------------
3. Has your facility been open for at least one whole fiscal
 year? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
4. Beginning date of most recent full fiscal year (MM/DD/
 YYYY)
----------------------------------------------------------------------------------------------------------------
Licensing & Accreditation
----------------------------------------------------------------------------------------------------------------
5. Is your facility licensed in your state as an inpatient
 hospital? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
6. Accredited by Accreditation Association for Ambulatory
 Health Care? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
7. Accredited by Joint Commission on Accreditation of Health
 Care Organizations (JCAHO)? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
8. Other accrediting organizations (1=Yes; 0=No) Specify:
----------------------------------------------------------------------------------------------------------------
History
----------------------------------------------------------------------------------------------------------------
9. First calendar year in which facility was licensed as
 inpatient hospital
----------------------------------------------------------------------------------------------------------------
10. First calendar year in which beds were added, if
 different from Q9
----------------------------------------------------------------------------------------------------------------
Beds and Capacity
----------------------------------------------------------------------------------------------------------------
11. Total bed capacity
----------------------------------------------------------------------------------------------------------------
12. Number of staffed inpatient beds
----------------------------------------------------------------------------------------------------------------
13. Number of operating rooms
----------------------------------------------------------------------------------------------------------------
14. Number of intensive care beds
----------------------------------------------------------------------------------------------------------------
15. Number of recovery beds (all stages)
----------------------------------------------------------------------------------------------------------------
16. Do you maintain & staff an urgent/emergent care center?
 (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
17. If Q16 = yes, how many hours per day is the care center
 staffed?
----------------------------------------------------------------------------------------------------------------
Ownership Structure (Q21-Q24 sum to Q20)
----------------------------------------------------------------------------------------------------------------
18. Total number of owners
----------------------------------------------------------------------------------------------------------------
19. Total number of physician owners
----------------------------------------------------------------------------------------------------------------
20. Total number of physician owners who admit 28 at least 5
 patients per year
----------------------------------------------------------------------------------------------------------------
21. Number of physicians in Q20 with 0-1% ownership stake
----------------------------------------------------------------------------------------------------------------
22. Number of physicians in Q20 with 2-5% ownership stake
----------------------------------------------------------------------------------------------------------------
23. Number of physicians in Q20 with 6-9% ownership stake
----------------------------------------------------------------------------------------------------------------
24. Number of physicians in Q20 with 10% or more ownership
 stake
----------------------------------------------------------------------------------------------------------------
Volume and Case Load
----------------------------------------------------------------------------------------------------------------
25. Number of inpatient discharges
----------------------------------------------------------------------------------------------------------------
26. Number of inpatient days (overnight stay)
----------------------------------------------------------------------------------------------------------------
27. Number of inpatient days (observation days)
----------------------------------------------------------------------------------------------------------------
28. Number of surgeries (overnight stay)
----------------------------------------------------------------------------------------------------------------
29. Number of outpatient surgeries (no overnight stay)
----------------------------------------------------------------------------------------------------------------
Patient Care Revenue
----------------------------------------------------------------------------------------------------------------
30. Total gross patient care revenue (inpatient + outpatient)  $
----------------------------------------------------------------------------------------------------------------
31. Outpatient revenue as percent of total gross patient                           %
 revenue (Q30)
----------------------------------------------------------------------------------------------------------------
Sources of Patient Revenue (Q32-Q35 sum to 100%)
----------------------------------------------------------------------------------------------------------------
32. Medicare revenue as percent of gross patient revenue                           %
----------------------------------------------------------------------------------------------------------------
33. Medicaid revenue as percent of gross patient revenue                           %
----------------------------------------------------------------------------------------------------------------
34. Commercial (private health plan) insurance revenue as                          %
 percent of gross patient revenue
----------------------------------------------------------------------------------------------------------------
35. Other revenue as percent of gross patient revenue                              %
----------------------------------------------------------------------------------------------------------------
Charity Care
----------------------------------------------------------------------------------------------------------------
36. If your state has a charity care risk pool, do you pay
 into it? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
37. If the answer to Q29 was yes, indicate annual amount paid  $
 into risk pool
----------------------------------------------------------------------------------------------------------------
38. Charity careas a percentage of gross patient care revenue                      %
----------------------------------------------------------------------------------------------------------------
Taxes Paid 29
----------------------------------------------------------------------------------------------------------------
39. State income tax paid previous tax year                    $
----------------------------------------------------------------------------------------------------------------
40. Federal income tax paid previous tax year                  $
----------------------------------------------------------------------------------------------------------------
41. Property tax paid previous tax year                        $
----------------------------------------------------------------------------------------------------------------
Expenses and Income
----------------------------------------------------------------------------------------------------------------
42. Total operating expenses                                   $
----------------------------------------------------------------------------------------------------------------
43. Net income after all expenses but before taxes             $
----------------------------------------------------------------------------------------------------------------
Nurse Staffing
----------------------------------------------------------------------------------------------------------------
44. Total number of full-time equivalent (FTE) RNs
----------------------------------------------------------------------------------------------------------------
45. Average patient to RN ratio (e.g., for 3:1 write ``3;''
 for 5:1 write ``5'') 30
----------------------------------------------------------------------------------------------------------------
Quality
----------------------------------------------------------------------------------------------------------------
46. Do you employ a computerized physician order entry (CPOE)
 system? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
47. Do you employ an electronic medical record (EMR) system?
 (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
48. Do you attempt to collect patient satisfaction data on
 all patients post-discharge? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
49. Percent of admitting physicians with admitting privileges                      %
 at community / general hospitals in market area
----------------------------------------------------------------------------------------------------------------
50. Number of admitted inpatients transferred to community /
 general hospitals in market area
----------------------------------------------------------------------------------------------------------------
51. Do you have a transfer arrangement with one or more
 community / general hospitals in market area? (1=Yes; 0=No)
----------------------------------------------------------------------------------------------------------------
Competitors
----------------------------------------------------------------------------------------------------------------
52. Number of inpatient hospitals in market area which you
 consider to be competitors
----------------------------------------------------------------------------------------------------------------
53. Number of outpatient surgery centers and clinics in
 market area which you consider to be competitors
----------------------------------------------------------------------------------------------------------------
 28 Admitted for inpatient care

