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23–642—PDF 2005

S. HRG. 109–142

PHYSICIAN-OWNED SPECIALTY HOSPITALS: IN THE

INTEREST OF PATIENTS OR A CONFLICT OF

INTEREST?

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MARCH 8, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 2

ADMINISTRATION WITNESS

Gustafson, Tom, Deputy Director, Center for Medicare Management, Centers

for Medicare and Medicaid Services, Washington, DC ..................................... 7

PUBLIC WITNESSES

Hackbarth, Glenn, chairman, Medicare Payment Advisory Commission

(MedPAC), Washington, DC ................................................................................ 5

Pierrott, Dr. Alan H., past president, American Surgical Hospital Association,

and chief executive officer, PSC Health, Inc., Fresno, CA ................................ 22

Veitz, Larry, chief executive officer, Lookout Memorial Hospital, Spearfish,

SD .......................................................................................................................... 25

Sullivan, Dr. J. Andy, chief medical officer, Oklahoma University Medical

Center, Oklahoma City, OK ................................................................................ 27

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 2

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Gustafson, Tom:

Testimony .......................................................................................................... 7

Prepared statement .......................................................................................... 39

Responses to questions from:

Senator Grassley ....................................................................................... 41

Senator Baucus .......................................................................................... 43

Senator Kyl ................................................................................................ 44

Hackbarth, Glenn:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 46

Responses to questions from:

Senator Grassley ....................................................................................... 55

Senator Crapo ............................................................................................ 55

Senator Kyl ................................................................................................ 56

Pierrott, Dr. Alan H.:

Testimony .......................................................................................................... 22

Prepared statement .......................................................................................... 57

Responses to questions from Senator Grassley .............................................. 107

Sullivan, Dr. J. Andy:

Testimony .......................................................................................................... 27

Prepared statement .......................................................................................... 107

Veitz, Larry:

Testimony .......................................................................................................... 25

Prepared statement .......................................................................................... 111

Page

IV

COMMUNICATIONS

American College of Surgeons ................................................................................ 115

American Hospital Association ............................................................................... 119

American Medical Association ................................................................................ 126

Cedars-Sinai Health System ................................................................................... 136

The Heartland Institute .......................................................................................... 140

MedCath Corporation .............................................................................................. 149

Nebraska Hospital Association ............................................................................... 160

(1)

PHYSICIAN-OWNED SPECIALTY HOSPITALS:

IN THE INTEREST OF PATIENTS OR A CONFLICT OF INTEREST?

TUESDAY, MARCH 8, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:17 a.m., in

room SD–628, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Kyl, Thomas, Baucus, Lincoln, and

Wyden.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. As you all know, Congress placed a moratorium

on the development of physician-owned specialty hospitals for 18

months, and that ends June 8th this year.

This moratorium was for a number of reasons. First, there were

concerns about the rapid growth of these facilities. Second, there

were concerns about physician self-referral. Third, there were

thoughts that these specialized hospitals might be an unfair form

of competition to the existing system of hospitals. In all of this was

a concern about the impact that these hospitals are having on the

health care system as a whole.

Now, specialty hospitals have existed for quite some time. There

are children’s hospitals and there are psychiatric facilities. But

these are not really what the moratorium is all about. We are talking about the emergence of a new type of hospital. These new facilities are mostly for-profit, they are mainly owned by physicians,

and they only treat very specific conditions, like cardiac, orthopedic, or surgical care.

These physician-owned specialty hospitals have more than tripled in number in the past 5 or 6 years. While there are still only

a small number of about 100, they are growing quickly.

They are also mainly located in certain pockets of the country.

Basically, they are located in those States without certificate of

need, or where hospitals do not need to get State approval to build

new facilities.

Now, these specialty hospitals have certain advantages. Because

they see one type of patient, they might be able to increase their

efficiency, lower their costs, and improve quality of care.

2

Also, patients like to go there because the facilities are often

new, with great amenities. This can be everything from easier

parking to certain types of meals. And also, perhaps more importantly, physicians like to work there because they have a greater

say in the hospital’s operations. They have more control over patient scheduling and purchasing of equipment.

However, others have said that these new hospitals are problematic. This is because doctors who refer patients to these places have

a financial conflict of interest.

Not only do the physicians get a fee through Medicare for performing surgery on the patients, but they also get a fee for use of

hospitals which they might own, and they get a share of the hospital profit as well. So, the more profitable, the more money that

they make.

There is concern that this interest in profit, the bottom line, may

lead physicians to actually steer patients. That is, physicians

choose where to send the patient based on his condition or based

on insurance, or based on whether or not they think that the patient will profit their hospital.

The Government Accountability Office has found that specialty

hospitals are less likely to have emergency rooms, and has found

that they treat fewer Medicaid patients, and few, if any, uninsured

patients. You know that there are now 45 million uninsured, and

that is a concern if we have facilities that do not help take care

of the needs of those who are uninsured.

Now Congress, with very few exceptions, does not allow physicians to refer Medicaid and Medicare patients to facilities in which

they are owners. One of these exceptions is the whole-hospital exception, which I think we will hear about during this hearing.

Obviously, we are interested in what MedPAC has found and

what those testifying here today have to say. I want to take a moment and thank MedPAC for their hard work on this report. I

know that Congress threw a lot of work at them, and they have

done a great job.

My colleague, Senator Baucus, and I are in the process of drafting bipartisan legislation on specialty hospitals. This hearing will

provide us an opportunity to learn more about this very important

issue, beyond the statements that we are making here.

I know a number of my colleagues are also engaged in this topic,

and I anticipate there will be a number of questions. I look forward

to hearing your thoughtful responses.

Now it is time for Senator Baucus.

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you very much, Mr. Chairman. I deeply

appreciate you holding this hearing. It is a very important one. It

has generated a lot of interest. In fact, it is kind of hard to believe

that the Medicare Modernization Act, the so-called MMA, was

signed into law just 15 months ago today.

It is also a little bit hard to believe—in fact, it is a little

strange—that the specialty hospital issue, at that time, was the

most difficult one to resolve in this 400-page bill, and here we are

again today, still attempting to resolve it.

3

Some view specialty hospitals as innovative, as focused factories

for high-quality, specialized care. Advocates say specialty hospitals

add competition to the health care marketplace.

Others say specialty hospitals flourish because they exploit a

Medicare loophole, allowing physician owners to select patients

who are less sick, and therefore more profitable.

For my part, I do not want to stand in the way of innovation or

competition. For example, I am glad that the Congress brought innovation to Medicare in the form of outpatient drug benefits. That

was long overdue.

And hospitals and physicians should work together in innovative

ways to improve efficiency in health care. The United States

spends twice as much per capita on health care as the majority of

advanced western countries, and yet our health outcomes are probably not twice as good. We should get a better bang for our buck.

That is why I want to encourage quality and accountability in

health care. I am pushing to advance incentives for quality improvement in Medicare, so patients and taxpayers get the most for

the money.

As for competition, I am all for it, as long as it is carried out on

a level playing field. But when it comes to physician ownership of

specialty hospitals, I am not so sure that the playing field is level.

That is because physicians alone choose where patients go on the

playing field, either to community hospitals or to specialty hospitals.

Some liken physician owners of specialty hospitals to coaches

who choose the starting line-up for both teams, in this case, the

specialty hospital team and the community hospital team.

And, for the third time, a Federal agency tells us that the healthiest team—that is, the most profitable patients—ends up at the

physician-owned specialty hospitals.

In 1989, the HHS Inspector General reported that patients of referring physicians who owned or invested in independent clinical

labs received 45 percent more lab services than Medicare patients

in general. Forty-five percent.

In response to this study and others like it, Congress passed the

Stark law. This legislation—that is, the Stark law—sought to restrict physician self-referral, first, in the area of clinical labs, and

subsequently in 10 other areas, including physical therapy and certain imaging procedures.

But the Stark law did not address the issue we are here to discuss today: physician self-referral to specialty hospitals. In part,

that is because there were not many specialty hospitals at the

time. But as the nonpartisan GAO has pointed out, the number of

specialty hospitals tripled between 1990 and March of 2003.

The Stark law does prohibit physicians with ownership interest

in only a hospital department from referring patients to that department. For example, doctors cannot invest in just the orthopedics wing of a hospital and then refer patients to that wing.

But, notwithstanding the MMA moratorium, the law currently

allows physicians to self-refer to specialty hospitals in which they

have a financial interest.

4

This is the case even though specialty hospitals are typically

smaller in size and scope than community hospitals. For example,

the average surgical specialty hospital has just 14 beds.

In many ways, these specialty hospitals resemble hospital departments more than they do community hospitals. This loophole

may well need closing, and I am interested to hear testimony on

this.

Today we will hear about a report from the Medicare Payment

Advisory Commission, MedPAC, which has heard public testimony

over the last 15 months, surveyed 48 specialty hospitals, and visited several communities in which specialty hospitals exist. We will

also hear what I understand are preliminary findings from the Department of Health and Human Services. HHS, for example, surveyed 11 specialty hospitals.

Starting with MedPAC, their report recommends a number of

steps to improve the accuracy of the Medicare inpatient payment

system. These recommendations should mitigate all hospitals’ incentives to choose healthy patients over sick ones. All hospitals.

Basically, it is a DRG refinement.

MedPAC also recommends several steps to better align physician/hospital incentives. On this point, many specialty hospital advocates argue that the growth in these facilities results from physician dissatisfaction with hospital management practices. MedPAC’s

recommendations for gain sharing stand to alleviate some of that

concern by giving physicians more control over their workplace.

Finally, MedPAC recommends extending the MMA mandated

moratorium on new specialty hospital construction. As I understand it, MedPAC made this recommendation, in part, to examine

further the issue of physician self-referral and whether it is appropriate to allow such referrals in the specialty hospital setting.

As for the HHS report, we received word only recently that the

Agency would be ready to testify today, albeit with preliminary

findings. I understand, further, that many of those findings are not

statistically significant. This suggests caution in using the HHS

findings as a basis for policy changes.

After MedPAC and HHS, we will hear from witnesses who have

experienced the impact of specialty hospitals firsthand, both pro

and con. These witnesses, I think we will hear, have strongly held

views formed by experience.

I am interested to hear their perspectives. We will be listening

to the music, as well as the words, and read between the lines of

what they are saying. I want to thank them for taking the time to

come and be with us today. Thank you.

The CHAIRMAN. Thank you, Senator Baucus.

Now I am able to introduce the first panel. Glenn Hackbarth is

Chairman of the Medicare Payment Advisory Commission, better

known as MedPAC. Tom Gustafson is Deputy Director of the Center for Medicare Management at the Centers for Medicare and

Medicaid Services.

Mr. Hackbarth and Mr. Gustafson and their teams of people that

work with them have spent the last year or so researching specialty hospitals, and we are pleased that they are here with us

today to give this report that is being released from MedPAC.

So, I will have you start, Mr. Hackbarth. Thank you very much.

5

STATEMENT OF GLENN HACKBARTH, CHAIRMAN, MEDICARE

PAYMENT ADVISORY COMMISSION (MedPAC), WASHINGTON,

DC

Mr. HACKBARTH. Thank you, Senator Grassley, Senator Baucus,

Senators. You well summarized the basic issues in the debate for

us, the pros and the cons of physician-owned specialty hospitals.

Our findings on the performance of physician-owned specialty

hospitals are based on 2002 data from 48 hospitals, some of which

are very small institutions, as Senator Baucus mentioned.

Only 48 hospitals in 2002 met our test for both specialization and

Medicare volume, and that is why we used that number. 2002, incidentally, was the most recent data available when we began our

study.

We also conducted site visits, three of them: Austin, TX, Wichita,

KS, and Sioux Falls, SD. The data underlying our findings are limited in three respects. First, is the small number of institutions.

Second, is 2002 was fairly early in the development of the specialty

hospital phenomenon. Third, we did not look at the quality of care

provided. That responsibility was given to the Department of

Health and Human Services.

On the other hand, as was mentioned in the introduction, we do

have a series of recommendations on refining the payment system

for hospitals, and we will be clear that those recommendations are

based not just on the analysis of 48 specialty hospitals, but on an

analysis of the overall Medicare claims and cost report database.

So, the foundation for those recommendations, we believe, is very

strong.

Almost 60 percent of the specialty hospitals in our study were in

four States: South Dakota, Kansas, Oklahoma, and Texas. Today,

there are more than 100 specialty hospitals, but they continue to

be geographically concentrated, as you can see from the map.

Let me talk about our findings. First of all we found, in studying

the 48 hospitals, that heart hospitals tend to focus on DRGs and

types of patients with a greater-than-average expected profit. Orthopedic and surgical hospitals, on the other hand, tend to focus on

DRGs where the expected profit is less than average.

However, all three types of hospitals—heart, orthopedic, and surgical hospitals—tend to treat patients within those categories that

are less severely ill than average. So, there are two types of selection effects, the type of DRGs provided, and then the type of patients within each of those diagnostic categories.

This table summarizes our basic findings on these issues. So the

column labeled ‘‘Across DRG’’ addresses the type of DRGs provided.

You can see that the heart hospitals have a higher expected profitability based on the type of care they provide.

The ‘‘Within DRG’’ column is about the severity of illness for the

patients within each of those categories. You can see that the numbers higher than one signify that the patients are healthier than

average within the DRGs served.

In 2002, the specialty hospitals that we studied tended to draw

their patients away from community hospitals as opposed to treating new patients, although we did find some indication of increased

utilization that merits further study and watching.

6

In 2002, the year we studied, the community hospitals competing

against physician-owned specialty hospitals seemed to recover relatively quickly from the loss of patients by lowering costs or adding

new services, although it may be more difficult for that to be accomplished in the smallest communities.

We also found that the cost of physician-owned specialty hospitals are not lower than community hospitals, although the average length of stay is lower. In fact, what we found was that the

cost of the care provided in specialty hospitals was higher than in

community hospitals, but the differences were not statistically significant.

The difference in average length of stay, however, was statistically significant. Finally, we also found that specialty hospitals

serve proportionately fewer Medicaid patients than community hospitals.

Based on this evidence, we have a series of recommendations.

First of all, we recommend that the DRG payment system be refined so that payments better match the expected cost of caring for

different types of patients.

There were several specific recommendations in this package

that pertain to how the DRG weights are calculated. The weights

are the factors that determine the relative payment rate for different types of cases.

We also recommend that a severity adjustment be added to the

system so that patients who are more severely ill, and therefore

more likely to cost more, bring with them higher payments.

The net effect of these recommendations is shown in this graph.

The net effect is to significantly improve the accuracy of our payment system. Over at the far left, you see current law. What that

says is that 35 percent of the payments in the Medicare system are

for DRGs where the expected profitability is within plus or minus

5 percent of the average.

If you go to the far right set of columns labeled ‘‘Plus Suggested

Outlier,’’ that shows the cumulative impact of all of our recommendations on refining the payment system.

You can see there that 86 percent of the dollars would be in

DRGs where the expected profitability is within plus or minus 5

percent of the average. So, we have a significant increase in the accuracy and fairness of the payment system.

We are better off adjusting for differences among the patients, so

that the financial outcome for a hospital is more likely to be the

result, not of the selection of patients they get, but their performance as an institution.

Let me emphasize again that this analysis and the recommendations on payment refinement are based on an extensive analysis of

the Medicare claims and cost report database.

A second recommendation is that we have a transition period.

These changes affect not just physician-owned specialty hospitals,

but all hospitals in the Medicare system. There are significant

shifts in the Medicare revenue received by different hospitals as a

result of these recommendations.

You are familiar with analysis that we have done in the past. We

talk about the impact of our proposals on urban hospitals, or rural

hospitals, or teaching hospitals versus non-teaching hospitals. The

7

impact of these changes is interesting, in that it cuts across those

different categories.

In other words, some urban hospitals would benefit from these

changes, but some urban hospitals would lose Medicare revenue

from these changes. Some teaching hospitals would benefit, some

would lose; some rural hospitals would benefit, some would lose.

Because it is shifting money around the system in the name of payment accuracy, we believe it would be important to have a transition.

Next, we recommend that Congress give the Secretary of HHS

the authority to permit and regulate gain-sharing arrangements

between hospitals and physicians. One part of the specialty hospital thesis that we find most appealing, is the notion that if physicians and hospital management work together, they can achieve

improvements in efficiency and quality that may not otherwise be

attainable.

Under current law, hospitals are not permitted to share gains

with physicians. We think that ought to change in the name of better aligning physicians and hospitals, improving care for Medicare

beneficiaries.

Finally, to permit time for Congress to consider our recommendations and HHS to implement them, we recommend an extension of

the moratorium until January 1, 2007.

We hope that Congress and HHS will move quickly to adopt

these changes. I must say that, even after these changes assumedly

are adopted and implemented, MedPAC does have concerns about

the impact of physician ownership of hospitals on the clinical decision-making, specifically whether the financial incentives involved

affect inappropriately decisions about where patients ought to receive care.

We are very eager to hear from CMS and the Department about

their analysis, in particular, of the quality issue, in differences in

referral patterns between physician owners and non-owners; and

we think that that information will help us develop a better understanding of the issues. Thank you very much.

The CHAIRMAN. Thank you, Mr. Hackbarth.

[The prepared statement of Mr. Hackbarth appears in the appendix.]

The CHAIRMAN. Now we go to Mr. Gustafson.

STATEMENT OF TOM GUSTAFSON, DEPUTY DIRECTOR, CENTER FOR MEDICARE MANAGEMENT, CENTERS FOR MEDICARE AND MEDICAID SERVICES, WASHINGTON, DC

Mr. GUSTAFSON. Thank you, Senator, distinguished members of

the committee. I appreciate very much being invited to testify

today.

I am here to present preliminary results of the technical analysis

that will underlie the report by CMS that we and the Secretary expect to be sending to you shortly.

I must emphasize that the quantitative findings I would discuss

with you today are tentative. Our analysis is not yet complete—the

researchers are doing final tweaks on the numbers—but I believe

that the qualitative nature of the results will not change materiVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 23642.000 SFINANC2 PsN: SFINANC2
8

ally. We will develop our policy recommendations once we have

completed the empirical analysis.

Our study collected a considerable amount of new data related to

the performance and impact of specialty hospitals. We made site

visits to six market areas around the country. They are listed in

the testimony.

And I would like to apologize to the Chairman. I am now advised

that Rapid City is in South Dakota and not in Iowa. There is an

error there.

The CHAIRMAN. If you can move the mountain, we will take it.

[Laughter.]

Mr. GUSTAFSON. We included 11 of the 59 cardiac surgery and

orthopedic hospitals that were paid for by Medicare at the end of

2003. These market areas were selected very deliberately to represent a range of the circumstances in which these hospitals operate.

Within each market area, we sent in teams to interview. We

interviewed the hospital managers of the specialty hospitals, their

owners, the staff. We also interviewed members associated with the

community hospitals in those areas.

And to assess patient satisfaction, which was one of the issues

that Congress asked us to look at, the study used patient focus

groups composed of beneficiaries treated in the specialty hospitals.

We also used Medicare claims data for 2003, a little bit more recent than the MedPAC data, to examine referral patterns, and

drew on information from the hospitals and from tax files to look

at financial information.

Major conclusions that we see coming out of our study are basically that cardiac hospitals differ very substantially from surgery

and orthopedic hospitals; that cardiac hospitals are larger, they

have a higher average daily census, about 40 individuals; they tend

to have emergency rooms and other features that are usually associated with full-service hospitals, such as community outreach programs.

About two-thirds of the patients treated in these hospitals are

Medicare beneficiaries, which is significantly higher than the average in other hospitals.

In the study of hospitals, ownership by physicians as a group

averaged about 34 percent. Typically, a national corporation, or

sometimes a nonprofit hospital in the area, owned the majority

share of these hospitals. The average ownership share of the individual physicians was about 1 percent.

Surgery and orthopedic hospitals, on the other hand, more closely resemble ambulatory surgical centers. They focus primarily on

outpatient services. They are much smaller. They have an average

daily census of about five.

Physicians, however, in general, own a larger share: looking at

physicians together, about 80 percent. The average ownership

share is just over 2 percent. Medicare patients account for about

40 percent of the inpatient days in these facilities, which is more

typical of what you see in other hospitals.

Now, unfortunately, the very small number of inpatient cases at

the surgery and orthopedic hospitals precluded the development of

many meaningful findings for this group on several of the dimenVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 23642.000 SFINANC2 PsN: SFINANC2
9

sions we were asked to look at, so our results will be qualified in

that respect.

Turning now to the results we have been working up, we have

discovered that the majority of Medicare patients in most specialty

hospitals are referred by a physician owner of that hospital. The

physicians in question do not refer their patients only to the specialty hospitals that they own, but also to hospitals in the area, to

the local community hospitals. A similar, but slightly lower, proportion of their patients go to those hospitals.

Overall, the Medicare cardiac patients treated in community hospitals were more severely ill than those treated in cardiac specialty

hospitals in most of the study sites, which I think conforms with

what MedPAC discovered.

This result held generally for patients admitted both by those

physicians that had ownership in specialty hospitals and by other

physicians without such ownership interest.

We found, in short, no difference in referral patterns for physician owners and non-owners looked at in this way. There was some

variation, but it looked like a fairly consistent pattern.

Looking at surgery in orthopedic hospitals, the number of cases

there was too small to draw definitive conclusions, but the preliminary results are suggestive of a similar sort of pattern.

In order to examine quality, we looked at the patterns of claims

using the AHRQ quality indicators and methodology. Our preliminary findings show that the measures of quality at cardiac hospitals were generally at least as good, and in some cases better,

than local community hospitals.

Complication and mortality rates were lower at the cardiac specialty hospitals, even when we adjusted for the severity of the cases

that these hospitals were serving. Because of the small number of

discharges at the surgery and orthopedic hospitals, we could not

make a statistically valid assessment in that area.

Patient satisfaction, one of the things we were asked to look for,

was extremely high in both groups of hospitals. Medicare beneficiaries enjoyed large private rooms and other amenities, and they

appreciated those features.

We used proprietary financial information from the specialty hospitals and, as I said earlier, some tax information to look at the

taxes paid by these hospitals and the uncompensated care as a proportion of their net revenues.

Relative to the net revenues, the specialty hospitals provided

only about 40 percent of the share of uncompensated care that the

local community hospitals provided.

However, the specialty hospitals paid significant real estate and

property taxes, as well as income and sales taxes, while the nonprofit community hospitals did not pay these taxes. In our study

areas, virtually all of the community hospitals were nonprofit.

As a result, the total portion of net revenue that specialty hospitals devoted to both uncompensated care and taxes, those two

items taken together, significantly exceeded the proportion of net

revenues that community hospitals devoted to uncompensated care

alone.

You have just heard from my colleague, Mr. Hackbarth, about

the complementary MedPAC study. I think it would be fair to say

10

that we found nothing in our results that appears to contradict any

of the MedPAC results. We are currently evaluating MedPAC’s recommendations as we form our own.

Mr. Chairman, thank you for the opportunity to testify, and I

look forward to your questions.

[The prepared statement of Mr. Gustafson appears in the appendix.]

The CHAIRMAN. Yes. Thank you very much. We will have a 5-

minute round of questioning.

