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35–439—PDF 2006

S. HRG. 109–905

PHYSICIAN-OWNED SPECIALTY HOSPITALS:

PROFITS BEFORE PATIENTS?

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 17, 2006

(

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

Smith, Hon. Gordon, a U.S. Senator from Oregon ................................................ 3

WITNESSES

Wilson, Rev. Michael W., pastor, Sellwood Baptist Church, Portland, OR ........ 3

McClellan, Hon. Mark, Administrator, Centers for Medicare and Medicaid

Services, Department of Health and Human Services, Washington, DC ........ 14

Morrison, Cindy, vice president, Sioux Valley Hospital, Sioux Falls, SD ........... 28

Mulholland, Dan, Horty, Springer & Mattern, P.C., Pittsburgh, PA .................. 30

House, John M., M.D., managing partner, Urology Associates of North Texas;

and chairman of the board, USMD Hospital, representing the American

Surgical Hospital Association, Sioux Falls, SD ................................................. 32

Cobey, James, M.D., orthopedic surgeon, Washington, DC ................................. 33

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Prepared statement .......................................................................................... 43

Cobey, James, M.D.:

Testimony .......................................................................................................... 33

Prepared statement .......................................................................................... 45

Grassley, Hon. Charles E.:

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

House, John M., M.D.:

Testimony .......................................................................................................... 32

Prepared statement with attachments ........................................................... 50

McClellan, Hon. Mark:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 99

Responses to questions from committee members ......................................... 117

Morrison, Cindy:

Testimony .......................................................................................................... 28

Prepared statement .......................................................................................... 173

Mulholland, Dan:

Testimony .......................................................................................................... 30

Prepared statement .......................................................................................... 183

Smith, Hon. Gordon:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 194

Wilson, Rev. Michael W.:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 195

COMMUNICATIONS

American Hospital Association ............................................................................... 201

American Medical Association ................................................................................ 207

Council of State Governments ................................................................................ 216

MedCath Corporation .............................................................................................. 219

(1)

PHYSICIAN-OWNED SPECIALTY HOSPITALS:

PROFITS BEFORE PATIENTS?

WEDNESDAY, MAY 17, 2006

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:09 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Baucus and Smith.

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

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. I am going to start the hearing, although other

members will not come because we are in the process of voting on

the floor of the U.S. Senate. I have cast my vote. We will proceed,

and hopefully members will be here before our first witness testifies. I welcome everyone.

Today, we have three separate panels of witnesses, so we will get

the hearing started. Senator Baucus and I will make opening statements.

Also in our audience today are three of my constituents from

Iowa. We have Jim Zahn and Sarah Rosener from the Iowa Health

System, and we also have Bill Lever, who is president and CEO of

Trinity Health Systems in the Quad Cities.

I welcome my constituents here. Thank you very much for coming. They represent a number of people in Iowa who are concerned

about physician-owned specialty hospitals. I thank them for coming

all the way to Washington, DC to participate in this hearing.

Next, we will be introduced to our first witness, Rev. Mike Wilson, from Portland, OR. We have two Senators from Oregon here,

and one of them is going to be present to introduce Rev. Wilson.

Then following his testimony, we are going to have Dr. Mark

McClellan, and after that, the final panel of witnesses.

As Chairman of the Finance Committee, it is my constitutional

duty to conduct oversight of the Federal programs to determine if

the policy that the committee makes is sound, and to ensure that

laws passed by Congress are implemented and enforced in a manner consistent with the spirit and intent of that legislation.

Today’s hearing presents an opportunity to address the issue of

specialty hospitals from an oversight perspective. This hearing will

examine the impact that these facilities have on patient safety and

the quality of care.

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Additionally, the hearing will explore the various financial arrangements used to finance these hospitals. Finally, the hearing

will address implementation and enforcement of specialty hospital

legislation by CMS.

Recent oversight work by the committee raises serious questions

about specialty hospitals and whether they serve the best interests

of patients being treated at them, and if they are serving the best

interests of physicians who own and operate them.

Further, the committee’s oversight work found that, in spite of

a Congressional moratorium on new specialty hospitals and an administrative extension of that ban, it appears that during that period of moratorium over 40 specialty hospitals have opened.

That is hard for those of us who made this decision on the moratorium to realize that a moratorium does not always mean a moratorium. So, obviously Congressional intent was not followed when

40 specialty hospitals opened during that period of time.

Today’s hearing also comes on the heels of three new reports on

specialty hospitals. The first was a follow-up review by the Medicare Payment Advisory Committee. We refer to that as MedPAC

for short. That report was released at the commission meetings on

April 19.

