[Senate Hearing 109-140]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-140
 
       OVERVIEW OF THE COMPETITIVE EFFECTS OF SPECIALTY HOSPITALS

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

                                HEARING

                               before the

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                                SECURITY

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2005

                               __________

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs


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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia

           Michael D. Bopp, Staff Director and Chief Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                      Trina D. Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL 
                                SECURITY

                     TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska                  THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island      DANIEL AKAKA, Hawaii
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia

                      Katy French, Staff Director
                   Sean Davis, Legislative Assistant
                 Sheila Murphy, Minority Staff Director
            John Kilvington, Minority Deputy Staff Director
                       Liz Scranton, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Coburn...............................................     1
    Senator Carper...............................................     3

                               WITNESSES
                         Tuesday, May 24, 2005

John Graubert, Principal Deputy General Counsel, Federal Trade 
  Commission.....................................................     5
Mark E. Miller, Executive Director, Medicare Payment Advisory 
  Commission.....................................................     7
Regina E. Herzlinger, Ph.D., Nancy R. McPherson Professor of 
  Business Administration, Harvard Business School, Boston, 
  Massachusetts..................................................    20
Stan Pelofsky, M.D., President, Neuroscience Specialists, and 
  Physician Owner, Oklahoma Spine Hospital, Oklahoma City, 
  Oklahoma.......................................................    22
John T. Thomas, Senior Vice President and General Counsel, Baylor 
  Health Care System, Dallas-Fort Worth, Texas...................    24
James E. Cain, M.D., Practice in Family Medicine, Lampasas 
  County, Texas..................................................    26
Ed Jungbluth, Heart Patient, Heart Hospital of New Mexico, 
  Albuquerque, New Mexico........................................    28
William G. Plested, III, M.D., Immediate Past Chair, Board of 
  Trustees, American Medical Association.........................    30

                     Alphabetical List of Witnesses

Cain, James E., M.D.:
    Testimony....................................................    26
    Prepared statement...........................................    96
Graubert, John:
    Testimony....................................................     5
    Prepared statement...........................................    37
Herzlinger, Regina E., Ph.D.:
    Testimony....................................................    20
    Prepared statement...........................................    74
Jungbluth, Ed:
    Testimony....................................................    28
    Prepared statement...........................................   100
Miller, Mark E., Ph.D.:
    Testimony....................................................     7
    Prepared statement...........................................    63
Pelofsky, Stan, M.D.:
    Testimony....................................................    22
    Prepared statement...........................................    81
Plested, William G., III, M.D.:
    Testimony....................................................    30
    Prepared statement with attachments..........................   103
Thomas, John T.:
    Testimony....................................................    24
    Prepared statement...........................................    88

                                Appendix

John W. Strayer III, National Center for Policy Analysis, 
  prepared statement.............................................   141
Thomas C. Howard, M.D., President of the McBride Clinic Inc., 
  Oklahoma City, Oklahoma, prepared statement with an attachment.   143
Sean Parnell, Vice President--External Affairs, The Heartland 
  Institute, Chicago, Illinois, prepared statement...............   151
Jane Orient, M.D., Executive Director of the Association of 
  American Phyusicians and Surgeons, prepared statement..........   161
Karen Kerrigan, President and CEO, Small Business and 
  Entrepreneurship Council, Washington, DC.......................   163
Letter to Mark Miller, from Senators Grassley and Baucus, dated 
  May 5, 2005, with attachments..................................   167
Questions and responses from:
    Mr. Graubert.................................................   172
    Mr. Miller...................................................   175
    Dr. Pelofsky.................................................   182


       OVERVIEW OF THE COMPETITIVE EFFECTS OF SPECIALTY HOSPITALS

                              ----------                              


                         TUESDAY, MAY 24, 2005

                                     U.S. Senate,  
            Subcommittee on Federal Financial Management,  
        Government Information, and International Security,
                            of the Committee on Homeland Security  
                                          and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:15 p.m., in 
room SD-562, Dirksen Senate Office Building, Hon. Tom Coburn, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coburn and Carper.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. The hearing will come to order. We 
attempted to delay to wait for Senator Carper. Hopefully, he 
will be here soon. I would like to welcome each of you here.
    The subject of today's hearing is an important one. 
Congress will soon need to make a decision about continuing a 
moratorium to prohibit new specialty hospitals from opening. It 
is my belief that if our Nation is to continue having the 
world's best healthcare system, we must carefully consider how 
our actions will impact the healthcare marketplace in both the 
long and the short term.
    This hearing will primarily focus on the effects of 
competition between and among hospitals in the delivery of 
medical and surgical services. We will examine a number of 
issues related to effectiveness and quality of care provided by 
specialty hospitals, including morbidity and mortality, 
operating time and time under anesthesia, nursing turnover, 
patient satisfaction, and efficiency.
    Our first panel will include witnesses from the Federal 
Trade Commission and the Medicare Payment Advisory Commission. 
We are pleased to have these witnesses give the Subcommittee 
their views on competition between and among specialty 
hospitals and community hospitals.
    In July 2004, the FTC and the Department of Justice issued 
a joint report on the role of competition in the healthcare 
delivery system, ``Improving Health Care: A Dose of 
Competition.'' This report is the culmination of a 2-year 
review of our Nation's healthcare system. It discusses the 
balance that must be struck between competition and regulation 
in the healthcare marketplace, the impact of certificate of 
need policies on competition, and hospital subsidies of the 
uninsured and under-insured in non-profitable areas such as 
trauma centers.
    In March 2005, MedPAC released its study of physician-owned 
specialty hospitals. The purpose of the study was to compare 
and contrast the differences between heart, orthopedic and 
surgical physician-owned specialty hospitals, and community 
hospitals.
    Regrettably, the Federation of American Hospitals and the 
American Hospital Association declined our invitation to be 
here today. It is our intention to provide a balanced hearing, 
including all parties, prior to the June moratorium. The 
purpose of this hearing is to allow a record to be laid down in 
the Senate which can be used for future legislative development 
or to analyze current and future legislation.
    This hearing is intended to allow the Senate to consider 
arguments explaining that specialty hospitals have a pro-
competitive effect on the healthcare industry, and that their 
elimination will reduce competition, decrease quality of 
medical and surgical care, and eliminate efficiencies produced 
by these institutions.
    I believe that unless we find a way to add a ``true dose'' 
of competition to the Nation's healthcare marketplace, the 
consumer will bear the brunt of our action or inaction. I also 
want our panelists and the Senate to know that I believe where 
we stand in healthcare in America today is at a crossroads. We 
spend 40 percent more per capita on healthcare than any Nation 
in the world. Yet, our healthcare is not better.
    The question is not competition versus no competition. The 
question is how do we spend the money the best way to get the 
most people cared for in the most efficient way with the fewest 
errors and not have redundancy of service and inefficiency as 
we deliver that care.
    Seven percent of the cost of healthcare today is because of 
the wrong incentives, the incentive of physicians ordering 
tests not because their patients need it, but because they feel 
a need to protect themselves from malpractice.
    If you look at the cost of pharmaceuticals in our country 
and the lack of true competition among branded items and 
patented items that all do the same thing, what you find is 
there is no competition in those particular brand name drugs 
treating the same disease under different chemical modalities.
    The fact is that competition is the very thing that has 
been lacking in healthcare. The idea that you can't rate a 
physician--consumers need to be able to rate their physicians. 
They need to know if they are a good physician or a bad 
physician. If they are a bad physician, they need to get better 
or get out. That is what American consumers deserve. That is 
what we ought to give them.
    So the purpose of this hearing is to allow a good body of 
information on competition to come before the Senate as we 
start down the first track--this is not the last; this is the 
first time, and it is my goal that we will inform the Senate as 
to the information it needs to make good decisions on how we 
truly allocate this scarce resource. To not do so, means that 
for those people who don't have access today, who are under-
treated and have minimal access or have lack of affordability, 
we will be letting down.
    I would like to recognize Senator Carper for an opening 
statement.
    Senator Carper, welcome. I am glad you made it.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Mr. Chairman, how are you doing? I 
apologize for running a few minutes late. We just finished our 
caucus luncheon and I came as quickly as I could. Thank you to 
our witnesses for being here.
    Mr. Chairman, I am happy to be with you today and our 
witnesses and our guests to discuss the issue of specialty 
hospitals and their role and impact on our healthcare system. 
One of the great things about this job is you learn a lot 
literally everyday. Sometimes, we learn things we didn't want 
to know. I didn't know a whole lot about specialty hospitals, 
so one of the good things that has come out of this is I have 
learned a good deal. I have got a lot more to learn, I am sure.
    We appreciate our witnesses being here and testifying. Just 
by looking at the expressions on their faces, I can tell they 
are delighted to be here. Our audience cannot see that, but 
these guys are happy campers. Particularly, I want to thank 
Mark Miller and all the folks at MedPAC for the hard work that 
they have done over the past year and a half since the MMA 
mandated that they study this issue. One of the things I 
learned is MedPAC is not a political action committee. My staff 
said, no, they are not; if they were they wouldn't be coming to 
this hearing.
    We know we have a big task ahead of us to complete in just 
15 months, but you have risen to the challenge and we 
appreciate all the work that you do not just for the Congress, 
but really for our country.
    I am sure we all know that this has been a controversial 
issue. Over the past decade or so, we have seen the number of 
specialty hospitals, I think, triple. We don't have any in 
Delaware, but I understand they have a few in Oklahoma. 
Proponents of specialty hospitals tell us that they give 
doctors more say in the management of hospitals, that they 
provide better quality, more efficiency and higher patient 
satisfaction. They also say that they inject competition into 
the healthcare marketplace.
    However, I think we ought to keep in mind that in 2003 
there were a couple of GAO studies that lead to concerns about 
specialty hospitals' rapid growth, about the possible conflicts 
of interest that could exist when physicians have an ownership 
interest in the hospitals to which they refer, and whether 
specialty hospitals might represent an unfair kind of 
competition that could harm community hospitals, and in turn 
harm our communities by making it harder for hospitals to 
provide needed care.
    These concerns led the Congress to include a provision--I 
think it was in the 2003 Medicare Modernization Act--which 
placed an 18-month moratorium on physician self-referral to new 
specialty hospitals. This provision was meant to serve as a 
sort of cooling-off period during which the Congress could 
further study the relevant issues.
    The moratorium, I think, is set to expire next month, and I 
am pleased that we are continuing to examine the issue so that 
we can decide how best to proceed. The focus of today's hearing 
is the role that specialty hospitals play in healthcare 
competition and whether this is the type of competition that we 
want to foster.
    We are going to hear today about whether specialty 
hospitals do, in fact, result in lower costs or better quality, 
as their proponents claim, and we are going to hear some 
different perspectives on that, which is good. MedPAC's work, 
for example, has shown that care provided by specialty 
hospitals, in their view, might actually cost more than care 
provided in community hospitals. Other recently published 
research has shown that specialty hospitals do not necessarily 
provide higher quality care.
    I, myself, am all for competition as long as it is fair 
competition. I suspect I speak for most of the people in this 
room. When it comes to specialty hospitals, I have heard from 
some people that the competition may not be taking place on a 
level playing field because specialty hospitals can essentially 
select their patients, while community hospitals treat everyone 
in the community, and also have to provide many unprofitable 
services like emergency care and intensive care services.
    However, I have also heard from physicians who believe that 
investment in specialty hospitals gives them an opportunity to 
play a larger role in making decisions about how best to 
provide care. Ultimately, I believe that a shared goal of all 
involved is to provide the best possible care for all patients, 
for all conditions, in all facilities. The question we must 
answer is are we doing just that.
    In closing, Mr. Chairman, let me just say I think we would 
also agree that as a Nation we need to reduce healthcare costs 
and improve healthcare quality in all sectors of healthcare. We 
will spend over $1.5 trillion on healthcare in this country 
this year. Yet, despite this spending, 45 million Americans 
lack health insurance. For Americans who do have health 
insurance, premiums continue to rise. Rising healthcare costs 
are becoming an increasing burden on small businesses and big 
ones, too, making us less competitive around the world.
    One of the things that I hear most, whether it is in 
Delaware or all around the country, is the need to control 
rising healthcare costs and improve outcomes. These increasing 
costs don't correspond to increased quality. Research has shown 
that the quality of healthcare in the United States varies 
widely, and as many as 98,000 deaths a year are caused by 
preventible medical errors.
    Finally, I am interested to learn the role that specialty 
hospitals might have to play in this effort. However, I believe 
that any competition between specialty hospitals and our full-
service hospitals must take place on a level playing field. I 
am interested to hear the perspectives of all of our witnesses 
regarding this important issue, and I thank you for coming and 
for this opportunity.
    Thank you.
    Senator Coburn. Thank you, Senator Carper.
    I am going to ask our witnesses to limit their oral 
testimony to 5 minutes. Your complete statements will be made a 
part of the record, and we will hold our questions until our 
first two witnesses have finished their testimony.
    I first would like to recognize John Graubert. He is the 
Principal Deputy General Counsel of the Federal Trade 
Commission. Mark Miller is the Executive Director of the 
Medicare Payment Advisory Commission.
    Mr. Graubert.