Mr. Hackbarth, in a transcript from September of 2004, MedPAC

staff said, ‘‘Physician-owned providers could have a competitive advantage over other facilities because physicians influence where patients receive care.’’

From your report, it also seems that physician-owned hospitals

treat patients who are generally less severe, with shorter recovery

times, and tend to concentrate on particular diagnosis-related

groups that are more profitable.

Based on the data from your report, do you believe that physician-owned specialty hospitals, under current law, have a competitive advantage over other facilities?

Mr. HACKBARTH. Two types of comments about that, Senator.

First of all, the reason that physician-owned specialty hospitals

have a better selection of patients, defined as a more profitable selection of patients, could be due to a number of different factors.

One could be the physician’s personal economic incentive, but

other factors could deal with the type of services offered and referral patterns from other physicians in the community. It is not all

necessarily directly due to the fact that the physician is an owner.

That does not mean that it is not a problem, however. So we

think that the best thing to do is change the payment system, as

I have described, so that a physician-owned specialty hospital does

not benefit from patient selection.

If we adopt the sort of changes that I have talked about, then

there will not be undue rewards for selecting patients in certain

DRGs, or selecting patients that are less severely ill.

By the same token, the community hospital that is competing,

and ends up with the more costly cases, will receive increased payment, which will help defray its added costs from those patients,

unlike current law. So we can balance the system, in terms of patient selection, with the payment reforms that I have talked about.

The CHAIRMAN. Then let me follow up with this question. If this

would be so, that there is some advantage to having a competitive

advantage, is this competitive advantage based solely on a physician’s ability to self-refer less severe patients for more lucrative

procedures?

Mr. HACKBARTH. Well, the direct answer to that would be no.

Again, I think there are multiple reasons why patients sort out the

way they do, one of which could be the physician ownership incentive. Second, you can derive competitive advantage from the services that you provide.

As Tom was describing, if patients are more satisfied with the

care received in a specialty hospital, they can want to go to the specialty hospital, which gives the hospital a competitive advantage.

11

The dynamics are fairly complicated, but we can largely fix the patient selection issue through payment reform.

The CHAIRMAN. All right.

Congress has repeatedly legislated—and this is for you, Mr.

Hackbarth—to prohibit physical referrals in certain areas like clinical labs, radiological services, durable medical equipment, physical

and occupational therapy, home health services, inpatient and outpatient services.

Based upon this expansive list, there seems to be a legitimate

concern that self-referrals could be blocked in most instances. Is

there a way to close the loophole so specialty hospitals that really

function as off-site hospital departments are not considered whole

hospitals?

Mr. HACKBARTH. Yes. It would be pretty straightforward to close

the loophole legislatively and rewrite the exclusions to preclude

physician-owned specialty hospitals. As I said in my testimony, we

remain concerned about physician-owned specialty hospitals, even

if our payment reforms are developed and implemented.

However, we are not quite prepared to reach the conclusion that

they ought to be outlawed. We want to see all of the evidence on

quality of care. We want to see as much evidence as possible on efficiency before reaching that judgment.

Frankly, the status quo, as Senator Baucus mentioned, in our

health care is not great. We have got real quality and cost issues.

If there is a type of institution that could provide better quality at

a lower cost and higher patient satisfaction, we ought not rule it

out.

Do physician-owned specialty hospitals fit that bill? We do not

know the answer to that today, but I think it is knowable in the

not-too-distant future. So, that is why we recommend an extension

of the moratorium as opposed to moving to close the whole-hospital

exception today.

The CHAIRMAN. All right.

Senator Baucus?

Senator BAUCUS. Thank you. Thank you, Dr. Hackbarth. First of

all, I want to thank you and MedPAC. I mean, it means a lot to

the Congress to have an independent, third-party group to look at

these kinds of issues. You have got the expertise, you have also got

the independence, and I just wanted to thank you for that very

much. It means a lot to all of us here in the Congress.

Following up on the last question, what do you need to know,

and by when do you think you will know it, in order to answer that

basic question, namely whether or not there is a role for specialty

hospitals or whether they should be outlawed?

Mr. HACKBARTH. Well, basically, what we want to know is the

questions you asked us in the MMA: how does the cost compare;

how does the quality compare; how does the patient satisfaction

compare? Those are the basic measures of institutional performance.

Right now, what we are working from, in the case of the

MedPAC analysis, is 2002 data. CMS, because they started a little

bit later, had the benefit of 2003 data. That is a relatively

small——

Senator BAUCUS. And you think you will have that data when?

12

Mr. HACKBARTH. Well, we have obviously now in hand 2002 and

2003, before the end of this calendar year we will have 2004 data,

so we would have a 3-year database to analyze as opposed to just

1 year.

Senator BAUCUS. Now, some of those who advocate specialty hospitals say, well, gee, it is a very small percentage interest, 1 percent, 2 percent, in the facility, so that cannot be a huge incentive

there. What are some of MedPAC’s concerns with that analysis?

Mr. HACKBARTH. Well, we think that just looking at the 1 percent or 2 percent may understate the rewards that come to a physician owner from a decision to refer patients to the physician in the

hospital, in two respects.

First of all, when a physician is an owner, he or she shares not

just in the gains from his or her referral decisions, but from the

physician partnership group. So, Tom indicated that, for heart hospitals, typically physicians will own, together, 30 percent. So, each

member of the ownership group is sharing not just in his or her

own additional referrals to the institution, but everybody else’s as

well.

The second factor to keep in mind is that, when you are thinking

about this economically and the rewards from one additional patient—which you ought to be looking at as the marginal profit derived from that additional patient—the marginal profit is different

from the average profits we usually talk about, because they don’t

include the fixed costs for the building, the equipment, and the

like.

Senator BAUCUS. Right.

Mr. HACKBARTH. So the economic gains from one more patient

are quite substantial. If you multiply that times 30 physician partners, the numbers can be much larger than 1 percent would suggest.

Senator BAUCUS. You said earlier, I think, that the recommended

changes to the DRG system, the refinement, and so forth, will help

a bit. But I also think I heard you say that may not sufficiently

resolve some of the concerns surrounding specialty hospitals.

Mr. HACKBARTH. Yes.

Senator BAUCUS. To what degree will those changes, do you

think, if used by both community hospitals and specialty hospitals,

alleviate the specialty concern, and to what degree not? And where

not, why?

Mr. HACKBARTH. Yes. First of all, we think that the reforms we

recommend will improve the DRG system a lot, and not just as it

affects specialty hospitals, but as it affects all hospitals.

There are important changes that we would like to see made.

Frankly, even if specialty hospitals did not exist, we would be making these recommendations on refining the payment system.

What they will accomplish is that, if a specialty hospital does

well only because of its selection of patients, those profits will go

away.

In order to do well in the future as a specialty hospital, you will

have to perform well, not just on patient selection, but on management of care, organizational management, and the like. In that

sense, the playing field will be more level.

13

The remaining residual concern, however, that we have is the

possibility that clinical decisions about appropriate care and site of

care may still be unduly influenced by an ownership interest.

We do not want to reach a final decision on whether that risk

is too great, however, until we know more about the potential benefits in terms of improved quality and lower cost. We want to weigh

both items on the scale.

Senator BAUCUS. Thank you.

Mr. Gustafson, as I understand it, your study looked at 11 specialty hospitals in all. Is that correct?

Mr. GUSTAFSON. Yes. That is correct, Senator.

Senator BAUCUS. And four of these were cardiac, and seven were

a mix of orthopedic and surgery.

Mr. GUSTAFSON. That is correct.

Senator BAUCUS. I also understand the data you collected from

the orthopedic and surgery hospitals were not statistically significant.

Mr. GUSTAFSON. In many cases, that is true, Senator.

Senator BAUCUS. I would just like to know, were the sites that

you visited randomly selected, according to standard statistical protocols?

Mr. GUSTAFSON. No, Senator. The number of hospitals involved

here is very small, so the sample was chosen as a judgment sample

in order to examine the range of different circumstances that specialty hospitals——

Senator BAUCUS. If you could explain, how were those four hospitals selected?

Mr. GUSTAFSON. I do not have the detail on that, Senator. I

would have to get back to you on that.

Senator BAUCUS. You do not know how they are selected?

Mr. GUSTAFSON. Excuse me?

Senator BAUCUS. You do not know how they are selected?

Mr. GUSTAFSON. I do not know the detail. It was done in collaboration with our research office and the research contractor. I would

be happy to provide you that information for the record.

Senator BAUCUS. And how did you measure quality? You said the

quality data, as I understand it, were all right. Measured against

what?

Mr. GUSTAFSON. Basically, we were looking at data that were derivable from our claims data. In that analysis, we were looking at

a much broader set of hospitals. So, we were looking at all 15 cardiac hospitals and 56 orthopedic and surgical hospitals.

The measures were derived from the AHRQ measures, and

looked at mortality, both during the hospital stay and within 30

days of discharge; complications associated with the case; and readmission within 30 days.

Senator BAUCUS. But the main point is, you looked at only 11,

and the orthopedic are not statistically significant because there

are so few of them, and the specialties you selected were not randomly selected, according to standard statistical protocols. We also

do not know how they were selected, or why they were selected.

Mr. GUSTAFSON. Let me just be clear here, Senator. The 11 that

we studied were ones where we went in and did intensive case

studies and detailed interviews on the ground. The quality results

14

are based on a larger set, so it is based on all of the hospitals that

were billing Medicare at the end of 2003 in these categories.

Senator BAUCUS. All right.

But, again, the selection is unclear as to why those particular—

say, cardiacs—were selected. We do not know why, we do not know

how.

Mr. GUSTAFSON. I do not have that information for you today,

Senator. I would be happy to provide that.

Senator BAUCUS. Could you get that?

Most disturbing to me is the sample is not large enough, and it

is not randomly selected according to correct protocols, so it raises

questions as to why those four were selected.

It raises further questions as to whether there is an ulterior motive here, frankly, to get a biased result. You have such small data

and you cannot answer the questions on how the hospitals were selected, at least one has to ask those questions. They may be satisfactory answers, but those questions have to be asked.

Mr. GUSTAFSON. I would be happy to provide that information for

the record, Senator. I can assure you, as I previously described, the

choices were made in order to reflect the diverse circumstances of

specialty hospitals.

Senator BAUCUS. If you could provide whatever you could, we

would sure appreciate it.

Mr. GUSTAFSON. Certainly, Senator.

Senator BAUCUS. Thank you very much.

Thank you, Mr. Chairman.

[The information appears in the appendix on page 43.]

The CHAIRMAN. Thank you.

Senator Kyl?

Senator KYL. Thank you. I appreciate both of you testifying.

Mr. Hackbarth, with respect to the net payment obligation of the

United States, the revisions in the DRGs that you have recommended would have what effect?

Mr. HACKBARTH. They would be budget neutral.

Senator KYL. So it is budget neutral. Is that based on the recommendation of the market basket or the reduction in market basket that was recently recommended?

Mr. HACKBARTH. That is based on the basic dynamics of the system. What we are changing, is how the dollars are distributed——

Senator KYL. No. I understand that. But you say it is budget

neutral. Budget neutral to what number, is what I am getting at.

Mr. HACKBARTH. Well, to wherever you decide to set the update

factor, it would be budget neutral. That is a policy choice that the

Congress makes, and this would be budget neutral to whatever target you set.

Senator KYL. So, in other words, the specific reimbursements for

specific situations, procedures plus degree of difficulty or acuity, or

whatever, would be adjusted upward or downward to match whatever Congress decided with respect to the market basket update.

Is that right?

Mr. HACKBARTH. Yes. So the update decision that Congress

makes influences the base amount and determines whether it goes

up by 3 percent, 2.5 percent, or whatever the number is, and then

this determines how those dollars are distributed among them.

15

Senator KYL. And your recommendations then are proportional

within that.

Mr. HACKBARTH. Yes. Exactly.

Senator KYL. Yes. It just seems to me, and I would like to have

both of you comment on what is a very general observation. If my

observation is incorrect, please say so, but it is intended to be sort

of a notional summary here.

As you have said, we do have quality and cost problems in our

current system. There is some suggestion that specialty hospitals,

at least in some situations, can help meet those challenges, especially with respect to patient satisfaction.

So, it seems to me that, maybe instead of trying to punish Group

A specialty hospitals which seem to be providing a legitimate service and meeting a need that we have, if there are some results of

that that impact negatively on Group B, the community hospitals,

the answer is to ensure that we are reimbursing Group B—that is,

the Federal Government’s obligation—at a level adequate to cover

the obligations we have imposed upon them, such as the EMTALA

obligations with respect to emergency room care and all of the

other things that we require or desire of our community hospitals.

Would you both please comment on that? In other words, instead

of making it a zero sum game here, since Congress has to deal with

this question of reimbursement each year, try to take the best of

both worlds to ensure the continued adequacy of our community

hospitals, while taking advantage of what specialty hospitals have

to offer.

Mr. HACKBARTH. Right. Two reactions. One, as I indicated, the

effect of our payment proposals, our refinement proposals, would be

not only to reduce payment to a specialty hospital that is treating

easier cases, but increase payment to the community hospital that

has——

Senator KYL. Right. May I just interrupt and say, let me just assume for the sake of this question your recommendations, which

have an inherent logic to them that I accept. So, let us assume

that. I am getting, now, to the net number.

Mr. HACKBARTH. All right.

After that, in fact, the burden of providing services that society

considers to be important is not equally distributed across hospitals. That was true even before specialty hospitals.

Senator KYL. Right.

Mr. HACKBARTH. So we find that some institutions that bear a

disproportionate share of those burdens, whether it be trauma centers, or whatever the service is, are hurt by that. Rather than stopping competition from specialty hospitals or new community hospitals, we think a better approach is to adjust payment to properly

pay for the services that society wants.

Senator KYL. Thank you. That is my thought as well.

Mr. Gustafson?

Mr. GUSTAFSON. I believe I would agree with Mr. Hackbarth on

that, Senator.

Senator KYL. Would that then suggest that, instead of a recommendation to reduce by 0.4 the market basket update, that Congress should go back to the rough draft that was presented, that

actually would allow us to compensate, on a net basis, the hospitals

16

more in line with the medical inflation and other costs that are associated with their care today?

Mr. HACKBARTH. No, I do not think that would follow, because

the update goes to all hospitals uniformly, not just to the hospitals

that are carrying those societal burdens.

So, spreading money across the whole system to try to help a few

hospitals is a very inefficient way to try to accomplish the task. In

a time where we face budget pressures from all around us, it may

not be the best use of Federal dollars.

Our philosophy is, try to improve the accuracy of payment at the

institutional level. If there are services that were weighed or

under-paid for, let us adjust the payment for those institutions that

provide them, not for every hospital in the country.

Senator KYL. Mr. Gustafson?

Mr. GUSTAFSON. I have nothing to add, Senator.

The CHAIRMAN. All right.

Senator Thomas, then Senator Lincoln, then Senator Wyden.

Senator THOMAS. Well, thank you, Mr. Chairman.

I am, I think, going to ask a little broader questions. For example, you said what else you need to know had to do with patients’

comfort, and so on. It seems to me that one of the other things,

particularly in small communities, is whether or not you can have

both kinds of facilities exist, just simply from a volume standpoint

and from an investment standpoint.

But is it not generally true that these special hospitals get more

people who have an ability to pay? They do not get the emergencies, they do not get the Medicaids, they do not get as much of

Medicare. They get the ones that are insured, generally.

Mr. HACKBARTH. Yes. Well, the piece that we looked at specifically was Medicaid. In fact, they serve proportionately fewer Medicaid patients. HHS looked at the uncompensated care issue.

Senator THOMAS. So that is generally the case.

You mentioned the specifics. But, again, in a small community,

volume has something to do with the fixed costs. So, if you divide

the amount of services between two, then some of the fixed costs

become more difficult to meet. Is that not true?

Mr. HACKBARTH. Yes. As I indicated in my testimony, we found

that, in general, looking across the full 48-hospital database, that

the community hospitals, faced with competition, were able to recover from the loss of patients relatively quickly.

But in our site visits, we came across some concerns that the situation might be different in the smallest communities. Part of it

is, you have fewer patients and, therefore, fewer opportunities to

add new services, and the like.

Senator THOMAS. And the reason some of these recover quicker

is because they get some public money, sometimes, local money.

Mr. HACKBARTH. We looked at the result as opposed to exactly

how it was accomplished.

Senator THOMAS. I guess what I am saying is, it seems like, instead of measuring the questions of comfort and so on, one of the

questions in a small community is, can both of these facilities

exist? The answer often, it looks like, would be no.

Mr. HACKBARTH. Again, depending on the community, that may

be the case. But the question that raises for me, then, is should we

17

make national policy that affects large and small communities

alike based solely on the impact on small communities or——

Senator THOMAS. National policies do not have to fit everyone

alike. As a matter of fact, that is one of the reasons that we often

want more local input into national policies.

So I guess I am talking in more of a general term than you are.

And I think we have to look at it that way because of communities—and we have some in Wyoming—where, really, there is a

question whether you can support both. If the private ones take the

best-paying jobs and the others have to pick up the rest, then you

have a problem.

I was interested in your talk about, we are looking here at a

problem that exists, apparently. But you are saying, why do we not

just extend the moratorium? What is the moratorium doing if the

problem exists to this extent?

Mr. HACKBARTH. Well, the idea behind an extension of the moratorium, from our perspective, would be to prevent the development

of new hospitals, the flow of capital into the development of new

physician-owned specialty hospitals, until we have more definitive

data on their performance.

We do not think that we know the definitive answers to the questions about how they compare on cost, quality, and patient satisfaction.

Senator THOMAS. I see.

Mr. HACKBARTH. So rather than outlaw them based on uncertain

information, we are basically saying, let us get some more time and

we can more definitively answer those questions. In the meantime,

we can also implement the payment reforms that help level out the

playing field between specialty hospitals and community hospitals.

Senator THOMAS. I am not an expert in this. These were there

before the moratorium?

Mr. HACKBARTH. Yes.

Senator THOMAS. It’s not possible for that to start now? Is that

right?

Mr. HACKBARTH. The 48 hospitals that we studied all pre-date

the moratorium, so they continue to operate under the moratorium.

The moratorium simply limits the development of new institutions.

Senator THOMAS. Well, as you know, we all know competition is

a good thing, in services and in goods. But health care is a little

different. Competition may, in a small community, not provide a

better thing, but provide nothing, as a matter of fact. So, I hope

we can look at it from the differences in the size of communities,

because I think that can make a difference. Thank you.

The CHAIRMAN. Thank you.

Now we go to Senator Lincoln.

Senator LINCOLN. Thank you, Mr. Chairman. Thank you, gentlemen, for joining us.

I guess, to both of you all, one of the questions I had is, how do

the State licensure laws and the certificate of need laws that regulate hospitals in some of our States affect or not affect the proliferation or, again, the nonproliferation of physician-owned specialty hospitals?

I think we will hear later on the testimony from Mr. Veitz that

the surgical hospital near his hospital in South Dakota has only

18

four beds. I do not know, but that is just incredible to me that

there would be a facility with four beds that was actually licensed.

Do you all have comments on that?

Mr. HACKBARTH. State licensing and certificate of need laws

seem to have a significant impact on where specialty hospitals develop. If you look at the map, they are not everywhere. If you look

at the States in blue, the States with certificate of need, there are

far fewer. For the most part, specialty hospitals have developed in

non-CON States.

In addition, some of the States where there are specialty hospitals have adopted special licensing rules that facilitate the development of the institutions and alter the requirements.

It is my understanding that, in fact, in some cases States have

done that to attract a certain type of care into less-developed areas.

They have lowered the hurdle so they could get specialty care into

less populated communities.

Mr. GUSTAFSON. I think he said it well.

Senator LINCOLN. Ditto, right?

Mr. GUSTAFSON. Yes.

Senator LINCOLN. All right.

Well, it just seems that some of this could maybe be solved

through States, or at least the encouragement from us to States.

I know we eliminated certificate of need, how long ago? Twenty

years. Something like that, was it not?

Mr. HACKBARTH. Right. Well, I should also mention that there

are some States that outright prohibit physician-owned specialty

hospitals.

Senator LINCOLN. All right.

Mr. HACKBARTH. There are a variety of different types of restrictions in addition to certificate of need that some States use to limit

the development.

Senator LINCOLN. I know that in touring both of these types of

hospitals—and I have gone out to see and to tour them and to listen to the physicians, patients, hospital administrators, and everybody—some of the complaints from the physicians have been about

their ability to work with the administration in the hospital in actually getting the kind of technologies and the advanced technologies they want.

I guess, Mr. Hackbarth, do you think your recommendation on

the gain sharing, which kind of allows the physicians and the hospitals to share savings from more efficient practices, putting into

place technologies and practices, would help doctors feel less frustrated with the community hospital environment or the environment that they do not have as much of a say? Would that maybe

be an alternative to physician ownership?

Mr. HACKBARTH. Well, our hope is that gain sharing could

change the relationship, improve the relationship between physicians and hospitals, get them pulling in the same direction to both

improve efficiency and quality.

In a previous life, I ran a very large physician group in Boston

and spent many hours listening to physicians—surgeons, in particular—frustrated with how the hospital was run and how they

felt it made it more difficult for them to practice, not just effiVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 23642.000 SFINANC2 PsN: SFINANC2
19

ciently, but also provide the level of quality and patient satisfaction. We were blessed to work with an outstanding institution.

So, personally I have some sympathy for physicians who are frustrated that they cannot always get over barriers that exist within

hospitals. We are hoping that gain sharing could help change those

relationships where they are not working and get benefits for Medicare beneficiaries.

Senator LINCOLN. Well, they are limited in terms of the number

of arrangements that are out there. But the ones that we do have

to look at, are they——

Mr. HACKBARTH. Well, the ones that we have, I think they are

all very new.

Senator LINCOLN. Yes.

Mr. HACKBARTH. There has been a spate of recently issued advisory opinions by the Inspector General saying that we can permit

relationships, gain-sharing type relationships, with these characteristics, but they are all too new to have yielded results.

CMS was going to do a demonstration of gain sharing to test the

hypothesis, but that was actually prohibited by a Federal court on

the grounds that it violated Federal law. What we are asking is

that law be changed to permit gain sharing.

Senator LINCOLN. It would be interesting to see. I know, as we

have had others that have come to testify, we talk about the improvements in efficiency in health care delivery. We keep hearing

all of this technology, IT, records, and blah, blah, blah, all of which

cost a tremendous amount of dollars in terms of the programs we

are dealing with.

Just one last one, I guess. The emergency care. As you all well

know, one of the criticisms of specialty hospitals is that they do not

really shoulder their share of emergency care or indigent patients.

We have talked about that.

I guess, in its site visits, did MedPAC find that specialty hospitals typically staff emergency departments? I know one of the

specialty hospitals I visited had a very active one, and the statistics

were good on their emergency room, but others did not have such

good statistics.

Mr. HACKBARTH. Right. We found—and I think this was also

found by CMS—a significant difference among the types of specialty hospitals.

Senator LINCOLN. The heart ones.

Mr. HACKBARTH. The heart hospitals are much more likely to

have a functioning emergency room and——

Senator LINCOLN. Yes. That is the one I visited.

