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Specialty Hospitals: Focused Factories or Cream Skimmers?

Conference Transcript
April 15, 2003

Opening Remarks
Paul B. Ginsburg, President, HSC
Kelly Devers, Ph.D., HSC
Click here to view the PowerPoint slides that accompanied this presentation.

Panel One: The View from the Health System
Moderator: Paul Ginsburg
  • William Greene, CEO, OrthoArkansas
  • David Kelleher, Health Care Options, Indianapolis
  • Gary Taylor, Principal of Equity Research, Bank of America Securities
  • William Petasnick, CEO, Froedtert Hospital, Milwaukee, Wisc.
Questions and Answers 10:05-10:20
Break 10:20-10:35
Panel Two: The View from the Policy Makers
  • Maria Castillo, Office of Rep. Jerry Kleczka, (D-Wisc.)
  • Mark Miller, Executive Director, Medicare Payment Advisory Commission
  • Thomas Walsh, consultant
Questions and Answers 11:35-11:50
Closing Remarks
Paul Ginsburg


PAUL GINSBURG: If you could take your seats now, I’d like to begin the conference.

I’d like to welcome you all to the Center for Studying Health System Change’s conference on specialty hospitals. The idea for this conference has been in my head for a long time. Our site visit team noted development of physician-owned specialty facilities in our previous round of site visits. This is the round that covers 2000 and 2001. And seeing this phenomenon and how important it appeared to be, we incorporated it in to protocols in our current round, which started in September 2002, and we will be finished at the end of this month.

One of our first visits was to Indianapolis where we really saw a striking story of a wide range of activity in both cardiovascular services and in orthopedic services as far as the development of specialty facilities. And, thus, given the interest, we decided to move ahead on publishing an issue brief that described the issues involved with specialty facilities, and we included the Indianapolis story as a case study.

We are planning additional analyses on this topic that will draw on the results from all 12 sites once we finish this, and we thought that we really ought to have a conference on this issue.

Despite the title, "Special Hospitals," this conference really focuses on the whole range of specialized facilities in health care, including ambulatory centers. Really, full or partial ownership of physicians is an important element of our focus, and what we are talking about really is part of broader changes that we see in the health system towards increased competition by all providers for services that are unusually profitable.

Let me talk about the plan of this conference. First, a word about your packets. Your packets, in addition to having the issue brief on specialty hospitals that is being released today, have the Indianapolis community report and has a special supplement to the Journal Health Services research which has some of the papers from last rounds of site visits. These are all the papers that have a strong longitudinal focus about changes in communities over the years that we have been going to communities, which dates back to 1996.

We will begin the conference with a presentation by Kelly Devers, a researcher at HSC and director of the provider team in the site visits, and then our first panel is for a view of this phenomenon from different segments of the health care system. We will get the perspective of physicians who are investing and practicing in specialized facilities. We will get the perspective of general hospitals who view these facilities as competitors in an unlevel playing field. We will get the perspective of investors, both those who invest in specialty facilities and those who invest in general hospitals. And, finally, we will get the perspective of employers who are concerned about the cost of health care and its quality.

Each of these panelists will speak for five to seven minutes, and because the time is short, I am going to time you with my kitchen timer. And then I am going to pose questions to each panelist after they speak rather than wait until all finish.

When they are finished and any panel discussion is over, then we will have questions and answers from the audience, and we are borrowing a tool that the Alliance for Health Reform uses with question cards. I think they are in your packet, and I urge you to write down your questions on cards, and we can get them answered more efficiently that way.

Then after a break, we will go into our policy maker panel, and from the policy makers we will hear about the role of Medicare payment policy in this phenomenon, and we will hear from proponents of legislation that would restrict ownership of specialty hospitals, and also we will hear a conservative policy perspective on these issues. And then we will have audience questions.

So, with that, let me turn to Kelly Devers for her presentation of the issue brief.

KELLY DEVERS: Good morning and welcome to the conference. I would like to thank my two co-authors, Linda Brewster and Paul Ginsburg.

[Note: Click here to view the PowerPoint slides that accompanied this presentation.]

The objectives of this presentation are to describe the prevalence and characteristics of specialty hospitals, drivers of their development, vital signs to monitor moving forward, and to discuss some of the policy implications.

The number of specialty hospitals has been increasing rapidly. Evidence of the rapid rise of specialty hospitals comes from both HSC site visits and national and local—local national reports. Since 1997, 11 freestanding specialty hospitals have opened or have been planned in the 12 CTS site visit communities. The U.S. has a long tradition of some types of specialty hospitals—for example, children’s hospitals, rehabilitation, eye, and ear—but those focusing on cardiology and orthopedics are new. While comprehensive national data on heart and orthopedic hospitals are not available, one report estimates that 50 or more such hospitals are already open and that many more are under development. As Paul mentioned, this trend appears to be a continuation of providers’ increasing emphasis on inpatient and outpatient specialty services.

Two important characteristics of specialty hospitals are who owns them and what other services they provide. Specialty hospitals are owned by national for-profit firms, general hospitals, physicians, or combinations of these groups through joint venture arrangements that vary in structure. For example, medical groups or individual physicians can have an ownership interest ranging from 15 to 50 percent. Physicians can partner with either general acute care hospitals or national for-profit firms that are increasingly prevalent and looking for growth opportunities in local markets. Partial physician ownership is a feature that distinguished heart and orthopedic hospitals from most general hospitals and other types of specialty hospitals.

With respect to services, the scope of emergency and other services varies. While some hospitals provide a full range of emergency services, others only have the capacity to handle emergencies related to the specialty service on which they are focusing. Similarly, the scope of other services provided may also vary. For example, what happens to a patient who has heart surgery that arrests in the middle of the night or spikes a fever, perhaps because they have developed some other kind of problem? A specialty hospital may have an anesthesiologist or a hospitalist available to respond to such emergencies; however, it’s not always clear whether other specialties and other specialists are willing to do consultations during the day or in the middle of the night at the specialty hospital where they may only have one or two patients.

The reasons for specialty hospital development are complex and vary across markets. However, our analysis suggests that three factors are important trends of this driver nationally. The first is relatively high reimbursement for some procedures. Since our first site visits in 1996 and ’97, hospital executives have reported that cardiovascular and orthopedic services are among the most profitable. It is unlikely that payers intended to create these distortions in payment rates; rather, reimbursement formulas may not be keeping up with productivity gains.

Another factor driving specialty hospital development is physicians’ desire to increase their control over the work environment. Physicians are increasingly frustrated with hospital control over management decisions affecting the quality and productivity of care, such as staffing levels, scheduling, and equipment purchase.

Finally, physicians are also looking for ways to increase their income. Specialty hospitals can help physicians raise their income by increasing the number of procedures they perform, that is, higher productivity, which in turn raises their professional fees.

Specialty hospitals also allow specialists to share a portion of the profit from the facility fee if they are owners.

Indianapolis, a market that the community tracking study has been following since 1996, provides an excellent example of how and why specialty hospitals are increasing in number. In the last two years, five specialty hospitals have opened or been planned in the metropolitan area, which only has 1.6 million residents. The building boom began when specialists affiliated with one of the four major hospital systems threatened to partner with MedCath, a national for-profit cardiovascular services company. These physicians had pressed the system to build a new hospital in which they could share an ownership interest but were turned away. The new competitive threat posed by a heart hospital jointly owned by its cardiologists and MedCath convinced the system to build a freestanding heart hospital, and the physicians own up to a 30-percent share.

Another hospital system also bent under pressure from specialists who threatened to partner with MedCath, agreeing to build a new freestanding facility in which they could own up to 50 percent. Given the increased competition from specialty heart hospitals and the MedCath threat, the two remaining large hospital systems in the market built their own heart hospitals, but without physician ownership.

Shortly after these developments, a large single-specialty group announced plans to build its own orthopedic hospital, so in a very short amount of time, the dominos fell and you have five hospitals up and under way. All of these specialty hospitals add some new capacity, some only modestly, primarily consolidating or replacing existing beds, while others add significant new capacity.

General hospitals have responded to the threat of specialty hospital development in three general ways. The first is to aggressively compete by establishing their own heart hospital or specialty hospital. By offering physicians some of the benefits of a specialty hospital, such as increased productivity, general hospitals have tried to prevent physicians from leaving and creating competing facilities or to counter any who do so. Hospitals have often attempted to keep down expenses by consolidating or replacing older facilities.

Another general response is to fight back. Hospitals have tried to deny admitting privileges to physicians who have ownership interest in competing inpatient and outpatient specialty facilities, a practice known as economic credentialing. Some courts have upheld these actions, but several other cases are pending. General hospitals have also attempted to discourage health plans from contracting with competing specialty hospitals by threatening to terminate their contracts for all of the hospitals in the system and all of the services.

Finally, as we saw in Indianapolis, general hospitals can joint venture with local physicians. As one CEO characterized it, "I’d like to have a whole loaf of bread, but if I can’t have that, I’d rather have a half a loaf than none."

To date, solid evidence about impact of specialty hospitals on quality, cost and price, and access to other services is sparse. However, insight into specialty hospitals’ potential impact on patients and communities can be garnered through debates between proponents and critics and related health services research.

Drawing on the concept of focused factories, proponents argue that specialty hospitals can improve quality and reduce costs through four mechanisms:

The first is performing a high volume of select procedures. Research shows that higher volume is associated with better quality and lower per-case cost.

Specialty hospitals are also able to build optimal facilities for delivering these select procedures, including the latest medical and information system technology.

Specialty hospitals may also select the best staff and motivate physicians through ownership.

And, finally, high volume and skilled, motivated staff are more likely to innovate and continuously improve care delivery.

Despite specialty hospitals’ promise, many are concerned about cream skimming. Specialty hospitals might succeed not by improving quality and reducing cost, but by selecting better paying services, better paying patients, and relatively healthy patients. Some patients with the same disease can be less severely ill and have fewer complicating conditions. As a result, they may be easier and cheaper to treat. An important implication of this concern is that studies comparing the quality and cost of specialty and general hospital care must take into account any differences in the types of conditions the facilities are treating and the severity of patients.

Another critical issue is whether demand is increasing enough to fill additional capacity. Will it? Proponents say yes. Relatively full / general hospitals, population growth, aging are some of the trends that proponents say support the need for additional specialty hospital capacity. If demand is not great enough in the immediate market, specialty hospitals can draw in patients from other markets because many procedures can wait to be scheduled in advance, i.e., they’re elective.

But critics say demand is not great enough to fill additional beds. The projections are either too optimistic or uncertain because long-term demand is extremely difficult to predict. For example, new technology like drug-eluting stenting may reduce the need for heart surgery by allowing patients to be treated with less invasive procedures or to live longer with the stent before a second surgery is required. Consequently, specialty hospitals will have to take patient volume away from general hospitals, negatively impacting both specialty hospitals and general hospitals.

Now, let’s take a closer look at the impact specialty hospitals might have on quality, cost and price,and address. These are the key vital signs for federal and state policy makers to monitor in the future.

As discussed, specialty hospitals can use focused-factory techniques to improve quality, including patient satisfaction. Yet specialty hospitals may lead to similar or poorer quality by spreading the same patient volume over more facilities. Specialty hospitals may also lead to inappropriate utilization as both specialty hospitals and general hospitals attempt to fill empty beds. Research shows that inappropriate utilization is a significant quality problem and may even be more of a problem when physicians have an ownership interest in the facility. Finally, specialty hospitals by definition do not provide a full range of services, raising concerns about the timeliness of needed care.

It is important to distinguish the impact specialty hospitals may have on both per-case and total cost. Per-case cost is the amount of resources required to provide a specialty service to an individual patient. Specialty hospitals, proponents argue, can use the same focused-factory techniques to achieve lower per-case costs. But critics content these specialty hospitals may lead to similar or higher per-case costs by spreading essentially the same volume over more facilities and creating empty beds.

Total cost is the amount of resources required to provide all health care services in both specialty and general hospitals. Again, proponents argue that total costs may stay the same or fall because per-case costs will decline enough to offset any increase in utilization. Essentially, if you are more efficient, you can provide more care with the same or fewer resources. Yet critics contend that specialty hospitals may increase total costs by creating excess capacity, potentially leading to overutilization of services, and, finally, to make up for revenue losses from specialty services, general hospitals may try to raise prices for other services.

A related issue is how price—that is, the amount that public or private purchasers pay for specialty services—are determined. Public payers like Medicare use formulas to determine payment, some of which may not be updated and there are elements of the formula that apply to all services. However, in commercial markets, prices are determined by negotiation between health plans and providers. Theoretically, more competitors and capacity will spur greater price competition. But price competition, critics contend, may be constrained by large general hospital systems’ negotiating rates for the specialty hospitals that they fully or partially own. Their desire not to undercut their own remaining programs and to maintain sufficient profits from these services to cross-subsidize other services may dampen the incentive to lower prices. As discussed previously, large hospital systems may also use their leverage to discourage health plans from contracting with competing specialty facilities.

With respect to access, proponents contend that specialty facilities may lead to improved access for certain services and for certain types of patients for sure. However, if specialty hospitals successfully cream-skim, it may jeopardize general hospitals’ ability to provide less profitable but essential services. For example, general hospitals may have to close or scale back some services, like burn units and psychiatric care, those that are simply essential but less profitable. These closures and cutbacks may have a greater impact on Medicaid and uninsured patients who rely on general acute-care hospitals and oftentimes do so as their usual source of care.

The rapid growth of specialty hospitals poses a significant challenge for policy makers, and that is, to allow competition and innovation while guarding against these potential problems. Despite relatively sparse evidence to date, policy makers have been asked to consider a range of options by proponents and critics.

One option is to revise Medicare hospital and physician payment policy, which many point to as a key driver in the payment differentials for certain services and that is contributing to the growth of specialty hospital development. Because many private payers use Medicare as a benchmark for their own policies, this could have an effect well beyond the Medicare population.

Another option would be to consider alternative approaches to funding essential community services, such as emergency care, burn units, psychiatric, et cetera. Currently, we rely on a complex system of cross-subsidies in which highly profitable services pay for unprofitable services. But if we could develop a new way to preserve access, this would be particularly attractive because specialty hospitals may, in fact, meet their promise of providing higher-quality services at a lower cost.