MedPAC made a number of findings regarding specialty hospitals, including that one physician-owned surgical hospital’s costs

were significantly higher than general hospitals, despite having

shorter stays.

Physician-owned hospitals see significantly fewer Medicaid and

charitable patients. Three physician-owned heart hospitals increased the number of heart procedures in the community when

they opened. Four physician-owned heart hospitals divert profitable

patients from community hospitals, decreasing revenue at the community hospitals.

The second report that I have referred to was a survey conducted

on specialty hospitals conducted by the Government Accountability

Office. We refer to that as the GAO. While advocates of specialty

hospitals claim that specialty hospitals force community hospitals

to improve quality and efficiency, the GAO’s most recent report released in April did not support that assertion.

The third recent report on specialty hospitals was released last

week, May 9, by CMS. This interim report details the progress

CMS has made in creating a ‘‘strategic and implementing plan’’ for

specialty hospitals.

The report is a starting place, but it is by no means the final

strategic and implementing plan that we in Congress envisioned

last December when we wrote this provision.

Our first panel today will provide testimony regarding a physician-owned facility that had no physician on-site, on-call doctors

who did not answer their phones, and—can you believe this?—a

standing policy to call 911 in case of patient emergency.

These policies ultimately led to the tragic death that we are

going to hear about from our first witness, an 88-year-old mother.

Clearly, this standard of care raises serious patient safety concerns

and requires immediate attention.

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On our second panel, we will hear from a friend, Dr. Mark

McClellan, the Administrator of the Centers for Medicare and Medicaid Services.

Finally, our third panel will address the impact that specialty

hospitals have on community hospitals, suspect financial arrangements of some specialty hospitals, patient safety, and quality of

care at those facilities.

I welcome our first witness and thank him for his testimony. I

would like to say a special ‘‘thank you’’ to Rev. Wilson for coming,

and I express my condolences about the story that he is going to

tell us in his testimony today.

Coming all the way to Washington, DC and testifying, all this

fanfare is difficult enough, but to come here and relive the story

of losing your mother is extremely difficult, I am sure, and we appreciate you sharing your story. It is my sincere belief that your

testimony today will help us avoid similar tragedies in the future.

I am going to ask Senator Smith to fill in, because Senator Baucus is not here at this point, because I call on members to recognize

constituents, and Rev. Wilson is a constituent.

OPENING STATEMENT OF HON. GORDON SMITH,

A U.S. SENATOR FROM OREGON

Senator SMITH. Yes, he is. I am here, Mr. Chairman, first, to

thank you for this important hearing. It is an issue that we have

to deal with. But also, to welcome Pastor Mike Wilson and his wife,

who is with him. They are great Oregonians. Mike is a pastor at

the Sellwood Baptist Church, and so performs lots of valuable service to our State, our Nation, and his congregation.

Mike, the Chairman has already reviewed what happened to

your mother, Helen. I know how hard it is to come and testify publicly about personal tragedies, but I have a sense your mom is very

proud of you today.

We who remain behind really can find good out of our losses if

we can look for that silver lining, and I am sure, again, that she

is proud that you are trying to make a difference for others, so

what happened to your mother does not happen to others.

But, Mr. Chairman, I have a statement. I will put it in the

record. You said much of it. It would simply be repetitive. But what

happened at Portland Physicians’ Hospital should not happen

again. We need to learn from it and fix it.

The CHAIRMAN. And we intend to do that, Senator.

[The prepared statement of Senator Smith appears in the appendix.]

The CHAIRMAN. Normally, Senator Baucus, who is now voting,

would be the next person to speak, but I will break in for his opening statement when he comes.

So we are ready now for your testimony, Rev. Wilson. Would you

proceed, please?

STATEMENT OF REV. MICHAEL W. WILSON, PASTOR,

SELLWOOD BAPTIST CHURCH, PORTLAND, OR

Rev. WILSON. Thank you. I bring you greetings from beautiful

Oregon. Our weather has been in the 90s the last few days, so this

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is a nice respite from that. Thank you for the privilege of coming

and sharing our family’s story with you.

We have brought with us a photograph of my parents that was

taken of them shortly before my mother’s death on August 1, 2005.

They had been married for 69 years at the time.

I know that you have heard my mother’s name, because it has

come before you already in your discussion of physician-owned forprofit specialty hospitals. It is our desire that, by our coming and

by your efforts here, as Senator Smith mentioned, that you can

help to see that this does not happen again.

My mother entered Physicians’ Hospital in Portland on the 27th

of July for a simple lamenectomy to correct some pinched nerves

in her lower spine, to free up motion in her legs and stop the

numbing and the pain that she was having. She was in general

good health, though she was 88 years old.