 29 All tax information should refer to the most recent full tax year. Facilities organized as partnerships
  typically allocate taxes to owners. In these cases please provide and estimate of the total tax liability for
  the entity for all owners combined.

 30 Patient to nurse ratios are expected to vary by stage of care (i.e., first and second stage recovery) and by
  shift. For this question, estimate an overall facility average; i.e., report the average number of patients
  per RN across all stages of care.


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Networks.

                                 

                                Focus On Therapeutic Outcomes, Inc.
                                         Knoxville, Tennessee 37909
                                                     March 18, 2005
The Honorable Nancy Johnson, Chairman
Subcommittee on Health
House Ways and Means Committee
U. S House of Representatives
Washington, DC 20515

Dear Chairman Johnson:

    Focus On Therapeutic Outcomes, Inc., (FOTO), a national medical 
rehabilitation outcomes database designed for providers, patients and 
payers of rehabilitation care, is pleased to submit this statement for 
the record in conjunction with a hearing conducted under your 
leadership by the Subcommittee on Health of the House Ways and Means 
Committee on March 15, 2005. The hearing provided the Subcommittee an 
opportunity to hear what CMS is doing to relate physician payment to 
quality and to learn what some physician groups are able to achieve 
with their systems of quality improvement.
    Due to a paucity of outcomes measures at this time, considerable 
discussion revolves around the use of process measures and claims data 
and perhaps a combination of the two. As was mentioned by two of the 
witnesses who testified at the hearing, valid and reliable outcomes 
measures are needed and in order to use such measures as a basis 
forreimbursement, precise risk-adjustment is essential.
    Perhaps no other area offers such a unique and ripe opportunity for 
paying on the basis of outcomes than the rehabilitation therapies. 
Valid and reliable functional outcomes measures currently exist in 
rehabilitation and precise risk-adjustment is available to facilitate 
the development of a pay-for-performance process in the outpatient 
rehabilitation therapies. Moreover, given the impending expiration of 
the moratorium on the therapy cap, it could not be more timely to 
explore pay-for-performance as an alternative payment method required 
by the Balanced Budget Act of 1997.
    FOTO, the leading purveyor of valid and reliable outcomes measures 
for outpatient rehabilitation therapy has amassed records from over 1.6 
million patients treated by more than 13,000 clinicians in twelve years 
using scientifically-based, valid and reliable assessment instruments, 
which determine a patient's level of function prior to intervention, 
periodically during intervention and at the conclusion of 
rehabilitation intervention. These data reflect changes in functional 
health during the rehabilitation experience. The data are used to 
assess and predict resources necessary for specific patient 
interventions including the appropriate number of visits, time and 
amount of improvement to be expected. In addition, the data reflect 
patient satisfaction resulting from the rehabilitation experience. 
Results are tabulated and reports are benchmarked to the national 
database, which is privately owned, confidential and independent of all 
providers and payer-related organizations. The robust FOTO database has 
been compiled from more than 13,000 clinicians in over 1500 outpatient 
rehabilitation customers who are primarily hospital outpatient 
departments, therapy clinics and physician offices. The data collection 
process is independent of the type of provider, and therefore it is 
applicable to patients treated by chiropractors and many physicians who 
treat patients with physical function deficits.
    The FOTO Experience
    FOTO uses instruments that have been proven scientifically valid 
and reliable and have their origin in widely known and accepted 
instruments, such as the SF-36, SF-12, Lysholm Knee Inventory, Oswestry 
Low Back Pain Questionnaire, Neck Disability Index, Lower Extremity 
Functional Scale, Shoulder Flexi-Scale, and Back Pain Functional Scale. 
Through extensive research, much of which is published in peer-reviews 