Finally, federal and state policy makers can regulate specialty hospitals in a variety of ways. For example, they could extend the federal Stark law and the federal laws that govern physician self-referral practices to freestanding specialty hospitals. Policy makers could also consider strengthening certificate-of-need laws, requiring specialty hospitals to gain state approval of construction projects and to show there is a need for additional capacity in the community. Policy makers could also impose the same quality and patient-safety standards that apply to general hospitals on specialty hospitals. These and other options will have to be considered as the number of specialty hospitals grow and we gain more experience with them and how they are affecting patients and local communities. Thank you.


PAUL GINSBURG: Thank you, Kelly. That was a great summary, and it was even better because you are perfectly on time.

So let me turn now to our panel, and we’ll start with Bill Greene, who is the CEO of OrthoArkansas, which is a large orthopedic surgery practice in Little Rock.

WILLIAM GREENE: Well, I started to try to be cute with you and tell you I’m Bill from Arkansas to talk to you about health care, but I wasn’t sure I could pull that off.


WILLIAM GREENE: I am very much out of my element here, but I think my role is to try to share with you some thoughts about what motivates physicians on the subject of ancillary income in particular perhaps, especially hospitals.

I use an analogy of the health care system as a three-legged stool made up of patients, providers and payers. Policy makers are the ones that tinker with the stool. Their role is to keep it in balance. My encouragement to policy makers is to be cautious in particular about over weakening or crippling the physician provider leg of the stool. If that should happen, it will be difficult and slow to repair that particular leg. What has happened over my tenure in clinic administration is that we began sometime back a phase of ratcheting down per-procedure reimbursements. The initial response by physicians to that was to simply work harder, see more patients to maintain their level of income. As we continued the ratcheting process, what we did in our group, what I see physicians around the country doing, is they began to reach out for ancillary income to sustain an anticipated or expected level of income. My concern is that that ratcheting per-procedure reimbursement or the overall control of physician income continues, that what we may begin to see is an abandonment of the market by some of those.

The real issue that I am supposed to hit her I think is why do physicians do what they do? If I could answer that well, I’d be rich. But out of every incoming class, generally speaking, the best and the brightest, at least some of those, and the ones that are most motivated to seek a challenge or reward enter the medical profession. Physicians are very incentive driven, and I think this is the one thing I wanted to try to focus on the most. Now, that incentive is not always the same, and I think it varies over their careers, but those incentives are recognition, income, accomplishment, lifestyle.

I kind of classify it into an incentive cycle for physicians. From the beginning of the training process through graduation, those incentive are almost exclusively challenge and accomplishment. They are clearly in a deferred gratification stage as far as all the income and lifestyle issues are concerned.

Beginning at graduation and going through kind of roughly the 10-year mark—and these are fuzzies, they vary for different positions—but that goal shifts almost exclusively to compensation, and perhaps recognition for what they’re doing. Somewhere in the middle there, about the 10 to 20-year mark on a physician’s career, dollars remain high, but all of a sudden lifestyle issues become much more important. And then at the final phase, from say the 20-year mark to the end of a physician’s career, lifestyle becomes critically important, and overall accomplishment or building of whatever becomes an issue.

So why do physicians build ancillary income, or in particular, hospitals? Well, it’s real simple. All those incentives I just gave you are met by this concept. In the early phases of practice, that first segment from graduation on, income is critical. Like I said, you’ve been through this huge deferred gratification phase, and accumulation and simply paying for getting where you are is a big deal. And so physicians see income as being threatened, so the development of ancillary incomes is a natural step to take to protect their anticipated level of income.

In the middle phase, kids are expensive, lifestyle, dollars are still important, but staying at home and enjoying those kids also becomes important, and it becomes important for the ancillary income step to be able to maintain or enhance their income, but at the same time, the attractiveness of the hospital concept guards their time and frustration concerns.

Then when a physician moves into the latter stages of his practice, from that 15 or 20-year mark on to the end—early in a physician’s career, they’re made of steel and can work forever and they’re invincible and they love the concept of what they do, and work equals income, so how hard they work and the requirements of call and all that stuff is not a big deal. They just say, "Bring it on." I have a new young physician in my group that was the top producer of my group last year. He walked down the hall saying, "I’ll take call for you," because all they want to do is work and generate. That changes pretty quickly.


WILLIAM GREENE: Anyway, by the time they get to this final phase, the physical grind of it and the lifestyle issues become paramount, and so the hospital, specialty hospital concept really fits well for the senior physician because it allows him the extend his career, and not have to do the things that are least appealing to him.

What do we do from a policy perspective? Fortunately, I’m not a policy maker, but it seems to me that again, don’t cripple the stool on the provider side, because if you drive out the best from the health care system, the health care system will suffer. People enter this profession with an anticipated level of reward, and so I would be cautious of that.

The trick is to define what you desire from physicians, provide the right incentives, study those incentives. An example, just a thought. Instead of limiting physician income potential, if you want to keep them in the general hospital setting, perhaps reward the things that they like the least, perhaps working in the intensive call setting, for a proceduralist at least, is worth more. It’s a thought. But there are ways to provide incentives for physicians.

Hopefully, that gives you some insights into doctors. Thanks.


PAUL GINSBURG: Bill, I have a couple of questions for you. One question is, I was wondering if you could elaborate on the—do you see major opportunities for physicians to be more productive as far as their own time, making better use of their own time in the sense of a specialized orthopedic facility?

WILLIAM GREENE: I think clearly not only more productive, but happier about it. And the reason is, for orthopedists in particular, and that’s what I am most familiar with, orthopedists go to a hospital setting, and they work in the same operating room where general surgery and OB and all that other stuff is done. Orthopedics is nuts and bolts equipment intensive. Drives them crazy to have a staff that’s not familiar with a full tray of multi-size screws and nuts and bolts. They want somebody who knows what’s there and how to use it. It’s not quite as high tech perhaps as cardiovascular, but it’s pretty high-tech, so their frustration level is high if they don’t get the help they want and the equipment they want. All of that working well, with a well-trained staff who’s real familiar with the technology, makes them quicker and more productive in that setting, and that’s one of the appeals of it.

PAUL GINSBURG: You had mentioned, when we were talking before, that your group had considered starting an orthopedic hospital, decided not to do it. Can you give us some insights into that discussion?

WILLIAM GREENE: Our group has been relatively aggressive on developing ancillary services. We do have our own ambulatory surgery center. We have our own physical therapy department and our own imaging center. A proposed orthopedic hospital has come up in our community. We have elected not to, but for an entirely different set of reasons. We have a limited number of payers in Arkansas. There is a very close relationship between our dominant payer and our dominant hospital. The only way to gain access to that payer for our surgery center would be to participate jointly with the hospital.

So out of our analysis of the orthopedic specialty hospital came a discussion to joint venture our surgery center in order that we could gain access to the major payer. So we got what we wanted out of that, but in a kind of round-about way.

PAUL GINSBURG: Final question. From your perspective on the business side of this practice, when you think of the different services that orthopedists perform that have a facility component—I am really talking about the facility side rather than professional—is there a lot of variation in the profitability of different types of services that orthopedists perform?

WILLIAM GREENE: Oh, yes. Like I said, we have a facility component to our imaging services. We have a facility component to our surgery center. Surgery centers and hospitals are much more complex animals to run, and I think the profit margins are slimmer than on in particular say imaging facility components, but there is a large variety there.

PAUL GINSBURG: Do you have any thoughts about how the situation has come up, that presumably the payers don’t want to put incentives to do some services and not others, but how we got there?

WILLIAM GREENE: I think some of it is just simply overlooking the physician component of the whole system, and what drives physicians. They really are fairly predictable animals, and that’s why I tried to focus on the incentive aspects of the system because although it is a three-legged stool, I think the physician component is clearly one of the most important elements. More time and energy and understanding motivations and desires of physicians, and perhaps rewarding the right behavior might be more productive than trying to constrict behavior.

PAUL GINSBURG: Let me turn now to our second panelist, who is William Petasnick, who is the President and CEO of Froedtert and Community Health.

WILLIAM PETASNICK: Thanks, Paul. As was mentioned, I’m the president of one of the major teaching hospitals in Milwaukee, Wisconsin, and certainly you don’t think of Milwaukee as the hotbed of turbulence when you look out in terms of the health system changes. But in our community of about a million, we have already one orthopedic boutique hospital. We have two boutique heart hospitals that are about to begin operation shortly.

As the CEO of a large teaching hospital, we also operate the only Level 1 trauma center in the community, and so we are very much involved in providing that critical safety net function for not only the Milwaukee area, but for Southeastern Wisconsin. Our mission is very societal in nature, and we are very involved in training the next generation of health professionals.

I believe the debate about specialty hospitals is not about an unwillingness to compete. Nor is it about whether one type of hospital is more user friendly than the other, more cost effective, or has better facilities or technologies. As I look at it, my concern is the ability to meet the important community health care functions that acute hospitals provide. From my perspective, it’s about having the resources to provide our communities with full service emergency, trauma and critical care services. It’s about having the necessary resources to treat the elderly suffering from complex, not only heart problems, but other medical diseases as well. It’s about having the resources to treat high-risk obstetrical patients or meeting the care requirements of infants in our ICU.

As community hospitals our sole purpose is to serve and meet the needs of our community, including the impoverished, the uninsured and the underinsured. In my opinion, the rapid growth of specialty care providers threaten community access to basic health care services by putting in jeopardy the delicate financial balance of acute care hospitals, and then threatening the existence of the community safety net function.

As I look at this issue, the gunshot--let me give you an example--the gunshot victim doesn’t go to the boutique hospital for their needs and for meeting their health care needs. In fact, I’m still looking for--and perhaps I wouldn’t be as critical about this trend if I could find that boutique, for profit indigent care hospital, which I’m still searching for.


WILLIAM PETASNICK: You know, there is a boutique institution that serves the needs of the uninsured, the medically indigent. It’s called the public hospital. Central to keeping the balance of services and community access is this issue of cross-subsidization. Full service hospitals must rely on the ability to use revenues from the more highly reimbursed services to subsidize and sustain low or no-profit services that are critically needed.

You can very easily see the--I think the initial paper presented an excellent overview of sort of the benefits and disadvantages of these institutions. But the truth is that the health care pie is getting smaller. In fact, it’s getting very small. Reimbursement rates are shrinking. Physicians are seeing significant erosion in their incomes which clearly is a motivator behind this. But what also concerns me, and it hasn’t been mentioned, is a serious potential for conflicts of interest. Most patients using boutique hospitals are unaware of the direct economic linkages that exist within the focus factory, between the provider as an investor and the provider as a care giver. Many specialty providers increasingly are owned by the same physician who makes decisions about when and what patient overseeing what care. There are no public disclosure laws. The potential does exist because of the economic linkage for over utilization of diagnostic services.

The boutique heart hospital doesn’t generate a return on investment by not doing procedures. It’s a simple reality. Patients need to be able to trust the decisions about where their care will be provided, and know that the basis of that care is based upon their best interest, not that of the provider.

We can all agree that every type of hospital should have a common commitment of quality, costs and access. But these deliverables must be accommodated to provide broad access to the full range of health care services regardless of a patient’s complexity or ability to pay. Unlike the boutique hospital, the local community hospital is part of the essential fabric of our communities. Their margins are not returned to a select few investors. Rather, their margins are used to support the societal mission and improve the health status of communities they serve.

Unlike one of the specialty hospitals in my community, who turns out its lights on the weekends, our hospital is there to serve the needs of our communities, rich and poor, 24 hours, 7 days per week, day in and day out. Thank you.


PAUL GINSBURG: How important are cardiac services for your hospital’s bottom line?

WILLIAM PETASNICK: I think because of this issue of cost subsidies, there only are a few major revenue sources, and cardiology and cardiac services tend to be a significant one. In some organizations it can be as much as 25 to 30 and 40 percent of the bottom line that they use to cross-subsidize some of these other services.

PAUL GINSBURG: Thanks. How in a sense in the nitty gritty of competition between general hospitals and specialty facilities, how would you describe the mechanisms that you would use to compete?

WILLIAM PETASNICK: Well, let me first say that I am really concerned about the term of "focus factory," because I don’t believe we’re in the widget business in the context of meeting the health care needs of our patients. We’re dealing with patients and their needs. I think clearly that in many ways competition is good because it sharpens the focus. It means that we have to improve and try to create a way that we can compete on an even keel. I mean in our organization we have focused much more on access issues, on efficiencies that are there as a part of a process of competing. I think it’s an issue of how do you respond in a way that you can provide better comprehensive services, and that the fact is only a few patients select in a very select way. And as the elderly continue to come into our system, we’re dealing with very complex health care problems, not just kind of an isolated view.

PAUL GINSBURG: I was thinking of Bill Greene’s example of, when I asked him about productivity, and how in a sense a staff that knows orthopedic surgery can help. To what extent can say general hospitals provide the conditions that really improve productivity without incurring the huge amounts of costs?

WILLIAM PETASNICK: Well, for example, what we’ve done is we created units of specialty services. For example, in our ORs, we have in essence carved out several of our Ors that are strictly for orthopedic care, and we have specially trained nurses. We actively involve our orthopedic physicians in the operation of those Ors, and in many ways try to create the same economies of scale or through throughput access be cognizant of quality of life issues, but we’ve done this in the whole, in a way that we can achieve the advantages that the specialty hospital claims to have, but yet those full revenues are still available to help underwrite the costly programs, like the trauma center, the burn center, the high-risk obstetrical unit, in a way that wouldn’t be possible if they were cut out and isolated.

PAUL GINSBURG: It sounded like some of those things that you can do, because of your scale you can do them, say, without increasing costs. But I wonder when it comes to scheduling, is there something to schedule things for the surgeon’s convenience, is there just no way around the fact that that’s going to mean having more excess capacity hanging around?

WILLIAM PETASNICK: That’s true. I think though--let me talk on one of the other points though. One of the rationales that are being given is the problem that physicians encounter with access and not having capacity. Some of the capacity issues are driven by the lack of nurses and others in a scarce workforce, and what we’re dealing with is taking a scarcity and now spreading it even further. I know in our organization, we have already lost a couple of our very skilled nurses to these specialty hospitals. Part of it is work hours. Part of it is select coverage. But part of that capacity issue that we’re struggling with is that we have a diminishing number of health professionals, and now we’re spreading it out differently. And that impact needs to be taken into consideration.