    TESTIMONY OF JOHN GRAUBERT,\1\ PRINCIPAL DEPUTY GENERAL 
               COUNSEL, FEDERAL TRADE COMMISSION

    Mr. Graubert. Thank you, Mr. Chairman, and I appreciate the 
opportunity to appear before you today to discuss new entry 
into hospital competition and related issues.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Graubert appears in the Appendix 
on page 37.
---------------------------------------------------------------------------
    The Federal Trade Commission has gained familiarity with 
these issues through the hearings held together with the 
Antitrust Division of the Department of Justice which led to 
the report which the Chairman mentioned, ``Improving Health 
Care: A Dose of Competition,'' issued jointly by the Commission 
and the Department of Justice in July 2004, as well as through 
the Commission's substantial experience in enforcing the 
antitrust laws in healthcare markets.
    The joint hearings and the joint report broadly examined 
the state of the healthcare marketplace and the role of 
competition and consumer protection in satisfying the 
preferences of Americans for high-quality, cost-effective 
healthcare. The joint hearings took place over 27 days, from 
February through October 2003, following a Commission-sponsored 
workshop on healthcare issues in September 2002.
    The Commission and the Department heard testimony from 
about 240 panelists, including representatives of various 
provider groups, insurers, employers, lawyers, patient 
advocates, and leading scholars on subjects ranging from 
antitrust and economics to healthcare quality and informed 
consent.
    Together, the hearings and workshop elicited 62 written 
submissions from interested parties. Almost 6,000 pages of 
transcripts of the hearings, and all written submissions are 
available on the Commission's website. In addition, staff of 
the Federal Trade Commission and the Department of Justice 
undertook independent research for the report.
    Our written statement for this hearing focuses specifically 
on a few of the issues addressed in this report that relate to 
new entry among hospitals, and I would emphasize three main 
points.
    First, vigorous competition can have important benefits in 
the hospital arena just as it has in the multitude of markets 
in the U.S. economy that rely on competition to maximize the 
welfare of consumers. Competitive pressure can lead hospitals 
to lower costs, improve quality, and compete more efficiently. 
Competitive pressure also may spur innovation and new types of 
competition.
    In hospital markets today, some new entrants specialize and 
provide only a limited portion of the in-patient and out-
patient services that general hospitals tend to provide. Of 
course, specialty hospitals are not new. In recent years, 
however, an increasing number of single-specialty hospitals 
have entered or attempted to enter particular markets to 
compete with hospitals in providing certain types of hospital 
services such as cardiac or orthopedic surgery.
    Ambulatory surgery centers have emerged to perform surgical 
procedures on patients who do not require an overnight stay in 
the hospital, thus providing additional competition to hospital 
services in this area. Testimony at our hearings reported that 
this entry has had a number of beneficial consequences for 
consumers who receive care from these providers.
    Second, when new firms enter or threaten to enter a market, 
incumbent firms may seek to deter or prevent that new 
competition. Such conduct is by no means unique to healthcare 
markets. It is a typical reaction of incumbents to possible new 
competitors in any market. In certain circumstances, such 
conduct may violate the antitrust laws. Antitrust scrutiny, 
however, sometimes may not reach certain anti-competitive 
conduct.
    For example, the Noerr Pennington doctrine immunizes from 
antitrust scrutiny conduct that constitutes petitioning of the 
government, even when such petitioning is done to restrain 
competition or to gain advantage over competitors. Moreover, 
the State action doctrine shields from antitrust scrutiny a 
State's activities when acting in its sovereign capacity.
    In the context of hospital competition, the combination of 
these two doctrines can offer antitrust immunity to hospitals 
or other groups that wish to lobby State officials to deny a 
potential entrant, such as a single-specialty hospital, the 
Certificate of Need it may require to open its doors. State CON 
programs generally prevent firms from entering certain areas of 
the healthcare market unless they can demonstrate to State 
authorities an unmet need for their services. The FTC and DOJ 
report concluded that market incumbents can too easily use CON 
procedures to forestall competitors from entering an 
incumbent's market.
    Not all States have CON requirements. Indeed, almost all of 
the recent entry by single-specialty hospitals has taken place 
in States that do not have CON requirements. Our report 
recommended that States with CON programs should reconsider 
whether these programs best serve their citizens' healthcare 
needs.
    Finally, policymakers should consider the extent to which 
regulatory distortions may affect competition among hospitals 
and other firms. Although entry by single-specialty hospitals 
and ambulatory surgery centers has provided consumer benefits, 
Medicare's administered pricing system has driven in 
substantial part the emergence of such facilities. Medicare's 
administered pricing system, albeit inadvertently, can make 
some services very profitable and others unprofitable.
    Several panelists at our hearings expressed concern that 
single-specialty hospitals and ambulatory surgery centers would 
siphon off the most profitable patients and procedures under 
Medicare reimbursement policies, leaving general hospitals with 
less money to cross subsidize other socially valuable, but less 
profitable, care.
    The FTC/DOJ report pointed out that, generally speaking, 
competitive markets will eventually compete away the higher 
profits and super-competitive profits that are necessary to 
sustain such subsidies. And we concluded that, 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.
    The FTC/DOJ report recommended that governments should 
reexamine the role of subsidies in healthcare markets in light 
of their inefficiencies and potential to distort competition. 
Indeed, I note that CMS has underway, as everyone knows, a 
study of Medicare payment rates that may address some of those 
issues.
    I would like to thank the Subcommittee for inviting the FTC 
to participate and taking the time to consider our report, and 
we will be happy to answer any questions later.
    Senator Coburn. Mr. Miller.

