[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
__________
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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
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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
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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.
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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.
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\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.
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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.
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\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).
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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\
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\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.
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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\
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\4\ A Comparative Study of Patient Severity, Quality of Care and
Community Impact at MedCath Heart Hospitals, The Lewin Group, February
2004.
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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.
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\5\ Editorial, In the (Specialty) Hospital, Wall Street Journal,
Jan. 3, 2005.
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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\
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\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.
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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\
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\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.
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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.
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\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.
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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)
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\10\ Charles N. Kahn III, A Health-Care Loophole, Washington Times,
February 3, 2005.
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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.
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\11\ GAO, supra note 2.
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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.
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\12\ Id.
\13\ Schneider, et al., supra note 4.
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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\
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\14\ Federal Trade Commission and Department of Justice, Improving
Health Care: A Dose of Competition, July 23, 2004.
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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.
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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.
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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.
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\1\ Herzlinger RE. MedCath Corporation. Harvard Business School
case 9-303-041. Cambridge, Mass.: Harvard University, 2003
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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
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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\
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\3\ Specialty hospital study meeting brief: prepared for meeting of
Medicare Payment Advisory Commission, September 9-10, 2004, Washington,
D.C.
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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.
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\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).
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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\
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\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).
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\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.
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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.
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\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.
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\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).
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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).
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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.
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\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).
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\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).
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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.
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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).
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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.
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\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.
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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.
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\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.
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\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.
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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.
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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.
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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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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.