Mr. HACKBARTH [continuing]. Be part of the emergency medical

service network in the community. On the other hand, we found in

our visits that orthopedic and surgical hospitals were unlikely to

have a functioning emergency room.

Senator LINCOLN. Mr. Chairman, can I ask Mr. Gustafson just

one quick question? It is a yes or no.

The CHAIRMAN. Better than having you offer an amendment.

[Laughter.] Quickly, so we can go to Senator Wyden.

Senator LINCOLN. All right.

20

Mr. Gustafson, I just wanted to know what you used, I guess, in

your research. Do you feel like seven hospitals is enough to bring

any meaningful findings?

Mr. GUSTAFSON. Yes. We were able to uncover some results we

regard as meaningful. We studied 11 hospitals in a case study

methodology. We also looked at a set of 59 hospitals, basically a national sample, of all of the cardiac, surgical, and orthopedic hospitals that were billing Medicare at the end of 2003.

These results have to be described as preliminary, for a couple

of reasons. One, as I think Mr. Hackbarth has stressed, this industry is maturing. It is an infant industry, in economic terms, and

it is a little hard to discern what is going on.

We have done as good a job as we thought we were able to do,

given the time involved, and given the small number of people to

look at in trying to track down what was going on here.

The CHAIRMAN. Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

Gentlemen, based on what is known now, how do poor people

fare in communities where these specialty hospitals are? Mr.

Hackbarth?

Mr. HACKBARTH. Senator, I am not sure that we developed any

evidence directly on that issue. As I said, we did find that specialty

hospitals were much less likely to have a lot of Medicaid patients.

But in terms of the impact of the specialty hospital on Medicaid

patients’ access to care or uncompensated care patients’ access to

care, I do not have any direct information on that.

Senator WYDEN. The reason I ask is, as I look at this, this is another step towards two-tier medicine in America. The system of

funding health care—and I know Senator Kyl asked about it—is a

zero sum game. I mean, we are spending $1.8 trillion today on

health care. Most Americans say we are spending plenty. So I

think if you take it out of community hospitals and move it to these

other hospitals, that is that. I want to know how the poor are going

to be affected.

It strikes me, as I look at the health care landscape, if you have

a lot of these, those who are affluent are going to go off and use

these kinds of facilities, and poor people are going to go to community facilities where, if they just do not have the revenue, at some

point they are just going to be sacrifice zones.

Now, tell me your reaction to that kind of concern.

Mr. HACKBARTH. Well, as I said in the discussion with Senator

Thomas, it is my belief that assuring access to care for all Americans is critically important. The best way to do that, is that we

properly pay for the services.

Senator WYDEN. No. But is the concern that I raise a valid one?

Because I do believe that this is a zero sum game. I mean, it is

fine to talk about more revenue and changing the reimbursement

systems. But you have a lot of these in the health care landscape

right now, and it seems to me we are going to be taking dollars

out of programs that serve the poor. Do you disagree with that?

Mr. HACKBARTH. I do disagree, in the sense that what I want to

do is assure access to care for the poor and all other Americans,

and I want to assure the best possible care for Medicare beneficiaries and all other Americans.

21

To say that the way we protect the core is to deny access to better care for other people, that is a policy that I do not prefer. I

would say, let us protect access for the poor by choosing to pay for

the services that the poor people need, not preventing competition—but constructive and helpful.

Senator WYDEN. I am for competition, too. But based on what I

hear you saying, pay for the services that the poor need, that

means extra money. I think it is a zero sum game, and I think you

are ducking the question unless you respond to, what do we do

with respect to that $1.8 trillion? I mean, it comes to $24,000 for a family of four. At this point in

the United States, we could go out and hire an internist for every

four or five families in the country for the amount of money we are

spending.

Mr. HACKBARTH. Well, that is precisely my point. I think there

is plenty of money in the U.S. health care system to provide quality

care for all Americans. The problem is not enough money.

The problem is, the system does not perform well. If we have a

type of institution—if, because we do not know this yet—a specialty

hospital that can improve system performance, we ought not be

outlawing them, we ought to be encouraging them.

We ought to be improving the performance of the existing system—set aside specialty hospitals, which are tiny—by linking payment to performance. There are a lot of things that we can do,

must do, to assure access to care for all Americans.

Senator WYDEN. I have actually introduced legislation to link

payment to performance as it relates to nursing home facilities, so

I am totally on board on that one. But how are we doing that with

what is being considered today with these specialty hospitals? Specialty hospitals are not making a commitment to take a certain

number of poor people.

They are not talking about how they want to do what you are

talking about, which I support. They are saying, look, we want this

moratorium lifted. We are going to go out and find the areas where

we want to go, and poor people will be off on their own.

Mr. HACKBARTH. Let us look within the Medicare program alone.

Within the Medicare program alone we have large payments going

to teaching hospitals and so-called disproportionate share hospitals

that may not be well-targeted to the goals that you and I share—

billions of dollars a year.

Rather than saying what we need to do is protect hospitals from

competition from institutions that may be better, let us talk about

how we redirect the dollars that we have already got in the game

to achieve our social objectives.

Senator WYDEN. My time is up. I am fine on redirecting those

dollars to places that have quality, as long as those places are willing to say that they have got a commitment to the poor and they

are not going to leave the poor behind. I do not see those specialty

facilities making that pledge right now. In fact, quite the opposite.

If you read all the little charts and phone banks they are running,

they just say, oh, communities are going to be fine where we have

specialty hospitals. The poor are going to get taken care of.

If we do what you are talking about, which is, we pay for quality

but those facilities are required to do their fair share for the poor,

22

then I think we are off to the races. But I think it ought to be understood, the specialty facilities are not making that commitment

as of now.

Mr. HACKBARTH. Nor do all community hospitals.

Senator WYDEN. Fair enough. Thank you.

The CHAIRMAN. Thank you. Thank you.

To this panel, you may expect some questions in writing from

those who could not be here. Other than that, thank you very much

for your kind testimony and answers to our questions.

I now move to our second panel. Dr. Alan Pierrott is past president of the American Surgical Hospital Association and chief executive officer of PSC Health, Inc., Fresno, CA; Mr. Larry Veitz, the

chief executive officer for Lookout Memorial Hospital in Spearfish,

SD; and Dr. Andy Sullivan, chairman of the Department of Orthopedics, Oklahoma University College of Medicine, and chief medical

officer at the Oklahoma University Medical Center in Oklahoma

City, OK.

We are going to go with Dr. Pierrott, then Mr. Veitz, then Dr.

Sullivan.

Dr. Pierrott?

STATEMENT OF DR. ALAN H. PIERROTT, PAST PRESIDENT,

AMERICAN SURGICAL HOSPITAL ASSOCIATION, AND CHIEF

EXECUTIVE OFFICER, PSC HEALTH, INC., FRESNO, CA

Dr. PIERROTT. Thank you, Mr. Chairman and members of the

committee. My name is Alan Pierrott. I am an orthopedic surgeon

from Fresno, CA and a founding member of the Fresno Surgery

Center, a multi-specialty physician-owned surgical hospital.

I am here today on behalf of the American Surgical Hospital Association, and we appreciate the opportunity to testify.

In 2003, Congress expressed concern that specialty hospitals

were harming general hospitals. A moratorium on new specialty facilities was imposed while MedPAC and CMS studied these concerns.

MedPAC found that general hospitals have effectively responded

to the competition posed by specialty hospitals. No proof of harm

to general hospitals, risks to patients, or abuse of the Medicare program because of excessive or unnecessary surgery has been presented.

Therefore, ASHA urges the committee and Congress to let the

moratorium expire in June as scheduled and take no other action

that would limit the ability of physicians to own or invest in specialized hospitals.

We oppose MedPAC’s recommendation to extend the moratorium.

The idea that large numbers of specialty hospitals will open as

soon as the current moratorium expires is not realistic.

I also think there is a widespread view that it is benign, allowing

existing specialty hospitals to proceed unhindered, while only limiting new development. This leads to the mistaken conclusion that

extension of the moratorium would not harm existing facilities.

In fact, the moratorium is not benign and has hurt many wellestablished specialty hospitals because it limits the expansion of facilities and the introduction of new services in response to changing

needs and circumstances in our communities.

23

Another moratorium would only exacerbate this condition.

MedPAC’s analysis of specialty hospitals did show that Medicare’s

inpatient hospital payment system needs substantial revision.

ASHA agrees with MedPAC’s recommendations to correct the problems that were found and urges Congress and CMS to act on them

this year. We also support adoption of MedPAC’s recommendations

on gain sharing and the proposals on pay-for-performance measures in the hospital setting.

The Fresno Surgery Center and other members of ASHA provide

cost-effective, high-quality surgical care in a very efficient manner.

Specialty hospitals offer a choice of surgical site for patients and

physicians. We get high marks from our patients, our staff, and our

physicians, whether or not they are investors.

Physician investment in these facilities is a key ingredient to our

success. It means that the people whose names are on the door are

responsible for setting the quality standards, the operational requirements, and directing all facets of the hospital activities.

It is this group of investors who are fundamentally responsible

for the existence of the hospital and the maintenance of its standards. Because these hospitals provide a focused set of surgical services, the staff is able to develop a high degree of skills in these specialized areas.

This skill makes possible the efficiency of operation and the high

quality of patient outcome. We succeed because we are focused factories designed to provide elective surgical care to otherwise

healthy patients.

The interest in a specialty hospital usually begins after physicians have failed to persuade the general hospitals at which they

practice to make changes that will improve physician efficiency and

patient care.

For example, the Stanislaus Surgical Center in Modesto was established first as an ambulatory surgery center, and later as a hospital, by surgeons who could not get reasonable access to the operating rooms at the other two major hospitals in that community.

Fresno is a similar case. My colleagues and I believed we could

provide a better model for elective surgical care, and we have. We

continue to care for patients at the other hospitals in Fresno, as do

our colleagues in Modesto.

In fact, we require our physicians to maintain privileges at one

of the other general hospitals in town. That means, of course, that

we are all subject to the on-call emergency room responsibilities of

those hospitals.

While physician ownership characterizes ASHA members, the

nature of those arrangements varies widely. GAO found that about

one-third of their sample of surgical hospitals was independently

owned by physicians, one-third had corporate partners like

MedCath or National Surgical Hospitals, and one-third were joint

ventures between physicians and local general hospitals.

Clearly, not all general hospitals are hostile to specialty hospitals

or joint ventures with their physicians. For example, Baylor Hospital in Dallas has a variety of joint ventures with physicians, including specialized hospitals and ambulatory surgery centers.

Integris Health System in Oklahoma City has a joint venture with

an ASHA member hospital specializing in orthopedic services.

24

HCA partners with physicians in numerous ambulatory surgery

centers and an orthopedic hospital in Texas. Avra McKenna in

Sioux Falls, SD has a joint venture with MedCath and the cardiovascular physicians who practice there.

In my community, the Fresno Heart Hospital is a joint venture

between our largest not-for-profit hospital, the one with the higher

indigent care load, and local physicians.

Our opponents say that specialty hospitals engage in unfair competition because they have physician owners. This ignores the reality identified by GAO that approximately 73 percent of physicians with admitting privileges to specialty hospitals were not investors in those hospitals.

Clearly, these physicians find something very attractive about

the specialty hospital model, even without an investment interest.

They have no motivation to engage in unfair competition.

General hospitals also have many tools they can use to respond

to competition from specialty hospitals, including revoking or limiting medical staff privileges to any physician who invests in a competing facility, exclusive contracting with health plans to exclude

specialty hospitals, and requiring primary care physicians employed by hospitals to refer patients to their facilities to specialists

closely affiliated with the hospital.

Specialty hospitals have been accused of not taking Medicare or

Medicaid patients. This is simply not true. According to a recent

survey, the average specialty hospital earns 32.4 percent of its revenue from Medicare, 3.7 percent from Medicaid, 46.4 percent from

commercial payors, and so forth, and provides charity care equal to

2.1 percent of total volume.

In addition, the average specialty hospital paid nearly $2 million

in Federal, State, and local taxes. CMS testified as to this point.

We are also accused of taking only the easiest cases. When GAO

looked at this issue, its analysis revealed little real difference in

acuity of admissions. For example, among admissions to surgical

hospitals, 2 percent of the cases were in the highest acuity groups,

while general hospitals had 4 percent of their admissions for the

same surgery fall into the most severe classification.

In other words, 98 percent of admissions to surgical hospitals

were healthy, and 96 percent of admissions to general hospitals

were in the same category.

The allegations that physician ownership of hospitals is a conflict

of interest and gives specialty hospitals a competitive edge over

general hospitals in their communities is baseless.

That issue was thoroughly debated when Congress considered

the Stark laws and Congress chose to allow physician ownership of

hospitals, ambulatory surgery centers, lithotripsy facilities, and a

number of other sites where the physician provided the service in

question. The AMA has also addressed the potential conflict of interest at length and concluded that no conflict exists in these circumstances.

AMA also raises the potential for conflict of interest that can

arise with hospital ownership of physician practices, their employment of physicians—particularly specialists—and the ownership of

health insurance plans by hospital systems.

25

If one is to argue that physician ownership of hospitals is a conflict of interest, then one is surely bound to agree that hospital

ownership of physicians’ practices or employment of physicians

raises the same concerns.

There is one other resource I urge you to look at as you consider

the issue of physician-owned specialty hospitals, and that is the

more than 20 years of experience that Medicare has with ambulatory surgery centers.

Nearly every ASC has some physician owners, yet there is virtually no evidence that physicians have performed unnecessary

surgery or engaged in behavior that placed patients at risk, nor is

there any evidence that an ASC forced the hospital to close or curtail essential community services.

Medicare’s ASC experience should be a strong predictor to Congress that physician-owned specialty hospitals also pose no risk to

Medicare, to patients, or to general hospitals.

In summary, after thorough study, the allegations against specialty hospitals have not been proven. Therefore, ASHA urges the

committee to allow the moratorium to expire as scheduled in June.

The reforms to Medicare’s inpatient payment system and the

hospital pay-for-performance recommendations suggested by

MedPAC would greatly benefit the Medicare program and should

be adopted.

However, there is no evidence to justify putting specialty hospitals under another moratorium during a period these changes are

implemented, or imposing any other limit on physician ownership

of hospitals.

Mr. Chairman, ASHA appreciates the opportunity to present this

testimony, and I would be pleased to answer any questions members of the committee might have.

[The prepared statement of Dr. Pierrott appears in the appendix.]

The CHAIRMAN. Mr. Veitz?

STATEMENT OF LARRY VEITZ, CHIEF EXECUTIVE OFFICER,

LOOKOUT MEMORIAL HOSPITAL, SPEARFISH, SD

Mr. VEITZ. Mr. Chairman, members of the committee, good morning. I am Larry Veitz, CEO of Lookout Memorial Hospital in rural

Spearfish, SD, a town of 9,300 people. Our 40-bed community hospital serves 35,000 people across three States: Wyoming, Montana,

and South Dakota.

I am here today to share my concerns about the impact that physician-owned limited-service hospitals are having on patient access

to care in communities across this country.

In many communities, certain physicians are exploiting a loophole in Federal law to own limited-service hospitals, where they

then refer their carefully selected patients to perform highly reimbursed procedures.

This raises serious concerns about conflict of interest, fair competition, and whether the best interests of patients and communities are being served. To protect patients and ensure health care

services for everyone, Congress should close the loophole permanently, prohibiting physicians from referring patients to limited

hospitals they own.

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My community has experienced, first-hand, the negative effect of

this loophole. In the 1990s, Lookout Memorial Hospital was recognized as one of the top 100 hospitals in the country. Now we are

struggling just to keep our doors open.

Our patients have lost access to important services, all because

of a physician-owned four-bed surgical hospital that began operating in 2000 just a few blocks from our hospital.

The physician-owned Spearfish Surgery Center focuses on general and orthopedic surgery. It does not take on the responsibility

of providing daily, round-the-clock emergency services like our hospital does.

In fact, the physician-owned surgery center did not add a single

new program of benefit to the community, it merely duplicated

services already available in the community.

The center’s physician owners have created a profitable business

by targeting patients that are healthier and have good health insurance, and by targeting highly reimbursed surgical procedures.

Their business practices have siphoned off resources critical to

Lookout Memorial Hospital’s continued ability to meet the needs of

our broader community, including the poor, the uninsured, and the

sicker patients.

The financial impact of the physician-owned surgery center on

our rural hospital has directly affected access to health care services, especially for our Wyoming patients.

We have eliminated our hospice program in Wyoming because we

no longer have the financial means to support it. Home health

services such as nursing and physical therapy have been curtailed.

Congress has previously passed laws designed to prevent conflict

of interest related to physician referrals. It is time for Congress to

act again to preserve access to health care services for all patients

by closing this loophole.

Both the Government Accountability Office and MedPAC have

found troubling evidence surrounding the business practices of physician-owned limited service hospitals. Physician owners refer only

healthier, well-insured patients, are less likely to offer emergency

room services, and do not have lower costs in treating Medicare patients than full-service community hospitals.

Mr. Chairman, the issue is not that full-service community hospitals do not want to compete based on quality, cost or efficiency.

We do that everyday in a market-driven economy.

But full-service community hospitals cannot compete in a system

riddled with conflict of interest, where some physician owners reward themselves for referring healthier, well-insured patients to

the facilities they own.

Full-service community hospitals must rely on physicians for

their referrals, but cannot pay for them for those referrals. Instead

of promoting fair competition, specialty hospitals actually stifle it.

Physician self-referral breeds conflict of interest. When physicians own limited-service hospitals to which they refer patients,

their decisions about when to provide care and where to send patients are subject to competing interests.

Mr. Chairman, community hospitals were created and sustained

by the community to serve all patients, regardless of their health

status or ability to pay. A conflict of interest inherent when physiVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 23642.000 SFINANC2 PsN: SFINANC2
27

cians refer patients to limited service hospitals that they own is

robbing us of our ability to meet that mission and is risking patient

access to essential medical services.

Enough data has been compiled, the studies have been completed, and the case is compelling. It is time to take action. I urge

Congress to close the loophole in the Federal law by permanently

prohibiting physicians from referring patients to limited-service

hospitals they own.

Thank you. I am happy to respond to your questions.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Veitz appears in the appendix.]

The CHAIRMAN. Now, Dr. Sullivan?

STATEMENT OF DR. J. ANDY SULLIVAN, CHIEF MEDICAL OFFICER, OKLAHOMA UNIVERSITY MEDICAL CENTER, OKLAHOMA CITY, OK

Dr. SULLIVAN. Good morning, Mr. Chairman.

As chief medical officer of the Oklahoma University Medical Center and chairman of the Department of Orthopedic Surgery at OU,

I have witnessed first-hand the adverse effect that limited-service

hospitals can impose on community hospitals, and I appreciate the

opportunity to share my experience.

As a physician practicing for 36 years, I know the frustrations,

complaints and constraints that affect our practices nationwide. Increasing medical malpractice premiums, uncertain Medicare and

Medicaid reimbursement, the bureaucracy of managed care, and

demanding on-call schedules all cause physicians to retire early or

to limit their practice, therefore limiting patient access.

Any solution to these problems must be comprehensive and

aimed to reform a fractured health care system. This is not about

the existence of specialty hospitals. Rather, it is physician ownership and self-referral to these facilities that creates an uneven

playing field and directly harms full-service community hospitals.

This ownership creates the potential for conflict of interest and

over-utilization of facilities.

These facilities drain essential resources from community hospitals, particularly harming their capacity to provide vital health

services. They do so by taking advantage of a loophole in the

whole-hospital exception to the Anti-Referral and Ethics in Medicine law.

Specialty hospitals are merely subdivisions of full-service hospitals. They specialize in services that offer the highest profit margin and reimbursement rates. Self-referral allows the physician to

profit not only from the fee for his service, but also from the facility

fee to the hospital. If a community hospital were to pay physicians

to refer patients to such units, they would be committing a felony.

Some individuals have been imprisoned for just such acts.

Physicians do not invest in trauma units, burn centers, or children’s hospitals because these represent the least profitable practice area. Removal of the most profitable services removes the ability of the full-service hospital to offset the provision of critical

health care needs that generate only low margins of revenue, or

even losses.

28

American hospital emergency rooms have become the de facto

public health care system for the Nation’s uninsured. These emergency rooms are required to provide medical evaluation and treatment to everyone, regardless of ability to pay.

From what I have witnessed in Oklahoma City, specialty hospitals do not share in this commitment to our community. In Oklahoma, despite a requirement that all licensed hospitals provide

emergency service, a significant number of the State’s specialty

hospitals provide little or no emergency care. They treat the most

profitable patients, leaving the full-service hospitals, the uninsured, and the high-risk patients.

OU Medical Center presently operates the only Level 1 trauma

center in the State of Oklahoma. We are credentialed by the American College of Surgeons and must be capable of treating the most

severely injured patients.

It has been shown repeatedly that these centers save lives and

reduce mortality. Typically, these patients arrive with multiple broken bones, along with other injuries to vital organ systems, such

as head and chest wounds. There was no Level 1 trauma center to

serve 3.2 million residents of Oklahoma prior to our designation in

2001. Wichita, KS, with a population of 350,000, was the closest,

followed by Dallas and Arkansas.

Studies by the American College of Surgeons suggest that, under

optimal circumstances, a Level 1 center should treat 80 percent of

the most serious victims and only 20 percent of the less seriously

injured. The less seriously injured need to be treated at Level 2

trauma centers.

This was not the case in Oklahoma. OU Medical Center was

treating 80 percent of all trauma patients across the entire metropolitan area of Oklahoma City, along with transports from across

the State.

This over-loading of our Level 1 trauma center with less seriously injured patients created a crisis, taxed our capacity, and jeopardized the Level 1 certification. Like police and fire, a full-service

hospital must remain in a complete state of readiness 24/7, 365

days a year. Trauma centers rely upon six surgical subspecialties,

including anesthesiology, to take care of the patients.

Before the advent of physician ownership of specialty hospitals

and ambulatory centers, physicians typically maintained an affiliation with multiple hospitals, assuring a sufficient number of doctors for the on-call roster.

As physicians in specialty hospitals dropped out of the call, a vicious cycle was formed. Those remaining had an increasing load, an

escalation in their work hours, and an inability to get their elective

patients in.

This caused a crisis in the Oklahoma City area. At the inception

of our Level 1 trauma center, we had six neurosurgeons at OU. We

now struggle to maintain two to sustain our emergency coverage

for head trauma. The hospital recently committed $1 million annually in temporary staffing and local attendants for neurosurgery

coverage.

We were forced to resort to a voluntary stop-gap on-call system

for trauma. Under this plan, OU Medical Center, along with the

29

other full-service hospitals and the Oklahoma County Medical Society, developed a voluntary Level 2 trauma rotation.

A group of neurosurgeons, orthopedists, and other critical specialists who had dropped out of call agreed, on a voluntary basis,

to provide coverage at at least one other Oklahoma City hospital

each night, lessening our load and providing an additional avenue

for Level 2 patients.

This voluntary system is very fragile. The State has agreed to give us a $5.7 million subsidy to support the Level 1 trauma center. These are short-term, temporary measures and they are costly,

but they have at least insured the temporary survival of our Level

1 center.