journals, FOTO has used these instruments to develop a patient-friendly 
survey instrument that provides highly accurate information describing 
physical function and patient satisfaction.
    The database is robust with valuable rehabilitation and patient 
information, so all FOTO reports are risk-adjusted. Risk-adjustment 
allows appropriate case-mix adjustment, which improves appropriate 
patient comparisons. FOTO uses risk-adjusted data to predict the number 
of visits necessary and degree of benefit derived from rehabilitation. 
No other acute rehabilitation outcome system combines outcomes and 
efficiency to allow payers to utilize outcomes data as a basis for 
provider reimbursement. The ability to accurately predict resources 
necessary to accomplish successful rehabilitation is of profound value 
to providers and payers as continued strides are taken to improve 
quality, enhance patient satisfaction and contain health care costs.
    Implications
    Retrospective analysis of the database has allowed FOTO to develop 
predictive models. Such information enables clinicians to practice 
evidence-based rehabilitation, payers to determine appropriate use of 
resources, employers to save money, and patients to feel confidence and 
express satisfaction knowing their rehabilitation is based on the most 
accurate, up-to-date, scientific information. Moreover, the data and 
methodology can be used as the basis of a pay-for-performance system 
for the outpatient therapies, thus aligning the incentives in 
rehabilitation therapy.
    Aligning Incentives
    For nearly two decades employers have been concerned about the 
rising cost of health care. Business owners have expressed a desire to 
pay for health care in the same manner used to purchase any commodity; 
contracting with vendors to provide a service delivered on time, at a 
known price and quality; and rewarding better-than-standard 
performance. In 2001, the Institute of Medicine published a landmark 
report, which essentially embraced such a philosophy. Crossing the 
Quality Chasm: A New Health System for the 21st Century, outlined a 
strategy that included broad themes to make healthcare safer and more 
accountable and called for an alignment of incentives in health care 
delivery. That is, incentivizing health providers for the delivery of 
high-quality care.
    The March to Pay-for-Performance
    In recent years numerous public and private sector developments 
have demonstrated a growing interest in value purchasing in health care 
delivery.

      The Medicare Modernization Act (MMA) of 2003 included a 
number of health care quality provisions and demonstrations including 
theHospital Quality Initiative and a pilot program with members of the 
Premier alliance of not-for-profit hospitals.
      In their 2004 publication Pay for Performance's Small 
Steps of Progress,

    PriceWaterhouseCoopers reported that as many as one-third of health 
plans indicate they have a pay-for-performance program in place.

      In testimony before this subcommittee on February 10, 
2005, Glenn Hackbarth, chairman of the Medicare Payment Advisory 
Commission (MedPAC), stated that a good pay-for-performance program 
would reward absolute high levels of quality and those showing 
significant improvement. In addition, risk-adjustment is needed because 
providers treating the sickest patients should not be penalized for 
failing to show enough improvement on quality measures. Hackbarth went 
on to suggest that providers should be held accountable on measures 
that are within their control and that patient experience should be 
introduced as soon as means are available to collect such data. For 
example, rehabilitation providers should be judged on patient 
functional improvement.

    With the availability of FOTO's robust, risk-adjusted database, 
which precisely quantifies functional improvement, it is indeed 
possible to judge and reimburse rehabilitation providers and suppliers 
on the basis of their patient's functional improvement.
    The National Quality Forum (NQF) has identified various components 
that will make introduction of value purchasing acceptable and even 
appealing to all health system stakeholders:

    1. Choosing and using quality measures that:

        have a clear and compelling application,
        do not impose an undue burden on those who provide 
data,
        help providers improve quality of care, and
        help consumers select plans, providers and/or 
treatments.