  TESTIMONY OF MARK E. MILLER, PH.D.,\1\ EXECUTIVE DIRECTOR, 
              MEDICARE PAYMENT ADVISORY COMMISSION

    Mr. Miller. Chairman Coburn and Ranking Member Carper, I am 
Mark Miller, the Executive Director of the Medicare Payment 
Advisory Commission, which is called MedPAC. MedPAC is a small 
congressional support agency that advises Congress on a range 
of Medicare issues. The staff reports to 17 commissioners who 
use our work to make those recommendations to Congress.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Miller appears in the Appendix on 
page 63.
---------------------------------------------------------------------------
    The Commission is comprised of 17 members with rotating 
terms that are appointed by the Government Accountability 
Office. They come from various parts of the health delivery 
system and from the health policy sector. For example, there 
are five physicians, three managers of hospitals and home 
health agencies, two nurses, a former Senator, a former CMS 
administrator and two health economists. The Commission was 
mandated by the Congress in the MMA to report on cardiac, 
orthopedic and surgical physician-owned hospitals, and I would 
like to briefly review what we found for you.
    The Commission found strong evidence, as did CMS, that 
specialty hospitals focus on less complicated patients than 
community hospitals. As you know, Medicare pays a fixed price 
for an admission at a hospital. In our analysis of the payment 
system, we found that Medicare systematically overpays for less 
complicated patients. And the reverse is also true; Medicare 
underpays for more complicated patients.
    We found that physicians are investing in specialty 
hospitals that focus on the type of patient that Medicare 
overpays. Since Medicare overpays for these less complex 
patients, specialty hospitals have a greater ability to earn 
profit whether or not they develop efficiencies.
    In the Commission's view, this is an unlevel playing field. 
Our report contains a set of payment recommendations that would 
create a more level playing field among all hospitals. A fair 
payment system would allow hospitals to profit through 
efficiency rather than simply through the patients that they 
focus on.
    There were several other questions in the mandate, and to 
touch on those, the Commission found mixed results on whether 
specialty hospitals are more efficient than community 
hospitals. On the one hand, they did find that they had shorter 
lengths of stay, which is a measure of efficiency. However, we 
could not establish that they had lower costs per case. It is 
important to note that this is the kind of result that could 
change if one examined this market later in its development, 
the specialty hospital market.
    The Commission report finds that the appearance of a 
specialty hospital in a market generally did not increase the 
number of services provided per beneficiary, which is one of 
the fears that people had. However, what this means is that 
specialty hospitals tend to get most of their business from 
community hospitals that are existing in the market.
    Turning to another question that the Congress asked us, the 
impact on community hospitals, we found that they experience 
small reductions in their Medicare revenues, but they appear, 
so far, to be able to compensate for this loss. We reached that 
conclusion because their overall profitability appeared to be 
unaffected by the entrance of the specialty hospitals in their 
markets. Once again, it is important to note that this is the 
kind of result that could change, depending on how mature the 
market was.
    The Commission found that specialty hospitals serve fewer 
Medicaid patients than community hospitals, although there is 
some variation depending on whether a specialty hospital runs a 
fully operating emergency room. The Commission found that 
cardiac hospitals get about two-thirds of their patients from 
Medicare and orthopedic and surgical hospitals get about two-
thirds of their patients from private payers.
    The Commission recommended that the current moratorium be 
extended another 18 months beyond the 18 months that were 
included in the MMA. The Commission reached this conclusion for 
several reasons: The evidence that I pointed out that specialty 
hospitals tend to focus on patients where Medicare overpays, 
and wanted to give the Congress and the Secretary time to make 
changes to the payment system because the evidence on specialty 
hospitals' efficiency was mixed.
    At the time that we completed our report and turned it in, 
there were no results on quality. Neither the Cram study, nor 
CMS's work had been published. Our mandate did not include us 
looking at quality. It is important to point out that there is 
continued interest on the part of the Commission in examining 
the issue of physician investment and its impacts on efficiency 
in the delivery of care.
    One final point about our report. The Commission 
recommended that the opportunities for gain-sharing be 
encouraged. Physicians and hospitals should be allowed to share 
in savings from improved efficiencies, and under current law 
physicians are often prevented from sharing in those gains.
    The specialty hospital physicians we talked to on our site 
visits often noted that they wanted to work with community 
hospitals, but pointed out frustrations with the community 
hospitals and certain barriers. One of those barriers can be 
addressed by the Congress and the Secretary by expanding gain-
sharing.
    In summary, I want to be clear. Competition and 
specialization are not the problem, and specialty hospitals may 
be an important contribution to competition. However, the 
immediate problem is that there is an unlevel playing field in 
Medicare reimbursement that rewards focusing on patients where 
Medicare overpays and discourages efficiency.
    I look forward to your questions.
    Senator Coburn. Well, thank you for your testimony.
    Let me go to you, Dr. Miller, first. Since there are no new 
specialty hospitals out there, how is 18 months more going to 
help you make a better decision? I know we have to do some 
payment changes, but how does 18 more months of no new 
competition in healthcare make a difference in terms of the 
data that you are going to collect?
    Mr. Miller. Actually, there is additional data that would 
come in. We had to look at 2002 data for the purposes of doing 
our analysis because many of the questions that Congress asked 
us were empirical in nature. Between 2002 and 2003, there are 
more specialty hospitals that actually entered the market. I 
think our sample size could actually be significantly larger 
and would allow us to look at more hospitals.
    Senator Coburn. What is ``significantly'' to you?
    Mr. Miller. We have 48 specialty hospitals in our sample. I 
think we could have that number again if we looked at an 
additional year.
    Senator Coburn. And what would you expect to change in that 
year?
    Mr. Miller. There are two or three things that I think 
potentially could change. The finding on cost, for example, 
when I laid that out for you--it is actually more subtle than 
that. We found that costs in specialty hospitals were actually 
higher than community hospitals, which is completely 
counterintuitive. And as analysts, we entered this analysis 
expecting to find the opposite. It may very well be that in a 
more mature specialty hospital market, that result would be 
different.
    To give you another side of the argument, we also found 
that there was no impact on community hospitals, and here again 
the results were trending in a direction showing that Medicare 
revenues, for example, were being affected. That may be the 
kind of thing that, over time, you saw a clearer impact of the 
specialty hospitals on community hospitals.
    Senator Coburn. Let me ask you a question about level 
playing field. You are stating that maybe the payment rates are 
too high for certain procedures and that those tend to be moved 
to a specialty hospital. And therefore they have revenue with 
less costs associated with them, but yet they are not more 
efficient by your own testimony. That doesn't create an unlevel 
playing field.
    If, in fact, their costs are higher, it is not an unlevel 
playing field if the margin between them is less for those that 
are going to a specialty hospital by your very testimony. So 
if, in fact, that is the case and we continue to study this for 
18 months, how would you account for the fact that the 
community hospitals don't pay income taxes and don't pay 
property taxes? That is an unlevel playing field in the 
opposite direction.
    So when you size it all up, how do you get 18 months more 
data that shows a significant level or unlevel playing field? 
It seems to me you can take that argument either way. It is 
unlevel in terms of the tax structure afforded to community 
hospitals in property tax and income tax versus supposedly a 
cost benefit in a private hospital, which your own study says 
wasn't the case. It is not more efficient, although their 
length of stay is significantly less, their complications are 
significantly less, their infection is less, but their cost 
isn't less. Explain that to me.
    Mr. Miller. You have a lot of questions in there, so let me 
just get this down. The first thing I want to address is the 
notion of the tax treatment. This is not an area that we have 
studied. In terms of whether that is fair or unfair, there is 
nothing that the Commission has done that----
    Senator Coburn. Well, let me interrupt you for a minute. If 
you are going to look at level playing fields and you are going 
to look at revenues versus costs, versus bottom line, because 
that is where capital comes from to reinvest in the healthcare 
field, how can you say that on one end we are going to look at 
an area that creates an unlevel field and in another area we 
are not going to look at an area that creates an unlevel 
playing field?
    Mr. Miller. Well, our mandate was to look at specialty 
hospitals and their role in Medicare, and I think the FTC is 
also pointing that out. A lot of people view the Medicare 
payment system as one of the stimuli in this marketplace that 
drives the development of these hospitals.
    Senator Coburn. Is it your viewpoint that one of the main 
stimuli is Medicare payment rates?
    Mr. Miller. I think it plays a substantial role, yes. Now, 
to your point on cost, I think the concern is when we found 
this result that they had higher costs, we were a little 
perplexed by it and so we talked to people in the specialty 
hospital industry. They said there could be a lot of things 
going on. We have higher start-up costs. We may have more 
staff. We may be paying our staff more. We certainly have more 
amenities, those types of things.
    I don't think those are bad things at all, but the point is 
that if two hospitals are competing and you are going to 
provide more amenities, it should be, in our view, on the basis 
of having a comparable payment for a comparable patient. And if 
you can produce efficiencies that allow you to provide those 
amenities, then you should prevail in the market and you should 
be able to do well. But what happens now is if the specialty 
hospitals focus on less complicated patients, their payments 
far exceed what their costs actually are even when they have 
higher costs.
    Senator Coburn. Do you think that the heart hospitals focus 
on less complicated patients?
    Mr. Miller. Yes. I think there are two things that happen 
in the heart hospitals, and it is a little bit complicated. 
They pick DRGs, the payment categories, that are more 
profitable and then within that there is some patient 
selection. For orthopedic and surgical, the story is a little 
bit different. The payment categories they pick are about 
average, but they definitely have stronger selection where they 
pick less complex patients.
    Senator Coburn. So if the payment changes were made, is it 
your feeling that we would see less incentive into specialty 
hospitals?
    Mr. Miller. That is our strong view, and the most important 
point that our report is trying to make is that a lot of this 
signal can be removed by re-torquing and re-balancing the 
payment system.
    Senator Coburn. Well, my time is up. We will come back. 
Having been a practicing physician, I will tell you it doesn't 
have anything to do with it. The only thing a doctor has to 
sell is their time, and having that time scheduled efficiently 
and effectively to where you get time utilization is why 
doctors--where 6 may own a hospital, but 60 go there to 
practice, it is because they are accommodating the physicians' 
efficient utilization of their time.
    Senator Carper.
    Senator Carper. Dr. Miller, go back. What was the last 
thing you said about the most important finding? Say that 
again.
    Mr. Miller. I am not sure I remember. I am sorry. 
[Laughter.]
    Senator Carper. Neither do I, but I want to.
    Mr. Miller. In response to this, I think the last thing I 
said was our most important finding was that we felt that the 
payment system was distorted and sending an improper signal. 
Based on the type of patient that specialty hospitals focus on, 
Medicare tends to overpay. And we believe that through the 
series of recommendations that are included in our report, you 
can correct most of that.
    Senator Carper. Run through some of those recommendations 
in the report for me.
    Mr. Miller. There are three or four recommendations, and I 
won't get really detailed, but the first and foremost to track 
on is that you would have an adjustment for the severity of the 
patient that you see. So the way it stands right now, 
Medicare's DRG is based on an average, but within that average 
there is a range of patients. So there are systems that allow 
you to tailor your payment more precisely to the type of 
patient you pick up.
    Second, these are pretty technical--in constructing the 
weights, the relative weights paying more for this surgery, 
less for that, you would use cost instead of charges. We 
believe there are distortions being entered into those weights 
because of hospital charging practices.
    Third, and this is highly technical--you would derive the 
average first at the hospital level and aggregate up to the 
national level instead of starting at the national level. There 
are a whole bunch of reasons that you do that, but one is that 
it eliminates some of the differences in charging behavior 
among the hospitals.
    Finally, we make a recommendation that you should adjust 
the outlier policy to have it tailored more precisely to the 
category of patient that experiences the outliers. And it is 
kind of complicated, but the way it currently----
    Senator Carper. Try to say this in a way that even I could 
understand it, OK?
    Mr. Miller. I will try. As it currently stands, it distorts 
some of the weights.
    Senator Carper. All right, thank you.
    Mr. Graubert, a question, if I could, and I may ask Dr. 
Miller to respond to this as well. Mr. Graubert, I think your 
report cites testimony discussing specialty hospitals' better 
outcomes, and I think better clinical standards and their 
ability to produce services less expensively. Your testimony 
also mentions that the entry of specialty hospitals has had a 
number of beneficial consequences for consumers. However, I 
don't believe that you elaborate a great deal on what those 
beneficial consequences are.
    Also, since the release of your report--I believe it was 
last year, 2004--there have been a number of studies that don't 
necessarily validate the claim that specialty hospitals have 
higher-quality outcomes or lower costs. MedPAC's work, for 
example, showed that specialty hospitals actually had, in their 
view, higher costs, despite their shorter lengths of stay.
    I think there was another study published by a Dr. named 
Peter Cram in the New England Journal of Medicine that reported 
that in hospitals with similar volumes, mortality for specialty 
hospitals and general hospitals were really about the same 
after adjusting for patient severity.
    I just want to ask you, if I could, your reaction to some 
of these newer findings, especially maybe Dr. Cram's work that 
is published in the New England Journal of Medicine, and what 
do you believe the beneficial consequences of specialty 
hospitals are to consumers.
    Mr. Graubert. Although it is true, Senator----
    Senator Carper. That was a long question, wasn't it?
    Mr. Graubert. I will do my best, Senator.
    Senator Carper. Thank you.
    Mr. Graubert. It is true that it is difficult to analyze 
cost of service in this area because of the overlay of 
administered pricing. What our report did was collect comments 
of our panelists. We did not independently do a great deal of 
analysis, and have not since. Our interest is in any meaningful 
source of potential competition, and it was interesting, I 
think, that there was quite a bit of testimony that this 
competition actually was beneficial.
    Most of the testimony--and this is cited on page 19 of 
Chapter 3 of our report; I believe it is Chapter 3, yes--does 
deal with patient satisfaction issues, quality of care issues. 
That was predominantly where most of our testimony came. There 
was not a lot of testimony, I don't believe I can recall 
offhand, on the actual economic efficiencies of the specialty 
services. But some of the points have already been mentioned, I 
think, in terms of patient satisfaction, and also more 
efficient use of physician services, more efficient scheduling 
of physician services, more control by physicians over their 
time.
    There was testimony that the cost of care might eventually 
be lowered because hospital stays were shorter and there were 
fewer post-operative complications, which is a subject that Dr. 
Miller had addressed. So I would have to defer to agencies with 
more of a healthcare-specific mandate to determine, under an 
administered pricing scheme, how the costs should be reflected.
    From a general antitrust enforcement point of view, 
obviously we believe that competition should solve these 
problems to the maximum extent possible, and it is intriguing 
to use that there is a potential here for such competition.
    Senator Carper. Mr. Chairman, if I could, I would like to 
ask Dr. Miller to comment on this Cram study, as well, whether 
you believe from the available research that specialty 
hospitals do provide better quality care.
    Mr. Miller. This was not part of our mandate, but here is 
what I know about what is out there. The New England Journal of 
Medicine article that you refer to by Peter Cram went through 
and compared Medicare patients in specialty and community 
hospitals. He controlled for severity of patient and volume of 
service. Actually starting off, he found that there was higher 
quality in specialty hospitals.
    Then when he controlled for severity and volume, he found 
that those differences disappeared, and his conclusion is that 
there is nothing peculiar to specialization that produces the 
quality. It is the severity of the patient that you are dealing 
with and the volume of service that you are providing.
    There has been a longstanding point in the literature that 
says if you treat more heart patients, you have better 
outcomes. And his point was really those seem to be the drivers 
here, not so much the specialization. That is one point.
    You are certainly aware of the CMS report. The CMS report 
found a couple of things on specialty hospitals. They found 
that in-hospital mortality is, in fact, lower among specialty 
hospitals when you control for severity. But they also found 
that readmission rates were higher, and that patients were more 
likely to have to go back into the hospital. So there was 
something of a mix there, and that is what I understand from 
CMS, but obviously they should speak for themselves.
    Senator Carper. Good. Thanks very much.
    Senator Coburn. Dr. Miller, you talked about the laws that 
prevent physicians from sharing in cost savings that are in 
hospitals today and incentivizing physician participation in 
that. It strikes me as curious that we would say that would be 
alright, but we have concerns with physician ownership in terms 
of it might create some other obligation. In every other area 
in our country where we have markets allocating resources, we 
get pretty good efficiency.
    If, in fact, CMS sends the signal that they are going to 
readjust rates so that the rates are truly up for those with 
higher severity of illness, more outliers, better payment for 
the more complicated patients, significantly lower payment for 
those with less complications, why in the world would we need 
to study it any longer? Why wouldn't we want the market to go 
on and just let it work?
    If that is what is going to happen and we all know that is 
what is going to happen, is that not a signal to the market 
that people might pause and say if, in fact, I am only doing 
this so I can cherry-pick patients, I wouldn't come into this 