We risk the possibility of losing our neurosurgery residence

training program. This loss would be devastating. It would result

in fewer specialists in the State of Oklahoma and would threaten

other residency programs within our center. It would also jeopardize our Level 1 trauma center certification.

When the Oklahoma Heart Hospital opened in 2002, we suffered $11.6 million in cardiovascular loss between 2002 and 2004. We

terminated programs to the uninsured and under-insured. We had

an outpatient pharmacy that provided drugs to patients who had

no money at greatly reduced costs that was eliminated.

We planned a facility renovation. We had to curtail that. The

part that got curtailed was services to women and children. We lost

56 staff members who joined the Heart Hospital, most of whom

were registered nurses.

Regular hours with no responsibility for call are great incentives to take a different job. The estimated cost of turnover was $2.6 million. We narrowly avoided the closure of our intensive care unit by

an infusion of $500,000 in retention bonuses.

Specialty hospitals offer an alternative to traditional hospitals,

and some patients certainly prefer these. Nevertheless, these facilities create both a conflict of interest for the physicians and an unfair competitive advantage with no evidence that they have increased in quality.

It is my hope that Congress will protect community hospitals like

OU Medical Center by removing the opportunity for self-referral. I

understand that Congress, as we have heard today, is weighing

recommendations by the Medicare Payment Advisory Committee

that would seek to level the playing field through Medicare payment adjustments.

Valid studies of past experience with this tactic demonstrate that

Medicare payment adjustments alone will not solve the self-referral

program.

So, Mr. Chairman, in conclusion, I would say that any of my faculty could leave today and double their income at a specialty hospital where the value of their investment, even if it is a small percentage, increases as a direct result of self-referral.

Two of my most critical faculty are being recruited as I speak.

There is also, despite the moratorium, a new specialty hospital

being built in our area, scheduled to open later this year.

As long as any financial gain can be generated through self-referral, competition will be neither fair, free, or equal between community hospitals and specialty hospitals.

30

Improper financial motives simply do not serve the best interests

of our patients and threaten to undermine the vital health care

services that communities expect from the cornerstone of American

medicine, the full-service hospital.

I ask this committee to eliminate these concerns by ensuring the

current moratorium does not lapse, and by supporting legislation

to prohibit physician self-referral before the network of full-service

hospitals becomes completely impaired.

I fear that we are facing a house of cards. For 29 years, I have

had the joy of taking care of all comers, regardless of ability to pay,

and to teach other young physicians how to become orthopedic surgeons. It alarms me that the hospitals in which this teaching occurs are being threatened at this time.

I also fear that members of my family or yours are going to arrive at what they perceive to be a full-service hospital, only to find

that the specialists needed to provide their care are no longer on

call.

I thank you for your time. I would be happy to answer any questions.

[The prepared statement of Dr. Sullivan appears in the appendix.]

The CHAIRMAN. Thank you very much.

I am going to ask Senator Lincoln if, after I get done and Senator

Baucus gets done, if you would finish up with your questioning.

And you can have all afternoon, if you want to take it. [Laughter.]

Senator LINCOLN. He says that because he knows there is a vote

at 12:50.

The CHAIRMAN. Would you do that for me?

Senator LINCOLN. Yes.

The CHAIRMAN. Thank you very much.

So, in advance, I thank all of your for your participation. Usually

the Chairman is the last one to leave the committee meeting, but

we have such good cooperation on this committee, that we try to

help each other out.

Mr. Veitz, you have told us about the impact of these specialty

hospitals on your hospital, like cutting such services as home care

and hospice. Could you please expand on which services were limited and to what extent, and did cutting of such services negatively

impact beneficiaries who received services at Lookout Memorial?

Mr. VEITZ. We eliminated the entire program in Wyoming for our

hospice patients. We eliminated our services for home health care

services in Wyoming. We had a negative bottom line and needed

to look at services that were not supporting themselves financially,

and those were two areas that we had to look at.

It was a very difficult decision for us because those were services

that we cared dearly about. But, again, we had to shore up our financial bottom line so that we could continue to provide emergency

room services.

In addition to that, we have worked, in the past, cooperatively

with the county to provide public health services. We gave them

notice that we could no longer afford to subsidize that program,

and over a year and a half period we ceased to subsidize that program, and that program is no longer in existence with the county.

31

We also curtailed a number of capital investments in cardiac rehabilitation, which is a very popular program. But it is not a selfsustaining program. We have curtailed our capital investment in

that program.

We have delayed some programs, like incontinent care and

wound care, because we did not have the funds and they were not

self-supporting programs, as well as diabetic education.

The CHAIRMAN. All right.

We had a statement from a physician in Spearfish: ‘‘There used

to be a collegial medical community in Spearfish. We used to work

together, even cover each other’s vacations. But no more. The establishment of Spearfish Surgery Center has torn our medical community apart.’’

From your testimony, it is clear, Mr. Veitz, that the entry of this

specialty hospital has had significant impact on community relations. The medical community in Spearfish does not get along like

it used to. Is that an accurate description?

Mr. VEITZ. Yes, it is.

The CHAIRMAN. All right.

Dr. Pierrott, in the MedPAC staff presentation last month,

MedPAC found that ‘‘specialty hospitals do not have lower Medicare costs per case.’’ Additionally, ‘‘average cost in orthopedic and

surgical hospitals are higher at 117 percent and 133 percent of the

national average.’’

My question to you, Dr. Pierrott, you and the American Surgical

Hospital Association claim that surgical hospitals are efficient.

What criteria do you use to base that claim on?

Dr. PIERROTT. The efficiency that physicians refer to generally

has to do with the way the schedule works. For example, when I

was in practice, I could do four operations at the big hospital or do

six at the surgery center in the same length of time. So, it has to

do with productivity.

Then you get into a quality issue. When physicians are in charge,

we have, since 1988, have had one nurse for every three patients.

In California last year, the nurses struck to get a 1 per 6 as a

State-wide standard.

So, I do not know all the reasons for the cost, but the biggest single cost in a hospital is labor. We do not have a 1 to 6 or 1 to 8

nurse-to-patient ratio, we have 1 to 3. That is one of the reasons

that I believe strongly that any investigation about quality is going

to show superior quality at the specialty hospital level.

If you talk to the front-line people, physicians and nurses, who

have experienced specialty hospitals, you will find an overwhelming majority believe that the model provides superior care.

The CHAIRMAN. All right.

Dr. Sullivan, we have heard from MedPAC today that specialty

hospitals tend to concentrate on particular types of cases or diagnosis-related groups. In your testimony, you state that fixing the

Medicare payment structure or diagnosis-related groups is not the

ultimate solution to the problem that we face today from specialty

hospitals. Why do you believe that closing the loophole in self-referral laws is so important, then?

Dr. SULLIVAN. There have been studies that show that when they

adjusted the rate that ophthalmologists were paid for cataracts,

32

they merely did other procedures and did not end up saving any

money.

I think closing the loophole is important because it represents a

conflict of interest. So long as physicians are able to profit on that,

and sometimes exceed the amount of income they make for the facility fee over the amount that they make from the fee-for-service,

it represents a conflict of interest. I think this loophole needs to be

closed.

Senator BAUCUS. Gentlemen, I have one question for Dr. Pierrott.

I understand that Senator Lincoln will be back very soon, because

I have got to leave.

I would like you, Dr. Pierrott, just to tell me what you think is

motivated by this statement. This was made, and I am sure you

have heard of it, by a physician investor named Dr. Larry Tuber.

He owns part of Black Hills Surgery Center, one of our association’s founding members.

This is what he said in his speech a few years ago to a neurosurgery conference: ‘‘The last thing, and the easiest thing, is

money. There will be a lot of money out there. Why go to a surgical

facility? Profit, profit, profit. You have got to get market share. You

want to take from them,’’ hospitals, ‘‘and it will be so easy. You

can’t believe how easy it is.’’

What is your response to that?

Dr. PIERROTT. I think that one of the challenges for the committee is that there are huge market differences. All I can speak

for is from my own experience in Fresno.

In Fresno, there are not anywhere near the high profits available

to anybody. Sixty-five percent of the hospitals in California are losing money from operations, and we are among them. So, markets

are very different.

The motivation that I find when I talk to physicians around the

country, is their fundamental drive is to improve their working

conditions. That is, to improve patient care and improve the efficiency with which they can accomplish the work that they do.

Senator BAUCUS. On that point, though I understand that is a

noble value, a noble goal, I do not understand how, frankly, doctors

can leave a hospital where they can go get a ‘‘more efficient operation’’ and not have to perform a lot of the services that the community hospitals have to perform, and do perform.

I am talking about—you know what I am going to say—emergency care, and all the full range of services, which are costly. I

would think that doctors, because they do like to serve people, like

to help people, would want to help and serve the community in a

broader, general sense and want to stay with the hospital and figure out how to be part of the team on the hospital, to make sure

the hospital is running efficiently, better patient-to-staff ratios, the

right equipment, and so forth, and not just skim the cream off the

top.

If I were a doctor, it would be very easy to think, gee, this really

sounds neat. I can just go ahead, whether it be cardiac, orthopedic,

or whatnot, because that is kind of where the money is, so I will

take the money and not have to share with others in the hospital.

It is interesting to me, for example, that there are not pneumonia care specialty hospitals, there are not AIDS specialty hosVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 23642.000 SFINANC2 PsN: SFINANC2
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pitals. There are not specialty hospitals in the areas where it is

tough, it is rough, where reimbursement is not quite so high.

Just help me get over this problem I have, the problem being,

why should we all not stay together here, doctors working with the

other doctors, the pneumonia doctors, the AIDS doctors, and the

emergency care doctors, and so forth?

Dr. PIERROTT. Senator, your comments sound absolutely reasonable until you try to change the behavior of a hospital. It is very,

very difficult to change and make more efficient a 400-, 500-, 600-

bed hospital where you are a very small part of the total equation.

That is the first comment.

The second one, this notion about emergency rooms is an interesting one. There was a study that was published last year by the

California Healthcare Foundation, a not-for-profit, independent entity looking at California emergency rooms.

They found that emergency rooms actually are profitable for hospitals. That is, they lost, on average, $84 per patient seen, but one

patient in seven was admitted and they made a profit of approximately $1,200 per patient admitted.

So, taken altogether, inpatient/outpatient, emergency rooms were

actually profitable. So the notion that specialty hospitals do not

have an emergency room and that it is somehow detrimental, to me

does not hold up under analysis.

The final point I would like to make is, if you look at the research of Harvard Professor Nancy Kane, you will find that hospitals receive more in benefits—that is, tax relief, property tax,

State income tax, Federal income tax, and a whole host of other

benefits—that, for 75 percent of American hospitals, exceeds the

charity care that they provide.

Senator BAUCUS. Just one final question, just trying to get some

facts out here. I asked about profit, profit, profit, and you said,

well, gee, that is not my hospital, that is not Fresno.

Dr. PIERROTT. Yes.

Senator BAUCUS. But, on the other hand, I understand, what, in

Fresno, this information is correct. A 600-bed hospital is treated on

the same footing as one that reports no Medicaid, has no discharges for the county indigent program, no charity care, bad debt

less than 1 percent of total gross patient revenue, and no emergency room. So, what is the point? This is your hospital. Is that

your hospital?

Dr. PIERROTT. I have no idea. We are a 20-bed facility.

Senator BAUCUS. You are a 20-bed facility, but you have no discharges for the county indigent program at your hospital. You have

no charity care at your hospital. You have bad debt at less than

1 percent of total gross patient revenue, and you have no emergency room at your hospital.

Dr. PIERROTT. We are not required to have an emergency room

at our hospital. We cannot get access to the Medi-CAL program. It

is a managed care program that channels all of its patients to a

small number of providers through contracts. So, we are criticized

for not having patients that we cannot get access to.

My final point is the point that was made by CMS, which is, if

you add the taxes that our facility pays to the charity care, it exVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 23642.000 SFINANC2 PsN: SFINANC2
34

ceeds, on a percentage of revenue, the charity care provided by notfor-profit hospitals.

Senator BAUCUS. Well, I have no further questions. Thank you.

Senator Lincoln?

Senator LINCOLN. Thank you.

Dr. Pierrott, you talked about the efficiency of specialty hospitals. I think MedPAC found that the specialty hospitals do not

have lower costs than the community hospitals. So I guess my

question is, how are you measuring efficiency? Can you get those

efficiencies without your physician self-referral?

Dr. PIERROTT. Physicians primarily measure efficiency—that is,

surgeons—in terms of the turnover of the operating rooms. It is

much quicker in surgery centers and it is much quicker in specialty

hospitals. That is why surgeons are the drivers behind these models, because they make that more efficient.

In addition, we clearly have, in my experience, better quality. I

have performed surgery on over 1,000 patients in the big hospital

setting. I have performed surgery on over 1,000 patients in the

small hospital setting.

I was a big-hospital physician. I was the president of the medical

staff of the largest hospital between San Francisco and Los Angeles. I am a convert. You have the zeal of the convert in front of you.

I found that our facility did a better job of taking care of our patients, and I would welcome any evaluation of our quality. We have

won awards for quality.

Senator LINCOLN. Well, we are talking about efficiency, which is

probably a combination of quality as well as other things.

Dr. PIERROTT. Yes. Exactly. So I think if we were to look at costs

plus quality, I think we are the winner.

Senator LINCOLN. But you do not have a lower cost.

Dr. PIERROTT. Well, not according to MedPAC. But MedPAC is

talking about an average. I do not know if they are talking about

my facility, and I do not have an absolute comparison of our facility.

Senator LINCOLN. It kind of gets back to what Senator Baucus

was asking, and that is really that you are talking about apples

and oranges.

If we compare your facility, which you said was a 20-bed facility,

compared to a 600-bed facility where there are no discharges in

that indigent program, there is no charity care, the bad debt that

is less than 1 percent, which my hospitals would scream to have

that, no emergency room, I mean, I guess the question I would say

is, when you talk about a definition of a whole hospital, how can

you truly look at that issue and use this apple and orange comparison to say that they are comparable in the definition of a whole

hospital? I mean, do you not see anything in terms of a little bit

of a stretch to consider your hospital in the same terms as the

other facility, the 600-bed facility?

Dr. PIERROTT. We are clearly different models, but we are licensed by the State and we carry a hospital license like the other

hospitals. If you look at the scope of services of the 400 or 500 hospitals in California, you will find a significant variation.

From the smallest to the largest, there will be huge differences

in the services that they offer. I think one of the challenges for

35

health policy is to try to match the facility to the needs of the patient.

I think one of the greatest successes of my lifetime is the development of this surgery center, which is very limited in terms of the

services provided, matches the need of the patient to that facility,

and offers significant benefits to payors and the patients and their

families.

So, we are talking about trying to develop a model that matches

the needs of the patient appropriately and out-performs a model

that was developed for a different purpose.

Senator LINCOLN. I do not think anybody wants to feel like they

are asking anybody to diminish the service or diminish the quality

or the technology that you are able to develop there.

I think what we are asking is the consideration of those that get

left behind because you peel off, obviously, those that are helping

to support the facilities that provide the other types of services, OB

care, and other things like that.

Have you ever been in a teaching hospital? Have you ever been

in medical academics?

Dr. PIERROTT. No, I have not ever been in academics. I obviously

had my training in a teaching hospital.

Senator LINCOLN. Right. But, I mean, when you were out of your

training.

Dr. PIERROTT. No.

Senator LINCOLN. No. I have a little bit of history with that. That

is why I was concerned, certainly, with our teaching facilities and

others where they do catch an awful lot of the care that is necessary for making sure that our communities are whole. If we want

to talk about whole hospitals, we have got to have whole communities.

Dr. PIERROTT. You bet. I have great respect for the teaching hospitals and Dr. Sullivan’s work, and others’, and they are very important. I just do not want to sacrifice a model that I have come

to find to be superior in the mix as we try to figure out how to sort

out priorities.

Senator LINCOLN. Do you have suggestions of how we deal with

those that are left behind by the institutions that you favor so

strongly?

Dr. PIERROTT. Well, first of all, from the reading that I have

done, this argument about being left behind, that there is somehow

inadequate compensation, I think, is going to be difficult to prove

based on the benefits that we already provide our big hospitals to

take care of those patients in terms of the tax relief and other benefits. There is a whole host of those that could be listed. People

who have looked into that, like Professor Kane, argue that the big

hospitals are compensated for their charity care.

Senator LINCOLN. And so you feel like those that are left behind

to be cared for, those institutions that care for them are adequately

provided for to do the kind of quality of work that you profess you

are able to do in a for-profit physician-owned facility?

Dr. PIERROTT. The statistics are that 75 percent of not-for-profit

hospitals receive more in tax benefits than they provide in charity

care.

36

Senator LINCOLN. We are not just talking about charity care. We

are also talking about volumes in terms of Medicare and Medicaid,

and others that obviously present a disproportionate share of one

group of individuals that need care. I think that is really important.

One of the things that Senator Baucus mentioned, and you mentioned many reasons, I think, why physicians establish specialty

hospitals. And I have visited with some of them, and I have toured

some of those facilities. I want to make sure I get all sides of that.

But you did not list profit, which I was a little bit amazed at.

I mean, it seems like, if we are going to lay everything out on the

table here, is this not something that is considered by physicians

as they enter into this agreement? We have seen some of the

quotes from, I guess, some of your founding members. The biggest

one—and I do not know if Senator Baucus said this, I was out—

but Dr. Tuber, who is one of your founders——

Dr. PIERROTT. Yes.

Senator LINCOLN. His quote said, a couple of years ago from a

neurosurgery conference was, ‘‘And the last thing, and the easiest

thing, is money. There will be a lot of money out there. Why go to

a surgical facility? Profit, profit, profit. You have got to get the

market share. You want to take from them,’’ meaning those hospitals, ‘‘and it will be so easy, you just can’t believe how easy it will

be.’’

If we are going to be realistic, we have got to be realistic about

what we are dealing with.

Dr. PIERROTT. In California, you cannot make that kind of statement. The marketplace does not allow any facility that I know of

in California—with a couple of exceptions, but they are not specialty hospitals—to make huge profits.

Senator LINCOLN. I do not know what Dr. Tuber was talking

about then.

Dr. PIERROTT. But, absolutely, there does have to be a return on

investment or you cannot attract the capital needed to build these

facilities.

Senator LINCOLN. Well, when we look at what MedPAC does

present us, it is that the distribution at some of the specialty hospitals frequently has exceeded 20 percent of the physicians in national investment, and the specialty hospitals in their study had an

average all-payor margin, I think, of 13 percent in 2002, which was

pretty much well above the 3- to 6-percent average for community

hospitals in those same markets, or in their markets.

Dr. PIERROTT. Yes. And then if you tax those profits and put

those into the system for delivering health services, you have a significant benefit to the community as well.

Senator LINCOLN. You mean, at the corporate yes?

Dr. PIERROTT. Yes. Or, no, at the personal rate.

Senator LINCOLN. Those guys have just got a big cut, just looking

at what we are going to be providing, and certainly what the incentives are there.

Dr. Sullivan and Mr. Veitz, and certainly, Dr. Pierrott, jump in

here, in terms of MedPAC’s recommendations on improving the accuracy of Medicare’s inpatient PPS and its recommendations on

37

gain sharing. You have supported the gain sharing, and in your

testimony, I believe, said that you felt like it would have——

Dr. PIERROTT. Absolutely.

Senator LINCOLN. I mean, I would like to investigate where we

need to go there, or if there is something there that is helpful.

Dr. SULLIVAN. I am on record. I will defer to Mr. Veitz.

Mr. VEITZ. As far as the gain sharing, I think that that is something I personally have interest in pursuing. Any time that you can

create an environment in which the physicians and the hospitals

work together, I would be in full support of that.

As far as the payment adjustments, that is always an option to

consider. But I do not think that it, in itself, is an adequate solution. First of all, it does nothing to address the issue of conflict of

interest, and second, it does not do anything to help the uninsured,

the under-insured, and the poor.

Senator LINCOLN. My last two questions. One, is to Mr. Veitz,

particularly. How do you think that MedPAC’s recommendation on

improving the accuracy of Medicare’s inpatient PPS would impact

small and rural hospitals? I have a vested interest there. The majority of my hospitals are rural. We are out there trying to serve

those rural communities, which is very difficult.

Mr. VEITZ. I do not have the answer to that. I would really have

to know specifically what they are talking about, and then take a

look at that. Just with my limited knowledge in that area, I would

agree with their comments that it probably will cut across all types

of hospitals. Our own concern is that it might hurt some hospitals

in very rural communities that are already struggling.

Senator LINCOLN. Right.

Mr. VEITZ. But I do not have any data to support that.

Senator LINCOLN. Well, I think it is important to make sure that

our point is well taken. That is, we do not want to diminish the

advancements in technology, the abilities to provide increased quality care to all people in this country. There are many advancements that are out there, but there is no doubt that we have got

to, in some way, make the playing field as level as possible.

Representing a State that is, one, disproportionately elderly—we

are in the top 10 States for the percentage of our population that

is over 65—we also are disproportionately low income, which

means the majority of our hospitals, if not all of them, are high

Medicare and high Medicaid.

The critical issue of meeting all of these needs and using all of

these new technologies, but making sure that we can still provide

the basic needs and the basic services that our hospitals and our

medical professionals have been able to do, is something that is

really critical.

So, I think the playing field has got to be level if these people

are going to be able to continue to keep their doors open. It certainly is quality of care and quality of life, but it is also jobs.

We almost lost one of our rural hospitals that covered a 90-mile

radius. Not only were we going to lose the hospital, which was the

second-largest employer in that county, but we were going to lose

the two biggest manufacturing facilities because their liability went

up when they lost the emergency room and the hospital care. So

when we disproportionately put these people at a disadvantage, it

38

just means a tremendous amount to people in these under-served

areas.

Dr. PIERROTT. Well, Senator, MedPAC conducted the study at the

request of Congress and did not find that specialty hospitals had

a negative financial impact on community hospitals. So, that must

be reassuring in this——

Senator LINCOLN. I think Mr. Veitz has a comment on that.

Mr. VEITZ. I believe that was qualified, except in small communities.

Senator LINCOLN. Well, this is certainly a conversation that I

hope will not end here. There are a lot of things that we still need

to address, and there are many of us that do feel very passionate

about making sure that that service remains there for our constituency. It just about broke my heart when Dr. Sullivan told me that

they had to cancel the hospice care.

Those are the kinds of services that are absolutely vital to people

living in these areas that will help us bring down, ultimately, the

cost of health care. Because when you have got a good program like

hospice that allows you the dignity, the home health, and all of the

other things that you can do, then you do not end up spending the

tremendous dollars in the end-of-life care in these hospitals.

Dr. PIERROTT. If I might describe my community. The eight-county area around Fresno, if it were a State, would be the 23rd largest

State in the United States. It would have the lowest per capita income. It would have the highest indigent care load. It would have

the highest rate of unemployment in the United States. It would

have statistics far worse than Appalachia.

So if there is a model to test the impact of a specialty hospital

on the ability of the not-for-profits to meet the needs of the uninsured and the under-insured, come to the Central Valley of California.