PAUL GINSBURG: Yes. The final topic is the notion that some services like cardiovascular services are a lot more profitable for the hospital than other services. Can you give me a perspective as to how we got there, how it happened in our system?

WILLIAM PETASNICK: Well, Paul, I can’t. I wish I knew that because I think much of the problem is that many of these data points are related to a DRG system that was set up in the early ’80s, and they haven’t yet fully been kept updated with regard to the technology and the complexity. I mean the big issue right now is with the coated stents, and that suddenly what was a very profitable service because of the way the DRG was set up, you had new technology, and it’s not being adjusted to that. So suddenly you have a procedure that was very profitable. Overnight the technology changes. You still have that billing code, but suddenly that profitable service suddenly is a very costly service.

And there hasn’t been a good mechanism, and the market basket concept has not kept up with the kind of technologies that we’re dealing with. So what made sense in the early ’80s, now we’re dealing with 2003, and it has no relevancy to the complexity of care, the technology, and we’ve got a new balance, and that is very much of an issue that’s driving medical practice right now.

PAUL GINSBURG: Would you say that pricing problems are more significant for Medicare than for private insurers, which tend to pay on a discount from charges?

WILLIAM PETASNICK: It is, because that kind of becomes the basis upon which you--becomes a starting point for your revenue streams. And it depends. I mean, many of us that are engaged in teaching hospitals, for example, tend to deal with issues where Medicare does sort of set the pace, and it’s this issue of cross-subsidy that comes into play here that presents a significant problem.

PAUL GINSBURG: Okay. Let me turn now to Gary Taylor, who is the Principal of Equity Research at Banc of America Securities, speaking on perspective of investors.

GARY TAYLOR: Good morning. Thanks for having me here.

One thing I want to do to start is just to clarify what I actually do because I think that will help you understand my viewpoint on what I have to say. I analyze the business and the financial results of publicly traded hospital companies, including general acute care companies and also specialty companies, such as MedCath and USPI. So, no, that doesn’t mean I’m a broker, although that’s what my mom thinks I actually am.


GARY TAYLOR: But to the extent that that helps, one of the things that also is unique I think about my viewpoint, besides the fact that I’m the first panelist not named Bill--


GARY TAYLOR: --is that I have a degree in hospital administration. I have a background in the nonprofit hospital world, and I am now on the other side of the fence with a very capitalist point of view looking at this.

Speaking of capitalists in this post-Eliot Spitzer world, I am required to say that the views I will express reflect my own views, not the view of my company. I don’t own any of the stocks of the companies I may talk about, although my firm may very well.

I guess the first thing I want to talk about--oh, the other thing I wanted to say was Paul doesn’t know this, but I’m paid to do two things; one is to talk a lot and, two, is to have very firm opinions. Whether those are right are wrong, I have to stick by those.


GARY TAYLOR: So I’m probably up to five minutes already, and I haven’t even started.

Why are investors interested in this business? Because it’s a great business, and I’m talking about the specialty model of carving out cardiology and orthopedic. One, look at the size of the market. Hospital-based cardiovascular services are $150 billion a year in the US The hospital orthopedic market is $100 billion. The outpatient surgical market is about $20 billion annually.

Why else are they interested? Growth. If you’ve looked at the economic statistics in the US, there is not a lot of growth around. The cardiovascular market has grown 11 percent a year, orthopedic has grown about 10, and the outpatient surgical market has grown about 7, but the ambulatory surgery center market is growing 11 because they are taking market share away from the hospitals.

That leads me to the next point. Why are investors interested in the sector share? Most of this business is dominated by the acute care hospitals, 85 percent of which are nonprofit. If you look at freestanding cardiovascular heart hospitals, they have 1-percent market share today. That’s nothing--$150-billion market, and there’s about $148 billion that they’re interested in going after.

The surgery center business has been around a long time. It’s been around about 20 years. There’s over 3,000 ambulatory surgery centers in the US That’s doubled in the last 10 years. They have 40 percent of the market, so there’s still 60 percent, there’s another $12 billion of that market that they’re interested in.

The orthopedic market, again, for freestanding orthopedic surgical hospitals, you’re talking 1- to 2-percent share today. So there’s another $95 billion-plus that they’re interested in.

Four, it’s been mentioned already, profitability. Those are very profitable procedures. If you consider, various sources would tell you, and my own research would tell you, that of the 5,000 general acute-care hospitals in the US today, about half of those have a zero-percent operating margin--don’t make a dime providing care. What they’d make is on what limited endowment funds they may have. So you’ve got a big chunk of the industry that doesn’t make a lot of money. These services, when you carve them out, the margins are 20 to 30 percent.

So investors obviously are quite interested in that. The last reason I would tell you investors are very interested in the sector is that investors have, and capitalists have, a very free-market mentality, which means they believe--and in most services this is true--if you build a better mousetrap that’s better because patients like it better or it’s better because the quality of care is better or it’s better because the per-case costs are cheaper, to most capitalists, that means you have a better product and that you should be very successful with that.

Well, we all know that health care provision isn’t a real free-market good in the US It’s, at the very least, a quasi public good, and some might argue it should be a government good, it should be a social good and should be provided.

So that is perhaps a flaw in the thinking of the capitalists and why they have so much interest in the sector. I would also tell you that my opinions on the investment worthiness of the sector perhaps differ very much from what my public policy opinion would be, and I’m going to touch on that in a minute.

So given all of those characteristics, are we going to see growth in the specialty hospital business? Absolutely. You’re going to see a ton of growth, and I think it will continue.

Why does the business model work? Well, there’s a few reasons for that. One, it’s already been mentioned, docs get a cut of the action. They get a piece of the facility fee, given that overall physician incomes have been, on an inflation-adjusted basis, declining. Physicians are very, very interested in supplemental income sources.

Obviously, we’ve had a lot of technological advance in terms of laparoscopic procedures, anesthesia, now robotic surgery. That’s allowing lots of procedures to be done much less invasively.

The other issue is commercial payer acceptance, and from a public policy standpoint, this issue is critical. Medicare and Medicaid do not carry their weight. In a lot of procedures, Medicare and Medicaid, the rates are not enough. They don’t pay enough. You’re underpaying the hospital. So the hospital has to do what? They have to cost shift, and they have to seek to get that reimbursement from the commercial sector.

And when you look at these types of facilities and the fact that their per-case-costs generally can be lower, the commercial payers like that very much. They don’t want to pay to subsidize the hospital’s ER money-losing business or their money-losing obstetrics business, and they don’t want to pay the hospital to subsidize their indigent care.

So the commercial payers have a real incentive to use these specialty facilities. I’m not necessarily going to tell you that’s the right public policy direction to go, but that is very much why the business model works. You could also argue that patient convenience is a factor, the way these facilities are set up, and I think it’s debatable, but you could also argue that quality of care can be better in a very high-volume facility focused on a single specialty.

I’m going to wrap up with three points:

And that is, from a public policy perspective, how can you approach the sector and the specialty hospital sector if you believe that these facilities really are cream-skimmers, and they’re hurting the public hospital industry?

I can tell you right now how to make it all go away in a heartbeat, and Mr. Stark knows the answer to that, and that is take away the physician ownership. If the physicians did not have ownership or the ability, under a couple of exemptions to the existing Stark laws, to have ownership in these facilities, this industry would be gone.

Now, there’s simply implications for the billions of dollars of investors’ capital that would be lost as a byproduct of that, but you can make this go away.

The second thing that’s very important from a public policy perspective is very steady, stable and fair reimbursement for procedures. If this industry wasn’t so efficient, if Medicare and Medicaid actually had rational rates per procedure and they didn’t underpay for certain procedures, you would probably have less of an ability to create these types of models.

And the final thing I do want to suggest, just to throw this out, total cost and per-case costs were touched on. I haven’t seen anything in my 10 years in this business that suggests when you create new capacity that you do anything except increase total cost to the system or when you develop new technology, medical technology, coded stents which will come out, which will be approved any day now by the FDA, the device companies would argue are going to reduce CABG procedures.

I guarantee you that you’re going to see hospitals expanding their cath labs, you are going to see more cath patients receiving stents, you’re going to see CABGs continue to grow and that total cost is going to go up. That’s not necessarily bad, because we all like the best health care, and we all like as much devices and drugs as we can have, but don’t fall into the illusion that this will reduce total cost to the system. Thanks.


PAUL GINSBURG: You really said a lot in seven minutes.


GARY TAYLOR: Did I cover everything you wanted?


GARY TAYLOR: If you still have a question--

PAUL GINSBURG: No, I do have a bunch of questions, a number of them stimulated by what you said.

Actually, one thing that was very interesting is that, despite what you said about the substantial profit opportunities, that the sector is growing and that profitability is high, you said that without physician ownership, it wouldn’t happen. And I was wondering is that a contradiction, in a sense? Given the fact that these services are profitable, why couldn’t it happen without physician ownership?

GARY TAYLOR: Because I really believe, and perhaps to other panelists would want to weigh on this as well, is that, especially a company comes into a new market where the major acute care providers have dominant market share, what is the competitive advantage to spring up from a hole in the ground to actually taking these procedures away?

And if you didn’t offer the ownership as a competitive advantage, the acute care hospital can’t offer that to the docs. If you didn’t have the ability to dangle that in front of the physicians, I think you would really have no competitive advantage.

The only thing that really would remain to allow the business actually to create itself would be a capital advantage, in which case most of these specialty companies are very well-financed by the public equity and debt markets and commercial banks, and they have a lot of capital to spend, and physicians love that. If you build a bigger OR or if you have the latest diagnostic equipment, that is a competitive advantage. As hospitals’ general profitability has improved somewhat, that may be less of an advantage than it was a few years ago.

But the real hook is dangling that physician ownership.

PAUL GINSBURG: Bill, do you have any perspective on that?

WILLIAM PETASNICK: No, I would agree. I think the motivation is always there for improved services for improved access. I think it’s that significant change that we have here in terms of being part of the action and the idea that that’s going to change behavior, and I think in many cases it will, and that is sort of why I mentioned my real concern about some of the significant conflicts of interest that will be created in this kind of framework.

PAUL GINSBURG: Gary, you mentioned that there’s a large potential market out there that’s growing rapidly. When we’ve looked at some of the markets that we’ve studied, like Indianapolis, it seems as though there’s a potential there for at least some short-term oversupply of these specialty facilities with all of the projects going on there.

I’m wondering if there are possibilities in some markets to actually get some significant drops in payment rates by private insurers if they perceive the excess capacity in some sectors.

GARY TAYLOR: You know, I think that’s possible. I think a characteristic of the hospital industry 20 years ago, especially after DRGs was implemented, was massive overcapacity. You’ve seen overall hospital capacity fall 20 percent in the last 20 years or so. I would argue the reason why you’ve seen hospitals with some new-found pricing leverage is because admissions have turned, patient days are going up again, hospital occupancy, after 20 years, is finally now on the rebound. This is a particularly inopportune time, from my standpoint, to see substantial additions to capacity.

I don’t know if I would characterize the amount of specialty hospital construction today at a level that really suggests overall you’re going to see enough new capacity at to dilute overall pricing. In some particular markets, that’s certainly an opportunity. We’ve noted that hospital construction activity inflation adjusted is at a 40-year low.

So despite the amount of headlines that these types of specialty hospitals are generating,there is not a tremendous, widespread amount of growth. So it would be particular markets only.

PAUL GINSBURG: What about the perspective of the investor-owned general hospital chains? Are they seeing this as a real threat to their business and viability?

GARY TAYLOR: Yes, absolutely. They see the same threat to their businesses from competing outpatient surgery centers, from competing heart hospitals, in some cases, from potentially competing orthopedic centers, really no different from any nonprofit acute care hospital. Despite the fact that they’re for profit, they’re still very much limited in the ability to dangle that physician ownership in front of them. So they absolutely see it as a threat.

PAUL GINSBURG: As far as investors, are there things that, I mean, investors are enthusiastic, but if there was a list of one of the things that worry them the most, as far as the potential of their investments not coming at, what would you say is on that list?

GARY TAYLOR: Well, you know, in this sector, let me start with hospitals overall. Medicare reimbursement is a huge concern. You had major reductions in ’97. Most of those cuts have "anniversaried" away. We’re heading into the first full year without legislative cuts. So overall for the sector, seeing how the run rate of Medicare reimbursement is going to play out is probably the single largest factor I deal with every day.

For specialty hospitals, I know Mr. Stark has pushed for a removal of the whole hospital exemption, which is that physician ownership that you dangle. I think Bill Thomas has suggested he would be interested in including that potentially in some legislation. So for the specialty hospital sector, clearly, that is the most draconian thing that’s on the drawing board that people are very worried about.

PAUL GINSBURG: I have one final question about commercial payer acceptance. This is a really intriguing thing, and it’s unfortunate we don’t have an insurer on the panel because I suppose commercial payers perhaps have the opportunity to pay less. I don’t know if they actually realize that opportunity. You might comment on that.

But the other thing is in some of our markets, we have seen commercial payers do the opposite, in a sense, often pressed by employers in that market. They have refused to reimburse specialty facilities which, for the most part, seem to have survived, and maybe even thrived, just based on Medicare, but in a sense, from the perspective that you brought up about, well, increased supply is going to increase our overall costs, this is what has motivated commercial insurers in Lansing, and I’m thinking Little Rock, to refuse, as much as they could, to refuse to pay for services at ambulatory or specialty facilities.

GARY TAYLOR: Well, I think there’s two phenomena going on there. The first is, in any given market, generally, the acute care hospital is the 800-pound gorilla or a number of those have substantial market share. So to the extent that they can use their leverage against the payers to exclude this new entrant from the market, that’s a very critical component of their strategy and is often very effective. So I think that’s part of it.

And I think the other issue to keep in mind is it really depends on which physicians are involved in the specialty facility and which are involved in ownership particularly. Because if you have the dominant orthopedic, cardiovascular practice in a given market, the insurance company is going to play. They’re going to play the game, and you’re going to be able to get the reimbursement for the hospital.