since I am not going to have any advantage from cherry-picking 
patients? Would that not be a signal that would allow the 
market to truly function as it should?
    Mr. Miller. I think that is a fair point and I think that 
in the Commission's deliberations, this point was made and 
discussed many times. There is definitely a view among 
commissioners that if you aggressively move on changing the 
payment system, that alone will be sending signals to the 
marketplace that say don't enter unless you are really here to 
play for a more efficient or a different kind of product.
    However, the Commission is comprised of 17 people, and as I 
tried to lay out in my opening statement, there were still some 
remaining concerns. There was this somewhat surprising result 
that the costs were not lower. There was the surprising result 
that the effects on the community hospital that people expected 
to see didn't seem to materialize. So that left some 
commissioners uneasy. There are also commissioners who--and I 
tried to be direct about this--have concerns about physician 
investment and the potential impact it has on delivery of care. 
So those issues still remain for some commissioners.
    Senator Coburn. But doesn't that disregard the fact that 
the vast majority of volume done in most of the specialty 
hospitals is done not by the owners, but by other physicians 
who are utilizing those hospitals?
    Mr. Miller. I am not sure how to answer that question. I 
know from the CMS work that physician ownership is related to 
how much you refer to a specialty hospital. You may be correct 
that most of what goes on in specialty hospital is unrelated to 
the owners.
    Senator Coburn. But carry that to an extreme. Say I am a 
cardiac surgeon and I am going to send this patient over there. 
By the time you get down to the bottom line at a specialty 
hospital, I might make $30 out of it, or $50 out of it or $70 
out of it. What you are asking me to believe as a practicing 
physician is that $70 times two a day, times 7 days a week, is 
more important to me than my time efficiency and time 
utilization.
    I didn't see anything in either report, neither yours nor 
CMS's or anybody else's, that has to do with one of the reasons 
I think specialty hospitals came into existence, and it doesn't 
have anything to do with money. It has to do with the ability 
of physicians to be able to practice.
    Mr. Miller. Can I say something about that? Because 
actually I think our report does say something about that. I 
think we were really on point on this. In addition to grinding 
through all the claims data and doing all the empirical 
analysis, we went out to specialty hospitals and community 
hospitals and talked to people, and there was a very clear 
message.
    And I want to be clear about this, because I think you are 
correct on this point that physicians are very frustrated with 
community hospitals in certain circumstances and they do feel 
that it is hard to come in and operate on a set schedule and be 
efficient about moving that business through. And I think there 
is some truth to that and I think there are community 
hospitals, in our conversations with them, who acknowledged it 
and said we had a wake-up call and we needed to change how we 
were running our business in order to accommodate these 
physicians.
    Senator Coburn. Isn't that exactly what we want competition 
to do?
    Mr. Miller. Absolutely, but I also want to make another 
point, which is you said that this was only worth a few 
dollars. I mean, that is potentially the case, but think about 
it this way. If we are talking about a payment rate that 
significantly overpays on costs, let's hypothesize a group of 
physicians. You have cleared your fixed costs in the hospitals. 
You start filling those beds. It is not just $10 and $20 and 
$30. It can really accumulate. And to be also direct on the 
other side of the conversation, there were physicians in our 
site visits who said point-blank, I am doing this in order to 
increase my income.
    Senator Coburn. Well, there is no question about that, but 
that is why anybody does anything in a market economy. That is 
why they take risks.
    Mr. Miller. I am not taking issue with that.
    Senator Coburn. Before the Hill-Burton Act, the vast 
majority of the hospitals in this country were owned by 
physicians.
    Let me go back. I want to reinforce for the record that 
sending a signal by CMS that the rates are going to change--
knowing that signal is out there, how will that change anything 
in terms of your next 18 months of study in terms of anybody 
coming into the market if there was not a moratorium?
    If the rates are going to change, then people are going to 
make their decisions based on what they perceive the declining 
rate would be. Why would we want to study it longer when we can 
have the market allocate much better than CMS has ever been 
able to market healthcare? My contention is because we are 
trying to manage this, we are having trouble--you would have to 
admit we are having trouble managing healthcare costs because 
we can't find every hole.
    Why would we not want the market to allocate that resource, 
since you are going to send the signal that the reimbursements 
for those less complicated cases are going to go down?
    Mr. Miller. The only answer that I can offer you is that we 
at MedPAC agree with that part of your statement that the most 
important thing to do is to aggressively move on changing the 
payment system, because we think that there is a clear 
distortion and we think it is the most important thing to do to 
reset the clock here and make this work better.
    However, I also have to say there are parts of the 
Commission who remain concerned about the role of specialty 
hospitals, for some of the reasons that I went through earlier 
in my statement. That is about as direct as I can be with you 
on that.
    Senator Coburn. Senator Carper.
    Senator Carper. Thanks, Mr. Chairman.
    Mr. Miller, I think the MedPAC report recommended that the 
moratorium on physician self-referral be extended until January 
2007, but it did not go so far as to recommend that the 
moratorium be extended permanently. I believe that the Chairman 
and Ranking Democrat on the Finance Committee might be looking 
at an approach that says let's extend the moratorium 
permanently. I don't know if they have introduced that or not.
    The MedPAC report, though, noted ``physician-owned 
providers could have a competitive advantage over other 
facilities because physicians influence where patients receive 
care.''
    Can you discuss with the Chairman, and me, MedPAC's 
concerns with physician self-referral? Can MedPAC's concerns be 
addressed solely through adjustments to the Medicare payment 
system or is there just a larger issue at play?
    Mr. Miller. Let me answer your questions.
    Senator Carper. Thank you. [Laughter.]
    Witnesses don't always do that, so it is welcome. 
[Laughter.]
    Mr. Miller. In fact, when they say that, they probably are 
not going to.
    Senator Carper. Or sometimes they answer questions, just 
not the ones we ask.
    Mr. Miller. I think it is important to point out that it is 
correct that MedPAC did not say extend the moratorium 
indefinitely, or ban specialty hospitals. In fact, I think the 
quote is something along the lines of that would be too severe 
of a remedy; there may be some promise here or there may be 
some value here. But nonetheless, the Commission did say extend 
the moratorium.
    On self-referral, the best I could explain it to you, I 
think, works like this. There were some studies somewhere in 
the 1990's, I think, that looked at physician ownership of 
laboratory and imaging services.
    Senator Carper. I remember those.
    Mr. Miller. OK, and if you remember those studies, then you 
know that there were some eye-popping results there on how much 
services were generated by physicians who owned imaging 
services versus physicians who didn't for controlled 
populations, similar patients, that type of thing, and I mean 
eye-popping numbers--twice as many MRIs relative to physicians 
who didn't own MRI machines, 29 percent more CT scans relative 
to physicians who didn't own them.
    Now, to be clear, the Commission also said we are not sure 
that same concern arises where specialty hospitals are 
concerned because surgery is often a different prospect than 
just let's run another MRI on somebody. So it was that kind of 
concern along with the uncertainty or the lack of clarity in 
some of our findings on cost, the impact on the marketplace, 
and the fact that no quality data existed at the time that we 
finished the report. I think that configuration of results left 
some of the commissioners concerned about it. But on self-
referral, it is the notion that somebody may be generating or 
routing patients on less than completely clinical grounds.
    There was one other thing. I think you said something about 
would solely----
    Senator Carper. What I said was could MedPAC's concerns be 
addressed solely through adjustments in the Medicare payment 
system or is there a larger issue at play.
    Mr. Miller. And here is the best way I think I can explain 
the situation on the Commission. It may be sufficient to fix 
the payment system, but at the point when we issued the report 
on the date it was due, some commissioners still had 
outstanding concerns. So the report says we need these changes 
to the payment system. The report even says the Congress could 
consider lifting the moratorium if the payment system changes 
and gain-sharing were in place, but also there are still these 
concerns on self-referral and the Commission might come back to 
that issue. So that was the best way I could explain how the 
Commission broke down on that issue.
    Senator Carper. Mr. Chairman, let me ask about just one 
last issue, if I could, and I am going to direct this again to 
you, Dr. Miller, and if time permits, I am going to ask Mr. 
Graubert to comment, too.
    One of the concerns that I have heard over and over again 
about specialty hospitals is that they could be further 
segmenting our healthcare delivery system, treating well-
insured, healthier patients at specialty hospitals, while 
treating few, if any, Medicaid and uninsured patients. I am 
concerned about this trend and I know some others are, too, and 
concerned about an overall trend in our healthcare system of 
wide health disparities between the insured and the uninsured, 
and also minority patients.
    It has been brought to my attention that MedPAC may have 
data that specialty hospitals are treating half as many 
uninsured minority patients as full-service hospitals. I 
understand that even in the same market, among patients who all 
have Medicare coverage, they are still treating half as many 
minority patients.
    Dr. Miller, can you shed any light at all on this issue? 
Any idea why this is occurring, and should this be the subject 
of some further study?
    Mr. Miller. I am not sure I can shed light. Just to clarify 
a couple of things, it is very clear from our analysis when we 
look at discharge data that specialty hospitals are serving 
significantly fewer Medicaid patients. There are lots of 
reasons why that could be the case. We don't particularly have 
a definitive analysis that says it is the location of the 
hospital. It could be the contracts that they are involved in. 
It could be any number of things.
    On the issue of the mix of the patients by race, I think my 
response is the same. Exactly what is generating that kind of 
pattern is not something that we looked directly at. You can 
observe it in the data. It is definitely there, as you said, 
but what generates that actual result I don't think I could 
say.
    Senator Carper. Mr. Glauber, any idea why we are seeing 
this kind of data?
    Mr. Glauber. There is an interesting empirical question 
there, Senator, and the only data that I can recall that we 
dealt with in our report was the GAO data, which as I recall 
showed, in fact, only very modest differences in the Medicare 
rates of admissions. So as far as we were aware at the time we 
wrote the report, there was not a very noticeable difference.
    There might be other data that we are not aware of and 
there might very well be a healthcare policy issue lurking 
here. But, again, from a competition point of view, I don't 
think that there is an independent problem in trying to 
encourage competition to the extent possible in the marketplace 
while simultaneously taking care of any other healthcare policy 
concerns.
    Senator Carper. Thank you. Thanks to both of you.
    Senator Coburn. I just think for the record if you have 
that data, we ought to have it in the record, if you can 
substantiate that data. I believe that your report showed like 
an 8- and a 12-percent community hospital Medicaid rate, and I 
think there was a 2- or 3-percent difference in Medicare.
    Do you have that number available?
    Mr. Graubert. I am looking at a table on page 21 of Chapter 
3 again, and in the orthopedic hospitals there was a difference 
of between 8 and 10 percent, cardiac hospitals a difference 
between 3 and 6 percent, and Medicaid admissions for women's 
health was 37 to 28 percent.
    Senator Coburn. But there is no data in your report or in 
your report that shows a difference in minority utilization?
    Mr. Graubert. I am not familiar with that.
    Senator Coburn. And is there any published data that you 
know that to be factual?
    Mr. Miller. What Mr. Carper is referring to is that there 
was a data request from the Senate Finance Committee that we 
responded to, and I believe that is what he is referring to. 
That was not in the report.
    Senator Coburn. But there is no reported data that would 
show that, in fact, is the case?
    Mr. Miller. At the request of the Senate Finance Committee, 
they asked us to review the admissions in a data set that is 
called MedPAR, which is where the admissions come from, and 
asked us to report it for them by race. The conclusions of that 
analysis were that there was something like--and these are 
using the categories that the MedPAR lists patients by. The 
percentage black was like 3 percent for specialty hospitals, 
compared to, if I am correct and remember correctly, about 9 
percent for other hospitals.
    Senator Coburn. And this is race-adjusted for the 
communities that they are in?
    Mr. Miller. Yes, and that is a really good question. It is 
looking at hospitals within the given marketplace to control 
for the fact that you have the mix within a----
    Senator Coburn. Would you be so kind as to submit that to 
this Subcommittee?
    Mr. Miller. Absolutely.
    Senator Coburn. Thank you very much.
    Senator Carper. That would be good. Thanks.
    Senator Coburn. I just have one other question, if I might 
ask it, and this is for Mr. Graubert. In June, your report on 
healthcare competition recommended repealing certificate of 
need laws because of their anti-competitive effects. Have you 
been able to quantify the cost that certificate of need laws 
add to the healthcare system, and if not, are you aware of 
other studies that have tried to measure this?
    Mr. Graubert. I believe we do have some studies that 
address this question, Mr. Chairman. Now, of course, I should 
preface this by saying that it is very difficult to measure all 
of the cost from lost competition because it also includes not 
only higher prices, but lost innovation, product choice and 
quality, things that if they are prevented, they are gone.
    In our study, we cite a number of studies in Chapter 8, 
particularly in footnote 37 which I would recommend to you. 
There is an older study from 1987 that estimated price 
increases between 4 and 5 percent resulting from the existence 
of CON laws. A later 1991 study indicated hospital costs 
approximately 10 percent higher in States that had had CON laws 
in place for at least 10 years. Then one of the witnesses at 
our hearings, Dr. Morrissey of the University of Alabama-
Birmingham, testified that his research had found price 
increases up to 20 percent attributable to CON laws.
    Senator Coburn. Thank you.
    Dr. Miller, aren't all the sub-specialty hospitals or 
specialty hospitals that receive Medicare reimbursement JCAHO-
approved?
    Mr. Miller. Not every hospital in Medicare has to be JCAHO-
approved, but it does have to meet Medicare conditions of 
participation.
    Senator Coburn. Is one of those conditions quality control 
in terms of surgical and medical procedures by the medical 
staff?
    Mr. Miller. I am not sure I could answer that.
    Senator Coburn. I can answer it. Absolutely, if you don't 
have control on that. The fact is in terms of self-referral for 
cases that should not be done, in fact, you can't get 
accredited if, in fact, you don't have a quality control 
looking at that in terms of utilization review inside any 
hospital in this country today.
    For my profession, I just want to defend it for a minute. 
Not everybody is a great actor in my profession. I understand 
that, but I also understand the institutions that are out 
there, and the physicians in this country are working hard 
everyday to make sure physicians who are not doing it right are 
held accountable for not doing it right. Procedures are rarely 
done on people that are not needed. And I am referring to 
hospitals; I am not referring to the others.
    So I wanted to make the point for the record that the whole 
purpose for accreditation is to make sure you have the controls 
in place in a hospital setting to control behaviors that might 
be susceptible to economic advantage through the lack of a 
medical ethic that is proper for the care of that patient.
    Mr. Miller. There should be nothing from my comments or the 
Commission's comments that should be taken as an attack on the 
medical profession. I don't think anything was meant to imply 
that a patient in these hospitals was getting inappropriate 
care. It was just that the patients that were going to those 
hospitals were less complex and the payment system was missing 
them.
    And if I could just say one other thing, I think it is 
important to point out that the Commission also looks at the 
issues much more broadly. I think in the FTC report they say 
something along the lines of you need to reward for quality. 
Physicians are rational animals like anyone else and if you can 
incent those types of things--and there were a series of 
recommendations that MedPAC made for inside the Medicare 
program to pay more on the basis of quality. So nothing should 
be taken as an attack on the medical profession here.
    Senator Coburn. No, but I think it is important for us when 
we talk about self-referral in specialty hospitals. The people 
I know who have an interest in specialty hospitals--it is about 
giving their patient the best care and the most timely care and 
the most efficient care, and controlling their own schedules in 
doing that, rather than self-referral for their own advantage.
    Now, there is no question that there is competitive 
advantage. That is why they put their investment into the 
hospital, but it goes back to the point I said earlier. In most 
of the specialty hospitals in Oklahoma, the number of doctors 
who are on staff who have no ownership far outweighs the number 
of doctors who are on staff that have an ownership.
    And you have to ask the question, why are they there? Why 
are they coming? If they get nothing financially out of it, why 
are they utilizing those services? That is an important 
question that needs to be asked by you all as you look at this.
    I have several questions I would like to submit for the 
record and ask that you return them with answers within 2 
weeks, if there is no objection by my counterpart. And I want 
to thank you so much for your forthright testimony and the hard 
work that you have done in this area.
    Mr. Miller. Sure. I appreciate it.
    Senator Coburn. Thank you. Let me welcome our second panel, 
and I appreciate all of those of you who have traveled and made 
an effort to be here for this Subcommittee hearing. Senator 
Carper had to attend another hearing and will not be with us 
for this second panel. However, your complete testimony will be 
made a part of the record and I would ask you, if you would, to 
limit your oral testimony to 5 minutes.
    On our second panel is Regina Herzlinger. She is the Nancy 
R. McPherson Professor of Business Administration, School of 
Business, Harvard University. Next is a well-known acquaintance 
of mine from Oklahoma, Dr. Stan Pelofsky, President, 
Neuroscience Specialists, and owner of Oklahoma Spine Hospital, 
and associated with a very good friend of mine, Dr. Jim Oder; 
John Thomas, Senior Vice President and General Counsel, Baylor 
Health Care System; Dr. James Cain, a practicing family 
physician from Lampasas, Texas; Ed Jungbluth, heart patient, 
Albuquerque, New Mexico--welcome; and Dr. Plested, Immediate 
Past Chair, Board of Trustees, American Medical Association.
    I welcome each of you, and Dr. Herzlinger, if you would 
start, please.