    These quality measures should be held constant over time to permit 
benchmarking and measurement improvement and be open to improvement 
based on the scientific approach to care. The process should use risk 
adjusting for more accurate benchmarking and have audit standards for 
assessing implementation.
    2. Voluntary approaches to quality measurement and reporting have 
failed to engage the entire health system. On the contrary, mandating 
participation and reporting increases compliance, bolsters data 
accuracy and value, and has potential to create a system that is more 
equitable for all stakeholders. Once captured, data must be routinely 
and publicly reported in a common set of measures.
    3. Quality measures should possess the integrity that allows 
benchmarking individual patients to a national standard as well as 
measuring results of care on a patient-by-patient basis. Thus, 
information can be used to guide and accurately assess benefits of 
treatment. Data can be used as the basis for determining payment 
predicated on a comparison of results of intervention to the time, cost 
and quality parameters revealed by the database.
    FOTO, Inc., has developed a Value Purchasing Payment 
Algorithm, a methodology for the rehabilitation 
therapies that is consistent with the above NQF criteria, with the 
recommendations of MedPAC and of the Institute of Medicine. The Focus 
On Therapeutic Outcomes, Inc. value purchasing process for outpatient 
rehabilitation services rewards higher quality of care (i.e., better 
functional outcomes) and more efficient rehabilitation services (i.e., 
fewest possible visits).
    The process is based on risk-adjusted patient self-report of 
functional abilities and an established number of rehabilitation visits 
provided per episode as determined by the robust FOTO database. 
Clinician/patient episodes are classified according to whether the 
number of visits for a patient was less than, the same as, or exceeded 
the predicted (established) number and whether the patient's change in 
functional health status was below, equal to, or greater than predicted 
by the database. The number of visits required and the change in 
functional health status expected, are risk-adjusted by diagnosis, 
severity of functional ability, age and acuity of symptoms. Clinicians 
are reimbursed in accordance with their performance compared to the 
risk-adjusted data provided by FOTO. Clinicians with patient 
experiences that are more efficient (fewer visits) and more effective 
(better outcomes) are paid a bonus. Clinicians who are less efficient 
(more visits) and less effective (worse outcomes) are penalized. The 
patient interface is an attractive, user-friendly computer program that 
provides valuable functional information to the clinician for timely 
patient treatment. Once the necessary data are submitted, visit and 
functional outcomes data are matched to the risk-adjusted payment 
algorithm. In short, it is clinically relevant, easily collected data 
that creates a system change that empowers and incentivizes clinicians 
to deliver the most effective care in the most efficient manner.
    FOTO joins other organizations who have submitted statements on 
this topic in supporting continuation of demonstration projects and 
studies on pay-for-performance. Such activities should be extended to 
the rehab therapies in an effort to develop and refine suitable 
alternatives to the therapy caps. Paying for results allocates 
resources to what is effective in caring for patients while shifting 
away from care that is ineffective, costly and possibly fraudulent. The 
FOTO value purchasing process for outpatient rehabilitation services 
results in: Care Based on Need--Payment Based on Results.
    Business and industry have been paying for performance for decades 
and leaders in the business community have difficulty understanding why 
all health providers are paid the same irrespective of the end result. 
``What can be more American than pay-for-performance,'' they ask. 
Progressive businesses, the ones recognized with awards for high-
quality, are pleased to see the ``American way'' coming to health care.
    Health care quality has long been talked about, but progressive 
organizations who are now ``walking the walk'' are considered leaders 
in the field. These leaders are discovering that using data with valid 
and reliable quality indicators is the most efficient, clinically-
relevant and administrative friendly way of aligning the incentives 
described in Crossing the Quality Chasm. Focus On Therapeutic Outcomes, 
Inc., is one of these leaders and is eager to share its vast 
experience, robust database and valid and reliable methods with the 
committee, the Congress and CMS in an effort to hasten the alignment of 
incentives in the delivery of outpatient rehabilitation services.
    Thank you for the opportunity to submit comments on this important 
and timely issue and, more importantly, thank you for the leadership in 
pursuit of efforts to obtain better value for the Medicare dollar.
            Sincerely,
                                                  Ben Johnston, Jr.
                                            Chief Executive Officer
                                   ----------
                Based on Need--Payment Based on Results
                   Value Purchasing in Rehabilitation
                   Focus On Therapeutic Outcomes, Inc
                             Knoxville, TN

                     Focus on Therapeutic Outcomes

                                F O T O

    FOTO

      A national outcomes database
      In existence for thirteen years
      Over 1500 providers
      Over 1.6 million patients
      Over 13,000 clinicians

    Designed for providers, patients and payers of outpatient 
rehabilitation care

      Uses scientifically-based, valid and reliable assessment 
instruments, which determine the:

         Severity of a patient's condition.
         Patient's response during treatment.
         Effectiveness of intervention.