So, again, it’s a market-by-market phenomenon, but I think the employers probably acknowledge the standpoint of increased capacity, even if it perhaps means lower reimbursement in the near term means higher utilization in the long term, to my point of anything we add to the system increases total costs.

PAUL GINSBURG: Actually, one more thing on commercial insurers, which you may or may not perceive. Given the fact that in many cases these facilities cost less, whether it’s an overhead allocation issue or whether it’s a true efficiency or whether it’s a skimming issue, to what extent are, say, commercial insurers recognizing that and developing policies to figure out how to pay them less, say, than they would pay a hospital or they would pay a hospital health--

GARY TAYLOR: I would argue, we’re still in the early stages, I would argue most commercial insurance companies’ reimbursement strategies are not as sophisticated as we give them credit for. Maybe that’s an understatement.


So we really haven’t seen a lot. I would say the biggest challenge for the specialty players from the start is you’re new in a market, you don’t do a lot of business. How do you get that big United contract, how do you get that big Aetna contract, and the specialty player may be willing to come in at a bit of a discount just to get a foothold into that piece of business, so it is probably driven more that way than the commercial insurer really being intelligent enough to know that they can leverage it.


Kelly, did you have any comments or questions?

KELLY DEVERS: No, it was excellent.

PAUL GINSBURG: Let me turn to Dave Kelleher, who will talk about the employer perspective on this issue.

As you know, Dave is the president of HealthCare Options and represents the Employers’ Forum of Central Indiana.

DAVID KELLEHER: Thank you. Thank you for inviting me. I feel like we’re a little bit in the spotlight today, coming from Indianapolis.


I would like to be known today as "Bill" Kelleher. I’m the third leg of the stool or at least that’s what I’m representing today.


A number of employers about a year ago, a little over a year ago, approached us. My background is 15 years in Indianapolis as a manager of a prepaid group practice and then consulting in HMO turnaround work, new starts, and a number of other engagements, and we have worked periodically with employers over the years.

But about probably 18 months ago, they began to perceive a crisis. We don’t see the health care market as shrinking, actually. We see it growing robustly in the town.

The concern, as expressed by the employers, was that the premiums were increasingly dramatically, as they were elsewhere, but what they were being told by the payers is this is just the down payment, that fragmentation is occurring in this market, that bricks and mortar are entering fast, and that you will be paying for this for many years, and the market structure needs to be looked at.

So we started with these concerns. We didn’t start with fragmentation or specialty hospitals as the primary concern, but one of the motivators for concerted action in a town that doesn’t have very many corporate headquarters, which is another particular challenge in that market.

But the concern that they expressed are the things that Kelly started with, that profitable services could be withdrawn from the community hospitals, that we had an irrational pricing structure within the health care community that needed to be addressed, that the motivation for this fragmentation, and they started using the term "fragmentation," rather than "specialty hospitals" because it implied both to inpatient and outpatient services.

The motivation appeared to be physician incomes, rather than patient welfare. So, in that context, that even if we did talk about focused factories, the focused factories arose, and the benefit of those factories exceeded the cost, including the losses to our community hospitals.

The question still remains who benefits? How is the market structured so that the consumer benefits from these initiatives if, in fact, they are positive. The concerns we also had were skimming, concerns with patients who need services, other than that single specialty, and the other host of things that we talked about today.

So we concentrated, the employers wanted to concentrate on market structure. We have very few markets in this country that produce beneficial results without some type of structure, and the health care market seems to have been left to its own devices. So we talked about structure.

They reviewed the health plan offerings of all of the initial participants and determined that their strategies of fostering competition among health plans, each required to have all-inclusive networks, one premium and one quality report card at the health plan level encompassed in the entire community, was a failed strategy. It wasn’t producing beneficial results.

So they asked that we start looking at how to create beneficial competition, accountability in the provider community across quality, cost and the economic performance and take advantage of the new technology or predictive modeling or acuity measurement to construct a system that was a fair system of competition among the constituent parts, spent probably three months debating the difference between vertical competition and horizontal competition.

I don’t know if these terms are commonly used. It came with a debate with Norm Payson when he was running Oxford. Vertical competition, in this conception, is a competition among vertically integrated systems of care, whether contractually integrated or legally integrated, where we have quality reports and cost performance reports by system of care.

Horizontal competition, again using this language, would be competition among the specialties; for example, across cardiology, across orthopedic and whatever. And each have their own advantages and disadvantages.

However, to start the process in Indianapolis, it was decided that the employers could commit to vertical competition, partly because the structures were available to the community, that information was more easily assembled, performance information and quality information at the system-of-care level, whether it be multi-specialty group practice, PHO, IPA or some other formulation, that vertical competition would provide a reward for these systems to invest in themselves, in electronic medical records, in building team care for patients with chronic conditions, for dissemination of evidence-based medicine.

It was felt that we needed to pull the systems back together. In the view of these employers, it wasn’t serendipity that Kaiser Permanente, a vertically integrated delivery system announced a major investment in automated medical records. They had a vehicle, competitive vehicle to extract reward from the benefits that might accrue to that investment, and we wanted to provide that base in Indianapolis.

But given the small number of competing delivery systems in the market, the employers haven’t really given up on the idea that they needed some sponsor of horizontal competition because of what they perceive as irrational pricing among the different specialties.

So we’re starting--I’m about to finish.

PAUL GINSBURG: You can take a few more minutes.

DAVID KELLEHER: So we started this process, and the first initiative is the employers sent letters to the HMOs and asked that in 2004, we begin to receive quality reports by delivery system and that in 2005 that the HMOs offering the products to the employers differentiate the delivery systems either by copayment differentials or premium differentials, based upon acuity-adjusted differences in performance. So we’re still awaiting response from that.

During the balances this year, the employers are trying to solicit an intermediary to construct the same system of choices and measurement in their fee-for-service products. Indianapolis is probably the self-funded capital of the United States. We have done business in 38 different states, and we have not seen more self-funding than in this particular community.

So you use the same technology and choice systems and measurement systems that you’d use on the HMO side to bring it over to the fee-for-service side in order to improve accountability.

The response from the medical community after scores of meetings with PHOs, and hospitals and others is that they wished to participate with the Employers’ Forum. In fact, this week, a number of the hospitals have strongly requested that they have membership in the Forum itself. We don’t know if we’re going to be successful, but we have started along a path of open communication among all the parties, and we hope to achieve the construction of a market where the incentives of the employers and the providers are aligned.

Thank you.


PAUL GINSBURG: You’ve actually covered a lot of the questions, and I just have one kind of stimulated by what you said. You were mentioning the model of vertical competition, and I recall when, you know, say, 10 years ago, when there was a lot of enthusiasm about the potential for integrated delivery and vertical competition and then, of course, it was I guess lost as a result of the managed-care backlash, do you think employers might be getting ready?

It seems to me that in order to have vertical competition, you have to have a willingness to have a managed care plan that offers a narrow network, let’s say that offers not all of those systems. Do you see employers getting ready to do that again?

DAVID KELLEHER: No, actually, what the employers would like is all providers to participate, but all providers held accountable for their performance, quality and cost.

The one of the things we did talk about was that narrow networks, the result of narrow networks seems to be aggregation on the provider’s side without apparent benefit to the public. So that if the promise is everybody gets offered, and if we have to create a responsibility center of the unwashed, the unwanted, we will do so, but everybody participates, but everybody’s performance is measured. That was the discussion.


Good. What I’d like to do is give people on the panel a chance to make any further remarks, question each other, and I’d like the audience to get working now on the, because you’ve got a job, on writing your questions down, and our staff will pick them up, and then we’ll get to audience Q&A.

Do any panelists have a reaction or question?

WILLIAM PETASNICK: Oh, I think, still, the core issue in all of this, and I think you mentioned it, is this issue of is health care a business or is it a social service. And at the heart of this still comes back to you still have this core societal mission that institutions provide, and the issue is who is going to pay for it?

Right now we’re engaged in our state, in which the whole support base for graduate medical education is under siege, and it’s the kind of thing where the business community values your product, which the product is the provision of future physicians, but it’s a question of who’s going to pay for it, and I think that’s kind of the fundamental issue that, from a public policy perspective, we still have not sorted this thing out in that there are unique programs and services that are societal in nature, and the business community is saying on the basis of I can’t afford it.

Society is saying we need these critical services, and then you have this specialty component that says, "We certainly don’t need it," and in fact we’re going to compete on the very fact that you still have to provide those services, and it creates an incredible dilemma for those of us that are involved in the provision of health services.

PAUL GINSBURG: Yes. Yes, that’s really what I guess a lot of this is about, that the health care system for generations almost has run through organizations cross-subsidizing, taking more than the costs for services that are well-compensated and using that to fund services that we perceive the community wants, that the community does not have a way of paying for it. And the more health care becomes a business, the more stress is put on those mechanisms.

I suppose there are two ways you can go. You can either start funding everything, in a sense have health care become a business, but funding these things that the community hasn’t funded or, in a sense, do things to protect those cross-subsidies, at least the ones that seem to be generated in an appropriate manner.

DAVID KELLEHER: Yes, I’d like to speak to that.

PAUL GINSBURG: Dave, sure.

DAVID KELLEHER: Because that’s been a discussion among employers is, once you have accountability or a performance measurement, the question is what do you do with it? Is you look and see that tiered networks, hospital networks or other delivery system networks are being measured and priced separately.

The question is whether, that now when you expose the cross-subsidies, whether that needs to be dealt with overtly by the employer community or some other mechanism and on how you organize your products also speaks to this. For example, if you look at the PacifiCare tiering in California, it’s by hospital, irrespective of the type of hospital.

If you look at the Tufts’ strategy in Massachusetts, they’re tiering within classification of hospitals, and that’s a different statement to the medical community and to the employer community, one versus another, but just the act of measuring performance differences raises the question.

GARY TAYLOR: Can I add one comment real quick?

I think even more basic, although social good versus free good is a very basic question, but another basic question I call is the Starbucks question, which is how much is too much? You know, in Manhattan, there’s a Starbucks on every block or two on every block, but people drink a lot of coffee in the US We like Starbucks.

So, in health care, it’s 15 percent of the GDP, and the CBO will tell you it’s going to be 20 percent of the GDP in 20 years. Well, how much is too much? In the US, we’re in the very fortunate position of being able to choose what we want to spend money on, and one of those things we very dearly love to spend money on is health care.

So that’s kind of I think a starting point, first of all, from a very broad macro policy perspective, and then you have to work down to who gets it. Do only people that can pay for it get it or only people that need it get it? And then you can work down into should it be a private system, should it be a public system, et cetera, et cetera? These things are all very fun to talk about, but not very easy to solve, I know.

PAUL GINSBURG: I have good news. The audience has really come through. We’ve got lots of questions.


We’ll start out with one for Bill Petasnick. The question asks you to talk about hospitals reacting to investment by their physicians by economic credentialing as a reprisal.

WILLIAM PETASNICK: Well, someone said we ought to call that community credentialing, as opposed to economic credentialing, but I think again it’s a reflection of a frustration. It’s reflective of we have certain requirements in terms of on call, for example. The community hospital is dependent upon physicians participating in the on-call coverage of your emergency rooms, and it’s part of the empower requirement that if you’re going to offer an emergency room, you’ve got to have capabilities to respond to unique needs.

And I think it’s a growing frustration, in terms of these obligations are still there, but if your orthopods now leave and divert patients to an element that they have an investment in and no longer are there or willing to provide on-call coverage, you have a real dilemma. And whether or not that’s a mechanism--the problem is there aren’t very many ways that hospitals have to deal with this, other than that particular mechanism of credentialing.


There is a general perception that general hospitals are very user unfriendly, not patient centers. Is there a potential for specialty hospital competition to prompt a reconfiguration of the way general hospitals are organized and operate?

And this question, I pose this to all of the panelists. Maybe it would be best to have the "two Bills" answer that.

Bill Greene, do you want to start?

WILLIAM GREENE: Well, I think size, to some extent, is an advantage. People can park 20 feet from the door to my MRI machine. I’ve never seen very many hospital MRI machines that weren’t buried in the bottom corner of a large building, and that’s just intimidating to the patient. So size has some impact on patient perception of how friendly or easy it is.

And I would readily admit that in our surgery center, if you’re only focusing on one type of patient and one general set of needs, that we should be able to do a good job of satisfying patients for the particular service that they came for.


Bill, do you have a comment?

WILLIAM PETASNICK: Well, I think this issue of access has been one that hospitals have been competing on really before we were talking about specialty hospitals.

I mean, there’s a lot of understanding that how one relates to the public and how well you relate to a patient is important, and so there’s been a lot of changes in our institutions with regard to being more accessible and more user friendly. To the extent that a specialty hospital creates added impetus, it may, but then that also requires additional expenditures, and it gets back to the total cost of care in a community.

If everybody then starts competing and says we’re going to do one-upmanship, we’re going to start fueling more capital expenditures, and then that community is going to see this additional cost because you’ve got to cover it at some point in your depreciation and everything else.

PAUL GINSBURG: In fact, I have a point that really concerns, the extent to which the health care system competes to be more consumer friendly because I think about the fact that insurance is paying 100 percent, 90 percent, 80 percent of the bill, so it’s quite possible that with the, unless you actually went to a true consumer-directed system, whether in a sense you could overinvest in consumer convenience because someone else is paying for it.

And this is something, you know, that’s really a lot of the issue between pharmaceutical-directed advertising. You’re telling people you need this thing, and someone else is going to pay for it.

A question for Bill Greene. Please comment on the conflict-of-interest concern. It seems very real. What would your employers say to contradict the concern?

WILLIAM GREENE: I wouldn’t argue the issue, honestly, from my perspective. The potential for conflict of interest is clearly there. In our house, we do try to measure ourselves on our utilization rates, on the services that we provide, but I think that clearly the potential for conflict of interest is there.

My only point is that physicians have moved to the sources of revenue generation that are available to them to maintain their anticipated level of income when they entered this profession.

PAUL GINSBURG: Any other comments, Kelly?

KELLY DEVERS: Can I ask a quick follow-up, which is do you think public disclosure of investment would help minimize this problem?