TESTIMONY OF REGINA E. HERZLINGER, PH.D.,\1\ NANCY R. McPHERSON 
PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD BUSINESS SCHOOL, 
                     BOSTON, MASSACHUSETTS

    Ms. Herzlinger. Thank you, Dr. Coburn, ladies and 
gentlemen. It is a pleasure to be here. I am going to talk 
about healthcare competition from the perspective of healthcare 
in our economy.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Herzlinger appears in the 
Appendix on page 74.
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    We are very fortunate to live in the United States. We are 
fortunate in many ways, but we also have the highest GDP per 
capita among the countries in the world. The reason we have it 
is we have the highest rate of growth of productivity among 
developed countries in the world. Productivity comes from 
innovation.
    It is unfortunate that this moratorium and the 
recommendations by MedPAC to extend it kill off one of the best 
chances for productivity in the healthcare system. It is 
unfortunate because, although we have such record high GDP per 
capita, our healthcare costs are killing national 
competitiveness.
    General Motors' financial problems can be traced directly 
to its healthcare costs. It is difficult to compete with 
countries that have far lower healthcare costs. At 15 percent 
of GDP, one out of every seven dollars, our healthcare costs 
are the highest in the world and they rise at record rates.
    Hospitals account for the most significant portion of our 
healthcare costs and they are the number one reason that they 
are rising. Innovation in hospitals would lead to productivity 
and productivity would increase our competitiveness when it 
comes to healthcare costs.
    Now, my colleagues here will talk about why specialization 
in healthcare is so good, but generally, specialization in our 
economy does two things. It makes things cheaper. It makes 
things better.
    When it comes to healthcare, specialization has another 
asset that nobody has addressed and that is the infrastructure 
of our nonprofit community hospitals is very old. It is going 
to have to be replaced and it will cost the taxpayers a great 
deal of money to do that. Specialty hospitals are investor-
owned. It will be the private sector that provides that capital 
and not the public sector.
    Now, what do we know about specialization from the rest of 
our economy? We know it is critical. For example, Nucor, which 
is a specialty steel company, almost singlehandedly revived the 
steel sector. Here are some of the results from Nucor. It takes 
one man-hour to make a ton of steel. The rest of the industry 
takes three man hours. Its workers earn $60,000 per year, 
mostly from bonuses based on productivity. They are treated 
like owners, whereas the unionized workers in the rest of the 
industry earn $50,000. Nucor made huge profits while the rest 
of the industry lost an enormous amount of money.
    What is the Nucor story? It is ``do good, do well.'' They 
did great for the customer, lowered the price of steel; great 
for their workers, higher wages; and great for their 
shareholders. That is the story of specialization.
    Another part of specialization is it is typically started 
by people who know what they are doing. Thomas Edison was a 
very famous inventor. He started a little business that is now 
called General Electric. Bill Gates certainly knows a lot more 
about computing than I do or than most people do. He started a 
little business called Microsoft. Sam Walton, a fabulous 
retailer, started a company called Wal-Mart. Typically, 
specialization is led by people who own it, who know a great 
deal about it. Many people may not know that Jack Welch, the 
brilliant CEO of General Electric, had a doctorate in 
engineering.
    Yet when the hospitals complain about specialized 
hospitals, they have valid points. It will hurt their 
profitability; there is the danger of over-referral; and who 
will care for the uninsured? Those complaints are quite valid. 
But the diagnosis that it is the specialty hospital that is 
causing these problems is not valid.
    The profitability issue, as your two prior witnesses ably 
testified, is caused by mispricing by CMS. It is caused by a 
system in which a bunch of bureaucrats try to replace what the 
market normally does.
    The problem of over-referral is not caused by the fact that 
physicians own facilities. Why don't people buy more steel than 
they need to? Why don't they buy more products than they need 
to? The answer is that the third-party system in healthcare 
insulates consumers from the costs of their care and they may 
buy more than they need to, and because it is a third-party 
system, consumers don't have the kind of information that would 
help them be very savvy in their buying.
    Last, the issue of the uninsured. Is that an issue that 
should be solved by suppressing efficient innovations, or is 
that an issue that should be solved through another mechanism 
by addressing the financing needs of the uninsured? Surely, it 
should be the latter.
    So what should the Congress do? It should lift the barrier 
to competition. The moratorium is a way of suppressing the 
competition that is so sorely needed in the hospital sector. It 
should encourage market-based provider pricing and stop the 
tinkering by a group of bureaucrats trying to emulate the 
market. And lastly, it should address the issue of how to make 
sure that the uninsured have as much access as anybody else.
    Senator Coburn. Thank you, Dr. Herzlinger. Dr. Pelofsky.

 TESTIMONY OF STAN PELOFSKY, M.D.,\1\ PRESIDENT, NEUROSCIENCE 
  SPECIALISTS, AND PHYSICIAN OWNER, OKLAHOMA SPINE HOSPITAL, 
                    OKLAHOMA CITY, OKLAHOMA