The doctor assured us that she would be able to survive and do

well through the surgery, and was confident that it would be a onenight stay. That was all she was scheduled to be in the hospital.

The surgery itself went well. It took about 2 hours. She was in

recovery. The nurse, then the doctor, came out and told us that she

had done well through the surgery, but was having quite a bit of

pain, so they had given her several doses of pain medication. She

was brought into her room, where my father and I were waiting,

about 4:30 in the afternoon.

From that point on, we were never away from her. We were by

her side every moment. She was coming out from under the anesthetic and was feeling well. She was able to talk. She was groggy

at first, but I asked her how she was doing. She said as long as

she did not move, she was fine.

At no point did she ask for more pain medication, and at no point

did anyone ask her if she needed any. That is important because

later, on the records, it showed that she was asked and reported

that she had a pain level of 6 out of 10. That was a fabrication.

It never happened.

My wife got to the hospital about 5:30, after she came from work

at the Portland Police Bureau. My father, my wife and I stood

around my mom’s bed, talking with her. I was feeding her ice chips

and she was doing well. We laughed and visited.

About 10 minutes after my wife got there, a nurse came in and

injected into my mom’s IV one more dose of pain medication. What

was used was a medication called Dilaudid. At the time we wondered, because she had not asked for anything.

We questioned the size of the syringe, because it looked like

something you would give a horse. But it was explained that it

would go into the IV and it had to be diluted with saline, and so

forth.

So she slowly injected it into the IV line and left the room. Within 2 or 21⁄2 minutes, my mother’s eyes drooped, her head began to

loll, and she obviously went to sleep. About that time, another

nurse stepped into the room, and we asked her if that was normal,

that a person would have that reaction that quickly. She said, oh,

yes, a person often goes right to sleep.

So my wife and my father sat down in the two chairs next to the

bed, and I was standing at the foot of her bed and just watching,

5

and we were talking. She suddenly made a little choking sound,

and I looked over at her, but she seemed to be sleeping normally.

I was not alarmed, and we went back to talking.

Just seconds later, maybe a half a minute later, she made another gurgling, choking sound. I looked at her, and her mouth was

open. It was obvious that she was turning very white. I stepped up

to the head of the bed from where I was standing at the foot, and

I could see that her chest was not rising, she was not breathing.

I checked her pulse, then I checked her carotid, and there was

no sign of pulse and no breathing. So I yelled for help, and hollered

for the nurses to come and help us, which they did, though to us

it seemed like it was taking an eternity.

The next minutes were some of the worst of our lives as we

watched perhaps one of the most egregious examples of negligence

and incompetence that I have ever heard of as the nurses were trying to get her to be able to breathe.

One nurse was using a resuscitation bag, but was not having

success. She was trying to get air into her lungs, but she had not

cleared my mother’s airway. Her tongue had fallen back in her

mouth.

I had to yell at the nurse, ‘‘You’re not getting any air in, it’s all

escaping around the mask.’’ It was inflating her cheeks, but there

was none going into her lungs. She looked at me with this look of

panic. She was over her head, it was obvious. They did not

intubate, which is what would be normal when a person is unable

to breathe. They brought in the crash cart after several minutes.

One nurse was trying to check her vitals, but was taking so long

at it.

Finally, she called for the crash cart. The crash cart was not

where it should have been, close by the nurse’s station. We were

right in front of the nurse’s station. They had to bring the crash

cart from a hallway, and came rolling it in.

When they did, the nurse that was looking to put it together and

be able to use the paddles on my mom was hollering and saying,

‘‘Where are the paddle covers?’’ and where is this, and where is

that? People were running to try to get equipment to be able to put

the paddles on her to try to restart her heart.

One of the things that we noticed was that there was no Code

Blue, or sometimes called Code 99 that was called. We kept asking,

why is there not a doctor here? Have you called a doctor? All we

got were stares and odd looks.

Later, someone said, well, we have called someone. They had

called someone, but we were assuming that they meant it was a

doctor that had been called. In reality, they called 911. They called

the fire department.

Some 10 to 11 minutes into this crisis, the paramedics arrived.

Of course, they operated like a well-oiled machine, which was in

stark contrast to what we had been witnessing, which looked more

like something from the Keystone Cops up until then.

The problem was, the damage had already been done because

they had not known how to intubate and respirate and get air into

my mother’s lungs. By that time, she was already brain dead from

lack of oxygen.

6

They were able to get her heart started and stabilized. They were

able to get her breathing. They transported her to Adventist Hospital in Portland. That is where she remained for the next 5 days,

until her death on Monday, August 1, 2005.