WILLIAM GREENE: I think public disclosure is healthy. I don’t think it changes where the patient goes. My contention about health care is that in the patient’s room, you have a very knowledgeable seller and a very unknowledgeable buyer, and that relationship never changes.

And the very knowledgeable seller, regardless of the disclosure or anything else that goes on, is always going to be able to influence the very unknowledgeable buyer.

DAVID KELLEHER: I’ll give you an example that from years ago, when I was running a pre-paid group practice, we switched hospitals for deliveries, and we did it with physician support, and we switched about 600 deliveries a year. About 8 miles’ difference in where the hospitals were located, and we had one complaint in 600 deliveries. Two years later, they raised the price, and we moved them back. We had one complaint.

Physician support, that’s where the patients go. That’s why the incentive system for these hospitals is so powerful.

PAUL GINSBURG: Good. A question I think probably Gary should take the first crack at this.

What is the likelihood of other types of specialty hospitals emerging, such as rheumatology hospitals, for example?

GARY TAYLOR: I thought the first question maybe would be what stock to buy.


That one is probably down in the pile somewhere.

I think there’s a great chance you’re going to see new types of models being developed. I’m obviously not a physician, so I’m not a great judge of what types of specialties particularly lend themselves to provision in a freestanding model without some of the ancillary support, such as ICU and other types of things.

I can tell you I was on the phone last week with a group of investors. I had a business proposal for a spinal hospital model, and Bill may know more about that business line than I do. I don’t know a lot about it yet, but I have a feeling I’m going to learn a lot more about it.

So some of these hospital folks may have a better idea on what new things will be carved out, but I think, under the existing incentives, you’re absolutely going to see more of this across different service lines.

PAUL GINSBURG: All of the panelists noted higher margins for cardiac and orthopaedic care. Will the whole issue disappear if rates were adjusted so margins became equal in all areas?


WILLIAM PETASNICK: Well, I think you certainly would have an impact and a leveling of the playing field. I mean, the fact is you sit down, and you look at your financial requirements for your organization, and then you look at what are the revenue streams that will underwrite those financial requirements, and right now because of the reimbursement changes that we talked about is it’s heavily towards your surgical disciplines.

Again, that’s a phenomena that we talked about with regard to the fact that Medicare hasn’t adjusted and looked at the very nature of the reimbursement elements. I think you’d have that. You’d still have this issue of the economic incentives, though, that are currently provided because of this exception that it creates an opportunity. So I think you’ve got to look at both sides here in terms of that part of it.



WILLIAM GREENE: I’ve had a longstanding thought on this, and so I’m going to throw it in, if I’ve got a chance, and this question differs on the hospital side than it does on the physician side. So I’m answering from the physician’s side.

But I start of start with the question of is it possible--I think it’s possible--that from the very beginning of training in a med center setting, that certain services are more complex, more intensive, and perhaps more valued than other services?

And I think that’s generally true, and I think that it doesn’t get talked about much, but there are all kinds of reasons why different physicians choose different specialties, but one of the elements of that is a pecking order that’s established early in med school where the most academically proficient physicians have the broader range of choice about areas that they’re interested in, and typically they do gravitate--they’re incentive driven--they gravitate to where they get the greatest reward.

That’s why the guy at the top of the class goes into radiology because radiologists make a bunch of money with an easy lifestyle.


That’s why procedurally oriented physicians go toward higher-paying specialties like neurosurgery, cardiovascular surgery or orthopaedic surgery. Some services are, early in the process, it seems to me, deemed to be more valuable than others. Now, is that right or wrong? I don’t know. I’m just saying that system exists. It’s pretty subtle, but it starts early in the process.

PAUL GINSBURG: Good. A question for Bill Petasnick. Did you or have you considered physician-hospital joint ventures as a strategy to stave off complete exodus of specialty procedures from your facility?

WILLIAM PETASNICK: We’ve actually looked at some of that. I think that some of the other community hospitals have done that by necessity because of what was mentioned in the opening report, is you are faced with a situation where your major orthopaedic group, for example, or anyone else comes in and says, We’re leaving. We’re going to set up a program.

And you are then confronted with this requirement of do you figure out a different way to do it through a joint venture or there’s even what’s called a "per click" arrangement, which, believe it or not, you can subsidize or sell a part of your cath lab, and suddenly you own it, and then you sell it to your physicians on a "per click" basis, and they get a return.

I mean, there’s all kinds of incredible opportunities out there if you want to deal with that, and I think everybody, by necessity, is kind of looking at all of these. And then you kind of walk away saying, Why are we doing this? Because at the end of the day, you still have these core requirements that you’re working through, and you’re trying to meet the needs of the community.

And so, yes, I mean, you’re looking at joint ventures, you’re looking at "per click" arrangements. I am inundated, and I don’t think I’m atypical, with every consultant coming through here in terms of a new scheme as to how you can retain your physicians or do this. And so it’s a great business out there, I guess, with some of their marketing at this point.

But you just have a feeling that this isn’t the right thing. This isn’t what health care is all about, and you kind of walk away from it just kind of shaking your head.

PAUL GINSBURG: Here’s a question that looks interesting, but it’s really long, and I haven’t read the whole thing, so I hope it’s still interesting when I read the whole thing.


It’s one for Gary Taylor.

Your emphasis on commercial payers was surprising. In our state, there’s a lot of pressure on the state licensure agency to adopt our regulatory framework to track what Medicare will pay for. Of particular concern has been a push to multiple licenses for one same-day surgery or endoscopy facility allocated on some kind of time-sharing basis to allow multiple physician groups to own a facility and collect a facility reimbursement from Medicare. Commercial payment strategies are never mentioned.

GARY TAYLOR: I’m trying to see the question in that.


But I don’t want to ask you to repeat it.


PAUL GINSBURG: It’s the last time I’ll read a long question.

GARY TAYLOR: Well, I’m not really sure what the question is. I saw, and I was listening, there was a piece of it at the end that just talked about the fact that, as you create surgical centers for physicians, there’s exemptions that allow them to have a piece of the facility fee, and I think it’s kind of alluding to the fact that if a physician comes into the Outpatient Department of the hospital and does a procedure, the physician bills his fee, collects it, the hospital bills their fee and collects it, and never the two shall meet.

In a surgery center, because of the exemptions that allow for physician ownership, the physician does a procedure, he bills for his piece and collects it, the facility bills for their fee and collects it, but the physician gets a little piece of it. So I think that’s clearly one of the economic incentives that’s allowed for the development of these centers, and obviously the interest by physicians in them.

And I guess the focus is on Medicare because in the commercial side of the business, there is no such law or exemption that prohibits physicians from having ownership and referring commercial business to facilities that they have ownership in. It’s a law that restricts the referral business of Medicare business facilities they have ownership interest in.

So if it weren’t for the Medicare law, then you wouldn’t need to have a specific strategy to do this. So maybe that is the question. Why isn’t commercial mentioned? Why isn’t Medicare? So maybe I figured that out.


PAUL GINSBURG: Kelly, a couple of questions for you on the issue of--and I will read one of them. The point is that orthopaedic specialty hospitals aren’t new. For example, the Los Angeles Orthopaedic Hospital, a leader of international innovation, collaboration, training and research, was begun well before the 1960s.

So I wonder if you could think about what is, in a sense, what is new about the phenomenon, even though clearly we’ve had some examples in the past; eye and ear hospitals and orthopaedist hospitals? What’s different today?

KELLY DEVERS: I think it’s obviously the rapid growth that we’ve seen and also we’ve been talking a lot about the partial physician ownership. So while there have been some proprietary specialty hospitals in the past, I think what’s been most striking to us has been the rapid emergence, in our site visits around the country, in the recent period, as well as a lot of the physician ownership interest in them.


Here’s a question that was addressed to one panel member, but I think maybe others can do better. Please comment on the merits of a business model which originates from the lack of cooperation between hospitals and physicians. In other words, because they don’t get along, physicians and hospitals choose to build separate houses with investor capital and public funds.

GARY TAYLOR: That’s a Wall Street question.


PAUL GINSBURG: That’s a question about getting along.

Go ahead, Gary.

GARY TAYLOR: Well, Senator--


--it’s--well, it’s interesting. I think, obviously, part of the incentive as well is that with all due respect, you can question, in some cases, the efficiency of nonprofit hospitals, in general.

You can question the administrative structure and bureaucracy, and a lot of times physicians have difficulty dealing with that, and they very much, like we all do, enjoy being catered to, and that’s exactly what these specialty hospitals do. They pick out docs, and they make them the stars. They are the superstars, and besides the financial benefit, that’s obviously been very flattering.

So I guess the question is comment on the business model. You know, you could argue that if the general acute care hospitals enjoyed the same access to capital and capital advantage, which currently generally they don’t, if they did perhaps a better, more efficient job of giving physicians what they want, without this ownership incentive that can be dangled, I would argue the business model would not have a real competitive advantage.

I mean, it’s all, quite frankly, it’s all really driven by the fact that if a physician wants to have ownership in a surgery center or a specialty hospital, he’s allowed to. If he wants to have ownership in Bill’s acute care hospital, it’s very difficult to structure that the way the laws are currently written.

So perhaps if we saw a refinement of those laws, either the elimination or the exemption or some sort of refinement of that exemption, I would argue that the business model doesn’t have as much merit as it might otherwise.


WILLIAM PETASNICK: We really are dealing in an uneven playing field, and I don’t want to overdo the issue of tension between the hospital and physician because it’s hard to generalize.

I think you have today’s physician coming out, first and foremost, with an incredible amount of debt from the educational process and $150- or $200,000 is not atypical. The fact is the reimbursement systems, not only on the hospital side, but on the physician side, have not kept pace with the cost of practice.

We’re dealing in a malpractice crisis now in terms of additional cost, and the mechanisms to try to create venues to kind of improve efficiencies so that the entire boat rises is problematic because of the issues we’re talking about and cost constraints.

And so you do have these elements of conflict and tension. In many ways, they are an inherent part of the system right now. And the inability to kind of deal with that because of unlevel playing field, we can’t, as hospitals, say, offer a gain-sharing arrangement to engage our physicians in efficiency practices, and they share the benefits in that as a way of helping them with some of their economic strife. That is not part of the process right now, and that’s not allowed.

So we have a lot of these inequities in terms of how the playing field is structured that really creates tension points that are there and are a part of the reality of the practice right now.

PAUL GINSBURG: That’s right. I think that’s characterized it well. One way of putting it is that in the general hospital, with physicians being neither owners, nor employees, it’s a very awkward structure, and when things don’t go well with that, that does present an opportunity for another facility to, in a sense, woo that physician away and compensate them better.

I would like to thank this panel. They’ve done a terrific job.


And we will take a 15-minute break now, and we’ll be back with our next panel.


PAUL GINSBURG: I’d appreciate it if you could come to your seats. I’d like to begin the second panel soon. Please come down to your seats.

One announcement I’d like to make, that the presentation by Kelly Devers and the transcript of the entire proceedings of this meeting will be on the HSC Web site shortly, and that’s

Our second panel--and these people were all here to listen to the first panel--is going to approach this issue from the view of policy makers.

And I’d like to begin by introducing Mark Miller, who is Executive Director of the Medicare Payment Advisory Commission or MedPAC.

MARK MILLER: Thank you, Paul.

A couple of things. Paul asked me to focus on Medicare and Medicare payment systems, so I will do that. While there’s a lot broader sets of issues, and I am aware of them, my comments will be focused on that.

I also want to say a little bit about where we are in our process at MedPAC. We’re in the process now of building the agenda for the upcoming year. Commissioners have expressed an interest in this issue, and we will be through the summer constructing an agenda in consultation with them. I’m going to go through some questions here and some issues of analysis. What exactly ends up on the agenda will obviously be part of the commissioners decision. And also I would point out, and in part influenced by what other people are doing this, because we try not to duplicate work that’s going on. For example, the General Accounting Office is looking at this issue, and we’ll be looking forward to any work that they do to also sort of color what we do.

An obvious starting point for us is to try and look for distortions in payment systems, and there are some basic things, like looking at revenues and payments across inpatient hospitals, outpatient departments, ambulatory surgery centers and physician payments as you start to construct a playing field for this issue. I will say a little bit more about the physician in just a second.

But focusing in on inpatient hospital, looking at the relationship of cost to payments for these specific procedures is an obvious please. It’s just a little bit more complicated in trying to yield that information. I can look in this room and I can see a lot of people who understand what I’m about to say. I mean when you look at the data that’s available for Medicare, you derive cost from charges, using cost to charge ratios, those cost-to-charge ratios are derived from revenue centers which are defined very differently across hospitals. Charges are obviously defined by hospitals. And basically the punchline here is it’s difficult to go in on a DRG by DRG basis and determine what’s profitable and what isn’t profitable. You get distortions in routine and ancillary costs. You get distortions in different DRGs. Ultimately it becomes a difficult exercise.

I’m not saying that it’s impossible. You do have to make some assumptions, and that makes my staff very nervous every time that I say that, but that’s certainly one leg of the exercise. Another way to go at this is to look at a very aggressive cost accounting study, where you go in and really assemble for the given procedure the costs that are related to it, and then look at the payments that are related to that. And there has been work like that in previous commissions I believe. ProPAC did that recently, not recently, in the past, if I’m not mistaken.

An issue there is that those kinds of studies are incredibly intensive and incredibly expensive. Now, MedPAC does have money to do these types of things, but if there’s anybody who’s involved in the appropriations process who’s listening, I will just repeat, those kinds of studies are extremely expensive, although important to be done to pursue this issue.

Another thing that we need to look at are differentials across sites of care, so how we’re paying for the same types of things in the outpatient department, the ambulatory surgery center, the physician’s office, that type of thing, because that can also be part of the picture and part of the incentives that may be driving things.

I had this thought independently, I swear to God, but it was certainly confirmed when I came into the room. I think the other issue that we need to look at if we’re going to explore this issue ultimately in the end is looking at what’s going on with physician reimbursement, because regardless of what’s happening in the inpatient/outpatient and those kinds of settings, to the extent that the physicians’ revenues--apparently listening to other panelists anyway--feel threatened physicians may be driving this phenomenon. And independently coming into this meeting, in addition to looking at all of the inpatient/outpatient, et cetera., I thought that part of this issue should also be looking at what the physicians are doing and how they’re getting paid.