    Dr. Pelofsky. Dr. Coburn, my name is Dr. Stan Pelofsky. I 
have been a practicing neurosurgeon for 35 years. I am a 
physician owner of the Oklahoma Spine Hospital, and I truly 
appreciate the invitation to appear before you and your 
Subcommittee. I have submitted my written testimony and now 
would like to present my thoughts concerning the Oklahoma Spine 
Hospital.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. Pelofsky appears in the Appendix 
on page 81.
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    I belong to a group of ten neurosurgeons, one of the 
largest and most reputable neurosurgical groups in the country. 
Ten years ago, my partners and I became extremely concerned 
with the quality of care our patients were receiving at all the 
large community hospitals in Oklahoma City. Staffing budgets 
were being drastically reduced. Agency nurses were being 
subcontracted to care for our patients not only on the floor, 
but in the operating room, as well. Trying to obtain new 
technology was like pulling teeth and often took 1 to 2 years. 
Endless and mindless committee meetings were zapping our time 
and our efficiency.
    CEOs receiving high six-figure salaries were spending seven 
figures annually on blatant advertisement. Inefficiencies were 
built into the system. Surgeons were competing for operating 
room time. The infection rate and complication rate was 
unacceptable, and quality of care had deteriorated and costs 
were skyrocketing.
    My partners and I knew there had to be a better way. We had 
a dream. We had a vision. We put together the Oklahoma Spine 
Hospital model and offered it to just about every community 
hospital in Oklahoma City. We were rejected and were told, what 
do doctors know about running a hospital? Well, Dr. Coburn, it 
turns out we knew a heck of a lot.
    What is the Oklahoma Spine Hospital? It is a totally owned 
and operated physician specialty hospital. It is a hospital 
which specializes in the diagnosis and medical treatment of 
spine disease. It is a world-class facility. And it is for 
patients who have failed every effort at maximum aggressive 
medical treatment. Surgery is never the first, second, or third 
choice. We are a true hospital. We are not an ambulatory 
surgical unit. We are licensed by the Oklahoma Health 
Department and we belong to the Oklahoma Hospital Association.
    Our patients stay 1 to 2 days in the hospital, some 3 to 4 
days after complex surgery. When surgery becomes, and I must 
stress this point, the last and only other choice for patients 
who are suffering from spine disease with disability and with 
pain, then expert surgeons with expert technology take care of 
them.
    Since our opening in November 1999, we have performed over 
12,000 spine and complex spine surgeries, including 
microsurgeries, fusion surgeries, and artificial disk 
replacements. We are an 18-bed, 5-operating room hospital that 
now employs over 200 Oklahomans. We are most proud of the fact 
that we have been able to save literally thousands of patients 
from surgical treatment by providing them a proper diagnosis 
and medical treatment plan.
    Well, what have we accomplished? Length of stay after 
complex surgery, spine surgery, 1.6 days now on the average, a 
0.11 percent infection rate, zero mortality rate, a nurse 
turnover rate of 3.2 percent, 98 percent patient satisfaction 
rate, 98 percent employee satisfaction rate, and I submit all 
these factors not only improve quality, but they cut the cost 
of healthcare to both Medicare as well as to the healthcare 
industry.
    We outsource all administrative functions. We have no six-
figure CEOs running the place. We spend nothing on 
advertisement or marketing except to give each patient who 
leaves our facility a pastel-colored T-shirt, their choice of 
color, their choice of size, with our logo on it. We have, as 
the physician owners, the ability to purchase state-of-the-art 
equipment at any cost, change policies, increase salaries, AND 
provide bonuses, literally overnight, without mindless, 
wasteful meetings.
    We have a Level IV emergency room that is opened and 
staffed by an on-call physician owner of the hospital 24/7, 
365. Plus, every one of the physician owners at the Oklahoma 
Spine Hospital participates in coverage in the emergency room 
of Mercy Hospital, a large community hospital across the 
street, 24/7, 365.
    Last year, the Oklahoma Spine Hospital paid the following 
taxes: Federal tax, $4.5 million; State tax, $770,000; sales 
tax, $860,000; property tax, $225,000. And much of our taxes 
have helped fund numerous State and Federal healthcare 
problems.
    The Oklahoma Spine Hospital brings value to our healthcare 
system and improves quality and is cutting costs. It has raised 
the bar. It has once again shown what American competition, 
invention, and freedom can do.
    However, our critics are not applauding our 
accomplishments. Our critics, the American Hospital 
Association, the Oklahoma Hospital Association, HCA, the $100 
billion Goliath in the industry, Integris in Oklahoma City, 
rather than embrace our model or compete against it, have 
decided quite simply to try to legislate us out of business. 
Here is our critics' spin versus the facts.
    Spin number one, Oklahoma Spine Hospital physicians self-
refer and are essentially knife-happy in order to reap personal 
financial rewards. This claim, based on our professional 
integrity and national reputation, is not only outrageous, it 
is insulting.
    Spin number two of our critics, the Oklahoma Spine Hospital 
physicians cherry pick our patients. Dr. Coburn, the fact is, 
we cherry pick our doctors. We cherry pick our staff. We cherry 
pick our nurses. We cherry pick our scrub techs. We never 
cherry pick our patients. Here is the payer mix of Oklahoma 
Spine Hospital: Private health insurance, 42 percent; workmans' 
comp, 33 percent, Medicare and Medicaid, 17 percent; self-pay/
no-pay, 8 percent.
    Spin number three of our critics, the physicians at 
Oklahoma Spine Hospital don't cover the ERs. Fact: We cover our 
ER, we cover Mercy's ER, again, 24/7, 365.
    Spin number four, we are sapping much-needed financial 
resources from our community hospitals and academic medical 
centers. Fact: HCA, which has a joint operating agreement with 
OU Medical Center, last year had a $47.5 million net profit, an 
11.1 percent profit margin, probably the highest in the State. 
Integris, Oklahoma City, made tens of millions of dollars in 
profit and they are a nonprofit hospital. Fact: Every large 
community hospital in Oklahoma City did extraordinarily well 
financially last year and these Goliaths should not be 
threatened by our 18-bed specialty hospital.
    In summary, Dr. Coburn, we are extremely proud of our 
accomplishments. We have created giant efficiencies with 
wonderful outcomes, patient and staff satisfaction rates that 
have been unheard of. Isn't that what being a doctor is all 
about? Isn't that what America is all about, the freedom to 
create, to compete, to raise the bar for everyone? What a 
country.
    Finally, two last points. Without grandstanding or 
showboating, the physician-owners of the Oklahoma Spine 
Hospital challenge any hospital in this country, any for-
profit, nonprofit, HCA, academic center, Integris, to go one-
on-one with us on a scientific study, a study that is 
prospective, double-blinded, independently judged and analyzed, 
peer reviewed, and with matched cohorts of patients looking at 
just three parameters. What are these three parameters? The 
parameters are outcomes, patient satisfaction, and cost. I will 
tell you, if they go one-on-one with us, once again, David will 
slay Goliath. [Laughter.]
    Last point, Dr. Coburn. The future viability of specialty 
hospitals rests largely within the control of the U.S. Congress 
and the Center for Medicare and Medicaid Services. The current 
moratorium is scheduled to end in just a few short weeks. On 
behalf of the Oklahoma Spine Hospital and its physician owners, 
I urge you to let this moratorium come to a permanent end. I 
also hope that you will express your support of specialty 
hospitals to CMS Administrator Mark McClellan and encourage the 
agency not to impose further regulations that will, by de 
facto, extend the moratorium beyond June 8.
    Again, thank you for this opportunity to testify.
    Senator Coburn. Dr. Pelofsky, thank you. I was somewhat 
lenient. I would hope the rest of us would stay within the 5 
minutes, if we could.
    Mr. Thomas.

   TESTIMONY OF JOHN T. THOMAS,\1\ SENIOR VICE PRESIDENT AND 
GENERAL COUNSEL, BAYLOR HEALTH CARE SYSTEM, DALLAS-FORT WORTH, 
                             TEXAS

    Mr. Thomas. Mr. Chairman, Members of the Subcommittee, my 
name is John Thomas. I am the General Counsel of Baylor Health 
Care System based in Dallas-Fort Worth, Texas.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Thomas appears in the Appendix on 
page 88.
---------------------------------------------------------------------------
    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 Baylor and to 
ask you to resist efforts to extend the moratorium on the 
development and growth of physician-owned specialty hospitals 
that will expire June 8 and to resist efforts to repeal the 
whole hospital exception under the so-called Stark self-
referral law.
    Baylor is the corporate sponsor of 13 nonprofit hospitals. 
Our flagship, Baylor University Medical Center, is located in 
downtown Dallas, a 1,000-bed quadenary teaching hospital with a 
Level I trauma center that provides care to more penetrating 
trauma victims than Dallas County's tax-supported Parkland. 
Baylor has the largest neo-natal ICU in the Southwest and one 
of the five largest organ transplant programs in the country. 
Last year, we provided more than $240 million in community 
benefits at cost, not including bad debt. Charity care is 
provided under the most generous charity care financial 
assistance policy among all Dallas-Fort Worth hospitals.
    At the same time, Baylor has a long history of innovation. 
In the early 1900's, Baylor developed the prepaid 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 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 surgical centers, surgical hospitals, 
and heart hospitals. Today, Baylor has an ownership interest in 
25 facilities partnered with physicians. Over 2,000 physicians 
actively practice at these facilities, while only about 500 
have an ownership interest.
    Texas Health Resources, the other major nonprofit system in 
Dallas, also has a number of hospitals and facilities partnered 
with physicians.
    Five of Baylor's facilities are affected by the moratorium. 
Three are surgical hospitals. Two are heart hospitals. Each is 
critically important to the mission, but more importantly, is 
critical to the advancement of healthcare competition and 
improvements in quality, safety, patient satisfaction, and 
access in Dallas-Fort Worth.
    By 2020, the population of Dallas-Fort Worth is expected to 
exceed ten million people, more than double the population 
today. As Baylor projects the needs of our community to meet 
this population growth and demand for access to healthcare 
services, partnering with physicians not only brings capital to 
help finance the response to those needs. More importantly, 
economic investment motivates physicians to bring their time, 
energy, and talent to the design, operation, and governance and 
operation of more effective and efficient healthcare 
facilities.
    No example proves this point better than our Baylor Heart 
and Vascular Hospital, a facility located on the inner-city 
campus of our flagship, Baylor University Medical Center. The 
quality of this facility is the highest in our healthcare 
system and is among the highest rated heart programs in the 
United States on CMS's website, hospitalcompare.hhs.gov. In my 
written testimony, you will see a chart comparing that hospital 
to the national average and the teaching hospitals.
    Month after month, the Baylor Heart Hospital scores at or 
near 100 percent on the CMS indicators for acute myocardial 
infarction, congestive heart failure, and surgical infection 
prevention standards. Emergency room Baylor Heart Hospital 
protocols consistently result in ER patients going from the 
door to the cath lab within 30 to 45 minutes of arrival, with 
vessel inflation under 90 minutes. Patient satisfaction, as 
measured by a national survey tool, exceeds the 96th percentile 
in that national database. When patients are asked, ``Did you 
feel the staff were knowledgeable and provided safe care?'' 
month after month, 100 percent of patients respond yes.
    With physician alignment, the Baylor Heart Hospital has 
seen dramatic improvements in cost reduction and efficiency. In 
the first year of operation, over $12 million of costs were 
eliminated from the cost to provide these services before the 
heart hospital opened.
    Dramatically, staff turnover is less than 11 percent per 
year, while the rest of our community exceeds 20 percent. This 
is an important indicator of both the quality of clinical 
environment--the staff enjoys working there--and cost 
containment. Baylor's cost to replace an R.N. approaches 
$60,000 per nurse for recruiting, training, and retention. With 
low turnover, these dollars are saved.
    Finally, Baylor's specialty hospitals are the safest in the 
system, with the Baylor Heart Hospital leading the way with no 
medical liability claims ever in the history of that facility. 
Baylor's other specialty hospitals also have much lower 
liability claim rates.
    Last, as the community focused on homeland security, the 
Nation's trauma system is the backbone of effective response to 
future incidents, if any. Baylor has used alignment of 
physicians through specialty hospitals and ambulatory surgery 
center joint ventures and other forms of effective alignment to 
keep physicians engaged in the trauma system. These physicians 
also commit to providing charity care under Baylor's charity 
care and financial assistance policy. Unfortunately, 30 percent 
of the Texas population is uninsured, with an even higher rate 
in downtown Dallas, where the heart hospital is located.
    We urge you to allow the moratorium on physician ownership 
and development to end June 8. The moratorium has not been 
benign and a continuation will be even worse. This has affected 
our ability to expand our inner-city heart hospital to meet the 
needs of that community. The moratorium has prevented Baylor 
from bringing higher-quality heart and vascular care to Plano, 
where heart disease remains the number one killer. And the 
moratorium has prevented the Baylor-Frisco Medical Center from 
expanding to provide obstetrics and other women's services to 
one of the fastest-growing communities in the country.
    Senator Coburn. Thank you, Mr. Thomas. Dr. Cain.