This was a tragic and needless death. Had my mother received

the kind of care at Physicians’ Hospital that she later received at

Adventist Hospital, she would be alive today, and I would not be

here telling her story.

No hospital should ever have to call 911 to come to rescue one

of their patients. I think we all can agree on that. We assume that

doctors and nurses know how to resuscitate a person who has gone

into respiratory or cardiac arrest.

I believe that we, as patients, have a right to make that assumption, that we will be well cared for. What happened to my mother

on July 27th was unconscionable and inexcusable, in my opinion.

As a result of the negligence, my father lost his wife of 69 years.

He is now 90. He had his birthday just days after her death. My

sister and I have lost a wonderful mother, our children have lost

a grandmother, and obviously on down the line. My youngest

daughter had a baby just days after my mother’s death, and Billy

will never get to know his great-grandmother as a result of these

events.

My mother was a wonderful, godly woman, and I have had wonderful parents growing up. She was ready to go meet the Lord that

she had served for these many years. She had been ready for many

years, and at any time.

However, that does not take away from the fact that the immediate cause of her death was the negligence of a hospital that I believe has a moral obligation to do everything possible to save lives.

To summarize, the staff at Physicians’ Hospital obviously did not

know how to intubate, or else it was their policy not to. I do not

know why that was not done. Even the paramedics asked that

question.

They did not administer the antidote for the drug that they

overdosed her on. They did not have a properly prepared crash

cart, and it was not stationed where it should have been.

There was no Code Blue team in the hospital trained for this

kind of emergency, no doctor in the hospital. No doctor ever appeared on the scene in this whole thing. I believe that my mother

is kind of a poster child for what can happen when, as I have told

others, the foxes own and operate the henhouse.

For instance, the doctor that operated on her, we did not know

that he was one of the owners of the hospital. That had not been

shared with us. We did not know that the hospital was only marginally prepared for this kind of an emergency.

There were many things we did not know, including, as Senator

Grassley mentioned, that it was their policy to call 911 in case of

a post-operative medical emergency. I already mentioned that

when we got her medical records we could see that they had been

doctored.

The times had been changed to make it look like she had received the last dose of pain medicine 40 minutes before the event

occurred when she went into arrest. There were three of us standing by her bedside the whole time, and that simply is not true.

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From the time the medicine was given, it was 2, 21⁄2 minutes

when she was already asleep and stopped breathing. So that was

one of the things that was very troubling.

Another is the attitude that we have heard from a number of

people, that, well, it is unfortunate, but it had to do with her age.

This had nothing to do with her age. She was in good health.

I am 56. If I had been in there under the same circumstances

and had been overdosed, I could just as easily have gone into respiratory or cardiac arrest. It could have happened to a young person as well. It had nothing to do, in my opinion, with her age.

It appears that Physicians’ Hospital is going out of business, for

which we are very grateful. In Saturday’s paper, it said that they

are trying to sell the hospital, and we are glad for that.

But our concern is that there are many others around the country that seem to be similar to this one, and it is my opinion that,

when doctors own the hospital and operate it to their benefit, when

the dollar is the bottom line, then patients are not going to be well

served. My mother is an example of what can happen when there

is no oversight, no one looking over the doctors’ shoulders.

If my mother’s death results in a greater public awareness and

results in this Senate committee being able to close some existing

loopholes and perhaps save someone else’s life, then I am sure that

she would say that it was worth it. We would ask that you do all

in your power to make it so.

I thank you for this opportunity to come and address you today,

and would be happy to take any questions you might have.

[The prepared statement of Rev. Wilson appears in the appendix.]

The CHAIRMAN. Yes. Would you wait for questions just a minute?

Then I will have Senator Baucus give his opening statement at this

point.

Senator BAUCUS. Thank you, Mr. Chairman.

Reverend, you have a lot of courage to come here and tell your

personal story, as difficult and as heart-rending as it has to have

been, and still is today. I sympathize with you and your family.

And I know I can speak for this entire committee in saying so,

and I can certainly speak for the Chairman. It is my very strong

view that these specialty hospitals should not be providing service.

That is, they are providing a disservice to America, not a service.

I, for one, am going to do all I can to stop specialty hospitals.

There are tons of reasons why, and you have given one very good

one. They are just not adequately prepared to deal with emergencies.

Rev. WILSON. That is true.

Senator BAUCUS. I am sorry, very, very sorry you had to go

through all this, even more sorry for your mom, but for your own

family.

I am not going to give my statement. I am just going to put it

in the record, Mr. Chairman. But I just want to tell you just how

wrenching this is, and how it could have been prevented, as you

said. It need not have happened. It is our job to do what we can

to not let that happen any more in the future. We will do our very

best.