            Patient's level of function

               Prior to intervention
               Periodically during intervention
               At the conclusion of rehabilitation intervention

         Patient's satisfaction with the rehabilitation 
experience.
         Appropriate resource utilization.

            Predict the expected duration (# of visits) of 
treatment
            Predict expected outcome
    Risk Adjustment

      The ability to accurately predict the resources necessary 
to accomplish successful rehabilitation.

         Robust database
         Valuable rehabilitation and patient information
         Able to predict

            Number of visits
            Satisfactory outcome
    Analysis

      Results and reports are risk-adjusted and benchmarked to 
the national database.
      Analyses are independent of provider, payer or national 
association
      Amount of improvement per visit.
      Amount of improvement per dollar spent
      Wide variety of patient conditions, payer types and 
treatment settings.
      Results used to predict and manage care.
      Patient satisfaction with the rehabilitation experience.

    Implications

      Clinicians enabled to practice evidence-based 
rehabilitation using benchmarked reports to direct and validate 
treatment choices.
      Payers obtain the reliability to determine the 
appropriate use of resources.
      Patients get the confidence and satisfaction associated 
with the knowledge that their rehabilitation is based on the most 
accurate, up-to-date, scientific information.
      A positive effect on access due to efficient use of 
patient and staff time.

    Conclusion

      This methodology, available now, represents the future--
evidence-based rehabilitation.
      Through retrospective analysis FOTO has developed 
predictive models, which are based on scientifically valid and reliable 
data-gathering instruments.
      This results in improved quality of rehabilitation 
intervention at the lowest cost.
      Allows payers to ``pay-for-results.''
              Care Based on Need--Payment Based on Results

                               

            Statement of Steven Jones, Little Rock, Arkansas
Ladies and Gentlemen:

    My name is Steven Jones, D.O. I am an orthopedic surgeon in Little 
Rock, AR. I am writing in reference to the Ways & Means Committee 
meeting on Tuesday. Specialty hospitals must continue to exist. 
Employees of nearly 100 facilities would be in danger of losing jobs. 
Whole communities are at risk. But most importantly, the citizens 
deserve the right to make their own healthcare decisions and the 
opportunity to access the high quality of care that single specialty 
hospitals provide. Please do not allow the moratorium on specialty 
hospitals to continue. Patients must be allowed to have a choice in 
health care.

    I feel opponents of specialty hospitals have misrepresented the 
industry. Here are the facts:

      Concerns over the so-called cherry picking of profitable 
patients are eliminated by DRG reform
      The American Surgical Hospital Association is not aware 
of any facilities that will open within a year of the expiration of the 
moratorium
      Surgical hospitals serve Medicare and Medicaid patients
      True! 40 specialty hospitals don't have ERs. Also True! 
400 general hospitals don't have ERs
      Physician investment averages 2% in specialty hospitals, 
according to the Government Accounting Office--hardly a conflict of 
interest
      Studies done in the 1980s show no inappropriate referrals 
by surgeons and over 85% of specialty hospital cases are outpatient
      Take a look at the general hospitals in your area, more 
than likely they are expanding, not closing departments or closing 
their doors altogether
      The Wall Street Journal and The Washington Times have 
both supported the industry with opinion pieces.

                                 

 Statement of Karen Kerrigan, Small Business & Entrepreneurship Council
    Chairman Johnson, Ranking Member Stark and Members of the House 
Ways and Means 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) will 
soon be presenting 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 is expected to 
make positive recommendations, including changes to the diagnostic 
related group (DRG) payment system, they are also expected to 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; with their innovative care and extra attention to customer 
service a positive 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 Johnson 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 to oppose the 
extension of the moratorium on specialty hospital development.
    Please do not hesitate to contact me if you have questions about 
the SBE Council's position on this issue.

                                 

   Statement of Jane Orient, Association of American Physicians and 
                       Surgeons, Tucson, Arizona
Madam 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 
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.

                                 

 Statement of John W. Strayer III, National Center for Policy Analysis
Madam 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) conducted a study of 
MedCath Hospitals, a group of 12 heart hospitals across the country, 
and their impact on neighboring general and community hospitals. The 
GAO's conclusions found that their cost effectiveness and rate of high 
positive outcomes outweighs any perceived disadvantages experienced by 
general and community hospitals.
    A study by the Lewin Group compared MedCath facilities 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 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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