    TESTIMONY OF JAMES E. CAIN, M.D.,\1\ PRACTICE IN FAMILY 
                MEDICINE, LAMPASAS COUNTY, TEXAS

    Dr. Cain. Dr. Coburn, thank you for having me here today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. Cain appears in the Appendix on 
page 96.
---------------------------------------------------------------------------
    Senator Coburn. I am glad you are here.
    Dr. Cain. My name is James E. Cain. I am from Lampasas, 
Texas, and I practice rural medicine. The first 18 years of my 
life, I was raised in rural Arkansas, the next 18 years of my 
life in Houston, Texas. My education was at Houston Baptist 
University, Baylor College of Medicine, and University of Texas 
Health Science Center.
    When I finished my education, I chose to go back to rural 
America and practice medicine. I live in Lampasas now, which is 
about an hour north of Austin, an hour West of Fort Hood, and 
about an hour South of a little town called Crawford, Texas. We 
have about 20,000 people in our county. Our average income per 
family there is about $30,000 per year.
    My partners and I are about the only show in the county. We 
also help the surrounding counties. Primary sources of income 
are Medicare, Medicaid, Tricare, which is the military 
insurance, a handful of commercial insurances, and private pay 
insurances. We work on an average 12 hours a day and we don't 
turn away anyone for their ability or lack of ability to pay.
    A few weeks ago, someone asked me how Austin Heart Hospital 
has affected my practice in Lampasas County, and the reasons I 
gave and the answers I gave to those questions are why I am 
here today.
    I shared with them the scenario, and I share it with you 
today. It plays out in my life on a weekly basis. I get a call 
from the emergency room. A patient of mine is there and is not 
doing well. I get in my truck--yes, I am from Texas and I drive 
a pick-up truck, no hat---- [Laughter.]
    Drive to the emergency room, and I call Austin Heart 
Hospital. Within a few minutes, I have a cardiologist on the 
line with me. They help me stabilize my patient, often 
stabilizing me, as well. You can relate to that, I am sure. We 
discuss transfer, ambulance, helicopter. The patient is 
transferred. I go back to work or back home.
    Within a few hours, that cardiologist is generally calling 
me, letting me know what happened to the patient, what kind of 
care they received, and what kind of follow-up care they are 
going to need. Within a few weeks, few days, the patient is 
back in my office for follow-up, obviously very well cared for 
and very impressed with the care that they have received there.
    The most important things about the scenario that I have 
laid out for you is that at no point in this conversation so 
far has anyone asked me about my patient's insurance or their 
ability to pay.
    Second, the time with which they handle these cases is 
second to none, and when you are an hour-and-a-half away from a 
tertiary center, sometimes minutes do mean everything.
    Compare that with what I get at most of the other hospitals 
that I transfer to. Right off the bat, I get an administrator. 
What is the first question she asks me? Who is paying? What is 
the insurance? Of course. Then I get a utilization nurse, and 
there is nothing wrong with that. I certainly can understand 
this. When they find out the patient has Medicaid, or for God's 
sake has no insurance, then the conversation turns to bed 
availability, is the patient actually stable enough to transfer 
to their facility, and are they actually the closest hospital 
for me to transfer my patient to? In the end, if I get that 
patient transferred to their facility, it is usually to the 
emergency room department because the utilization review nurse 
feels like a second workup will probably be better and in the 
best interest of the patient, which means maybe we can find 
something different, keep the patient out of the hospital, not 
utilize resources that this patient obviously can't pay for.
    It also frustrates me when I get a patient at another 
facility after hours on the weekend. In a few hours, I call, 
try to find someone. I usually get a nurse on the phone and I 
am told the patient can't get a procedure tonight because they 
don't do this after hours on the weekends. The patient is going 
to have to wait until Monday to figure out what is going on 
with them. They are stable, however. To me, that is two extra 
days in the hospital, a calculated but small increased risk to 
my patient, obviously an increased risk to the system.
    My experiences with Austin Heart Hospital has been, like 
the neurosurgeon down the table, a 7-day workweek, 24 hours a 
day.
    I am constantly seeing in the medical journals and in the 
medical economic journals now medical models that are being 
related to patient outcome. Then the insurance companies are 
now reimbursing us based on patient outcome. I have included in 
my written statement many of the studies and recognitions by 
the reputable organizations that speak favorably of Austin 
Heart Hospital, their length of stay, their patient outcome, 
quality of care, so on and so forth, but it is my personal 
experience and the experience of my patients that leave no 
doubt in my mind that they are receiving the best possible care 
that I can offer them at this institution.
    In this day and age of frustrated physicians, skeptical 
patients, confused administrators and politicians, trying to 
figure out how to make these dollars cover expenses, it is very 
easy to become cynical. I assure you, I am no cynic. I still 
love what I do. I enjoy going to work every day. I am proud to 
be a country doctor.
    I ask that you guys look at the information, look at the 
data that institutions such as the Heart Hospital of Austin are 
giving you. Look at the effective care that they are 
delivering. Look at their patient outcome data. I believe, as 
many of us in the business, that good patient outcome and 
effective care in the end is what is going to stretch these 
dollars.
    I appreciate your time and thank you for your patience.
    Senator Coburn. Thank you, Dr. Cain. Mr. Jungbluth.

TESTIMONY OF ED JUNGBLUTH,\1\ HEART PATIENT, HEART HOSPITAL OF 
              NEW MEXICO, ALBUQUERQUE, NEW MEXICO

    Mr. Jungbluth. Thank you, Mr. Chairman. My name is Ed 
Jungbluth and I am a 71-year-old heart patient and I think I am 
one of the patients that everybody is talking about today, 
actually, although you may be jumping around it. I have had a 
heart attack, angioplasty, and an AICD, automatic internal 
coronary defibrillator. I am sure you know what that is.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Jungbluth appears in the Appendix 
on page 100.
---------------------------------------------------------------------------
    Senator Coburn. I do.
    Mr. Jungbluth. Make that three AICDs. I have always been an 
active person and enjoyed life to the very fullest, so needless 
to say, the onset of my first heart attack was a bit discerning 
to both me and my wife, Mimi.
    In 1988, I had a heart attack while living and working in 
the tourism industry in Estes Park, Colorado. After 
experiencing chest pains, we went to the local emergency 
department, where I was stabilized and transported to St. 
Luke's Hospital in Denver, Colorado, where I had an 
angioplasty. Though the care at the emergency room in Estes 
Park was good, the hospital was not equipped to do any 
interventional procedure. I have termed this as a ``pack and 
ship'' operation. That is what I got a lot of, pack and ship. 
Because I love life and because my wife took advice to heart, 
we modified our eating and exercise habits and took the steps 
necessary to give my heart the best chance for recovery.
    It wasn't until 2000 that I began to experience other heart 
problems, though this time it was rhythm problems. While 
spending time in Phoenix for Major League Baseball spring 
training, I had my first bout with v-tach, ventricular 
tachycardia. It was a Sunday afternoon and I ended up at Mesa 
General in the Phoenix area and spent many days in intensive 
care while my condition was being diagnosed and I was 
stabilized. Again, I happened to land in a facility where there 
was not specialty care available for my heart problems.
    Finally, I was transported to another facility in Phoenix 
where I received my first AICD. The care was adequate, but 
neither facility really had the extensive type of cardiac care 
that I required. I was released and I was able to travel back 
home to Gallup, New Mexico, on the next day after the implant.
    Soon after arriving home, I had my first experience as a 
patient at Rehoboth McKinley Christian Hospital in Gallup. I 
had a tremendous pain in my left arm and went to the emergency 
room. The diagnosis was a blood clot in my arm. Unfortunately, 
I was told that they could not treat me--a higher level of 
cardiac care was necessary---and was instructed to go to 
Albuquerque for treatment.
    As you can imagine, these weeks were traumatic and I was 
concerned about my heart. I am a Medicare-insured patient and I 
knew that I could have access to any facility in Albuquerque. 
At that point, I heard about the Heart Hospital of New Mexico 
and that if I went there, I would have access to all heart 
specialists and decided to get myself there as quickly as 
possible. I was driven by a friend and arrived about 3 a.m. 
that morning. I spent 9 days at Heart Hospital of New Mexico 
and have never felt so safe and secure and confident that I was 
receiving the specialty treatment that my condition required. I 
was not sent by investor physicians, but rather chose to go 
because I had investigated and learned that they provide the 
highest quality heart care. It is important when you live in a 
rural area to educate yourself and be prepared to make life and 
death decisions in terms of healthcare.
    The story continues. In 2002, while in Santa Fe on 
business, my AICD fired for the very first time. That is really 
a thrill. I went to St. Vincent's, the sole community hospital. 
Again, I was stabilized overnight and released with follow-up 
instructions to see a New Mexico Heart Institute 
electrophysiologist in Albuquerque.
    My condition became more of a concern, and throughout the 
year of 2002, I experienced numerous firings of the AICD while 
living in Gallup. On each occasion, I had to get to the 
emergency department at Rehoboth while I was being stabilized, 
and because they were unable to treat me, I was transferred, 
packed and shipped, by air to the Heart Hospital of New Mexico.
    Fortunately, through the relationship of Dr. Swaminathan, a 
New Mexico Heart Institute cardiologist who practices in 
Gallup, and Heart Hospital of New Mexico's quick transfer 
initiative, I was able to arrive with specialists waiting as 
quickly as possible. In one instance, while in the ambulance en 
route to the airport in Gallup, my AICD fired four times and I 
had to return to the hospital to be stabilized again before I 
could be flown to the Heart Hospital of New Mexico (HHNM). Upon 
arrival at HHNM, it was determined that the unit installed in 
Phoenix had failed and I received a new AICD. Because my v-tach 
is severe, I have had numerous firings over the past few years 
and in each case was transferred.
    Upon concern for my health and well-being, for the peace of 
mind for both my wife and I, we decided we wanted to move to 
Albuquerque to be close to Heart Hospital of New Mexico. We 
feel at home, safe, and secure. With the experience we have had 
as an inpatient, I know that care is always timely, with the 
most specialized staff.
    As it has turned out, our decision was the right one. Since 
moving, I have had the fortune of being close to the Heart 
Hospital of New Mexico and have experienced treatment in their 
emergency department. They know that time means muscle, heart 
muscle, and life when it comes to heart patients. I have had 
more problems with v-tach and have been rushed twice over a 2-
month period to the Heart Hospital emergency department. I know 
from experience that the timeliness of care and expertise of 
all physicians have allowed me to maintain an active and normal 
life. The emergency department physicians have deep experience 
and have immediate access to the specialized cardiologists. On 
both occasions, my treatment was quick, technically superb, and 
compassionate. In fact, my wife, who is an accomplished artist, 
was scheduled to participate in an art show in California, felt 
comfortable with me in HHNM that she went on to the art show.
    Senator Coburn. Could you sum up for us?
    Mr. Jungbluth. I am going to do that. In April 2005, I 
received a replacement AICD from the Heart Hospital. They put 
patient care first. I am a chronic heart patient. I suffer from 
congestive heart failure. Am I concerned? Yes, but worried, no. 
Thank you.
    Senator Coburn. Thank you. Dr. Plested.

 TESTIMONY OF WILLIAM G. PLESTED, III, M.D.,\1\ IMMEDIATE PAST 
     CHAIR, BOARD OF TRUSTEES, AMERICAN MEDICAL ASSOCIATION