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Unfortunately, there are some pretty powerful interests that

want to keep specialty hospitals open, and this is not an easy matter before us, that is, to stop these hospitals. I have tried hard,

Senator Grassley has tried hard, and we will keep trying hard.

Your story here today, frankly, gives me even more energy to get

the job done and stop these hospitals from performing. But thank

you very, very much for taking the time to come here. I will have

some questions a little later, but thank you very much.

[The prepared statement of Senator Baucus appears in the appendix.]

The CHAIRMAN. We will have 5-minute rounds for whoever

comes, or whoever is here now. We will do it in the order of: Grassley, Baucus, and Smith, 5 minutes each.

My first question to you would be to follow up on what we often

refer to as the importance of patient advocates to ensure that

things go as planned in the hospital.

Now, you probably did not assume the role of a patient advocate,

but you were there with your family. I am sure as you look back

now, you were essentially in the dark about hospital policies and

procedures for emergencies. You talked about 911 and all that.

So, just asking you to look back, what questions do you feel

would have been helpful to ask prior to surgery at a limited-service

hospital?

Rev. WILSON. Well, sir, we did not know enough about it to know

what questions to ask. It had not crossed our minds, or our parents’ minds.

The CHAIRMAN. I am asking about hindsight, now.

Rev. WILSON. Yes. Certainly.

The CHAIRMAN. Go ahead.

Rev. WILSON. Looking back, I would certainly know better the

questions to ask, but it never dawned on us that, for instance, the

orthopedic surgeon who was operating was one of the owners of the

hospital. We knew that he had privileges there, but my parents did

not know, nor did I, about how the hospital operates, so we did not

ask the right questions.

One of the other issues was a fact that, for instance, we had

questions about it, but it was not something we were able to ask

about until afterward. My mother was never connected to a monitor, to a heart monitor, which should have occurred with a person

of her age, and she had had heart surgery 15 years earlier. But

they did not have her connected to a heart monitor. That is normal

procedure in a hospital under these conditions.

They did not do that. So there were a number of things that simply were missing, but we did not have all of the information to

work with to know the right questions to ask then.

The CHAIRMAN. Well, in regard to the possible questions you

would have asked if you had thought the necessity of it, would answers to these questions have affected your decision to seek treatment at a specialty hospital?

Rev. WILSON. Absolutely. It never dawned on us that there was

any hospital anywhere that did not have an emergency physician

on call, or on staff and present. Yet, there was not one at Physicians’. Even with their calling, they could not come up with one

from any other part of the hospital.

9

We did not know that there was a hospital on the planet that

was in that situation. We saw the stark contrast between Physicians’ and Adventist Hospital, which is a fine hospital, well run,

when my mother was taken there.

Twice while she was in CCU, there were Code 99 events called

in in that unit, and we saw what it was supposed to look like.

When people come in immediately, they are able to give aid and

to resuscitate a patient. None of that occurred with my mother.

The CHAIRMAN. Now, you spoke about not knowing that the hospital was owned, or partly owned, by the surgeon. Do you believe

that informed consent for patients should include a disclaimer of

any ownership interest a doctor may have had in the hospital?

Rev. WILSON. Absolutely.

The CHAIRMAN. Would knowing that a doctor had an ownership

interest alter the questions you would ask prior to receiving care?

Rev. WILSON. Yes, I believe it would have altered that. The same

physician had privileges at Adventist Hospital, and my mother had

been there previously for another procedure.

We would have opted for that had we known there was any deficiency in the care at Physicians’, but we simply did not know. None

of that was shared with us, none of it was revealed.

The CHAIRMAN. I thank you.

I call on Senator Baucus.

Senator BAUCUS. Thank you very much.

Reverend, you have touched on this a little. I just want to nail

it down the best I can. What did you know about Physicians’? I

mean, was it your impression that Physicians’ was, if not a fullservice hospital, virtually the same quality of a full-service hospital, that all the procedures would be there if there was an emergency? I am curious what you knew about Physicians’.

Rev. WILSON. We had very little information about that. I asked

my father about it later, what he had been told about the hospital,

and he said, nothing. Because the doctor said that that is where

he would prefer to do the surgery, and he had told them that the

nursing staff had received nothing but high marks and recommendations from patients that he had had there previously, my

parents said that they would be happy to have the surgery done

there.

Senator BAUCUS. Right. So, without putting words in your

mouth, the physician steered her to Physicians’?

Rev. WILSON. Yes.

Senator BAUCUS. Would that be an adequate characterization?

Rev. WILSON. Yes, sir. The surgeon did that.

Senator BAUCUS. The surgeon did that.