This raises all kinds of reimbursement principles, which is how do you pay when you have the same service in different settings? And that is something that MedPAC and previous commissions have grappled with quite a bit. I mean there’s arguments that should you just pay what the most efficient provider requires, and that raises all kinds of issues. Another way to look at it--and this I think would be something that we would try to look at again if we go and pursue this issue in detail--is the notion of outcomes, the idea that for a given service in a given setting do patients in fact do better? That, of course, gets into issues of are they the same patients? But I’ll try and handle that in just a second.

So as I said, it does raise questions of what principles you use to reimburse across sites, and just I’ll draw your attention to at least one place where this issue was touched on in the March report. We made a recommendation on how ambulatory surgery centers are reimbursed relative to hospital outpatient departments. In the interest of time I won’t go through that, but if there’s questions on it, I can certainly raise that. But in that particular instance we did look at analysis where we looked at the payments, obviously, in those two settings, but we also looked at things like the relative risk of the patients who were going to the two different settings, and felt that the relative risk was higher in the outpatient department settings, and that there wasn’t a strong argument for reimbursing more in the ambulatory surgery center for the same bundle of services. As you can imagine the ambulatory surgery centers and to the extent that they are here today, we are extremely unhappy about that.

Another thing that I should point out here is that sort of the notion, sort of another element of the questions we would look at are things like impacts. The obvious things are, are costs lower? Is there efficiency gains here? Or if costs are lower, how do they achieve them? Are they efficiency gains? Are there patient selection issues going on? How are these things actually occurring?

And that implicates another issue, which I’ll just say as we drive by here and point these things out, is the notion of looking at refined DRGs to the extent that there is within DRG variation in the inpatient setting, and that part of this is in fact driven by selection. Another way to get at that is the refining of the DRGs, which are referred to--referred to as the APR DRGs. And I think again, almost everybody in this room has heard of those kinds of things before.

The other kinds of issues are whether utilization is induced or what happens with the excess capacity? What happens if a set of physicians leave the hospital? Do the physicians left in the hospital respond by filling that capacity? If there’s the whole self referral and physician ownership issue, I think there’s reasonable evidence on what happens over on that side. And in the end, does the health care system end up with greater degrees of utilization, and is that utilization resulting in better outcomes?

One thing I’ll point your attention to--and this is what I mean when I get back to the notion of sort of patient outcomes as well as sort of the impact on the system in general, greater utilization, less utilization, that kind of thing, greater or lesser cost. But there’s another thing I would point people’s attention to. Just recently Elliott Fisher [ph] and the Lemburg [ph] Group put out some work on geographic variation and one of the things he strongly--he came to MedPAC and gave a talk, and I would urge any of you to get the guy in and listen to him.

He made a strong argument that the supply in the levels of specialization is resulting in high levels of utilization or certainly related to it, and he very aggressively tried to go through and demonstrate linkages between that and quality, and he is really unable to do that. And one question--

[Sound of bell ringing]

That’s it, I’m done.


I am literally almost done. The one question that I think--see, now I’ve lost my thought. Seriously, one question to focus on here is when you get all of this increase in different specialization, how does the patient’s coordination of care actually get taken care of? How does the number of providers--Elliott Fisher makes the argument that the numbers of providers involved begins to result in compromises in quality. "I thought you gave him the ACE inhibitor," that type of thing, quite literally.

The only other thing I was going to say is that one other aspect in terms of impact is the impact on beneficiaries out of pocket.


PAUL GINSBURG: I was sufficiently engrossed in what you were saying that I didn’t give you warning, kind of time to end it.

Most of my questions for this panel are ones where perhaps all three can answer, so I would like to move directly to Maria Castillo, who is the senior legislative assistance for Congressman Kleczka of Wisconsin, and then we’ll hear from Tom Walsh, and then we’ll have the discussion.

MARIA CASTILLO: Congressman Kleczka represents the Fourth Congressional District in Wisconsin, which comprises primarily the city of Milwaukee and its surrounding suburbs.

As some of you know, my boss became very interested in this topic when reports surfaced in July 2001 that there were three specialty cardiac boutique hospitals under development with joint physician ownership in Southeastern Wisconsin. We like to joke that although we enjoy our fair share of good beer and cheese, three heart hospitals is probably a little bit excessive for our area.


You’ve all seen the Packers games, I’m sure.


In our area Covenant or MedCath were developing these joint ventures. I’ve just been told that Aurora is backing off its plans to do so, but MedCath hopes to be operational in September, and Covenant with their facility in January 2004. We also have a specialty orthopedic hospital in our area as well.

As some of my colleagues on the first panel mentioned, a major consideration with boutique facilities is the issue of physician self-referral, in which doctors send their patients to facilities in which they have a preferential ownership stake. Current federal law forbids physicians from referring patients to facilities such as laboratories and radiology clinics in which they stand to financially benefit. The Stark laws did include an exception for whole hospitals. Since they provide a wide variety of services, there is minimal risk of conflict of interest. Unfortunately, this exception has become a loophole by which physicians can legally refer patients to free-standing boutique facilities.

Typically, stakes in boutique hospitals are marketed exclusively doctors in a position to refer patients to them. We believe that this creates an incentive for investor physicians to over utilize services and base treatment decisions on profits rather than the medical needs of the patient. This is exactly the type of behavior that the Stark laws were designed to prevent.

I recently came across, just this past weekend, a business model to potential physician investors that flat out states, if you aren’t going to use the facility, don’t invest in it because it would be a poor investment. Without a doubt, there’s a need to clarify the law that these joint ventures are against the intent of Congress.

Boutique facilities also rob full-service community hospitals of their most profitable lines of business. You simply cannot take the profit center out of the hospital and expect it to survive without high-profit cardiac and orthopedic care to subsidize less profitable but equally important burn care and trauma centers. Community hospitals will be forced to turn to the Federal Government and local communities for help. Medicare, Medicaid and consumers should not be forced to take on this additional burden because joint ventures are skimming off profits for their investors.

In Southeastern Wisconsin, health care costs have jumped about 14 percent in 2002, and double digit increases are expected once again this year. It seems that one billion dollars in new hospital construction will only aggravate the situation.

Likewise there are significant quality of care concerns. Specialty hospitals are not typical general hospitals which are prepared to meet a wide variety of health needs within a community. As others have mentioned, what happens to you if you’re in a car wreck and suffer severe internal injuries like a ruptured spleen or head trauma, complications beyond the capacity of the nearest facility, which in our case would be a heart hospital. Could they treat you and would you want them to? Even worse, what if there’s no back up because the full service community hospital down the street was forced to close due to financial constraints?

Since for-profit boutique facilities are a relatively new trend, Congressman Kleczka, along with Congressman Thomas, Chairman of the Ways and Means Committee, asked the General Accounting Office, the GAO, to look into this matter. The GAO is considering generally how specialty hospitals differ from community hospitals in terms of patient volume, patient severity of illness, and patient sources of health coverage. The GAO will also consider how physician ownership of specialty hospitals affects the types of patients treated at the facilities, the finances of community hospitals, and the utilization of health care services in a market area. We hope to have some results very shortly from the GAO.

In the meantime, Congressmen Kleczka and Stark have reintroduced the Hospital Investment Act, which would prohibit preferential hospital ownership terms for physicians. Under the bill physicians could continue to refer patients to specialty hospitals, but only if their investment interest is purchased on terms also generally available to the public at the time. This would ensure that stock purchases aren’t a result of a sweetheart deal available only to physicians.

The Hospital Investment Act is one solution, but it may not be the only one. It would be helpful if we could get more input from hospitals and affected parties to see how we can best address this growing problem, in addition having MedPAC, the GAO and think tanks study this issue, will help us design the most appropriate legislative response. Mr. Kleczka also hopes the Ways and Means Health Subcommittee on which he serves will hold a hearing on this matter. We have expressed a great willingness to work with Chairman Thomas. His recent remarks referring to specialty hospitals as cash cows gives us great hope that this might be an issue on which we can work together in a bipartisan manner.

Thank you.


PAUL GINSBURG: Now, I’ll turn to Tom Walsh. Tom Walsh is a consultant now and has worked with Senator Grassley in a number of capacities in recent years, both on the Finance Committee and the Special Committee on Aging.

THOMAS WALSH: Well, I’m down here at the bottom of the lineup. Those of you who are baseball fans know that you let your heavy hitters do the hard work in the beginning. I’m sort of in the position of the pitcher coming up last. And usually what they tell the pitcher when he goes up to hit is, "Don’t get hurt."


So my goals for this talk are really modest ones.

I was asked to bring a Republican perspective, and I have. It actually has some overlap with the Democratic perspective Maria just shared, but let me try to explain how I think I agree with her, and then some of the points where I think we depart.

To me, what Maria had to say suggested a fairly clear conclusion that these specialty hospitals are a bad thing that the government should stop. And I think I come at this with a little more ambivalence about the situation, and that may be representative of the Republicans who are still working on Capitol Hill.

The element of the Kleczka-Stark approach that does have some merit from my perspective is that the same implications that are included in the existing Stark bill, with the same physician conflict of interest issues, do seem to clearly exist in this situation. Physicians, when they own these interests in these facilities, potentially very large interests, it seems hard to argue that there is an incentive for them to refer patients to them, and that taxpayers are at least potentially going to end up footing higher bills. So even though that bill is a Democratic bill, I think it would be a mistake to say that the concerns it represents are limited to Democrats.

On the other hand, it would, as the investment analyst pointed out, it would pretty much destroy this industry, and that is something that Republicans tend to have a little reluctance to do, or at least want to make sure we really weed out the costs and benefits of doing that. We have a certain skepticism about the ability of the government to pick winners in the economy in general, and in the health care system in particular. The reason evolutions like this one towards specialty hospitals occur is because someone has figured out a way to provide a service in possibly a more economically efficient way. I mean greater specialization is really the way of the world throughout the economy, and the reason is because of this economic efficiency it can provide. Health care, whatever one can say about it, is not exempt from this trend, because look at the profession of medicine itself. We don’t require all doctors to be general practitioners. There was over time an evolution, that some people decided to say, well, I’m just going to be a heart doctor or a brain doctor or whatever. And was that motivated at all by a desire for increased profitability, increased economic efficiency? I wouldn’t know, but it seems plausible that that was one of the factors that contributed to this division of labor.

And in case economic efficiency doesn’t seem like an inspiring slogan, it’s another way of making very scarce dollars go further, and dollars are very scarce, as you well know, both in the public programs, Medicare and Medicaid, but also in the private insurance industry, as we all know, as we get our insurance premium bills, whether we have private coverage or on one of the public programs.

So my argument is certainly not that economic efficiency trumps every other consideration, just that it needs to be weighed in the balance and given due weight.

There are many troubling issues. I feel like they’ve been so well covered already, I don’t really need to go through them, but just to tick off some of them. Are these specialty hospitals really more economically efficient, or are they so profitable because of the different patient mix they have? Do these specialty hospitals provide improved quality? The MedCath Company got Lewin to do a study, and the conclusion of that was, yes, the quality of care was higher, but that’s just one study. And there is others out there who disagree with it. Will these be the apocalypse for community hospitals, or will they be like previous apocalypses, one that the community hospitals find a way to adjust to and get through, perhaps by joining them rather than beating them, as we’ve heard in some cases.

Will the development of these facilities force the government to increase its level of direct and indirect subsidy to community hospitals? From a Republican perspective I think transparency of subsidies is a good thing, so the fact that there are a lot of subsidies in the current system that have not previously been widely recognized that are now sort of being revealed by this, that’s good information. That should inform government’s decision making about how we fund health care. The cross-subsidization issue, I mean those are--I was comparing those with Alec Vashon [ph], who was a predecessor of mine at the Finance Committee, and we agreed that we had gotten almost no lobbying over the years on these distortions in the payment system, in the DRG payments, for example, saying, you know what? You’re grossly overpaying for some of these procedures, and under for some of these others. You know, they sort of--they focus on other things, increasing the level overall was what we would mainly hear about.

So improving the accuracy of payment is certainly an important goal, something we could all agree on, but we heard from Mark Miller that’s not so easy to do. Now, if MedPAC was able to show the way to improve the accuracy of payment, would this force Congress to take the unprecedented step of listening to and obeying MedPAC? Is that a bridge they’re ready to cross? Will these specialty hospitals in fact stimulate competition and lead to lower costs for consumers? Is it reasonable to hold them to the same licensure and safety standards as general hospitals? Will they exacerbate the nursing shortages faced by hospitals?

These are all big, important questions, and one good piece of news that you heard about briefly was that there is a General Accounting Office study on them in progress, initiated by Congressmen Thomas and Stark, and it laid out quite a few of these questions and indeed the result of that is expected quite soon, or the report is expected in the next few weeks. So that will give us--I think that will provide sort of a new text for Congress to work off this year as it considers these questions.

My basic premise though is that the government needs to proceed with humility about its ability to answer all of these questions exactly right. You see, as a great philosopher put it: there are known knowns, known unknowns, and unknown knowns. Okay, I thought that was a joke.


A little Rumsfeld humor there. Anyhow--


So I think there are big concerns here shared on all sides, but destroying the fledgling industry all together as some of the more draconian approaches would do, is something that should be done with great reluctance and caution.

Now, it is a rather uncomfortable binary choice, it seems to me, of kind of destroying this issue through this expansion of this industry through the expansion of the Stark law or not, and those binary issues are the tough ones for Congress.

Let me just say a few words about the politics of this since I’m now sort of--can speak independently about it. It’s not really a Democratic versus a Republican issue primarily. With reference to this notion of health care as a three-legged stool, having worked on the Hill, we see it more as like a wicker chair. I mean, there’s just like a million pieces that are all sort of entwined.


And all you know is every now and then you end up sitting on the ground because it just didn’t hold you up.


So a few words about the politics. The AMA has definitely taken an aggressive stance in defense of the ability of physicians to own and operate these things. They have supported the Office of Inspector General’s initiative to assess whether the Anti-kickback law should be applied to hospitals’ efforts to do economic credentialing, so that just shows to me the level of physicians’ commitment to this issue.