Senator LINCOLN. This is the same place where the 600-bed hospital sits beside your 20-bed hospital?

Dr. PIERROTT. We have a 400-bed hospital in our community, and

a 300-bed hospital that just expanded as well. But, yes. There is

no better place, I think, no better laboratory.

And if you look at this, and we all report our financial information to the State, you will find the most profitable hospital in our

community in, I think, 2002, was the biggest one with the highest

charity care load, and the least profitable was our specialty hospital.

So, these generalizations that are being made do not absolutely

hold up. We have a long history of demonstrating that specialty

hospitals do not harm community hospitals, and it has been confirmed by MedPAC.

Senator LINCOLN. Well, it would be important to look at the financial structure of both of those institutions to see where those

gains were made.

Thank you all very much. As I said, I hope this discussion does

not end here. I think I officially will adjourn the committee.

[Whereupon, at 12:25 p.m., the hearing was concluded.]

(39)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF TOM GUSTAFSON

Senators Grassley and Baucus, distinguished committee members, thank you for

inviting me to testify today about physician-owned specialty hospitals. At the Centers for Medicare & Medicaid Services (CMS), we remain deeply committed to improving the quality of patient care and to increasing the efficiency of Medicare

spending. As you know, how Medicare pays for medical services can have important

impacts on quality and medical costs, for our beneficiaries and for our overall health

care system. By carefully examining interactions between physicians and hospitals,

we can consider how the financial incentives created by the Medicare program

might be redirected to improve quality. To that end, Section 507 of the Medicare

Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) requires

HHS to study a set of important quality and cost issues related to specialty hospitals, and to report to Congress on our findings. I am here today to present the

preliminary results from the technical analysis that will underlie the CMS report

for Section 507.

CMS STUDY

Specifically, MMA required HHS to study referral patterns of specialty hospital

physician owners, to assess quality of care and patient satisfaction, and to examine

the differences in uncompensated care and tax payments between specialty hospitals

and community hospitals. CMS contracted with RTI International to conduct the

technical analysis. At this time, we are reporting on the factual findings of the RTI

analysis. Any policy recommendations on this issue will have to be developed once

the report on the analysis is finalized.

While national data were used for some aspects of this analysis, some questions

related to quality, cost, and community impact as mandated by the MMA required

the detailed analysis of data that have not been previously available. Consequently,

the analysis involved the collection of a considerable amount of new data related

to the performance and impact of specialty hospitals. The analysis included information about the environment in which specialty hospitals and community hospitals

in the same geographic areas operate, and sensitive and proprietary non-public data

on such issues as ownership. To conduct this detailed analysis, site visits were made

to 6 market areas (Dayton, OH; Fresno, CA; Rapid City, IA; Hot Springs, AR; Oklahoma City, OK; and Tucson, AZ) around the country. These markets included 11

of the 59 cardiac, surgery, and orthopedic specialty hospitals that were in operation

as approved Medicare providers by the end of 2003. These market areas were selected because they were thought to represent a range of the circumstances in which

specialty hospitals operate. Within each market area, specialty hospital managers,

physician owners, and staff were interviewed. Executives at several local community

hospitals also were interviewed, in order to evaluate their views and concerns with

respect to the specialty hospitals. To assess patient satisfaction with specialty hospitals, the study used patient focus groups composed of beneficiaries treated in cardiac, surgery, and orthopedic hospitals.

Referral patterns for all specialty hospitals were analyzed using Medicare claims

data for 2003. The inpatient hospital quality indicators developed by the Agency for

Health Research and Quality (AHRQ) were used to assess quality of care at the

study hospitals and local community hospitals in the 6 study sites. Data obtained

from Internal Revenue Service (IRS) submissions and financial reports, as well as

from the hospitals themselves, were used to estimate total tax payments and uncompensated care for these hospitals.

40

CARDIAC HOSPITALS DIFFER FROM SURGERY AND ORTHOPEDIC HOSPITALS

The empirical evidence clearly shows that cardiac hospitals differ substantially

from surgery and orthopedic hospitals. Compared to surgery and orthopedic hospitals, cardiac hospitals tend to have a higher average daily census, an emergency

room, and other features, such as community outreach programs. The average daily

census of the 16 cardiac hospitals nationwide was 40 patients. All the cardiac hospitals that were operational in 2003 reported that they were built exclusively for

cardiac care. Cardiac hospitals treated 34,000 Medicare cases in 2003, and Medicare

beneficiaries account for a very high proportion (about two-thirds) of inpatient days

in those hospitals nationwide. In aggregate, within our sample, physicians own

about a 49-percent share in cardiac hospitals; typically, a corporation, such as

MedCath or a non-profit hospital, owns the majority share. In the study hospitals,

the aggregate physician ownership averaged approximately 34 percent for the cardiac hospitals in the study. The average ownership share per physician in those hospitals was 0.9 percent, with individual ownership share per physician ranging from

.1 percent to 9.8 percent, with a median of 0.6 percent and an average per physician

share of 0.9 percent.

Surgery and orthopedic hospitals more closely resemble ambulatory surgical centers, focusing primarily on outpatient services. Their aggregate average daily census

of inpatients is only about 5 patients. Physicians generally own a large share of the

interest, averaging 80 percent in aggregate for the surgery and orthopedic hospitals

in the study. The average ownership share per physician is 2.2 percent, with individual ownership shares per physician ranging from 0.1 percent to 22.5 percent,

with a median of 0.9 percent. The balance is typically owned by a non-profit hospital

or national corporation. Medicare patients account for about 40 percent of the inpatient days in these facilities. The small number of inpatient cases at surgery and

orthopedic hospitals precluded the development of meaningful findings for this

group on several of the dimensions of performance that we examined.

PRELIMINARY RESULTS

At this time, we would like to present the preliminary findings of our technical

analysis. While we are still finalizing some aspects of the study, we do not expect

the results to change significantly.

Our findings on physician owner referral patterns indicate that the majority of

Medicare patients in most specialty hospitals are referred or admitted by a physician owner, but that these physicians do not refer their patients exclusively to the

specialty hospitals that they own. They also refer a similar but slightly lower proportion of their patients to the local community hospitals.

Overall, the Medicare cardiac patients treated in community hospitals were more

severely ill than those treated in cardiac specialty hospitals in most of the study

sites. This generally was true for patients admitted both by physicians with ownership in specialty hospitals and by other physicians without such ownership, indicating no difference in referral patterns for physician owners and non-owners. However, there was some variation, with cardiac hospitals in some areas having higher

average severity than in the community hospitals. Although the number of cases

was too small to draw definitive conclusions for surgery and orthopedic patients, the

difference in the proportion of severely ill patients treated in community hospitals

was greater for the surgery and orthopedic patients than for the cardiac patients.

The analysis of patients transferred out of cardiac hospitals did not suggest any

particular pattern. The proportion of patients transferred from cardiac hospitals to

community hospitals is about the same, around 1 percent, as the proportion of patients transferred between community hospitals. The proportion of patients transferred from cardiac hospitals to community hospitals who were severely ill was similar to patients in the same diagnosis-related group (DRG) who were transferred between community hospitals. The number of cases transferred from surgery and orthopedic hospitals was too small to derive meaningful results on this type of analysis.

Based on claims analysis using the AHRQ quality indicators and methodology,

preliminary findings show that measures of quality at cardiac hospitals were generally at least as good and in some cases were better than the local community hospitals. Complication and mortality rates were lower at cardiac specialty hospitals

even when adjusted for severity. Because of the small number of discharges, a statistically valid assessment could not be made for surgery and orthopedic hospitals.

Patient satisfaction was extremely high in both cardiac hospitals and surgery and

orthopedic hospitals, as Medicare beneficiaries enjoyed large private rooms, quiet

surroundings, adjacent sleeping rooms for family members if needed, easy parking,

41

and good food. Patients also had very favorable perceptions of the clinical quality

of care they received at the specialty hospitals.

We also used proprietary financial information provided by the specialty hospitals

in the study that allowed the calculation of their taxes paid and their uncompensated care as a proportion of net revenues. Relative to their net revenues, specialty

hospitals provided only about 40 percent of the share of uncompensated care that

the local community hospitals provided. However, the specialty hospitals paid significant real estate and property taxes, as well as income and sales taxes, while

non-profit community hospitals did not pay these taxes. As a result, the total proportion of net revenue that specialty hospitals devoted to both uncompensated care

and taxes significantly exceeded the proportion of net revenues that community hospitals devoted to uncompensated care.

MEDICARE PAYMENT ADVISORY COMMISSION (MedPAC) REPORT

The MMA also required a complementary MedPAC study of certain issues related

to the payments, costs, and patient severity at specialty hospitals. Based on our initial review of their report, there are several preliminary findings in our analysis

that are consistent with their results:

• Both analyses found specialty hospitals generally treat less severe cases than

community hospitals. The CMS analysis found this difference did not appear to

be related to referrals by physician owners of less severe patients compared to

referrals by other community physicians.

• Additionally, MedPAC’s analysis of the payer shares for specialty and community hospitals is consistent with the CMS finding that specialty hospitals provide less uncompensated care than community hospitals as a whole. In addition,

the CMS analysis found that specialty hospitals pay a substantial proportion of

their net revenues in taxes, so that total payments for uncompensated care plus

taxes are a higher proportion of total revenues at specialty hospitals.

• MedPAC’s analysis also found large differences in relative profitability across

severity classes within DRGs, which create financial incentives to select low severity patients. MedPAC has recommended refining the DRGs to reduce these

incentives, and we are currently evaluating their recommendations.

CONCLUSION

Mr. Chairman, thank you for this opportunity to discuss the technical findings

that will be incorporated into our report on physician-owned specialty hospitals. We

have been thoroughly studying this important topic, with extensive collection and

analysis of new data, as part of our ongoing efforts to provide a strong factual foundation for implementing policy decisions that help patients get the high quality

health care possible at the lowest cost. We will act expediently to incorporate these

findings to complete our study and prepare our final results and recommendations

for your review. As part of our careful evaluation of this multi-dimensional issue,

we are also assessing what authority we have in this area to assure the best possible alignment of Medicare’s financial incentives with our goal of improving quality

of care provided to our beneficiaries while avoiding unnecessary costs. CMS looks

forward to continuing to work with you closely on this issue. I thank the committee

for its time and would welcome any questions you may have.

RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

Question: Your testimony indicates that your findings are based on 11 specialty

hospitals in six market areas across the country. Of these 11 hospitals in your

study, how many were heart hospitals? How many were orthopedic? And how many

were surgical?

Answer: Where possible, we used the entire population of physician-owned specialty hospitals to answer the study questions. The quality study and the analysis

of severity levels use the entire population of physician-owned specialty hospitals.

The analysis of physician referral patterns, patient satisfaction, and uncompensated

care required data beyond the Medicare claims could only be done with the sample

of 11 facilities in the six market areas we visited: in those six areas, our research

team visited four cardiac specialty hospitals (25 percent of the universe in 2003) and

seven orthopedic and surgery hospitals (16 percent of the orthopedic/surgical universe in 2003).

Question: In your testimony you present findings about quality care, patient severity, transfers and physician referral patterns, but you often state you only have

enough data to draw meaningful results on heart hospitals. To what extent do your

findings apply to orthopedic and surgical hospitals?

42

Answer: Surgery and orthopedic hospitals more closely resemble ambulatory surgical centers, focusing primarily on outpatient services. In 2003, these physicianowned hospitals treated only 8,400 Medicare cases, and their aggregate average

daily inpatient census was about 5 patients. The measures of quality used in the

study, e.g., mortality, complications, and readmissions, are rare events within any

hospital population. Using all Medicare cases treated in these hospitals, there were

very few deaths, no complications for most patient safety indicators, and lower readmissions rates than in community hospitals. However, the very small number of

these events precluded a statistically meaningful comparison to community hospitals for similar cases.

The number of cases of the entire population was large enough to assess the relative severity levels in the physician-owned orthopedic/surgery hospitals. Staff from

the seven hospitals visited stated that they did not accept patients that required an

intensive care unit level of care, since their hospitals did not have this level of service. Consequently, our severity analysis corroborated their statements by finding

that the Medicare cases were less severe than comparable cases in community hospitals. The severity levels in the cardiac hospitals were much closer to community

competitor hospitals and, in some cases, exceeded the competitor hospitals in a market area.

Question: Based on national data, you indicate that cardiac hospitals differ pretty

significantly from orthopedic and surgical hospitals. Heart hospitals have more beds

and more patients. They operate emergency rooms and community outreach programs. And, physicians own much less of these facilities—34 percent versus 80 percent. With heart hospitals differing from other types of specialty hospitals, do you

believe that conclusions regarding heart hospitals can be applied equally to orthopedic and surgical hospitals?

Answer: We observed many similar patterns among the cardiac and the surgery

and orthopedic group in relation to the local community hospitals for level of uncompensated care and patient satisfaction. On other issues (e.g., quality of care, severity

of illness), however, the number of cases in the surgery and orthopedic group was

too small to derive statistically significant results.

Question: HHS found that quality in specialty hospitals was ‘‘generally at least

as good and in some cases better than the local community hospitals.’’ Does this

then mean that in some cases the quality at full service community hospitals is better? Is it then also accurate to say that the quality at community hospitals is ‘‘at

least as good and sometimes better’’ than at cardiac hospitals?

Answer: We examined quality on several dimensions. For some of these dimensions—such as readmissions—the community hospitals marginally outperformed the

specialty hospitals. On measures such as in-hospital or 30-day post-admission mortality rates, the specialty hospitals performed better. The cardiac hospitals also had

lower complication rates compared to community hospitals.

Question: Some say that a patient’s ability to assess clinical quality is challenging.

For example, I’m not sure I could really judge the skill of one surgeon over another.

I might only know, for example, that my appendix has been removed and I’m feeling

better. This especially gets tricky when these same doctors and surgeons are practicing at both community hospitals and specialty hospitals. It might be easier for

patients to judge their satisfaction with things like food and parking. Given this,

can you explain what information you used to assess quality? Can you assess the

accuracy of this information? And, are there other measures out there that you

could have employed?

Answer: In our assessment of patient satisfaction with focus groups of specialty

hospital patients, we also asked about quality, but our major findings on the relative performance of specialty and community hospitals with regard to quality were

based on our analysis of clinical measures using claims data.

Question: Your testimony didn’t make any qualifications regarding limitations of

this analysis. What are these limitations?

Answer: While national data could be used for some aspects of our analysis, the

questions related to referral patterns by physician owners, patient satisfaction, and

tax payments, as mandated by the MMA, required data that are not generally available. In order to obtain such data, we conducted site visits in a limited number of

areas, with a small number of hospitals. Although the study areas were chosen to

represent the diversity of conditions in which specialty hospitals operate, they are

not necessarily statistically representative of the entire group of specialty hospitals

nationwide.

However, it must be pointed out that there also are wide variations in operations,

performance, and impact among community hospitals across the country, even within specific market areas. The analyses in the CMS report are intended to provide

information that is broadly indicative of the range of situations we observed.

43

Question: When do you expect Congress will receive HHS’s final report and recommendations?

Answer: We will act expediently to incorporate these findings to complete our

study and prepare our final results and recommendations for your review. Additionally, as part of our careful evaluation of this multi-dimensional issue, we are assessing what authority we have in this area to assure that the financial incentives created by the Medicare program might be aligned to improve quality.

RESPONSES TO QUESTIONS FROM SENATOR BAUCUS

Question: Mr. Gustafson, as I understand it, your study looked at 11 specialty hospitals in all. Is that correct? And four of these were cardiac, and seven were a mix

of orthopedic and surgery.

I also understand the data you collected from the orthopedic and surgery hospitals

were not statistically significant.

I would just like to know, were the sites that you visited randomly selected, according to standard statistical protocols? And how did you measure quality? You

said the quality data, as I understand it, were all right. Measured against what?

Answer: The number of specialty hospitals is not large, and we chose the hospitals

for site visits to represent the diversity of experience within this small group—as

is discussed more fully below—and thus to provide the best information we could

to address the questions articulated by Congress. The case studies allowed us to

delve in some depth into the situations of the selected hospitals and to gather information that CMS does not routinely collect. For instance, CMS does not usually obtain data on ownership, physician referral, uncompensated care, or patient satisfaction.

We also examined the quality of all specialty hospitals nationwide by using claims

data. For hospitals in the sites visited, interviews with clinicians and management

and patient focus groups were used to corroborate the findings on quality that were

derived from the claims data.

CRITERIA FOR SELECTION OF SITES FOR VISITS

Site visits were made to six market areas: Dayton, OH; Fresno, CA; Rapid City,

SD; Hot Springs, AR; Oklahoma City, OK; and Tucson, AZ. Our research team visited four of the 16 cardiac specialty hospitals (25 percent of the universe) and seven

of the 43 orthopedic and surgery hospitals (13 percent of the universe). A randomized approach could not be used to choose facilities because of (1) the disproportionate number of cardiac hospital cases (80 percent of the specialty hospital cases,

but only 25 percent of the facilities), (2) the inadequate number of cases for analysis

in the orthopedic/surgery hospitals, and (3) the need to visit sites that could represent a range of circumstances. Consequently, we developed the following site selection criteria based on what we needed to learn.

For all specialty hospitals:

• Have as much geographic diversity (both urban and rural) as visits to six market areas would allow.

• Visit both mature hospitals and recent start-ups in order to understand the evolution of the industry.

• Visit hospitals that had an adequate level of cases to analyze and include in

patient focus groups.

• Not repeat visits in the three areas visited by MedPAC.

Additional factors relevant for cardiac hospitals:

• Limit the cardiac hospital visits to no more than two of the nine hospitals in

which MedCath is a majority owner, since these use similar operating protocols

and ownership arrangements.

• Visit some cardiac hospitals that had non-profit hospital owners.

With the population of these hospitals so small and so diversified, random selection would not have given us the information necessary for the report. There was

no indication that the hospitals were developed as a result of a random process, but

rather developed as a result of the conditions in each State and area. During and

after our site visits, we confirmed that each specialty hospital had its own unique

set of circumstances.

QUALITY AND CLAIMS DATA

Three measures of quality were used to assess differences between specialty hospitals and competitor hospitals:

• Mortality, both during hospitalization and within 30 days of discharge from the

hospital.

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• Complications during hospitalization. • Readmission within 30 days of discharge; and discharge disposition.

These measures were analyzed using the 2003 Medicare claims data from both

the entire population of specialty hospitals and their area competitors. The site visit

and patient interviews were used to corroborate the results of the claims analysis.

The mortality data were adjusted for severity for comparison purposes. Complications during hospitalization were assessed using the inpatient hospital indicators

developed by the Agency for Health Research and Quality (AHRQ). The AHRQ

measures, expressed as rates, that were used to compare specialty hospitals to competitor hospitals were: • Complications of anesthesia.

• Death in low-mortality diagnosis-related groups.

• Decubitus ulcer.

• Failure to rescue.

• Foreign body left during procedure.

• Iatrogenic pneumothorax.

• Selected infections due to medical care.

• Post-operative hip fracture.

• Post-operative hemorrhage or hematoma.

• Post-operative physiologic and metabolic derangements.

• Post-operative pulmonary embolism or deep venous thrombosis.

• Post-operative sepsis.

• Accidental puncture or laceration.

RESPONSES TO QUESTIONS FROM SENATOR KYL

Question: Part of the confusion around specialty hospitals centers on the lack of

a clear definition. According to the GAO and MedPAC definitions, two criteria must

be met:

(a) Primarily cardiac, orthopedic, surgical or other specialty services, and

(b) Two-thirds or more of its inpatient claims from one or two major DRGs.

It is interesting that after the moratorium was implemented, some facilities that

were considered specialty hospitals were anxious to claim that they were not specialty hospitals.

When will CMS issue a clear definition for a specialty hospital?

Answer: Section 507 of the Medicare Modernization Act defined a specialty hospital for the purposes of the moratorium. For the moratorium only, a ‘‘specialty hospital’’ is a hospital in one of the 50 States or the District of Columbia that is primarily or exclusively engaged in the care and treatment of one of the following:

• Patients with a cardiac condition;

• Patients with an orthopedic condition;

• Patients receiving a surgical procedure; or

• Patients receiving any other specialized category of services designated by the

Secretary.

The Secretary has not designated any additional specialized services that would

cause an institution to be considered a specialty hospital within the meaning of Section 507 of MMA. We note that we have not issued any definition that differs from

or expands on the statutory definition because specialty hospitals under the moratorium are not a category used for any other Medicare program purposes.

For purposes of identifying appropriate specialty hospitals for the MMA-required

study, we generally followed the MedPAC criteria, but with an additional requirement that cardiac and orthopedic hospitals perform at least 5 major procedures. To

be considered a cardiac specialty hospital, 45 percent or more of a hospital’s Medicare cases must have been in the Major Diagnostic Category (MDC) 5, Diseases and

Disorders of the Circulatory System. Orthopedic hospitals must have had 45 percent

of their cases in MDC 8, Diseases and Disorders of the Musculoskeletal System and

Connective Tissue. For surgery hospitals, 45 percent or more of their discharges

must have involved a surgical procedure.

Question: If the DRG changes are implemented before January 1, 2007 and an extension of the moratorium is passed, should the moratorium be lifted once the

changes are completed?

Answer: The MMA required MedPAC and the Secretary to study various issues

concerning physician-owned specialty hospitals and report to the Congress. The reports to Congress must include any recommendations for legislation or administrative changes. The MedPAC study addressed issues of cost differences, payment equity, and impacts on local community hospitals. The HHS study will address issues

involving referral patterns, quality, patient satisfaction, and uncompensated care

differences. We believe that Congress should consider all of these issues when evaluVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00048 Fmt 6601 Sfmt 6621 23642.000 SFINANC2 PsN: SFINANC2
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ating any potential legislative change, including the duration of any extension of the

moratorium.

MedPAC’s Report to Congress on the MMA-mandated study recommended certain

DRG refinements, statutory changes to permit certain gain-sharing arrangements,

and an extension of the moratorium until January 1, 2007. We note that CMS is

currently analyzing MedPAC’s DRG refinement recommendations. These recommendations are complex and have the potential to result in significant changes

to hospital payments. We expect to present our analysis of the MedPAC recommendations in the IPPS proposed rule that will be published this spring.

Question: If the implementation of the DRG changes extends after January 1,

2007, would it follow logically that the moratorium should be extended?

Answer: The MMA required MedPAC and the Secretary to study various issues

concerning physician-owned specialty hospitals and report to the Congress. The reports to Congress must include any recommendations for legislation or administrative changes. The MedPAC study addressed issues of cost differences, payment equity, and impacts on local community hospitals. The HHS study will address issues

involving referral patterns, quality, patient satisfaction, and uncompensated care

differences. We believe that Congress should consider all of these issues when evaluating any potential legislative change, including the duration of any extension of the

moratorium.

MedPAC’s Report to Congress on the MMA-mandated study recommended certain

DRG refinements, statutory changes to permit certain gain-sharing arrangements,

and an extension of the moratorium until January 1, 2007. We note that CMS is

currently analyzing MedPAC’s DRG refinement recommendations. These recommendations are complex and have the potential to result in significant changes

to hospital payments. We expect to present our analysis of the MedPAC recommendations in the IPPS proposed rule that will be published this spring.