Did the surgeon or the referring doctor, whomever, indicate that

there was another option, you say Adventist Hospital, or some

other hospital? Was that relevant to her, too? Did she learn about

that?

Rev. WILSON. There was no option given. He stated that it was

his preference to do the surgery there where he had privileges. We

found out later that he also had privileges at Adventist, so that

would have been an option. But it was the doctor’s choice that that

would be where the surgery was performed.

10

Senator BAUCUS. And, I am sorry if this was covered. Was your

mother told that he had an equity interest in, or ownership interest, in Physicians’?

Rev. WILSON. No, sir. No, sir. At the time, we did not know that

it was a physician-owned hospital. Physicians’ took over the old

Woodland Park Hospital that had been there for 43 years in Portland, and was, more or less, a full-service hospital. In fact, my second son was born there.

So we made some assumptions that, looking back, we should not

have made. We should have done more homework. It never dawned

on my parents or myself that we were stepping into a situation

such as Physicians’ is, a for-profit, physician-owned hospital.

Senator BAUCUS. Just as a matter of public policy, do you think

it is better to ban physician ownership or have full public disclosure of physician ownership?

Rev. WILSON. I think public disclosure. If anything, they need to

come under greater scrutiny. We have many hospitals in Portland

whose mission statement contains nothing to indicate that it is primarily a business. We recognize that any hospital has to make a

profit to keep its doors open, but when the major mission is to

make money, I think the patient is in danger. The profit motive is

not necessarily a noble motive.

When doctors are in it primarily to increase their income, corners

will be cut, and they were at Physicians’, in training. I felt sorry

for the nurses because it put them in a horrible position of being

confronted with an emergency like this, but they had not been

given the tools, nor the training, nor the practice to do what they

were called on to do.

I will never forget the look of terror in their eyes as they worked

in that room around my mother, but they, frankly, did not know

what they were doing.

Senator BAUCUS. Now, do you think it is even right for a physician to have all kinds of additional equipment in his hospital? Let’s

say, at Physicians’, I assume, because they do surgery there, and

I assume—perhaps incorrectly—that they focus somewhat on orthopedics, because your mother had back surgery, that they have not

only X-ray equipment, but CAT scans, maybe even an MRI there?

Do you know, is that true? Do they have those?

Rev. WILSON. I do not know what level of equipment they have.

I have not seen any of that. I do know that the surgery itself, from

all that we have gathered, the surgical theater, the recovery room,

seems to be well-equipped, from all that we know. But as far as

other equipment, I do not know how well-equipped the hospital is.

Senator BAUCUS. So the things that concern you are, the service

was poor and your mother died.

Rev. WILSON. Yes.

Senator BAUCUS. And you think it is largely the consequence of

not only inadequacy, but malfeasance. That is, they did some bad

things. That is, the medication and inadequate staff there. That is

number one. Is that correct?

Rev. WILSON. I would say yes.

Senator BAUCUS. And, second, you are concerned about the financial interest that the doctors have at that facility versus other facilities.

11

Rev. WILSON. Yes.

Senator BAUCUS. You are concerned about the training, inadequate training at those kinds of facilities compared with full-service hospitals.

Rev. WILSON. Yes, I am.

Senator BAUCUS. And do you think that it is best that it be

banned, or should they be somehow brought up to speed? What is

your view on that?

Rev. WILSON. Sir, I do not think they should be banned. I believe

that we need more hospitals. But we need good hospitals. We need

hospitals that are well run, where patient care is put first rather

than profits.

Senator BAUCUS. Now, can that happen, in your judgment? What

if Congress just said, sorry, doctors, you can have no financial interest in procedures, or images, or whatnot that you perform? I had

a personal experience, Mr. Chairman, not long ago.

A doctor said, well, we can do this or that. Do you want to have

an MRI? he asked me. I said, what do you mean, do I want to have

an MRI? I want to know what is wrong and I want your professional advice as to what is wrong. So why are you asking me my

opinion? I realized, that is code. That is a way for him to cover

himself, because, clearly, he had a financial interest in my getting

an MRI.

The CHAIRMAN. That is why you ought to go to a veterinarian.

He tells you what is wrong.

Senator BAUCUS. Yes. Right. [Laughter.] I mean, it just bothered

me that something is not quite right here.

Rev. WILSON. Yes.

Senator BAUCUS. I am being asked, not for medical reasons, but

he wants to get my permission so that he can, in his head, somewhat justify referring me for a pretty expensive imaging procedure

where he has a financial interest.

I just found that very bothersome, frankly, and that is wrong. I

mean, his decision should be based entirely on his medical judgment, his professional judgment, not on his pocketbook.

Rev. WILSON. Right.