    Dr. Plested. Thank you, Chairman Coburn. My name is Bill 
Plested. I am Immediate Past Chair of the Board of Trustees of 
the American Medical Association and a practicing thoracic and 
cardiovascular surgeon from Santa Monica, California.
---------------------------------------------------------------------------
    \1\ The prepared statement of Dr. Plested appears in the Appendix 
on page 103.
---------------------------------------------------------------------------
    First, I want to thank you for calling this important 
hearing. The AMA believes that competition is absolutely vital 
to ensuring high quality, cost effective healthcare for 
America's patients. And competition from physician-owned 
hospitals is key. Why? It means more choices for patients, 
improvements and innovations, increased quality of care, 
extremely high patient satisfaction, and healthcare decisions 
that are made by patients and their physicians.
    Physicians who invest in specialty hospitals increase 
productivity and efficiency, improve scheduling of procedures, 
maintain desired staffing levels, purchase state-of-the-art 
lifesaving equipment. Competition from specialty hospitals has 
even been a self-admitted wake-up call for some general 
hospitals, forcing them to innovate in order for them to stay 
competitive.
    Studies support the premise that focus on a specific area 
of service can lead to higher quality and lower costs 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 patients' needs, and 
modify care delivery, as necessary.
    CMS found that quality measures at specialty heart 
hospitals were equal to or better than general hospitals. It 
also found lower rates of infection. Post-operative hip 
fracture, deep-vein thrombosis, and sepsis were also lower at 
specialty hospitals. In addition, mortality rates were 
significantly lower at specialty hospitals, even when adjusted 
for severity.
    Numerous studies, including CMS and MedPAC studies, found 
that patient satisfaction at specialty hospitals is extremely 
high. Greater convenience and comfort, higher nurse-to-patient 
ratios, and knowledgeable specialized nurses all contribute to 
these extremely high levels of satisfaction reported by 
patients and their families.
    Despite these benefits to patients, the continued existence 
of specialty hospitals is in jeopardy. The hospital 
associations and many general hospitals are vigorously 
attempting to eliminate competition. They attack physician 
ownership of specialty hospitals and engage in numerous 
practices to simply stifle competition.
    For example, general hospitals revoke or refuse medical 
staff membership or clinical privileges to physician investors 
and they advance State laws to ban physician ownership of 
hospitals. General hospitals also force health plans to sign 
exclusive contracts that shut out competing specialty 
hospitals. They refuse to cooperate with specialty hospitals in 
ways such as declining transfer agreements for emergency care. 
These practices interfere with the patient-physician 
relationship and they adversely affect patients.
    General hospitals claim that competition from specialty 
hospitals will hurt them financially by reducing some of their 
most profitable services which they use to subsidize 
unprofitable services. However, MedPAC found that general 
hospitals that compete with specialty hospitals have 
demonstrated financial performance that is comparable to other 
general hospitals.
    But even assuming that a hospital could prove it incurred 
financial harm, the answer is not to eliminate competition and 
support cross-subsidization. The answer is exactly the 
opposite. It is to support competition and eliminate cross-
subsidization. The Federal Trade Commission and the Department 
of Justice share this view.
    MedPAC recommends that CMS change Medicare hospital DRG 
payments to more accurately reflect the relative costs of 
hospital care, thus eliminating cross-subsidization, and the 
AMA supports these changes.
    The AMA strongly supports and encourages competition as a 
means of promoting high quality, cost effective healthcare. We 
believe that patients should continue to benefit from increased 
choice and competition that result from specialty hospitals.
    Therefore, the AMA believes patients will be better served 
if neither Congress nor the Administration acts to extend the 
moratorium on physician referrals to specialty hospitals, and 
CMS makes payment and policy changes recommended by MedPAC, and 
finally, healthy competition is not stifled. Thank you, sir.
    Senator Coburn. Thank you, Dr. Plested.
    For any of you that want to answer this question, we heard 
today that the study from MedPAC says that it is not 
necessarily cheaper, even though the number of hospital days is 
less. In any of your experience, can you relate to that at all? 
Dr. Herzlinger.
    Ms. Herzlinger. I teach accounting as well as healthcare at 
the Harvard Business School. The MedPAC method that was used to 
calculate costs is archaic. It is no longer used by 
corporations. The cost techniques that corporations now used is 
called activity-based costing and many of the cost data that 
come about from this methodology differ substantially from the 
old way that companies used to allocate their costs, which is 
the technique that MedPAC used.
    So, first of all, I question whether they accurately 
measured the costs of the general hospital. Of course, they 
measured accurately the costs of the specialty hospital because 
it does only one thing. But in a community hospital, in order 
to identify the costs of that one thing, you have to allocate a 
lot of joint costs and the methodology that was used is 
antiquated.
    Second, the specialty hospitals have to spend a tremendous 
amount of money in order to get through the thicket of 
regulations that would justify their existence. In MedCath, 
which is a heart hospital, the average expenditure just to 
enable it to exist, just to satisfy the myriad regulations it 
must go through, is about $200,000 a year.
    Third, depreciation, which is a major element of cost, is 
measured on the basis of historical cost, the plant and 
equipment, and community hospitals are often much older than 
the plant and equipment in specialty hospitals. So when 
specialty hospitals depreciate, those dollars are going to be 
much more expensive.
    Fourth, specialty hospitals have a cost of capital. They 
borrow money at non-subsidized rates. They have equity costs. 
Nonprofit community hospitals have none of those costs.
    The comparison is heavily flawed and until it is corrected, 
I don't think that it stands to support the allegation that one 
is more or less efficient than the other. Specifically, what 
MedPAC should do is adopt activity-based costing techniques in 
order to better understand what the costs of community 
hospitals are in providing the specific kind of care that 
special purpose specialty hospitals do.
    Senator Coburn. Thank you, Dr. Herzlinger. Dr. Pelofsky.
    Dr. Pelofsky. It just doesn't compute, Dr. Coburn, for 
those of us in the trenches. When you can have a patient out of 
the hospital in 1\1/2\ days after complex spine surgery with 
instrumentation, or the placement of an artificial disk, when 
you have an 0.11 percent infection rate compared to national 2 
to 5 percent, every time there is an infection, that is 7 more 
days of hospitalization at a cost of, what, $1,000 a day with 
antibiotics? If you could cut your infections, your 
complications, your days in the hospital, your readmission 
rate, you have to be saving the system money. It just simply 
doesn't compute.
    Senator Coburn. Mr. Thomas.
    Mr. Thomas. Mr. Chairman, the Baylor Heart Hospital 
experience was vastly different than MedPAC reported. As I 
testified, we reduced $12 million of cost directly out of the 
heart service that was once controlled and owned completely by 
our nonprofit hospital and then it was moved across the street. 
We have very accurate apples-to-apples comparisons.
    And then, second, with MedPAC's conclusion about the full-
day lower length of stay, on the managed care side, where you 
have per diem contracts and other forms of payment as opposed 
to a DRG fixed-base system, that is a 25 percent reduction in 
the cost to the payer and the individual patient.
    So, again, with us, it doesn't compute, either. Our 
hospital was open the year after MedPAC's study was--they 
looked at 2002. Ours is 2003. So we think that is an inaccurate 
conclusion that they reached.
    Senator Coburn. So maybe his comments about start-up costs 
and things like that may have been theirs, too?
    Mr. Thomas. Sure.
    Senator Coburn. All right. Does anybody else want to answer 
on that, comment on it?
    I want to make one observation and then I will ask a 
question. Dr. Cain, as a primary care doctor myself, dealing 
mainly in obstetrics but doing everything, my biggest 
frustration is the lack of accountability at the interface of 
where hospital employees interface with my patient. I don't 
know if you have experienced that. I know Dr. Pelofsky has. But 
there is no control by physicians anymore in terms of getting 
written orders done on their patients on a timely basis because 
the management in the hospital setting often does not compare 
to that of a specialty hospital.
    Any comments about accountability of ancillary personnel, 
in your hospital or in the Baylor or in the Austin Heart 
Hospital in terms of efficiency, of responsibility?
    Dr. Pelofsky. Yes. I brought 500 patient surveys that will 
deal with that issue. We at the Oklahoma Spine Hospital have 
happy faces, efficient people working at the top of their level 
of accomplishment and knowledge. If they don't, they are gone. 
We fire people if they don't perform our orders in the 
appropriate manner, or in the appropriate way.
    Senator Coburn. When all the hospitals are struggling to 
have nurses today, how is it that you can fire somebody and get 
a replacement?
    Dr. Pelofsky. Because we have a waiting list of nurses 
and----
    Senator Coburn. And that is because?
    Dr. Pelofsky. Because we pay better, we have better 
benefits, they have a better job, they have a better quality of 
life, and they are part of a team. They are part of every 
decision we make.
    I had a scrub tech tell me--we have a suggestion box. He 
tells me, Dr. Pelofsky, for your complex spine cases, you open 
up three packages of suture and you only usually use one. That 
was on my computer card. So we only open up one. We save two 
packages of suture, $15 each, $30 a case, 10 cases a week, $300 
a week times 52 weeks. On just me, we saved $15,000 in cost.
    So our people are part of the team. They are part of the 
creation of this model and it works. They are incentivized. It 
is America.
    Senator Coburn. All right. Mr. Thomas, any comment?
    Mr. Thomas. I think the team approach is exactly what we 
experienced. There is a waiting list to move from our other 
hospitals to our heart hospital and our specialty hospitals and 
the turnover rate--and the treatment by the physicians, again, 
as part of that team approach, there is much more 
accountability and the accountability flows both ways. The 
staff like working there. And again, the turnover rate has been 
very low.
    Senator Coburn. Let me ask those of you that are involved--
did you want to answer, Dr. Plested?
    Dr. Plested. Well, I just wanted to say that in my visits 
to the specialty hospitals, the thing that I am struck with and 
has been of interest to me my whole life is the level of 
esprit. I have always thought that people need to love what 
they do, and we heard that very well from Dr. Cain.
    In the general hospital, we have a continuing problem. I 
have to continually meet with nurses to tell them how important 
they are. They don't feel like they belong. They are shuffled 
off here and there and they are short here today and they are 
short there the next day. In the specialty hospitals, they are 
where they want to be. They are important members of the team, 
and this esprit is there. It is palpable, and I think that is 
incredibly important, and the question you have about turnover.
    Senator Coburn. Why is it there and not in the general 
hospital, in your opinion?
    Dr. Plested. Well, my personal opinion is that is a matter 
of leadership, and I just think that--what Stan said about 
happy faces, I think it just goes all the way. If you walk into 
the general hospital today, nobody is happy. I mean, walk into 
the admissions thing. You are greeted by the most dour, unhappy 
people, who don't like their job, they don't want to be there. 
They wonder why you are there. I have spent my life working on 
this in my hospital and I wish I could say it was different, 
but it isn't.
    Senator Coburn. All right. Dr. Pelofsky.
    Dr. Pelofsky. Dr. Coburn, I think the difference is that 
doctors get it. We are not administrators. We have no 
administration at our hospital. It is doctor-owned, doctor-run, 
and we know how valuable nurses are. They will make or break 
our case. They will get us sued or they will get us glorified. 
They are our left hand and our right hand and we treat them 
that way.
    Senator Coburn. Which would say that maybe they are not 
treated that way in the other hospitals?
    Dr. Pelofsky. They all have left the other hospitals 
because----
    Senator Coburn. OK. The question, what I want to get to is 
here is another advantage of specialty hospitals. What is the 
problem in the general hospitals with morale, turnover, 
training, competence, and efficiency?
    Dr. Pelofsky. The problem is that the CEO never goes up to 
the floor, never goes into the operating room, never goes into 
the doctor's lounge. I am thoroughly convinced it is so 
bureaucratic and it is such a dinosaur. The organization of 
today's community hospitals have got to change. They are 100 
years behind the time.
    Senator Coburn. Dr. Herzlinger.
    Ms. Herzlinger. I think there is analogy to other parts of 
the economy. For example, the department store is a failing 
economic entity and it has been supplanted by targeted, focused 
lifestyle stores.
    For example, I go to a store that is called Talbot's, which 
is a store that specializes in career dressing. That means dark 
pantsuits with long jackets for women with hips. [Laughter.]
    My daughter, who is a physician, she goes to Ann Taylor, 
which is a store that specializes in clothes for young career 
women. I don't know if you have Office Max or Office Depot or 
Staples in Oklahoma, but they are an example----
    Dr. Coburn. We are not quite that backward. We do have 
them. [Laughter.]
    Mr. Herzlinger. I didn't mean it that way. I didn't say--it 
is very complicated. [Laughter.]
    Senator Coburn. Markets work everywhere.
    Ms. Herzlinger. The point is, why did the department store 
fail? It failed to please its customers and it was because the 
scope was too big. It was beyond the ability of managers to 
manage it, and so the salespeople were unhappy. The merchandise 
was stale. It was just too much. These focused lifestyle-
oriented stores are very successful. They are successful in any 
way you count it.
    Now, McKensie did a study of why we have such great 
increases in productivity in our country. There were six 
industries that accounted for all the increases. Number one was 
the retailing industry, and the retailing industry is very 
surprising because it is a service industry and it is consumer-
driven. Why retailing? Because it reorganized itself from being 
everything for everybody kind of department stores that nobody 
could manage to much more feasible entities that were focused 
on things from the consumers' point of view.
    Senator Coburn. So higher unit sales per volume of work.
    Ms. Herzlinger. They do. They certainly do.
    Mr. Jungbluth. From the patient's perspective, Mr. 
Chairman, having been a very frequent visitor of the Heart 
Hospital, I see many of the same faces time and time again, not 
only the doctor staff, I also am talking about the nurses, I 
also am talking about the techs. I am talking about the people 
that sweep your floors and mop your floors every single day.
    I can only guess the reason that they are still there is 
that they are happy, because the tendency in this country is if 
you are not happy, you move on. And they must be fairly well 
paid, again, because the tendency is to move on if you are not 
well paid.
    I can't speak enough for at least this specialty hospital, 
and I know in talking with Dr. Cain about the Heart Hospital in 
Austin, the two are run by the same company. We both 
experienced the same thing in my conversation. It is the same 
feeling throughout each of these institutions--that there is 
just a different feeling there.
    It is not a ``pack and ship'' operation, and I say that 
with somewhat affection. It is not that type of operation at 
all. You are welcomed. The emergency rooms are great. I see the 
same people in the emergency rooms, because that is the only 
way I get in, is through the emergency room because I am an 
emergency case every time I go.
    Senator Coburn. Thank you. Let me thank each of you for 
being here. You will be submitted some questions for most of 
you and we would hope that you would respond to those within 2 
weeks.
    I would also make note that this country's economic model 
was based on the concept of competition, fair and open 
competition, and it is very concerning to me that the very 
thing that I think we need the most to control the cost in 
healthcare is the very thing that is probably going to be 
limited, at least over the next 6 months, through bureaucratic 
fiat associated with CMS. That costs us a lot. And if you are 
wondering how that can happen, all you have to do is look 
around at the power of lobbying and bureaucracies in Washington 
rather than the power of true competition and an honest and 
forthright discussion.
    My hope is that we see much more competition in healthcare, 
and I do not mean just at the hospital level, I mean at every 
level of healthcare--putting the consumer in the game. I know 
they know how to buy, and I know that we can compete. Good 
competition produces better quality, better price allocation, 
and better outcomes.
    I thank each of you for being here.
    [Whereupon, at 4:12 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

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