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PREPARED STATEMENT OF GLENN HACKBARTH

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RESPONSE TO A QUESTION FROM SENATOR GRASSLEY

Question: Mr. Hackbarth, in your testimony and in MedPAC’s report you indicated

that: ‘‘The Commission is concerned with the issue of self-referral and its potential

for patient selection and higher use of services. However, removing the exception

that allows physician ownership of whole hospitals would be too severe a remedy

given the limitations of the available evidence, although we may wish to reconsider

it in the future.’’

Closing the loophole would still allow physician owners to self-refer to full service

hospitals treating a wide range of patients but it would not allow physician owners

to self-refer to specialty hospitals that treat only a certain type of patient. Is this

assumption correct?

Answer: Whether physicians would still be allowed to refer patients to full-service

hospitals in which they invest depends on how the whole-hospital exception would

be modified. If the exception were completely eliminated, this would subject physician ownership of any hospital, whether full-service or single specialty, to the selfreferral prohibition of the Stark law. However, the exception could instead be modified to permit physician investment only in full-service hospitals but not specialty

hospitals. Given the limitations of evidence on the quality and efficiency of specialty

hospitals, we do not at this point recommend modifying or eliminating the exception. We may wish to reconsider our position in the future as more evidence becomes

available.

RESPONSES TO QUESTIONS FROM SENATOR CRAPO

Question: In your testimony you write: ‘‘Because hospitals provide many kinds of

services, an exception was created [in the Ethics in Patient Referrals Act] that allowed physicians to refer patients to hospitals in which they invest. This is the

‘‘whole-hospital’’ exception. Physician investors have a greater opportunity to influence profits at single-specialty hospitals—which generally provide a more limited

range of services—than at full-service hospitals.’’

Do physician-investors also have a greater opportunity to influence profits at

ASCs in which they own stakes?

Answer: The OIG has concluded that physicians’ investment in an ASC where

they perform services involves minimal risk of overuse. This judgment is based on

the premise that an ASC is, for practical purposes, an extension of a physician’s office practice (OIG 1998). Because physicians who invest in ASCs perform procedures

there themselves, there is less risk of overuse than when they refer patients for

services performed by others, such as laboratory tests. Moreover, physicians already

have an incentive to perform surgery to generate a professional fee, so the revenue

they earn from ASC facility fees might not substantially increase their incentive to

perform surgery.

In 1999, OIG established ‘‘safe harbors’’ that protect physician investments in

ASCs from prosecution under the anti-kickback statute (OIG 1999). The ASC safe

harbors are limited to physicians who routinely use the facilities and to facilities

that do not provide ancillary services (such as lab tests) other than those included

in Medicare’s bundled ASC facility fee. These two conditions limit the incentive to

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overuse services and to profit from services physicians do not personally perform.

By contrast, the whole-hospital exception in the Stark law makes no such distinction between services personally performed by the referring physician and those

that are not. The exception applies to all services billed by the hospital. For example, it permits physicians who invest in a hospital to share in the profits from ancillary services they do not perform (such as radiology and laboratory) as well as profits related to procedures they perform.

Question: Is MedPAC aware of any studies that demonstrate any evidence of kickbacks or referral abuse by physicians who own interests in ASCs? If so, please provide such.

Answer: We are not aware of any studies that examine whether physicians who

invest in ASCs engage in kickbacks or referral abuse.

References

Government Accountability Office. 2003. Specialty hospitals: Geographic location,

services provided, and financial performance. GAO–04–167. Washington, DC: GAO.

October 22.

Office of Inspector General, Department of Health and Human Services. 1999.

Medicare and State health programs: Fraud and abuse; clarification of the initial

OIG safe harbor provisions and establishment of additional safe harbor provisions

under the anti-kickback statute. Final rule. Federal Register 64, no. 223 (November

19): 63517–63557.

Office of Inspector General, Department of Health and Human Services. 1998.

OIG advisory opinion no. 98–12. Washington, DC: OIG. September 16.

RESPONSES TO QUESTIONS FROM SENATOR KYL

Question: From page 2 of your testimony, you are quoted as stating the following:

‘‘Improving the accuracy of the payment system would help make competition more

equitable between community hospitals and physician-owned specialty hospitals,

whose physician owners can influence which patients go to which hospital. It would

also make payment more equitable among community hospitals that currently are

advantaged or disadvantaged by their mix of DRGs or patients.’’

Does this mean that after revising the DRG payment as you have recommended,

that you believe specialty hospitals should be able to then compete with general hospitals and, in fact, should be left alone?

Answer: If our recommended changes to the inpatient prospective payment system

are implemented, specialty hospitals’ advantage based on the selection of certain

types of Medicare cases and patients should be substantially reduced. In this case,

specialty hospitals would have to compete with community hospitals on a more level

playing field. Nevertheless, the Commission has some remaining concerns about

whether there is an inherent conflict of interest in physician ownership. In addition,

our limited, early evidence does not show that specialty hospitals have lower costs

than community hospitals. Although we considered recommending that the Congress repeal the whole-hospital exception in the Stark law, we decided against doing

so because specialty hospitals may be an important competitive force that promotes

innovation. We do not want to preclude their development before gaining a fuller

understanding of their quality and efficiency. As more information on service use

and community impact becomes available, we may reconsider the advisability of repealing or modifying the whole-hospital exception.

Question: If so, why does continuing the moratorium on their development make

sense? While you are reforming that payment system for all hospitals, why should

a general hospital be allowed to expand or to open, especially in States without a

certificate of need process in place? Why should other hospitals—community hospitals, satellite facilities associated with academic medical centers, for-profit whole

hospitals—be allowed to develop while the DRGs are revised and specialty hospitals

should not?

Answer: Physician-owned specialty hospitals are advantaged under the current inpatient payment system because they tend to treat patients in profitable DRGs and

low-cost patients within DRGs. Some community hospitals also are advantaged

under the current payment system while others are disadvantaged. This factor—

coupled with our finding that physician-owned specialty hospitals do not have lower

costs than other hospitals and our concern that there may be an inherent conflict

of interest in physician ownership of hospitals—led the Commission to recommend

extending the moratorium on physician-owned hospitals rather than inhibiting the

development of all hospitals. This extension would provide more time to gather information on specialty hospitals’ efficiency and quality and their effects on community hospitals and overall use of services. Extending the moratorium would also give

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the Secretary and the Congress time to consider our recommended changes to the

inpatient prospective payment system.

Question: In the January 12, 2005 public MedPAC meeting, you made the following statement: ‘‘I think all of us would agree that right now the burden of providing care to Medicaid recipients or uncompensated care is not evenly distributed.

That’s an issue that long predates specialty hospitals, and it’s an issue that has very

important implications for the system. And to say that stopping specialty hospitals

is going to materially alter that problem, fix that problem, I don’t think that’s the

case.’’

We can agree that the majority of people who require cardiac surgical procedures

by their sheer demographics are not usually Medicaid patients. Medicaid patients

tend to be women and children. I hear from hospitals, aside from this issue, about

problems they are having financially, whether there is a specialty hospital in the

vicinity or not. How do you believe specialty hospitals can exist in the market,

whether it is the market we currently have or one we create? Do you believe specialty hospitals should be able to exist at all?

Answer: Although GAO found that few cardiac patients in general hospitals were

Medicaid beneficiaries (6 percent of the total), this was twice the proportion in specialty hospitals (3 percent of the total) (GAO 2003). Should specialty hospitals be

able to exist? Our report found that physician-owned specialty hospitals have an advantage because they tend to treat patients in profitable DRGs and low-cost patients

within DRGs. Therefore, the accuracy of the inpatient prospective payment system

should be improved to help make competition more equitable between physicianowned specialty hospitals and community hospitals. Beyond that, the Commission

is concerned that there may be an inherent conflict of interest in physician ownership. On the other hand, physician-owned specialty hospitals may be an important

competitive force that promotes innovation and may be an appropriate response to

physician frustration with community hospitals’ lack of responsiveness and physicians’ desire for control. We therefore do not want to preclude their development before gaining a fuller understanding of their quality and efficiency. As more information becomes available, we may reconsider the advisability of repealing or modifying

the whole-hospital exception.

Question: Is it just a matter of physician ownership, or would corporate ownership

be permissible?

Answer: We are primarily concerned about physician ownership of specialty hospitals because of the potential for financial incentives to influence clinical decisions.

However, the problems with the current inpatient payment system affect both physician-owned and non-physician-owned hospitals. Thus, we recommend that the accuracy of the payment system be improved to reduce financial incentives to select

certain cases.

PREPARED STATEMENT OF DR. ALAN H. PIERROTT

Mr. Chairman and members of the committee, my name is Alan Pierrot. I am an

orthopedic surgeon from Fresno, CA and a founding member of the Fresno Surgery

Center, a multispecialty physician-owned surgical hospital. I am here today on behalf of the American Surgical Hospital Association (ASHA), the national trade organization representing 75 physician-owned hospitals that specialize in surgical care,

the vast majority of such hospitals in the United States. I served as the first president of ASHA and continue to be active on the board of directors. I appreciate the

chance to represent our patients, our staff, our doctors and our facilities. ASHA is

very pleased to have the opportunity to testify at today’s hearing, the first Congressional hearing on the subject of physician-owned specialized hospitals.

THE VALUE OF SPECIALTY HOSPITALS

The Fresno Surgery Center opened as an ambulatory surgery center in 1984,

largely in response to the problem surgeons were having with operating room schedules and the efficiency at the local hospitals. Four years later we added a 20-bed

inpatient care unit under a pilot project authorized by the California legislature. In

1993 we converted that unit to a licensed hospital. We promised the legislature that

we could improve surgical care and patient satisfaction, and we did. Physicians in

other communities have now adopted this structure as a response to their frustration with general hospital operations. Our hospital is licensed by the State of California as an acute care facility, just like all the general hospitals in the State. This

is the case in other States as well.

The Fresno Surgery Center and the other members of ASHA provide cost effective, high quality surgical care in a very efficient manner. Specialty hospitals offer

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a choice of surgical site both for patients and physicians. Our patients are very satisfied with the care they receive, and far prefer the model we offer to that provided

in the typical general hospital. We get high marks from our patients, our staff and

our physicians, whether or not they are investors. Surveys of patients indicate there

are five conditions they would like in a hospital experience: a private room, good

food, a welcome environment for visitors, a nurse that responds promptly, and control over sound, heat and light. The typical American hospital provides not one of

those conditions to its patients, its customers. There is probably no industry less responsive to customers than the hospital industry.

I particularly want to emphasize the excellent patient outcomes we achieve. In

Fresno our nurse-to-patient ratio is about 1:3.5, and it is well established that the

nurse-patient ratio is a prime determinant of quality of care and medical outcome.

In California hospitals generally, the ratio is about 1:8, and the State had mandated

a standard of one nurse for every six patients. That standard is being challenged

by California general hospitals. On all measures of quality, surgical hospitals excel,

including lower infection rates, few transfers to other hospitals, fewer medical errors

and very low readmission rates.

ASHA believes that two factors are primarily responsible for this excellent record

that is replicated across its membership. The first is physician ownership and control of the hospital’s values and patient care standards. The second is the very fact

of specialization that allows physicians and staff to develop a high level of skill in

all facets of surgical care.

Physician investment in these facilities, whether alone or as part of a joint venture, is a key ingredient to our success. It means that the people whose names are

on the door are responsible for setting the quality standards, the operational requirements and directing all facets of the hospital’s activities. It is this group of investors who are fundamentally responsible for the existence of the hospital and the

maintenance of its standards. They create the environment that is so attractive to

patients and other physicians. One of my greatest points of pride about the specialty

hospital concept is the number of surgeons who bring patients to the facility even

though they have no investment interest. They know that their patients will be

treated with skill and respect from the moment they enter until discharge.

Because these hospitals provide a focused set of surgical services, the staff is able

to develop a high degree of skill in these specialized areas. This skill makes possible

the efficiency of operation and the high quality of patient outcome. We succeed because we are ‘‘focused factories’’ designed to provide elective surgical care to otherwise healthy patients. Cardiac hospitals may care for a different population, but

their adoption of heart-focused, best-hospital practices under the guidance of their

physician investors also allows them to provide an excellent level of care to patients

with serious medical conditions.

I know that CMS will soon issue its report, which will include an analysis on

quality. I am confident that our hospitals will do well. I would also encourage the

committee to look at HealthGrades.com, an independent service that evaluates hospital quality for specific procedures. Using Medicare data and other resources, this

service calculates an expected complication rate for each hospital. Actual performance is then measured and compared to the projected rates. I am pleased to note

that on a risk-adjusted basis, Fresno Surgery Center had the highest scores in three

of the four categories rated and an average that was superior to any of the general

hospitals in its market. This has also been the case for other surgical hospitals.

The presence of a surgical hospital in a community is positive for patients and

health plans. Competition forces general hospitals to improve their own services to

patients and can lead to a reduction in overall costs, as health plans are able to

negotiate for lower rates. In non-competitive environments, there is little incentive

to improve services and cost-effectiveness, whether to please patients or payers.

MedPAC’S REVIEW OF SPECIALTY HOSPITALS DOES NOT SUPPORT

A CONTINUATION OF THE MORATORIUM

For the past 4 years there has been a great deal of rhetoric about specialty hospitals, but little solid information. We now have reports from the Government Accountability Office (GAO) and the Medicare Payment Advisory Commission

(MedPAC) that shed more light on the issues in the debate. The forthcoming report

of the Centers for Medicare and Medicaid Services (CMS) will provide important information on quality of care, patient satisfaction and physician referral patterns. In

addition, reports are now available from non-governmental sources. There have been

numerous articles in the press on this issue, as well as in scholarly journals, like

the New England Journal of Medicine.

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MedPAC has looked carefully at the fundamental issue raised by general hospitals at the beginning of this debate: are specialty hospitals harming general hospitals to the detriment of patients? The current moratorium was imposed because

of concern that such harm was occurring and the desire of Congress to obtain information that would let it answer this basic question.

MedPAC’s bottom line is that general hospitals have not been harmed. They have

effectively responded to the competition posed by specialty hospitals and remained

as profitable as their peers in communities where no specialty hospitals exist. This

is certainly true in Fresno, where the general hospitals have thrived since Fresno

Surgery Center opened. I know this to be the case in other cities where specialty

hospitals operate. No proof of harm to general hospitals, risk to patients or abuse

of the Medicare program because of excessive or unnecessary surgery has been

found. Therefore, there is no justification to continue the moratorium beyond the

legislated expiration date.

I want to make an important observation about the current moratorium. I think

there is a widespread view that the 18-month moratorium is benign, allowing existing specialty hospitals to proceed unhindered, while only limiting new development.

This leads to the false conclusion that an extension of the moratorium as recommended by MedPAC would also not harm existing facilities. In fact the moratorium is not benign, but has hurt many well-established specialty hospitals. That is

because it limits the expansion of facilities, the introduction of new services and the

addition of new investors in response to changing needs and circumstances in our

communities. Most of our members are located in areas experiencing rapid population growth, yet they have not been able to expand the number of beds or add

new specialties to meet that increased patient demand.

Our ability to serve our patients and our physicians has been eroded. Another

moratorium would only exacerbate this situation. There is no justification for extending the moratorium on a model of care that does not harm general hospitals

and that provides superior care and patient satisfaction.

ASHA also believes that none of MedPAC’s findings would justify any change to

the current law governing physician ownership of hospitals. We are pleased that

MedPAC decided against including any recommendations on the whole-hospital exemption to the Stark law.

MedPAC’s analysis of specialty hospitals did show that Medicare’s inpatient hospital payment system needs substantial revision. ASHA agrees with their recommendations and urges Congress and CMS to act on them this year. We also urge

adoption of MedPAC’s recommendations on gain-sharing to encourage hospitals and

physicians to work in concert to improve the quality and efficiency of health care.

Finally, ASHA encourages the committee to act on MedPAC’s recent proposals on

pay for performance measures in the hospital setting.

ASHA also supports full disclosure of ownership, consistent with the ethical

standards of the American Medical Association. I, for one, am proud of my hospital

and my involvement in it. I have had no hesitation in telling my patients about my

ownership. I also have never hesitated to perform their surgery in another facility

if they requested that I do so.

THE WHOLE-HOSPITAL OWNERSHIP EXEMPTION IN STARK II

I noted with interest the recent petition of the Federation of American Hospitals

calling on the Department of Health and Human Services to restrict the whole-hospital exemption in the Stark law to hospitals that ‘‘provide a full range of services

customarily offered by general community-based hospitals.’’ ASHA believes that no

evidence exists that should cause Congress or the department to modify the current

hospital ownership exemption. Physician ownership of hospitals and other facilities

is not new. Physicians who owned the facilities started many of today’s finest medical clinics, like the Mayo Clinic.

Certainly no evidence supporting limits on physician ownership of hospitals was

found in the original studies that led to the establishment of the Stark laws. In testimony before the House Ways and Means Committee in 1991, the individuals who

conducted the original Florida studies on physician ownership and referral arrangements concluded that, ‘‘Joint-venture ownership arrangements have no apparent

negative effects on hospital and nursing home services.’’

The American Hospital Association also encouraged Congress to incorporate flexibility in the law governing referral arrangements. In testimony before the Ways and

Means Committee in 1989, AHA noted, ‘‘Oftentimes, joint ventures which are the

subject of H.R. 939 are well intended to provide the highest quality, most accessible

and most reasonably priced medical care to the community.’’ AHA urged Congress

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to take a ‘‘more flexible or less proscriptive approach, allowing ventures consisting

of referring physicians, if such ventures are for a legitimate business reason. . . .’’

In 1995, testifying before the same committee, AHA stated that ‘‘First there needs

to be careful examination of the effects of the self-referral law on the development

of new, more efficient delivery systems, and elements of the law that prevent new

systems from evolving must be stricken or amended.’’ AHA went on to call for an

expansion of the physician hospital ownership provisions in the Stark II law. It is

important to note that the language that allows physicians to have ownership of

hospitals is not a ‘‘loophole’’ in the Stark law, but a carefully reasoned provision designed to maintain flexibility in the evolution of health care delivery systems.

Regarding the FAH petition, if you examine the variation in services provided by

general hospitals across the country, you quickly see that there are many differences among those facilities that we might think are ‘‘general community-based

hospitals.’’ CMS could devote considerable energy to solving this puzzle. Does the

Federation include a heart program among the obligatory ‘‘full range of services?’’

Most hospitals don’t have one. Is Ob-gyn a requirement? There is great variation

among general hospitals in how, or even whether, they provide those services.

Maybe it should be based on revenue sources, but there’s a problem with that also.

According to a number of hospital consultants, more than 60 percent of general hospital revenue comes from inpatient surgical services. Does that mean that most

‘‘general community-based hospitals’’ are, in fact, surgical hospitals?

As previously noted, MedPAC debated whether or not to include a recommendation on the whole-hospital exemption but decided not to incorporate one in their report on specialty hospitals. Among the concerns expressed during discussion of this

idea was the fact that no one could predict where elimination or modification of the

exception might lead. For example, physicians have purchased rural hospitals in an

effort to keep them open. Those acts of community concern could be outlawed if the

exemption were to be amended or eliminated. The recent purchase of a Tenet hospital in California by the physicians who had a long-standing relationship with the

hospital might not be allowed. It is obvious that there is no clear line that easily

distinguishes physician ownership of one hospital versus another. If HHS accepts

the recommendations of the FAH, it will only further muddy already complex laws

and regulations, making obedience to the law more difficult and enforcement nearly

impossible. Congressional action to limit or eliminate the current provisions governing physician ownership of hospitals would have a similar effect.

SPECIALIZED HOSPITALS IN THE UNITED STATES

Specialized hospitals are not a new phenomenon in medicine and have been in

existence in this country for many years. There are many hospitals, both not-forprofit and for-profit, that provide a limited array of medical services. For example,

psychiatric hospitals are very focused in the kinds of patients they treat. Often they

will not admit a psychiatric patient with significant physical comorbidities because

they do not have the medical services that patient requires. Such individuals are

admitted to general hospitals with psychiatric units. However, I have yet to hear

the general hospitals accuse their psychiatric colleagues of ‘‘cherry picking.’’ Children’s hospitals and women’s hospitals have a long history in this country, and their

services are certainly focused on those appropriate to the populations they serve.

Eye and ear hospitals are just one more example of the kinds of specialization that

have developed in hospitals. Again, I am not aware that general hospitals have accused eye and ear hospitals of ‘‘skimming the cream.’’ Cancer hospitals are also facilities with a focused mission. Clearly specialization is not the issue driving the opponents of ASHA’s members. Something else must be motivating their enmity.

Perhaps that enmity stems from the fact that today’s physician-owned specialty

hospitals are not seeking out niche services of no interest to the general hospitals,

but are competing directly with them across a number of valued service lines. In

any other industry, competition and the benefits it can bring to consumers are encouraged. Hospital services should be no different, so that society can reap the benefits of innovation and cost-effectiveness that accompany competition. Yet our opponents ask Congress to protect them from that competition. ASHA urges you to resist

their call for protection, since MedPAC found that general hospitals have responded

effectively to the competition offered by ASHA members, even going so far as to

make an effort to improve their own services to patients, physicians and hospital

staff. I doubt if those enhancements would have occurred in the absence of effective

competition.

A careful examination of general hospitals in this country would show that they

vary widely in the types of services they offer, consistent with their facilities, staffing and the kinds of physicians present in the community. For example, few hosVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00064 Fmt 6601 Sfmt 6621 23642.000 SFINANC2 PsN: SFINANC2
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pitals have burn units and most do not have heart programs. Level 1 trauma centers are not common. The emergency services offered by most general hospitals are

not of that caliber. Rural hospitals routinely send complex medical and surgical

cases to their larger colleagues. The less difficult cases stay behind. Yet no one is

accusing rural hospitals or critical access facilities of ‘‘unfair competition’’ or ‘‘skimming the cream’’ or ‘‘cherry picking.’’

The reality is that every hospital tries to do those things for which it is best suited and whenever possible sends other cases to a better-equipped facility. Such behavior is appropriate and in the best interests of patients. I am certain that the

members of this committee would be outraged if hospitals failed to ensure that patients were treated in the most suitable facility, whatever or wherever that might

be.

As I noted, ASHA is the trade organization for specialty hospitals. We have 75

member facilities, and all have some degree of physician ownership. All specialize

in surgical care. While our cardiovascular hospital members focus just on heart care,

the typical ASHA member provides services in six surgical specialties. Urology, general surgery, orthopedics, gynecology, neurosurgery and ENT are commonly found

in these facilities.

Our members are located in 18 different States. GAO found that 28 States had

at least one specialty hospital, but approximately two-thirds were located in seven

States. In MedPAC’s sample, almost 60 percent were concentrated in four States.

This concentration is primarily due to the presence of certificate of need (CON) laws

governing hospital construction. Most specialty hospitals are in States that do not

have hospital CON requirements. Since CON laws tend to protect existing facilities

from new entrants into the market, it should come as no surprise that our members

are usually found in States that do not have such barriers to market entry. It is

worth noting that both the Department of Justice and the Federal Trade Commission have called for an end to CON because of its anticompetitive effects.

