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

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

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

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

HEARING

before the

SUBCOMMITTEE ON HEALTH

of the

COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

__________

MAY 12, 2005

__________

Serial No. 109-38

__________

Printed for the use of the Committee on Energy and Commerce

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

__________

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

JOE BARTON, Texas, Chairman

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

Bud Albright, Staff Director

David Cavicke, Deputy Staff Director and General Counsel

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

______

Subcommittee on Health

NATHAN DEAL, Georgia, Chairman

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

(ii)
?

C O N T E N T S

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Page

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

(iii)

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

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THURSDAY, MAY 12, 2005

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

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

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

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

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

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

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

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

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

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

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

CMS' STUDY OF PHYSICIAN-OWNED SPECIALTY HOSPITALS

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

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

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

CMS' RESEARCH FINDINGS REGARDING PHYSICIAN-OWNED SPECIALTY HOSPITALS

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

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

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

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

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

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

RECOMMENDATIONS REGARDING PHYSICIAN-OWNED SPECIALTY HOSPITALS

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

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

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

STATEMENT OF GLENN M. HACKBARTH

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

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

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

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

HOW MANY AND WHERE

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

MOTIVATIONS FOR FORMING PHYSICIAN-OWNED SPECIALTY HOSPITALS AND CRITICS
OBJECTIONS

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

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

DO PHYSICIAN-OWNED SPECIALTY HOSPITALS HAVE LOWER COSTS?

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

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

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

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

DO SPECIALTY HOSPITALS TREAT A FAVORABLE MIX OF PATIENTS?

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

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

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

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

PAYMENT RECOMMENDATIONS

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

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

RECOMMENDATIONS ON THE MORATORIUM AND GAINSHARING

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

[GRAPHIC] [TIFF OMITTED] T1636.001

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

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

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

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

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

THE VALUE OF SPECIALTY HOSPITALS

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

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

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

THE WHOLE HOSPITAL OWNERSHIP EXEMPTION IN STARK II

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

SPECIALIZED HOSPITALS IN THE UNITED STATES

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

WHY PHYSICIANS ESTABLISH SPECIALTY HOSPITALS

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

RESPONSES TO CRITICS OF PHYSICIAN OWNED SPECIALTY HOSPITALS

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

Mr. Deal. Thank you.
Mr. Hornbeak.

STATEMENT OF JOHN E. HORNBEAK

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

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

INTRODUCTION

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

BACKGROUND

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

SELF-REFERRAL IS THE ISSUE

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

QUALITY

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

COMMITMENT TO COMMUNITY

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

IMPACT ON METHODIST HEALTH SYSTEM

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

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

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

FEDERATION OF AMERICAN HOSPITALS' PETITION

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

SOLUTION: CLOSE THE SELF-REFERRAL LOOPHOLE

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

CONCLUSION

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

Mr. Deal. Thank you.
Mr. Thomas.

STATEMENT OF JOHN T. THOMAS

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

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

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

Mr. Deal. Thank you.
Dr. Cram.

STATEMENT OF PETER CRAM

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

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

INTRODUCTION

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

THE HISTORY OF HOSPITAL SPECIALIZATION

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

THE SPECIALTY HOSPITAL CONTROVERSY

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

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

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

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

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

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

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

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

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

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

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[GRAPHIC] [TIFF OMITTED] T1636.003

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

Prepared Statement of the American College of Surgeons

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

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

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

Prepared Statement of the American Medical Association

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

BACKGROUND

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

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

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

EFFICIENCY, QUALITY AND PATIENT SATISFACTION

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

INCREASED COMPETITION

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

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

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

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

CONCLUSION

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

Prepared Statement of Jane Orient, Executive Director, Association of
American Physicians and Surgeons

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

Prepared Statement of the Federated Ambulatory Surgery Association

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

Prepared Statement of Thomas C. Howard, President, McBride Clinic, Inc.

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

Prepared Statement of Karen Kerrigan, President and CEO, Small Business
and Entrepreneurship Council

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

Prepared Statement of Sean Parnell, Vice President-External Affairs,
The Heartland Institute

INTRODUCTION

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

INDUCED DEMAND

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

CERTIFICATE OF NEED

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

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

GENERAL HOSPITALS FACE REAL CHALLENGES

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

CONCLUSIONS AND RECOMMENDATIONS

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

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

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

Prepared Statement of John W. Strayer III, National Center for Policy
Analysis

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

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