On the other hand, the American Hospital Association I think is in a more uncomfortable position in that they have some members who are involved in these joint ventures with physicians and others who see these specialty hospitals as the enemy, so I don’t think they have been able to speak with as much of a voice, but in general, it’s a battle between community physicians and community hospitals, and that is a battle that members of Congress do not enjoy being in the middle of. Those of us on the outside can enjoy them being in the middle of it.


It’s the kind of issue they really struggle with. So if it was a betting man, I would not bet on major legislation in this area that’s going to have really draconian effects, but Congress is nothing if not unpredictable.

I will say one--I’m reluctant to prognosticate in that area, but one organization that can prognosticate quite well I know is the Center for Health System Change, because this was originally going to be held on April 1st, but they looked at sophisticated modeling and were able to determine that the war would probably be over by now, and people would be ready to focus on this issue, and so they settled on Tuesday morning, April 15th.

So I think we’ll take some questions now. I just wanted to mention that right now I run a Web site Please take a look at it,, where I publish things on health care, politics and other things, and my e-mail address is Thanks.


PAUL GINSBURG: Tom, I appreciate your focusing on predictive ability, having graduated from predicting the health system to talking about when the war will end, but the one thing we will never try to do is predict Congress.


Anyway, I am going to ask some questions for a while and get some discussion on the panel. It seems as though there are probably two areas that we should talk about. One is the area of payment rates and possible distortions, and one is the area of physician ownership and what changes in those rules might do to the industry.

I want to start off about the distortions, and actually, I have been for quite some time, whenever hospital executives tell me how profitable cardiovascular and orthopedic services are, I have been going around asking people how that happens. And one explanation to me which sounded reasonable--and I wanted to run it by you--is that it’s the services which have had the most technological change in the sense where productivity has gone up and that these are services where, say, our implicit assumption in the Medicare system and also in private payment for hospitals that there’s some uniform relationship between cost and charges does not true, in the sense that these--say these services, if technological change has led to productivity gains, means that in a sense the ratio of charges to costs is higher for these procedures, and that gets into the DRG system and it gets into private systems which are paying a discount from charges.

So would you like to kind of speak to that generally, Mark?

MARK MILLER: I think that there is probably some truth to that. I think that probably there’s more going on than that, and I’m going to circle back to that in just a second.

I think that there’s probably some need--and we saw some of this when we were looking at the impacts of the outpatient prospective payment system, about how hospitals go about marking up for certain things relative to others. So I think exactly how charges relate to costs in a given situation is at least part of the issue. It may vary by the kinds of services. It also may vary much more unpredictably than that, just depending on how hospitals do it.

I also think there’s cost accounting issues which are, for given revenue centers, where do you put certain things, and depending on how you put that--because it’s rarely organized around the specific procedure that you’re talking about in question--can also influence this.

But I also think that what you’re saying is, I think, true as well, that there are changes in technologies that have driven this.

But I think I have this right. I was trying to think about this as you were saying it, which is always complicated because then you don’t hear the question. But I think we are hearing two different things. We are saying, on the one hand, the introduction of new technology is not properly accommodated in DRGs and that the payments are insufficient. But then we are hearing that new technology is creating the opportunity for profiting in these areas.

And I think I’ve got it right that that sounds like two different arguments. But like I said, I was trying to listen to your question at the time that this question was moving through my head.

PAUL GINSBURG: I think they may be both right in the sense, you know, maybe there is some issue about how new technology is initially paid for. Actually, I always thought the new technologies paid very well because they’re only done by, you know, the most innovative physicians, et cetera. But, you know, just a concrete example of coronary artery bypass graft surgery, think of the decline in operating room time over the years as surgeons have gotten better at doing it. So to the extent that you set the charges for that procedure when it was relatively new and you haven’t reflected all the learning, I think that’s what I had in mind by potential distortion of technological change. It is not the technological change that gets the headlines about the new stuff to do, but just doing the stuff that used to be new better and better over time.

MARK MILLLER: Right, I agree with that. There are other examples that I think you can give where when they initially were created, people were saying, oh, this needs to--all of this money needs to be put into the DRG. But after you watched it for a year or so, you actually found that there were efficiency gains often through the length of stay. Anyway, let me stop there.

PAUL GINSBURG: Okay. So, anyway, you’ve sketched out the ways that there were to fix it, and now I want to talk about, say, the politics of fixing payments. Just in casual conversations I was having during breaks here, the issue has come up that, you know, the sense if there was a rationalization of payments, would there be a credibility problem, say, in a sense, would the hospitals believe that the reductions in payments for cardiovascular services would be offset by increases in payments for, say, medical admissions, which presumably would be the beneficiary of a rationalization?

This question is really for any of the panelists. Do you think in a sense that there is--you know, presumably, at least in my background in policy with physician payment, we always thought in terms of budget neutrality, and I think it is that the DRG system began with a budget neutrality rule. But do you think there would be a credibility problem in getting people to believe that, in fact, it truly would be budget neutral and they would make up for the reductions in payments for some services with increases in services that appear to be relatively underpaid? Tom?

THOMAS WALSH: I just think there is a--that individual participants in the health care system understand that aggregate changes are not what they experience, that they experience their own change based on their own mix of patients and acuity and everything else. So, yes, no matter how budget neutral things are for the taxpayer, there tends to be a lot of skepticism and anxiety, even over--I will just say even over things that seemed very inoffensive, you know, minor tweaks to systems, it turns out somebody’s ox is gored almost inevitably. So that’s why it’s such an inert--Medicare is such an inert system. Really, it’s very difficult to really change it.

PAUL GINSBURG: So, in a sense, to get some significant changes in payments, do you think this would really need congressional action? And in a sense, there are two ways you could need congressional action. Perhaps it legally does, or perhaps it just politically does. I’d love to hear your reactions to that. Mark?

MARK MILLER: Yes, since we’re getting into opinions now, I want to make sure that these don’t represent opinions of the Commission, so this is just me talking now.


MARK MILLER: Actually, I want to backtrack over that question and actually go back also to the first question. The other thing that I should have mentioned along the way is to the extent that there’s differences in severity, that can also be part of the answer.

PAUL GINSBURG: That’s right.

MARK MILLER: Which links to some of what we’re talking about here.

I think, you know, the question of budget neutrality probably depends on what solution a person ends up dealing with inside Medicare. And just before I say that, the other thing I want to say before I get to Medicare is I think we also should decide whether--what do we think is driving this phenomenon. I mean, because it’s the Medicare Payment Assessment Commission and we are talking about Medicare, we are talking about Medicare solutions. But I think a first-order question is: What is driving this? This is much more a phenomenon that’s being driven by physicians’ incomes because you can argue and even demonstrate that the opportunity in these particular areas--cardiology, that kind of thing, cardiac DRGs--has been present for years. It is just now it seems to be really taking off. So does Medicare need to respond to that?

But then let’s assume for the moment that it does. In that box, I think the question on budget neutrality and how it’s received is a function of what you do. If you were to put into place severity adjusters, I think there is an argument that it’s budget neutral. If you were to put in place things that say I don’t think that Medicare, on the basis of outcomes and costs and all the rest of it, should pay any more in this setting because there’s no clear advantage of paying it in a different setting, then that might not necessarily result in a budget-neutral outcome. It depends on, I think, what solutions are considered.

PAUL GINSBURG: Any other comments?

KELLY DEVERS: Well, I just wanted to briefly mention that I think one of the things that didn’t necessarily come out as clearly today is that another sort of market dynamic that has created a window of opportunity for specialty facilities is the loosening of managed care; that is, the less use of restrictive provider networks, capitated payment, and other kinds of incentives. So as managed care is weakened and we have that as less of a tool, some of these other policy options or other solutions may become more important.

PAUL GINSBURG: That’s a good point.

Actually, one thing, I wanted to respond to what Mark said about, Why Medicare? What’s Medicare’s role? And one thing I’ve perceived is that Medicare is very important as a leader, and, you know, it really struck me that as we have gone around and we talk to managed care plans and the sites, it’s virtually universal now that for physician payments they use the relative value scale in the Medicare fee schedule. You know, this would have shocked some economists that this would happen because they’d say Medicare’s distorting from where the market is. And here, you know, the commercial insurers have found that this is a valuable tool for them. It makes it easy for them to negotiate payment rates for physicians because they can say, you know, we pay 120 percent of Medicare, and everyone knows exactly what they’re talking about.

The previous panel mentioned, you know, when I asked the question about, well, have insurers taken advantage of perhaps some oversupply situations in some markets by paying these facilities less or paying less for those services, I really didn’t get any indication that this would happen. So in a sense, even though commercial insurers and managed care plans did not follow the DRG system, there certainly may be a prospective--an opportunity for them to follow various outpatient payment reforms that Medicare does, again, not adopting the overall payment rates but adopting the structure and all the technology that comes from Medicare because they don’t want to invest in it themselves.

MARK MILLER: Can I also say one thing about that?


MARK MILLER: We also went out and talked to--when we were looking at physician fee schedule issues recently, we went out and talked to payers. And we did not--while people definitely are using RVUs, we also asked questions of: Are you following what’s happening? Do you tend to track off of what happens on Medicare’s fees? So if they go down, do yours go up? Or if they go down, do yours go down?

And we did not get an overwhelming response that on that level they tracked to that. They say they make their decisions much more independently of that. Now, again, I don’t think our survey was particularly, you know, definitive but that’s what we found.

The other thing I’ll say about Medicare being a leader, the other side of that--and this is another issue that I think gets implicated here. Let’s say this happens in some, you know, massive way and the mission of a community hospital becomes, you know, an issue and at stake. The other thing that Medicare does is it’s often sort of the first place people go to start correcting things. So, you know, if private payers, you know, depending on who you talk to, don’t necessarily support teaching missions of hospitals, but people expect Medicare to. And to the extent that uncompensated care and those kinds of issues come up, people are going to go to Medicare and start looking for solutions. And often the notion of the mechanism or the targeting through Medicare isn’t the most efficient way to go after it.

PAUL GINSBURG: Sure. Let me change the topic now towards the issue of physician ownership. And one thing that--you know, one trend that we’re seeing is a trend towards consolidation of single-specialty group practices. And often the number one reason for this is to get big enough to get new equipment and technology into the physician’s office. So given the concern about physician ownership of specialty hospitals, should we be concerned about that as technology is changing, more and more of these worries are coming into the physician office, which is a conflict that we have traditionally kept our hands off of? Any thoughts on that?


THOMAS WALSH: Is it okay if we don’t?


PAUL GINSBURG: Okay. So it sounds like the physician’s offices are clearly politically out of bounds.

THOMAS WALSH: I think so. Gosh, I--yeah, I just think it’s--I mean, I’m just giving a crass political answer. Yeah, I think so.


One other thought, something that you said, Tom, when I combine it with the first panel, which is about--I guess your major concern about types of legislation that Mr. Kleczka is working on is the potential to actually wipe out this industry development and you see this industry having the potential to have some constructive pressure on hospitals and to do some innovations. And it just came to mind, I guess the issue about--you know, we probably should have talked more with the first panel about this, but in the sense if you didn’t have this opportunity, if your bill passed, but still it’s very profitable to provide these services, and, in fact, there’s still an economic incentive for whether the hospital or some group which isn’t owned by physicians to start these facilities, but the sense that perhaps it wouldn’t happen because of the concentration, and that in a sense, it’s another way of saying that perhaps entry into the provider business is very difficult now, and maybe that’s really what you’re saying, is that you’re concerned that with such limited entry that you just need to--this is the only entry we can fathom, even though it has problems with conflicts of interest.

THOMAS WALSH: Right. I mean, I think that’s--again, I used the term "inertia" to describe our health care system. There are certainly elements of it that change, but in the elements where the government is involved, there’s such an inertia for the status quo, and a lot of times, you know, seemingly menacing new developments do end up contributing vital new things that help reduce costs of improve quality and will--I mean, I will just say, in terms of quality, if you were given the choice, you know, for your heart surgery of going to a GP or going to a heart surgeon, I think most of us would say, you know, I think I want the more specialized facility.

Now, I’m not saying that that is necessarily going to be true with respect to these specialty hospitals, that they’ll offer improved quality with respect to the services they offer. But I’m also saying it’s not necessarily not true, either. I mean, it could be--it could work out that way. And so I just think you sort of need to wait and see. I mean, the government really has to do its best to anticipate the effects of the policy choices it makes, and the longer you wait to make them, on the one hand, the more effects you can anticipate, the more evidence you have; on the other hand, the more entrenched the industry gets. And if we do decide at some point, wow, this was all a big mistake, you know, the barn door will be closed and there will be, you know, horses running all over the place.

So it’s a difficult issue. But, yeah, it is certainly the case that it is, I think, difficult to innovate in the world in general, but in the health care sphere in particular, there are some special barriers to it.


MARIA CASTILLO: I’d like to respond to that. While our belief is for-profit boutique facilities, while they may do very well for themselves, can be very detrimental to a community, I think the cost is simply too high if full-service community hospitals are frankly cut off at the knees in the name of free market. I mean, as one study points out very aptly, I think, few people would consider taking police protection, fire protection, and changing that to a for-profit joint venture. They’re there in the community for the welfare of the good--for the good of the people, and I think the citizens deserve choice and they deserve access to affordable care, and that means a variety of health care services. That doesn’t mean a very specialized, focused provision.

PAUL GINSBURG: All right. Thanks.

I have a nice bunch of questions from the audience. Before I begin, please fill out your evaluation form. We do pay careful attention to them, and hand it in as you leave.

This is a question for Maria and Tom. It says: Consumers are smart shoppers. As consumer-directed health care expands, shouldn’t they have more options, and won’t that drive change better than the government would do?

MARIA CASTILLO: I think I just answered that question.


THOMAS WALSH: You know, perhaps so. There’s only one way to find out, really, and that’s to allow it and see what flows. I mean, you are--whoever asked that question is putting their finger on obviously a sort of philosophical difference in terms of health care. From our perspective, you know, we have not attained perfection in the delivery of health care such that we need to say, okay, no more changes, no more new delivery systems.

So, yeah, all I can say is I agree with the basic point of that question, that rhetorical question.