WHY PHYSICIANS ESTABLISH SPECIALTY HOSPITALS

It is important that the committee understand why physicians establish specialty

hospitals. Those reasons will vary in each community, but the interest in a specialty

hospital usually begins after physicians have failed to persuade the general hospitals at which they practice to make changes that will improve physician efficiency

and patient care. For example, the Stanislaus Surgical Hospital in Modesto was established first as an ambulatory surgery center and later as a hospital by surgeons

who could not get reasonable access to the operating rooms at the two other hospitals in town. These hospitals were profiting from their cardiovascular and neurosurgery services. Those cases had first call on the OR. Orthopedics, urology, ENT

and other surgical disciplines took what was left, and even then were often bumped

by trauma and other emergency cases. The result was that elective cases were delayed until 10 p.m. or later, to the great unhappiness of patients and surgeons alike.

While no one disputes the need for hospitals to deal quickly and effectively with

emergencies, many hospitals have figured out ways to keep the rest of the surgical

schedule moving along. Stanislaus arose out of this unresolved conflict.

Fresno is a similar case. My colleagues and I believed that we could provide a

better model for elective surgical care. We could not persuade the hospitals to go

along with our ideas, so we built our own facility and have never regretted it. We

continue to care for patients at the other hospitals in Fresno, as do our colleagues

in Modesto. In fact, we require our physicians to maintain privileges at one of the

other general hospitals in town. That means, of course, that we are all subject to

the on-call and other requirements of those hospitals. In California, like many

States, insurance contracts are the dominant reason patients go to one hospital or

another. Therefore, we all must have privileges at multiple facilities if we are to

meet the medical and financial needs of our patients. There may be rare examples

of physicians moving their entire case load to a surgical hospital, but those are truly

the exceptions to the general rule.

To the best of my knowledge, only five members of this committee represent

States with functioning physician-owned specialty hospitals—Utah, Arizona, Idaho,

Montana and Arkansas. Mr. Chairman, your home State of Iowa is not on that list,

although Mercy Medical Center in Sioux City does have a joint venture with Iowa

and South Dakota physicians that is located in Dakota Dunes, SD. A number of

Iowa residents receive their surgical care at that facility. The specialty hospital

would probably have been built in Iowa were it not for the State’s regulations governing hospital construction. The remaining States represented by the members of

this committee have laws and regulatory systems that effectively prevent the construction of physician-owned specialty hospitals.

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To me this is one of the most interesting facets of the national debate over physician-owned specialty hospitals. States historically have determined what kinds of facilities can be licensed as hospitals and have established various regulatory standards in this regard. For example, not all States require hospitals to have emergency

departments as a condition of licensure. That is the case with my home State of

California. The Federal Government has respected this State role and has focused

its attention on quality standards for facilities participating in Federal health benefit programs, for example Medicare’s conditions of participation. Yet now we are

debating whether or not the Federal Government should usurp that State role and

decide what does and does not constitute a hospital for purposes of Federal health

programs. ASHA would argue that absent evidence of Medicare or Medicaid fraud

or grave risk to the public health, there is no need for the Federal Government to

infringe on these State determinations.

Using State law as an indicator of the will of those residents, the committee could

easily conclude that an extension of the moratorium or the addition of any other

restrictions on specialty hospitals would be unnecessary in CON States. In those

States that have abandoned CON, such restraints on competition and innovation

would probably be unwelcome.

While physician ownership characterizes ASHA members, the nature of those arrangements varies widely. GAO found that about one-third of their sample was

independently owned by physicians, one-third had corporate partners like MedCath

or National Surgical Hospitals, and one-third were joint ventures between physicians and local general hospitals. ASHA’s own survey of its members found similar

characteristics.

Clearly not all general hospitals are hostile to specialty hospitals or joint ventures

with their physicians. For example, Baylor hospital in Dallas has a variety of joint

ventures with physicians, including specialized hospitals and ambulatory surgery

centers. Integris Health System in Oklahoma City has a joint venture with an

ASHA member hospital specializing in orthopedic services. HCA partners with physicians in numerous ambulatory surgery centers and an orthopedic hospital in

Texas. Avera McKennan in Sioux Falls, SD, has a joint venture with MedCath and

the cardiovascular physicians who practice there. Incidentally, Avera McKennan is

across the street from the Sioux Falls Surgery Center, a physician-owned surgical

hospital. Both facilities have grown and prospered, and the physicians practice at

both hospitals. The Fresno Heart Hospital is a joint venture between our largest

not-for-profit hospital and local physicians.

RESPONSES TO CRITICS OF PHYSICIAN-OWNED SPECIALTY HOSPITALS

I would like to turn to the main criticisms of physician-owned specialty hospitals

and address them. Fundamentally these are allegations that specialty hospitals hurt

general hospitals financially and engage in unfair competition because they have

physician owners. There are a number of arguments used to justify these criticisms.

These are (1) ASHA members have a favorable payor mix and refuse to admit or

otherwise limit the number of Medicare, Medicaid and charity cases; (2) they focus

on the highest paying inpatient DRGs; (3) they only take the easier cases in those

DRGs; (4) physician ownership is a conflict of interest and gives specialty hospitals

an unfair competitive advantage in the market; and (5) physician ownership leads

to increased, and unnecessary utilization of surgical services.

Let me start with the first fundamental accusation made by our opponents: specialty hospitals have hurt general hospitals. The facts do not support that allegation. No general hospital has closed because of competition from a specialty hospital.

There is no evidence that general hospitals have eliminated a critical general service, like the emergency department, because of competition from a surgical hospital.

MedPAC concluded based on its review of 2002 data that the financial impact on

general hospitals in the markets where physician-owned specialty hospitals are located has been limited and those hospitals have managed to demonstrate financial

performance comparable to other hospitals. Fresno has a 16-year history with specialty hospitals, and our experience confirms the MedPAC conclusions. All Fresno

hospitals have expanded since the debut of Fresno Surgery Center.

Although MedPAC tries to caveat this conclusion by noting the ‘‘small number’’

of specialty hospitals in its sample, the reality is that they looked at 48 hospitals,

more than 50 percent of the entire complement of physician-owned specialized facilities. By any statistical measure that is a more than adequate sample upon which

to base sound conclusions.

I know for a fact that, in Fresno, the specialty hospital model has had no negative

financial impact on local hospitals. The same is true in nearby Modesto, which also

has a specialty hospital. The other hospitals are either expanding or have plans to

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expand. Kaiser is building a new hospital in Modesto. In fact, hospital construction

nationwide totals in the billions of dollars, hardly a sign of an industry in financial

distress. General hospitals obviously have access to capital and are sufficiently

sound financially that lenders continue to finance their projects.

GAO found that ‘‘financially, specialty hospitals tended to perform about as well

as general hospitals did on their Medicare inpatient business in fiscal year 2001.’’

According to GAO, specialty hospital Medicare inpatient margins averaged 9.4 percent, while general hospitals averaged 8.9 percent. This is not a significant difference in performance. The highest margins were reserved for the for-profit general

hospitals, such as those operated by Tenet and HCA.

According to the Health Economics Consulting Group (HECG), ‘‘Based on a longitudinal study of general hospital profit margins in markets with and without specialty hospitals, we find that profit margins of general hospitals have not been affected by the entry of specialty hospitals. Consistent with economic theory, the models consistently showed that the most important predictor of general hospital profitability was the extent of competition from other general hospitals in the same market area. . . . Contrary to the conjecture that entry by specialty hospitals erodes the

overall operating profits of general hospitals, general hospitals residing in markets

with at least one specialty hospital have higher profit margins than those that do

not compete with specialty hospitals.’’

Let’s look at the unfair competition argument next. Our accusers say that specialty hospitals engage in unfair competition because they have physician owners.

That ignores the reality identified by GAO that ‘‘approximately 73 percent of physicians with admitting privileges to specialty hospitals were not investors in their hospitals.’’ Clearly these physicians find something very attractive about the specialty

hospital model, even without an investment interest. They have no motivation to engage in ‘‘unfair competition.’’ Perhaps they are drawn to the high quality of hospital

care, as evidenced by a nurse-to-patient ratio of one nurse for every 3.5 patients and

an almost nonexistent infection rate. Possibly the ability to keep to a tight surgical

schedule attracts them. Most surgeons see patients in their offices once they finish

their surgical schedule. If that schedule is disrupted, so are the lives of the patients

waiting not so patiently for their surgeon to meet with them.

The percent of ownership is another important factor. According to GAO, ‘‘On average, individual physicians owned relatively small shares of their hospitals.’’ At

half the specialty hospitals with physician ownership, the average individual share

was less than 2 percent; at the other half, it was greater than 2 percent.’’ MedPAC

reported the range of ownership to be from 1 to 5 percent. While the return on investment can vary among physician-owned facilities, the modest ownership shares

and the large number of physicians who are using the facilities, but who have no

investment, suggest that financial gain is a secondary consideration for most physicians.

One cannot look only at a single side of a competitive market. Congress needs to

consider the tools that general hospitals have to compete against specialty hospitals.

According to the December 2004 report on specialty hospitals of the American Medical Association’s Board of Trustees, these include (1) revoking or limiting medical

staff privileges to any physician who invests in a competitive facility; (2) hospitalowned managed care plans denying patients admission to competing specialty hospitals; (3) exclusive contracting with health plans to exclude specialty hospitals;

(4) refusing to sign transfer agreements with specialty hospitals; (5) requiring primary care physicians employed by the hospital to refer patients to their facilities

or to specialists closely affiliated with the hospital; (6) requiring subspecialists to

utilize the hospital for all of their medical group’s referrals; (7) limiting access to

operating rooms for those physicians who invest in competing facilities; and (8) offering physicians guaranteed salaries to direct or manage clinical services and departments in the general hospital.

In addition, not-for-profit facilities have significant advantages because of their

special tax status. Society has given not-for-profit hospitals special tax benefits in

part to compensate them for the essential community services they offer. If they fail

to hold up their end of the bargain, they should lose this special treatment. An analysis by Harvard professor Nancy Kane suggests that as many as 75 percent of notfor-profit hospitals receive more in tax relief than they provide in charity care.

Much has been made of the unfair burdens that weigh down general hospitals

that are not shared by specialty hospitals. Often cited is the fact that specialty hospitals are less likely to have emergency departments. The burden of EMTALA is frequently raised. General hospitals often talk about the need to support burn units

or other costly services and how competition from specialty hospitals affects their

ability to do that.

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State law determines whether or not a hospital is required to have an emergency

department. Surgical hospitals that are in States requiring emergency facilities

have them, and they are thus subject to EMTALA. If they are not required, surgical

hospitals that treat only elective cases are not likely to have an ER, since it is an

unnecessary expense and not consistent with the model of care provided. Heart hospitals, on the other hand, almost always have emergency departments because of

the nature of the diseases they treat.

To the extent that such disparities are widespread, the payment changes recommended by MedPAC would relieve them by moving Medicare dollars from highpay to low-pay cases, evening out the differences. However, Congress needs to remember that most general hospitals do not have burn units, Level 1 trauma centers

or even heart programs. In fact, most hospitals must transfer burn patients or cardiac cases to another facility with the capacity to care for those individuals. No one

challenges that practice as ‘‘cherry picking.’’ It is widely regarded as appropriate

medical practice because the facility is not designed to care for that particular individual or condition.

The situation at most surgical hospitals is no different. They are designed to provide elective surgery to otherwise healthy patients. Patients needing such surgery

who have multiple comorbidities would not be good candidates for a surgical hospital. Good medical judgment requires that the patient be admitted into the appropriate facility. In 1987–1988 I served on the California committee that developed

the regulations for recovery care centers, a precursor to the specialty hospital. The

primary charge of the committee was to develop standards that would assure patient safety by preventing the admission of higher-acuity patients to those specialized facilities. We fulfilled our mandate and developed rules to prevent high acuity

patients from being inappropriately admitted to recovery care centers. Yet today

those same actions would be characterized as ‘‘skimming the cream.’’

Heart hospitals are different in that many of their cases will be emergent, so they

are designed to accommodate them. Emergency departments and ICUs or CCUs are

commonly part of these facilities. They are likely to offer a broader array of supporting medical services, consistent with the medical needs of their cardiovascular

patients.

Payor mix has been another contested area, with accusations lodged that specialty

hospitals don’t take Medicare or Medicaid patients. This simply is not true. According to the HECG, the average specialty hospital earns 32.4 percent of its revenue

from Medicare, 3.7 percent from Medicaid, 46.4 percent from commercial payors,

18.1 percent from other sources, and provides charity care equal to 2.1 percent of

total revenue. Cardiac hospitals have higher Medicare rates, while hospitals specializing in other kinds of surgery have lower levels of Medicare. In addition the average specialty hospital paid nearly $2 million in Federal, State and local taxes.

According to MedPAC, there was wide variation in Medicaid admissions among

specialty hospitals, although on average the rate of Medicaid was lower in such facilities when compared to general hospitals. Several factors may account for the difference. First, hospital location is a major determinant of the level of Medicaid and

charity care. Second, because surgical hospitals tend to focus on elective surgeries

and have fewer emergency admissions, they may not see the same level of Medicaid

traffic as a general hospital with a busy emergency department, which often serves

as the source of primary care for the uninsured or those on Medicaid. Third, many

States have moved to managed care in Medicaid and have limited Medicaid patients’

access to certain facilities. If a hospital is not on the approved list, it will not see

very many Medicaid patients, and those that do show up will have to be transferred

to another hospital that is on the State’s list.

The disparities in the distribution of Medicaid and uncompensated care were recognized at MedPAC when Chairman Hackbarth said on January 12 that ‘‘I think

all of us would agree that right now the burden of providing care to Medicaid recipients or uncompensated care is not evenly distributed. That’s an issue that long predates specialty hospitals and it’s an issue that has very important implications for

the system. And to say that stopping specialty hospitals is going to materially alter

that problem, fix that problem, I don’t think that’s the case.’’

Specialty hospitals may indeed have a different payor mix than many general hospitals, but that does not mean that the general hospital is being harmed. Hospitals

with higher levels of Medicare and Medicaid are eligible for DSH payments in compensation. If their Medicare case load is more complex, another point of contention,

then the outlier payments can offset the higher costs. In California, Medicare is one

of the best payers for inpatient surgery. No hospital, whether specialty or general,

limits Medicare admissions in California.

Specialty hospitals have been challenged on the basis that they select only the

highest paying DRGs. While MedPAC has demonstrated that some of the DRGs are

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more profitable than others, many of the cases treated in specialty hospitals are not

drawn from the ‘‘rich’’ DRG pool. In fact, many surgical DRGs are no more or less

profitable than other services. To the extent that this is an issue, however, the payment recommendations of MedPAC would correct any disparities between rich and

poor DRGs.

Within DRGs, the case is made that surgical hospitals select the easiest cases,

thus maximizing the profit that can be obtained in any DRG. There are some differences in patient acuity, but they are slight, and would be addressed by MedPAC’s

payment recommendations.

When GAO looked at this issue, its analysis revealed little real difference in acuity of admissions. For example, among admissions to surgical hospitals, 2 percent

of the cases were in the highest acuity groups, while general hospitals had 4 percent

of their admissions for the same surgery fall into the most severe classification. In

other words, 98 percent of admissions to surgical hospitals were healthy and 96 percent of admissions for the same services to general hospitals were in equally good

health.

In hospitals that specialized in orthopedic care, 95 percent of admissions were in

the lesser acuity categories, while 92 percent of comparable admissions to general

hospitals had the same severity classification. In heart hospitals GAO found only

a 5-percent difference in acuity between specialized facilities and general hospitals.

These are not large differences. The only conclusion one can draw is that patients

having elective procedures are generally healthy, no matter what kind of hospital

they are in. If there are differences in the profitability of specialty hospitals versus

general hospitals, it must be for reasons other than patient selection.

Let me now turn to the allegation that physician ownership of surgical hospitals

has generated additional surgical volume, some of it of dubious medical necessity.

The facts do not support this accusation.

MedPAC has determined that specialty hospitals do not add to the volume of surgery. The commission could not find evidence that the increase in service volume

experienced in communities with specialty hospitals was higher than that found in

areas that had no specialty hospitals.

I would like to conclude by examining the allegations that physician ownership

of hospitals is a conflict of interest and gives specialty hospitals a competitive edge

over the general hospitals in their communities. I would argue that there is no conflict of interest when a physician owns the facility in which he or she provides services to patients. That issue was thoroughly debated when Congress considered the

Stark laws, and Congress chose to allow physician ownership of hospitals, ambulatory surgery centers, lithotripsy facilities and a number of other sites where the

physician provided the service in question. The AMA has also addressed the potential conflict of interest at length and concluded that no conflict exists in these circumstances. AMA also recommends additional safeguards to protect patients, and

some of those have been incorporated in various safe harbors developed by the Inspector General.

AMA also raises an issue that I believe the committee must explore if it is going

to consider whether physician ownership creates a conflict of interest that should

be addressed in Federal legislation. That is the conundrum of hospital ownership

of physician practices, their employment of physicians (particularly specialists), and

the ownership of health insurance plans by hospital systems. If one is to argue that

physician ownership of hospitals is a conflict of interest, then one is surely bound

to agree that hospital ownership of physician practices or employment of physicians

raises the same concerns. If one arrangement is outlawed, then all should be dealt

with in the same way.

There is one other resource that I urge you to look at as you consider the issue

of physician-owned specialty hospitals, and that is the more than 20 years’ experience that Medicare has with ambulatory surgery centers (ASCs). There are now

about 4,000 Medicare-certified ASCs in this country, providing millions of surgical

services every year. Virtually every ASC has some physician owners. Yet in the history of Medicare’s coverage of ASCs, there is virtually no evidence that physicians

performed unnecessary services or engaged in behavior that placed patients at risk.

Nor is there any evidence that an ASC forced a hospital to close or curtail essential

community services. Medicare’s ASC experience should be a strong predictor to Congress that physician-owned specialty hospitals also pose no risk to Medicare, to patients or to general hospitals.

A great challenge to the committee and to Congress generally will be digging

through the layers of rhetoric, spin and cant to get to the real facts. It amazes me

that so much has been said or written, much of it wrong or false, about fewer than

100 hospitals that make up about 1 percent of Medicare inpatient payments. However, it will be worth the effort to get past the rhetoric and examine the facts, beVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00069 Fmt 6601 Sfmt 6621 23642.000 SFINANC2 PsN: SFINANC2
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cause there is solid information available to you on many points in the debate. I

hope you will rely on that data to make any decisions about legislation that might

impact the future of specialty hospitals.

In summary, after thorough study, the allegations against specialty hospitals have

not been proven. Therefore, ASHA urges the committee to allow the moratorium to

expire as scheduled in June. The reforms to Medicare’s inpatient payment system

and the hospital pay for performance recommendations suggested by MedPAC

would greatly benefit the Medicare program and should be adopted. However, there

is no evidence to justify putting specialty hospitals under another moratorium during the period these needed changes are implemented, or imposing any other limit

on physician ownership of hospitals.

Mr. Chairman, ASHA appreciates the opportunity to present this testimony, and

I would be pleased to answer any questions the members of the committee may

have.

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RESPONSES TO QUESTIONS FROM SENATOR GRASSLEY

Question: As you know, the MedPAC report shows that physician-owned specialty

hospitals treat fewer Medicaid patients than general hospitals, instead tending to

treat healthier patients. The GAO report released in 2003 states that ‘‘specialty hospitals tended to treat a lower percentage of Medicaid inpatients among all patients

with the same types of conditions.’’ Does your organization, the Fresno Surgery Center, currently treat Medicaid patients? What has been your Medicaid volume and

Medicaid revenue over the past couple of years? What percentage is this of overall

discharges and overall revenue?

Answer: Yes, Fresno Surgery Center will accept and treat Medicaid patients. However, less than 1 percent of our revenue and case load comes from Medicaid because

Medicaid patients in California are covered by HMOs, and we cannot get access to

the HMO contracts. In Fresno, almost all of the Medicaid patients go to University

Medical Center/Community Hospitals of Central California, which has the contract.

Question: What percentage of the cases at Fresno Surgery Center would be affected by MedPAC’s payment recommendations to change the inpatient prospective

payment system?

Answer: Approximately 25 percent of FSC revenue is from Medicare. We assume

that the changes would have an impact, since MedPAC estimated a 14–16 percent

decrease in Medicare revenue for all specialty hospitals if the changes were enacted.

However, MedPAC has not been specific enough in its recommendations for us to

determine on a DRG-specific basis what the impact would be for FSC.

Question: The GAO found that about 70 percent of specialty hospitals in existence

or under development had some physician owners. Among these hospitals, total physician ownership averaged slightly more than 50 percent. The average share owned

by an individual physician was more than 2 percent at half the hospitals and less

than 2 percent at the other half. What share of your facility is physician-owned?

And what is your individual share?

Answer: 86 percent of FSC is owned by a C corporation, FSC Health, Inc. The remaining 14 percent is owned by 25 physicians. FSC Health, Inc. has 109 physician

shareholders and approximately 20 non-physician shareholders. The 109 physician

shareholders own 95 percent of FSC Health, Inc. Approximately 60 of the FSC

Health owner-physicians are retired or not in active practice. Physicians in active

practice own less than half of the FSC Health, Inc. stock. I own approximately 29

percent of the FSC Health, Inc. stock. I have retired from active practice and, therefore, do not refer patients to FSC. To the best of my knowledge, there are no physicians in active practice who own more than a 3-percent interest, and the overwhelming majority own less than 1 percent each.

PREPARED STATEMENT OF DR. J. ANDY SULLIVAN

INTRODUCTION

Mr. Chairman, members of the committee, and staff—good morning. My name is

Dr. Andy Sullivan. Currently, I serve as Chairman of the Department of Orthopedics at the OU College of Medicine, and Chief Medical Officer for the OU Medical

Center. OU Medical Center is a teaching hospital, operating under a joint agreement between the State, the University of Oklahoma and the Hospital Corporation

of America.

As a physician leader at OU Medical Center, I have witnessed first-hand the adverse effects that physician ownership and self-referral to specialty hospitals can impose on community hospitals. I appreciate the opportunity to come before you this

morning to discuss my views and experience with the proliferation of these facilities

and their impact on access to emergency care.

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As a practicing physician for the past 36 years, I know all too well the frustrations and constraints that affect our medical practices nationwide. We continually

face increasing medical malpractice premiums, unpredictable Medicare and Medicaid reimbursement, the pressures of managed care, and demanding on-call requirements. For those working in a community hospital, often there is a need to engage management for purchasing and scheduling decisions. Within this environment, it is understandable that some physician specialists would be attracted to a

specialty hospital’s promise of personal financial gain. However, each of these challenges requires a comprehensive solution that aims to reform a fractured health

care system, not an anti-competitive solution in the form of self-referral to specialty

hospitals, which ultimately impacts patient access to health care. Unfortunately,

this is exactly what is occurring today with the expansion of physician-owned specialty hospitals.

SELF-REFERRAL IS THE ISSUE

To be clear at the outset, it is not the existence of specialty hospitals that fosters

the problem. Rather, it is physician ownership of and self-referral to these facilities

that creates an uneven playing field and directly harms full-service community hospitals. Physician ownership creates the invidious potential for conflicts of interest,

over-utilization of facilities, and a distortion of the free market.