Senator BAUCUS. I just think, Mr. Chairman, we have to find

ways that doctors—most of them are really good people. They are

terrific people. But, like everybody else, they are tempted. And if

they have an ownership interest, they are going to be tempted to

ask people like me, what do you want? Max, do you want an MRI

or not? What do I know?

But thank you very much. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator Smith?

Senator SMITH. Thank you, Mr. Chairman.

Pastor Mike, how is it you were directed to Physicians’ Hospital?

Rev. WILSON. By the surgeon himself suggesting that that is

where he wanted to do the surgery. He had privileges at two hospitals, we found out, but he opted, and he simply told my parents.

My mother, at her age, and my dad, they come from a generation

that does not ask questions of doctors. That is where much of the

danger is. Elderly people many times do not question anything that

a doctor says, so they are open to being taken advantage of.

12

Senator SMITH. Did the physician tell them he had a financial

ownership in this hospital?

Rev. WILSON. No, he did not.

Senator SMITH. Did they sign any kind of admittance form with

real small print that people our age, to say nothing of the age of

your parents, cannot read without a magnifying glass?

Rev. WILSON. They were given many things to sign in the normal

procedures. There was nothing on that that I saw or read that gave

any indication that the surgeon was an owner in the hospital.

Senator SMITH. Had an interest?

Rev. WILSON. Had any interest in it, or even that it was a physician-owned hospital. We did not know that. I guess by the name

we should have put two and two together, but we did not connect

up the dots. I had never met the surgeon until the morning of the

surgery.

I came in that morning after she had gotten settled in, and then

I was there for the rest of the day. I met him for the first time the

day of the surgery, was impressed with him. Met the anesthesiologist.

I would say that, up until the emergency occurred when my

mother went into respirator arrest, the service we received, the

care, and the kindness we received from the nurses, we had no

problem with any of that. It is when it all came down and hit the

fan that things came unglued.

Senator SMITH. And no physician was around?

Rev. WILSON. None.

Senator SMITH. And on the form that probably your father—or

did you sign the admission forms?

Rev. WILSON. My father signed the admission forms.

Senator SMITH. And is there anything in those forms, legible or

not, to someone his age that talks about, their emergency policy is

to call 911?

Rev. WILSON. No.

Senator SMITH. It is my understanding that the licensing of this

hospital left something to be desired, that it was done in haste.

Can you speak to what the State of Oregon’s role was in this?

Rev. WILSON. I do not know all the details, but my understanding is that they came in basically claiming that they were a

continuation of the Woodland Park Hospital. In reality, that was

not true. It was new owners, new administration, everything new.

They purchased the facilities, but they were under new management, a new charter. So they came in during the time of the moratorium. I am not sure how that happened.

Senator Grassley mentioned that there are others that also managed to come in under the wire. But that is how they came into

existence. There were four doctors who were the primary owners,

four who have controlling stock. Since then, another 35 or so physicians have come aboard, bringing the number to somewhere close

to 40, who are owners of this hospital.

Senator SMITH. I want to join my colleagues, again, in thanking

you, Mike. Your testimony sets the emotional bar for the work that

we and CMS need to do on the whole category of physician-owned

hospitals. I am not against people making a profit.

Rev. WILSON. Of course.

13

Senator SMITH. I am for consumers having all the information

necessary, and I certainly think it is apparent we need to have

some standards that patients can expect to be met if they go to this

hospital or another. There just ought to be that threshold in America.

I just wanted to say publicly how sorry I am for your loss. I hope

you will express to your father the same. But I thank you for your

courage, and your family’s, and the good you are trying to find in

this tragic family experience.

Thank you, Mr. Chairman.

The CHAIRMAN. Do you have any more questions?

Senator BAUCUS. No, thank you. I just thank you for your testimony, very, very much. Appreciate it.

The CHAIRMAN. And we thank you very much for your testimony,

and we thank you for coming. You are welcome to stay if you want

to hear the rest of the testimony from other people.

Rev. WILSON. Thank you very much.

The CHAIRMAN. Thank you very much.

I think Dr. McClellan is not here right now. If he does not show

up, then we will go on to the third panel. We will wait just a moment.

[Pause.]

The CHAIRMAN. We thank you very much for coming, Dr. McClellan. For those of you who do not know Dr. McClellan, he appears

before this committee very often. He has been very thorough in his

testimony and very helpful to this committee.

Most recently, as we expressed concerns to him about the implementation of the Part D drug program, and as it turned out now,

4 or 5 months later after we first met with him, it has turned out

to have a very successful sign-up. We thank you for your leadership

in that area, and we know it is going to continue.