MARK MILLER: My only comment on that is that, at least from Medicare’s perspective, just to be sure, as much as it--assuming the current payment systems, if there’s no radical change, that competition occurs on a basis of, you know, not patient selection; that if you set a payment rate you set a payment rate, and if they can provide it at that rate and do better, then fine, if that’s the direction that ultimately we decide to go in.


KELLY DEVERS: I’d just like to point out that it’s incredibly challenging to provide quality and cost information to consumers. There’s been efforts in the area of patient satisfaction surveys and other kinds of report card efforts, and I think what we’ve learned from that is that it’s very difficult for consumers to access and understand that information. So I certainly agree with the premise that we need choice and that consumers can make informed choices when they have the information. But, in practice, that’s been very difficult to achieve.

PAUL GINSBURG: I’ve got a question for Mark. Medicare relative prices have been characterized as rigid and inert. However, DRG relative prices are determined by hospitals’ charges, which are set by hospitals. So who is rigid--Medicare or the hospitals?


Why do hospitals persist in charging based on cross-subsidization since Medicare prices would change if hospitals changed their charge structure?

MARK MILLER: Can you just not answer a question?


PAUL GINSBURG: Okay. I guess that’s more of an opinion than a question.

MARK MILLER: Well, I mean, in all--I did try and point out in this, I mean, part of this is cost accounting practices and how hospitals charge. That’s certainly part of it. I think, you know, many people have pointed out that the system is built on a large set of cross-subsidizations, and when things like this happen, those sets of cross- subsidizations become revealed. And that’s kind of what drives everybody into the room to talk about this.

The notion of who is rigid and who isn’t rigid, you know, I don’t want to talk about that.


PAUL GINSBURG: Regulatory barriers prevent many innovations in health care. This is a question for anyone. What regulatory relief or undoing do you see coming down the pike? P.S.: How will regulation thwart consumer-driven care? Tom?

THOMAS WALSH: Well, there is a regulatory relief piece of legislation that I think has now pretty much attained, in broad terms, a consensus position. There are some distinctions between the two parties and between the two Houses on it, but it is a grab bag of reg relief provisions that I think are not going to personally prove to be some major transformation of the government’s relationship with health care providers. I think they will, you know, be some small tweaks that improve some of the really clearly identified problem areas. But if people are expecting the Federal Government and the federal programs to become radically more provider friendly, I think their expectation is misplaced. I think it kind of is what it is.

MARIA CASTILLO: I’ve been lobbied over the last two years for this regulatory relief bill, and we’ve worked very hard on it in the Ways and Means Committee over the last two years in a bipartisan manner, until unfortunately the markup last month. But it was my impression that providers really needed that relief and that it would be very helpful. So just to add that.


Mark, a question for you. Is there a recent example of specific Medicare fee adjustments that reduced overpayments that might serve as a model for cardiovascular or orthopedic services in question today?

MARK MILLER: Overpayment...?

PAUL GINSBURG: Yes, in other words, has there been an example--this actually--while you’re thinking, you know, when physician payment reform passed in 1989, a few years before it passed, actually at the suggestion of the Physician Payment Review Commission, Congress reduced the payment rates for a small number of significant services that were identified as overpaid while the analytic work was going on to doing a full-scale reform. Have there been any examples in the hospital area?

MARK MILLER: The place I was going to go to was the physician fee schedule and actually not--the overpriced procedure policy I had forgotten about, but more just the whole notion that the entire fee schedule was designed to move things from surgical specialty procedure to more E&M types of stuff. I mean, that was the example that leaps to mind.

My sense of the hospital--and I’m sure somebody will point me out wrong after I say this, and it will be every member of my staff, I’m sure. But my sense of the hospitals is that more to the extent that distortions are taken into account, it tries to be more hospital-specific, and that, you know, the policies are articulated along the lines of disproportionate share payments or payments for hospitals that are in sole community.

The only other thing that I can think of is--I think you’re saying overpriced--is sort of the other direction. I mean, recently the innovation in the inpatient setting on how you pay for new technology and the circumstances under Medicare will pay for a new technology has kind of been the other direction, if you will. That’s sort of what comes to mind.

PAUL GINSBURG: Well, that’s certainly an interesting thought about a way of approaching this issue that would be a step at a time.

This question says for anyone on the panel. What is the difference in incentives between physician ownership and the revenue sharing of joint hospital-physician IPAs or the techniques of large teaching hospital--or the gain-sharing techniques of large teaching hospitals where revenues are compared with costs for each department? I was wondering if Kelly would want to take a crack at that.

KELLY DEVERS: That’s a complex question, but I believe there’s just more limitations on what kinds of arrangements general hospitals can have with physicians and how much of an incentive they can give them, and certainly it’s not a direct ownership piece in the same way. If there’s other folks in the audience who can provide additional detail, that would be helpful. But that’s my understanding, is that there are just more limitations on the nature of the relationships.

PAUL GINSBURG: Okay. Here’s a question that probably Maria can give us something on. Please walk us through the policy responses to boutique hospitals at the state and local levels. What states, if any, prohibit physician ownership of specialty hospitals or require specialty hospitals to maintain full service emergency departments? So you might want to answer this specifically, or it’s actually a question I always think of, a general question about what should be done at the state level versus the federal level in this area.

MARIA CASTILLO: It’s my understanding that Ohio, the State of Ohio, and a few other states are looking at this matter. I don’t know the specifics of state bills that are out there. Wisconsin is also looking--I believe State Senator Decker is looking at a perspective of condition of--certificate of need, which we discussed in the first panel, as a way to limit and make considerations of construction costs and to see if the existing facilities--excuse me, the existing full-service hospitals will meet the health care needs without the additional two cardiac facilities. Perhaps Kelly found some information in her research.

KELLY DEVERS: Maria, you mentioned the major ones, which are Ohio and some other states that are essentially trying to prohibit physicians that have an ownership interest in inpatient or outpatient facilities from also participating or having admitting privileges at general hospitals. So that’s certainly one approach.

Another approach is the State of Oklahoma basically requires specialty hospitals to accept Medicaid and uninsured patients. And I believe some other states are, through licensing requirements, requiring specialty hospitals to have full-service emergency departments. So those are some of the approaches and strategies being pursued at the state policy level.


THOMAS WALSH: Still, I believe a majority of states still have certificate-of-need laws, and so that is already--I believe it’s 30 states that still have them. So that presents some limitation on the ability to open these and, you know, there is some movement or at least lobbying in some states to reinstate CON where it was done away with. But I do not believe that actually happened during any of the legislative sessions that were done this year, so I think that would be unlikely to happen.

PAUL GINSBURG: Good. So this is an area where we really could get a lot of activity at the state level because I think a lot of the policy options that you were talking about, Maria, are really available to states if they should choose to legislature.

MARIA CASTILLO: Right, but I just don’t think that a federal perspective is needed because these facilities are popping up all over the country, I think.

PAUL GINSBURG: Sure. Okay. Here’s something that--who defines what is a hospital? All specialty hospitals are licensed by states as hospitals. A specialty hospital must meet all state standards. Would the Kleczka bill put the Federal Government in the role of the states in defining what constitutes a hospital?

MARIA CASTILLO: First of all, our bill does not define what a specialty hospital is. Some people may consider that this is rather broad because it could potentially be any hospital with--excuse me, as a joint venture. One thing to keep in mind, we don’t feel that we’re incorporating--allergy season is here. Children’s hospitals are not-for-profit institutions, so it’s really not an issue in our mind that this legislation would affect. Doctors in these facilities aren’t referring patients and profiting from the referrals.

During the drafting stages of the legislation, we worked with staff in the Inspector General’s office and--excuse me--they thought that the bill would adequately target boutique, your cardiac and your orthopedic facilities because that was where the trend was in physician ownership. It wasn’t necessarily in general acute-care hospitals. So that’s why our bill is drafted that way.


I have a very good question. I don’t know if anyone has an answer, but it’s a good question.

At least three non-efficiency sources of profit for specialty hospitals have been mentioned. Any idea of their relative importance? And the three are distorted DRG payments--and I would expand that, and perhaps distorted charges in general--creaming of less costly patients or creaming off less costly patients, or, number three, creaming off better paying patients.

MARK MILLER: I certainly don’t have any sense of what these relative proportions are. My comments are sort of identifying where at least in Medicare you would try and look for those kinds of issues. I don’t know if other people have views.

THOMAS WALSH: I think those are some of the things that GAO is taking a look at and will hopefully have some evidence on.

MARIA CASTILLO: Exactly. And I think some initial findings have showed that the median percent of claims paid by Medicaid was lower at cardiac and orthopedic facilities, but they’re also looking at Medicare claims. So I think this is an issue that we’ll get some good data on.

PAUL GINSBURG: That’s really good, what that study has been doing.

You know, the real issue is saving the general hospitals serving a public mission. Why are we not focused on the undue administrative burden, maybe 26 percent of entire health care costs, which is a big contributor to hospitals’ financial problems, rather than going after specialty hospitals that appear to provide high-quality, cost-effective care? I’ll take that as a comment rather than a question.

Okay. For Tom Walsh and possibly others: Given that eliminating the relevant Stark exception may not be feasible, what modifications to it might remedy the perceived conflicts of interest or payment/cost concerns?

THOMAS WALSH: Well, I’m six or seven years removed from practicing law, but if memory serves, it’s difficult to modify Stark in a minor way because it is a pretty sweeping prohibition. That’s why I think you really--you know, I’m certainly open to education on this, but it basically is just a blanket prohibition on physicians’ referring Medicare or Medicaid patients to any facility in which they have an interest, period. So it is pretty difficult to see how you can come up with--how you can do anything other with specialty hospitals basically than include them in this prohibition or not. I don’t--I at least am not really aware of--I mean, I’m aware of things you can do outside the Stark law context that address this, and I don’t want to misrepresent what Maria’s bill does because it doesn’t specifically change this exception; rather, it basically prohibits physicians from investing in a--

MARIA CASTILLO: It requires a public offering of an investment opportunity.

THOMAS WALSH: Right. So that’s another way to get at it. But it still has the effect of basically preventing physicians from investing in facilities to which they might refer patients. So I at least, within the Stark law approach, can’t think of any more targeted ways to deal with this.

Now, outside of that, in terms of having them--you know, requiring them to comply with the same licensure requirements as general hospitals, you know, some of the other things that we’ve talked about, those are kind of on the table. But Stark is a fairly blunt instrument, as I understand it.

PAUL GINSBURG: Good. This would be a good time, if people on the panel have a kind of closing thought they want to communicate.

MARIA CASTILLO: I guess I’ll go first.


MARIA CASTILLO: Like I said in my remarks, my boss has taken a position that is one way to address the concern that specialty hospitals raise. It’s not the only one, and I’d be very welcome to sitting down with various parties to discuss your concerns. I have done so. I’ve spoken multiple times with MedCath and a whole bunch of other specialty hospital facility organizations, as well as affected parties. If there’s a better way to do this in a legislative manner, I would welcome your suggestions and urge you to present them.

In the meantime, this is a way to do so, and perhaps this issue will get considered as part of a larger Medicare package.


THOMAS WALSH: I just want to reiterate something I said, which is please don’t interpret anything I’ve said as saying Republicans are not interested in this issue or don’t think there are some serious concerns being raised by the proliferation of these hospitals. I think that is the case, that Republicans on Capitol Hill are going to--are awaiting with great interest this GAO study, and it’s likely to inform what they do. I just think there is likely to be attention to the costs and benefits of any regulatory approach, and I think that’s a good thing, or should be.

MARK MILLER: And I guess all I would say by way of closing is I think there’s the first-order question of what is driving it; a second-order question to look inside Medicare to the extent that it’s part of it and determine where distortions are occurring; and then at least in terms of a principle to pursue, to try and design the payment system to track the patient, and assuming that you’re paying correctly for the patient on the basis of relative risk or whatever the case may be, then, you know, let the system try and play itself out.

Then the third or fourth, whatever it is, is then to look back at the question of what role the community hospital plays.


KELLY DEVERS: I just want to reiterate some of Gary Taylor’s remarks, that we can really expect to continue to see growth of specialty facilities for all the reasons he laid out about the attractiveness of growth in the particular sectors. And I hope that we’ve laid--and the panelists have laid out today the issues to monitor moving forward, and that this was a start towards identifying some of the options. And I think everyone’s done a terrific job.

I just want to also acknowledge Cara Lesser, the director of the site visits, and members of the public affairs staff--Richard Sorian, Alwyn Cassil, and Roland Edwards--for doing such a terrific job helping up put on a conference.

PAUL GINSBURG: Thanks. You were almost closing the meeting, but I have a couple more things to say.

Actually, one thought I had in sitting on this panel is to really remind you that the specialty hospital or the physician-owned outpatient center is really only a part of an even broader phenomenon, that as we look at the sites that we monitor, you know, in some sites like Indianapolis and Little Rock and Phoenix, we see a lot of development of specialized services and, you know, by specialty hospitals and others.

There are some other sites that we just don’t see it. But it doesn’t mean nothing is happening in those other sites. What’s happening in those other sites is that, in a sense, the general hospitals are doing it. So, in a sense, the notion that the health care fields or providers of health care are expanding and vesting a lot in services that seem to be profitable is a very broad phenomenon, and as you go from site to site for different reasons, in some cases it’s popping up through specialty hospitals or physician-owned ambulatory surgery facilities; in other sites, it’s just things the hospitals are doing.

So, in a sense, you know, the general concerns about costs, we ought to think about that, even as this, say, more pressing thing because of the threats to general hospitals we’re talking today about the specialty hospital phenomenon.

Anyway, that’s perhaps in the way of a summary remark of closing. Really, the focuses in our discussions were on the payment structure and they were on the issue of physician ownership. And, you know, in the latter it’s really a very complex issue because of the very awkward but longstanding mechanisms we have had in the way hospitals--physicians relate to hospitals, the fact that they are neither employees nor owners, and, you know, there’s a whole history of that relationship never working very well. In a sense, the specialty hospital is a new way of defining the relationship between the physician and the facility, but there are some real issues as to whether that’s a good one.

Again, thank you all for coming. Thank you for your work in sending up really good questions, and thanks to the panelists and the HSC public affairs staff, and the Robert Wood Johnson Foundation.



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