As evinced by the findings of both the Government Accountability Office (‘‘GAO’’)

and the Medicare Payment Advisory Commission (‘‘MedPAC’’), physician ownership

and self-referral encourage favorable patient selection. The profit motive results in

the diversion of the most profitable, least complex patients to specialty facilities.

The sickest, most acute patients—often on Medicaid or uninsured—are left to be

cared for by full-service community hospitals. Ultimately, these harmful effects

threaten the long-term viability of community hospitals, which represent the cornerstone of our American health care system.

SELF-REFERRAL IMPACT ON EMERGENCY SERVICES

As the Chief Medical Officer at OU Medical Center, I see every day the adverse

impact of self-referral on access to emergency services in my community. Simply

put, these facilities drain essential resources from full-service community hospitals—particularly harming the capacity of full-service hospitals to provide emergency care and other vital health services. They do so by taking advantage of a loophole in the whole-hospital exception to the anti-referral law, creating an unlevel

playing field.

To begin with, in my professional opinion, physician-owned specialty hospitals are

merely subdivisions of full-service hospitals—essentially cardiac, surgical or orthopedic wings. As such, they do not have the capability to manage complications outside their area of specialization when they occur. They specialize in these particular

health services because they offer the highest profit margins and Medicare reimbursement rates. Notably, we have seen little to no market entry by physicianowned trauma units, burn centers, or children’s hospitals. This is not surprising, because these services typically represent the least profitable of practice areas. When

physician-owned specialty hospitals remove the most profitable practice groups, they

leave the full-service community hospitals without the ability to offset the provision

of critical health care needs that generate only low margins or even revenue losses,

such as emergency services.

Maintaining an operational, fully functioning emergency department is OU Medical Center’s commitment to our community. We are open 24 hours per day, 7 days

per week. Unfortunately, America’s hospital emergency rooms have become our de

facto public health care system, the primary point of access to quality health care

services for the Nation’s uninsured. The committee undoubtedly is aware that hospitals equipped with emergency rooms must provide medical evaluation and required treatment to everyone, regardless of their ability to pay. Since the advent

in recent years of these physician-owned specialty hospitals, which skim profitable

service areas for low-risk patients, this burden has grown even heavier. While specialty hospitals treat the most profitable patients, full-service hospitals are left with

the task of handling uninsured and high-risk patients within their community. As

such, maintaining an emergency department for those who truly need it also means

contending with a regular population of people with little or no health care options.

Moreover, this population often seeks emergency room care only once an illness has

reached a level of acuity that makes their case more complex and costly.

For the most part, from what I have witnessed in Oklahoma City, specialty hospitals simply do not share in this commitment to our communities. For instance, a

2003 study by the GAO found that while 92 percent of full-service hospitals mainVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00112 Fmt 6601 Sfmt 6621 23642.000 SFINANC2 PsN: SFINANC2
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tained emergency departments, merely 45 percent of specialty hospitals had emergency rooms. Even among those few specialty hospitals with emergency departments, most provided care limited to that particular hospital’s specialty, and only

63 percent were staffed 24 hours per day. Overall, specialty facilities nationwide

treated less than one-tenth the number of patients admitted at the emergency departments in full-service hospitals. And in Oklahoma, despite a licensure provision

requiring that all hospitals be capable to provide emergency services, a significant

number of the State’s specialty facilities provide little or no emergency care. For example, one physician-owned specialty hospital in Oklahoma generated only $4,300

in charges for emergency services against its total charge base of $89 million.

By opting not to operate a fully functioning emergency department, specialty hospitals are able to enjoy a high degree of self-selection, generally treating a healthier

and better-paying patient population with fewer complications and shorter lengths

of stay. An additional strain on full-service community hospitals is caused by the

departure of physicians and surgeons who relocate their practices to specialty facilities. Not only does this reduce a community hospital’s staff of specialists, specialty

hospital physicians also are unlikely to accept on-call responsibility, which is a vital

component in providing specialty coverage for a community hospital’s emergency department.

PHYSICIAN-OWNED SPECIALTY FACILITIES HAVE PRECIPITATED A CRISIS

IN ACCESS TO EMERGENCY SERVICES IN OKLAHOMA

OU Medical Center presently operates the only Level 1 trauma center in the State

of Oklahoma. Trauma centers in the U.S., which are credentialed by the American

College of Surgeons (‘‘ACS’’), require that Level 1 centers must be capable of treating the most severely injured patients. Typically, those requiring treatment at a

Level 1 trauma center arrive with multiple broken bones, along with injuries to

other vital body systems, such as head and chest wounds. Prior to the designation

of OU Medical Center as a Level 1 facility in 2001, Oklahoma’s health care system

served a population of 3.5 million residents without a single Level 1 trauma center

in the entire State.

Ideally, the resources of Level 1 trauma centers should be conserved for treatment

of the most seriously injured patients. Studies by ACS suggest that under optimal

circumstances within any particular service region, a Level 1 trauma center should

treat 80 percent of the most serious trauma victims, but only 20 percent of those

less seriously injured patients; the remaining less seriously injured patients instead

should be treated at Level 2 trauma centers or full-service community hospitals.

With the migration of specialists to specialty hospitals, however, this scenario was

not the case in Oklahoma. Despite its mission, OU Medical Center was treating a

full 80 percent of all trauma patients across the Oklahoma City metropolitan area,

along with transports from other areas of the State. This overloading of our Level

1 trauma center with less seriously injured patients taxes our capacity, and jeopardizes its continued survival.

Very much like police and fire departments, a full-service hospital must maintain

a complete state of readiness around the clock, every day of the year. Yet given the

proliferation of specialty hospitals, a number of physicians and surgeons have removed their practices from operating within community hospitals. Among other

harmful effects, this pattern has created a significant strain on staffing. At the same

time, many specialists have reduced their community hospital standing to ‘‘courtesy’’

staff, or even resigned their medical staff privileges altogether. In particular, this

trend imposes a significant burden on the ability of hospitals within our community

to meet on-call requirements, which ensure adequate staffing outside normal work

hours, as well as on holidays and weekends for hospital emergency departments.

Trauma centers rely upon six surgical sub-specialties, including anesthesiology,

which are essential to providing adequate trauma care. Nonetheless, the unavailability of sufficient specialty physicians for on-call duty is not rooted in a lack of

specialists. For example, the United States averages one neurosurgeon for every

59,000 citizens, yet the Oklahoma City metropolitan area is home to one neurosurgeon for every 39,000 residents. Despite this seemingly adequate supply of qualified specialty doctors, Oklahoma is witnessing a crisis in on-call coverage for neurosurgery, and nearing a crisis for meeting on-call coverage demands within the subspecialties of orthopedics, facial trauma, anesthesiology, and general surgery. Clearly, the issue does not derive from a lack of capacity.

Rather, the problem is attributable directly to the many specialists who have relocated their practices away from the community hospitals, to specialty hospitals in

which they have an equity interest. Before the advent of physician ownership of specialty facilities, physicians typically would maintain an affiliation with multiple hosVerDate 11-MAY-2000 15:48 Oct 18, 2005 Jkt 095484 PO 00000 Frm 00113 Fmt 6601 Sfmt 6621 23642.000 SFINANC2 PsN: SFINANC2
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pitals within their geographic service region. As a result, the various hospitals

would have access to a substantial universe of available doctors when assigning

their on-call schedule. With the introduction of physician ownership and self-referral, however, this scenario has changed dramatically. Rather than retaining privileges at hospitals in which they do not own a financial stake, many specialty physicians have reduced or eliminated their affiliations with other facilities, instead committing their practice to where they have an equity stake.

Doctors establishing a specialty hospital practice, for the most part, no longer will

agree to provide on-call duties at the community hospitals. Generally, a doctor withdrawing to a hospital’s courtesy staff list is relieved from meeting any hospital requirements to accept on-call hours. Worse yet, those terminating their affiliation are

removed entirely from the pool of qualified and available medical professionals,

upon whom the hospital can depend to meet its on-call needs. The loss of on-call

specialties is extremely problematic for a trauma center, but even more so for a general acute care hospital with nowhere to turn for on-call coverage.

As specialists drop out of the call schedule rotation, a vicious cycle forms—increased on-call duties among those remaining specialists cause them to become dissatisfied, and can prompt them to leave full-service hospitals. In addition, an escalation in on-call obligations increases physicians’ stress, and reduces their ability to

control their time and practice. Moreover, call coverage obligations reduce a specialist’s earnings potential, because emergency patients bring relatively poor reimbursement for most specialties and crowd the available time spent treating other patients.

At the inception of our Level 1 trauma center, OU Medical Center boasted a staff

of six neurosurgeons. We now struggle to maintain just two neurosurgeons on staff

in order to sustain our emergency coverage for head trauma patients. In fact, the

hospital recently committed nearly $1 million annually in temporary staffing (in

locum tenum) for the required neurosurgery coverage, just to keep the doors open

to our trauma center. We also were forced to resort to a stop-gap on-call system for

trauma. Under this plan, OU Medical Center, the other full-service hospitals, the

county medical society, and the State hospital association developed a voluntary

Level 2 trauma rotation. As a result, a group of neurosurgeons and other critical

sub-specialists who had dropped out of call rotation agreed on a voluntary basis to

provide coverage at one Oklahoma City hospital each night, ensuring that our metropolitan region continually maintains the Level 1 center, as well as one additional

full-service hospital able to accept Level 2 trauma patients around-the-clock. The

State also agreed to provide a $5.7 million subsidy to support the operations of OU

Medical Center’s Level 1 trauma center. These various short-term measures, though

costly, have ensured at least the temporary survival of a single Level 1 trauma center and other viable trauma facilities to serve the needs of our State.

Let me stress, however, that these solutions only are temporary. Without stable,

permanent neurosurgery staffing, OU Medical Center risks losing the accreditation

of our neurosurgery residency training program, which would create yet another vicious cycle: the loss of accreditation in one residency training program invariably

would affect and risk the loss of accreditation for our other residency programs. Together, these programs train many of the physicians who choose to remain in practice in the State of Oklahoma. Their loss would be devastating, resulting in fewer

specialty physicians practicing in Oklahoma, and a further exacerbation of our

State’s crisis in emergency service coverage. In addition, the loss of our neurosurgery residency program would put even our Level 1 trauma center designation

at risk. In my view, this crisis in emergency services simply would not have occurred in Oklahoma but for the rapid growth of physician-owned specialty hospitals.

PHYSICIAN-OWNED SPECIALTY HOSPITALS ARE DIVERTING NEEDED RESOURCES

FROM FULL-SERVICE COMMUNITY HOSPITALS

Full-service community hospitals long have used funds generated by profitable

services to subsidize the losses suffered by unprofitable services. Only by maintaining the successful product lines are full-service hospitals able to financially support

such services as trauma and burn centers, as well as special programs for uninsured

and underinsured patients. In June 2002, OU Medical Center suffered a major loss

when our private cardiovascular group left to become owners in a nearby specialty

cardiology hospital, the Oklahoma Heart Hospital (‘‘OHH’’). OU Medical Center witnessed a steep decline in cardiovascular admissions—from over 150 patients per

month before that center opened, to zero by August 2002. All told, OU Medical Center has suffered losses of $11.6 million in cardiovascular operating income between

2002 and 2004.

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With the income previously flowing from cardiovascular services no longer available, OU Medical Center was forced to curtail unprofitable programs that could not

support themselves. In doing so, programs that provided services to the uninsured

and underinsured became targets for reductions. For instance, an outpatient retail

pharmacy formerly provided drugs to qualified patients at greatly reduced or no

cost. This program was eliminated, saving $2.6 million per year. And the scope of

a planned facility renovation was severely reduced, resulting in a reduction of facility enhancements in areas that directly affected the provision of health care to

women and children within the community. These unfortunate but necessary cuts

compromised the mission of our academic medical center to provide safety net coverage for the most needy residents in the State of Oklahoma—particularly those

who are uninsured or otherwise lack access to specialized care.

As a consequence of removing the most profitable services from full-service community hospitals, physician-owned specialty facilities also have incentive to refer

only those better-funded and less severely ill patients. This leaves the uninsured,

underinsured and more severely ill patients to be treated by community hospitals,

often without adequate (or any) compensation. While paying and less severely ill patients are diverted to physician-owned specialty facilities, community hospitals are

left with the burden of caring for a higher percentage of the uninsured, underinsured and the sickest patients, with fewer resources to cover the vast and unreimbursed costs involved.

Besides diverting revenue from full-service community hospitals, physician-owned

specialty hospitals also divert limited human resources. Within the 1-year period following the departure of our cardiovascular group, OU Medical Center lost 56 staff

members who joined that facility, 40 of whom were registered nurses. The estimated

cost of turnover—including increased salaries, retention bonuses, and recruitment

training costs—totaled approximately $2.6 million. We narrowly avoided the closure

of our intensive care unit by paying nearly $500,000 in retention bonuses.

CONCLUSION

To summarize, I understand the role that specialty hospitals can play in response

to consumer demands. Nevertheless, when using physician self-referral as a means

of attracting and sustaining a steady flow of low-risk, highly insured patients, these

facilities create both a conflict of interest for the physicians and an unfair competitive advantage, which I believe is unethical.

It is my hope that Congress will protect community hospitals like OU Medical

Center by removing the opportunity for self-referral. I understand the Congress is

weighing recommendations by MedPAC that would seek to level the playing field

through Medicare payment adjustments. With over 30 years of Medicare reimbursement experience, I can assure the committee that Medicare payment adjustments

alone will not solve the self-referral problem. The fact of the matter is that any of

my medical specialty staff could leave tomorrow and double their income at a specialty hospital, where the value of their investment increases as a direct result of

the self-referral. As long as any financial gain can be generated through a referral,

competition will be neither free nor fair between community hospitals like OU Medical Center and our neighboring specialty facilities.

Improper financial motives simply do not serve the best interest of our patients,

and threaten to undermine the vital health care services that communities expect

from a local full-service hospital. I ask this committee to eliminate these concerns

by ensuring the current moratorium does not lapse, and by supporting legislation

to prohibit physician self-referral before the network of full-service community hospitals in this country becomes irreparably impaired.

Thank you for your time, and I’d be glad to answer any questions.

PREPARED STATEMENT OF LARRY VEITZ

Good morning, Mr. Chairman. I’m Larry Veitz, chief executive officer of Lookout

Memorial Hospital in Spearfish, SD. I appreciate the opportunity to testify today on

the issue of physician-owned, limited-service hospitals.

In many communities, certain physicians are exploiting a loophole in Federal law,

and own limited-service hospitals to which they refer their own patients. This activity raises serious concerns about conflict of interest, fair competition, and whether

the best interests of both patients and communities are being served.

To protect patients and the health care safety net, Congress should close the loophole in Federal law by permanently banning physician self-referral to limited-service hospitals.

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Here’s what has happened in our community. Lookout Memorial Hospital is a 40-

bed community hospital located in rural Spearfish, SD, a town of 9,300 people. Although Spearfish itself is a relatively small town, our hospital serves 35,000 people

across three States: Wyoming, Montana, and South Dakota. Because of our very

rural location, patients, who live 120 miles away or more, rely on our hospital for

the care they need.

During the 1990s, Lookout Memorial was a thriving rural hospital and, in 1996,

was recognized by U.S. News and World Report as one of the top 100 hospitals in

the United States. Today, however, we are struggling to exist and to continue to

provide care to those 35,000 people who rely on our health care services across a

3-State region. The primary reason why we have fallen from being a thriving rural

hospital to one struggling just to keep its doors open to the community can be directly attributed to a physician-owned, four-bed surgical hospital that opened in

2000 just blocks away from our hospital.

Unlike our hospital and other community hospitals across the country that provide a wide range of medical services, the four-bed surgical hospital in Spearfish primarily focuses on general and orthopedic surgery. It does not take on the responsibility of daily, round-the-clock emergency services like we do. The Spearfish Surgery

Center merely duplicated programs and equipment already available in our area

and took nurses, technologists and technicians away. It did not add a single new

program of benefit to the community. This physician-owned surgery center has created a profitable business in two ways—by targeting healthier patients and those

with good health insurance coverage and by targeting well-reimbursed services.

Meanwhile, Lookout Memorial continues to care for everyone in need of care—the

poor, the elderly, the uninsured and sicker patients. We turn no one away.

THE IMPACT OF PHYSICIAN SELF-REFERRAL IN SPEARFISH, SD

Yet, by steering well-insured patients away from Lookout Memorial and focusing

on surgical procedures that are well-reimbursed by Medicare and private insurers,

the surgical hospital has successfully siphoned off resources critical to our hospital’s

continued ability to provide important medical services to our service area. The negative effects resulting from the surgical hospital’s practices have already been experienced in several ways.

First, by selectively referring and treating only healthier, well-insured patients

and providing only elective and highly reimbursed procedures, the surgical hospital

also has left our communities with significant challenges that jeopardize the health

care safety net in our area. Lookout Memorial now treats a greater share of poor

and uninsured patients with less financial support for essential services that are

seldom self-supporting, such as emergency care, cardiac rehab, home health, diabetic education, and obstetrical services.

For our Wyoming patients, the financial impact of the physician-owned surgical

hospital has been particularly harsh, forcing us to make very difficult decisions. For

example, we had to eliminate our hospice program for our Wyoming patients because we no longer had the financial means to support it. This means that some

of those Wyoming residents with terminal illnesses, who are not expected to live beyond 6 months, will likely spend their final days as a hospital inpatient rather than

being able to die with dignity at home surrounded by family and friends. It means

that we no longer have the ability to provide support services to those Wyoming

residents who have struggled with the stress and grief of caring for and losing a

loved one with a terminal illness.

Fewer resources also forced us to curtail our home health program for our Wyoming patients. This program allows frail, elderly patients to stay at home with their

loved ones and receive needed nursing care or physical therapy. Now, the alternative for some of these patients is a nursing home—a setting that many elderly

patients fear because of its high-costs and because it takes them away from their

spouses and social support systems.

Physician-owned, limited-service hospitals, such as the surgical hospital in Spearfish, duplicate services already available at full-service community hospitals and

jeopardize our ability to provide care to all patients, whether it is care for uninsured

or Medicaid patients, or emergency care for everyone in the area.

EXPLOITING A LOOPHOLE

Congress has historically been concerned with the potential conflict of interest

that can arise when physicians refer patients to labs, hospital departments and

other health facilities they own. Research at that time showed that physicians order

more services when they have an ownership interest in the entity that is going to

provide those services. That is why laws were passed in 1989 and 1993 prohibiting

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physician self-referral to a wide range of health services where a doctor is also an

owner. However, Congress made an exception to allow physicians to be owners in

‘‘whole hospitals’’ with the reasoning that no specific patient referral would economically benefit an individual physician.

At the time these laws were passed, however, lawmakers could not have envisioned that specific departments or specialties within a hospital, such as surgery,

cardiac care or orthopedics, would be turned into four-bed, limited-service facilities

disguised as ‘‘whole’’ hospitals. Yet, that is exactly what has happened. Certain enterprising physicians have exploited the exception in current law, are investing in

these limited-service facilities and are referring only carefully selected, financially

rewarding patients to them, clearly to the financial benefit of these physician owners.

Both the Government Accountability Office (GAO) and the Medicare Payment Advisory Commission (MedPAC) in separate studies have uncovered troubling evidence

with respect to the business practices of physician-owned, limited-service hospitals.

Specifically, they found that physician owners refer only patients with the best

health coverage and those who are less sick to their limited-service hospitals. As a

result, full-service hospitals are left to treat a higher percentage of poor and uninsured patients requiring more intensive care. Further, the GAO and MedPAC also

found that limited-service facilities were much less likely to offer emergency services

and tend to offer only highly profitable services, while community hospitals provide

emergency treatment, burn care and other vital services for which payment seldom

covers cost. Interestingly, MedPAC also discovered that the limited-service hospitals

do not have lower costs per case in treating Medicare patients than do full-service

community hospitals.

Based on these findings, it is not surprising that MedPAC questioned whether financial gain—not clinical considerations—may be driving some physicians to refer

patients to those limited-service hospitals where they have an ownership interest.

The issue of whether doctors’ personal financial gain is driving patient care decisions deserves serious examination and congressional action.

Congress was so concerned about the rapid proliferation of physician-owned limited-service hospitals and the potential conflicts of interest posed by physician ownership that in 2003 it implemented a moratorium prohibiting physicians from referring Medicare patients to new, physician-owned limited-service hospitals as part of

the Medicare Modernization Act. That moratorium, however, is set to expire in

June.

THIS IS NOT ABOUT COMPETITION

Advocates for physician-owned limited service hospitals argue that full-service

community hospitals simply do not want to compete based on services and quality.

This could not be further from the truth. Full-service community hospitals around

the country compete every day in our market-driven health care system. They compete by introducing innovations in medicine, technology and care delivery to offer

the best services to their patients. But the power of physician owners to direct

where patients get their care and refer only well-insured patients to their own facilities is not competition—it is conflict of interest. It is illegal for full-service community hospitals to offer any financial inducements to physicians in exchange for patient referrals. Yet, these physician-owned limited-service hospitals are masking inducements to refer patients under the guise of ownership.

Full-service community hospitals are more than willing to compete based on cost,

quality and efficiency. But, currently, there is an unlevel playing field that is unfairly rewarding certain physicians for selectively referring healthier, well-reimbursed patients to limited-service hospitals they own. Full-service community hospitals are, therefore, placed at an unfair competitive disadvantage.

THIS IS NOT ABOUT QUALITY

Although physician-owned limited service hospitals claim that patients receive

higher quality care in their facilities, there is no credible, independent evidence to

date to suggest any quality differences between physician-owned limited service hospitals and full-service community hospitals.

Limited-service hospitals use the same medical technology as the full-service community hospitals. Often, these facilities have the same doctors and nurses that practiced at the full-service community hospital—they just opened their own facility a

few miles away. Given all this, it is hard to see why there would be differences in

quality. What is clear is the duplication of services already available at the full-service community hospitals.

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SELF-REFERRAL CREATES CONFLICT OF INTEREST

When physicians own facilities to which they refer patients, their decisions about

when to provide care and which facility to send any particular patient to are subject

to competing interests. Studies have shown that physician self-referral can lead to

increased use of services and add cost to the system. Also, the ability to direct patients to one facility or another causes a competitive distortion that generally cannot

be overcome as long as referring physicians own competing entities.

CONCLUSION

The growing body of evidence suggests that physician-owned limited-service hospitals represent a serious conflict of interest that could threaten patient access to

emergency and other medical services. That is why MedPAC has recommended that

Congress extend the current moratorium on physician self-referral of Medicare patients to new, limited-service hospitals until January, 2007.

I respectfully urge Congress to close the loophole in Federal law by permanently

banning physician self-referral to limited-service hospitals. Community hospitals are

created and sustained by the community to serve all patients regardless of their

health status or ability to pay. The conflict of interest created when physicians refer

patients to limited-service hospitals they own is robbing our community hospitals

of their ability to serve everyone and is risking patient access to essential medical

services.

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COMMUNICATIONS

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