It is very important, for those of you who are in the audience,

for people who administer our laws—and in this case it is Dr.

McClellan—people who make tough decisions, to do so with an understanding of those who are impacted by their decision.

So, he is here to discuss the 3-month interim report on strategic

and implementing plans for specialty hospitals. The interim report

was issued, as I said in my opening statement, by his agency last

week.

The interim report was mandated by section 5006 of the Deficit

Reduction Act of 2005, and that provision required the Secretary

of Health and Human Services to issue the interim report 3

months prior to the full Strategic and Implementing Plan on Specialty Hospitals.

When Congress passed the Deficit Reduction Act, it was envisioned that the strategic and implementing plan would be more

than just another report to Congress and would include meaningful

disclosure requirements.

I trust that Dr. McClellan’s testimony will address this point, as

well as provide the next steps that the law requires in creating

that final strategic and implementing plan. Thank you very much.

We have given you extra time, so proceed.

14

STATEMENT OF HON. MARK McCLELLAN, ADMINISTRATOR,

CENTERS FOR MEDICARE AND MEDICAID SERVICES, DEPARTMENT OF HEALTH AND HUMAN SERVICES, WASHINGTON, DC

Dr. MCCLELLAN. Thank you very much, Mr. Chairman, Senator

Baucus. I appreciate the opportunity to talk with you about the

critically important topic of the quality of care that our beneficiaries receive.

I want to start by saying that, as a physician, it is unacceptable

that a patient in this country could get care like we have heard

about this morning, and I want to offer my condolences to Rev. Wilson and his family for their loss. Their mother seems like a wonderful woman. This should never happen, and CMS is in the process of terminating the hospital from the Medicare program.

Tragically, things like this that never, ever should happen in our

health care system do happen every single day. Last year, for example, 84 patients got surgery on the wrong part of their body;

hundreds of patients died of infections they got after they were admitted to a hospital.

Our quality oversight activities are designed to prevent this by

prohibiting payments to providers that do not meet appropriate

standards of care. We would like to work with you to do more to

prevent poor care that should never happen. As Senator Smith

said, if there is a silver lining to these tragic events, it is that they

remind us of the opportunity for action.

With that goal in mind, I would like to describe the application

of our quality standards and the new steps we are taking to improve quality of care in hospitals.

Rev. Wilson put it best: we need hospitals that are well run, and

that demonstrate that by putting patients first. That is what we

should be supporting.

Our quality standards apply to all hospitals, whether a facility

is rural or urban, for-profit or nonprofit. These quality requirements are enforced through Medicare’s Conditions of Participation

and the survey and certification process.

When CMS receives a credible report of a quality concern, the

agency authorizes State survey agencies to investigate. We did this

thousands of times in the past year. If there is evidence of persistent problems at a particular hospital, one of our regional offices

will conduct a Federal survey. This is what happened in the case

of this specialty hospital in Oregon, and this is what is leading to

the hospital termination.

CMS used this targeted approach with inspections because, as

you know, the agency has a limited budget for survey and certification. For the past 2 years, our survey and certification functions

for Medicare have been funded at levels well below the President’s

budget request, and I look forward to continuing to work with this

committee to ensure the agency receives continued strong support

for these essential functions.

At the same time, we also believe that Medicare can do more

through its payment system to improve quality and prevent adverse events in hospitals. This is particularly important, as it provides an opportunity to improve care and identify quality issues

sooner before quality problems result in serious adverse events.

15

CMS has worked with a number of key stakeholders through the

Hospital Quality Alliance to develop a shared national strategy for

improving the quality of care provided at all hospitals, including

physician-owned specialty hospitals.

The authority to adjust payments and collect quality measures

was initiated in the Medicare Modernization Act, that very important law that you mentioned at the outset, and it was expanded

through the Deficit Reduction Act. This gives us a solid foundation

for not just passable performance, but high-quality performance in

our health care system.

I appreciate and support your leadership in building on these

steps by implementing performance-based payments. Patients

should know not just that a hospital has met minimum standards,

but whether it is achieving up-to-date and error-free care, and hospitals need better rewards and support for improving quality above

the minimum standards.

If we truly want to prevent quality problems, there is no place

for paying for poor care every day that should not happen at all.

The Deficit Reduction Act will allow CMS, beginning in 2008, to

adjust payments for hospital-acquired infections, which many hospitals have shown can be reduced, if not eliminated entirely,

through evidence-based medical practices.

We should build on this step. CMS is now considering administrative and legislative changes to address ‘‘never’’ events. These are

serious, preventable medical errors that should never happen. I

mentioned a few ‘‘never’’ events that are currently regular occurrences in this country, like surgery on the wrong body part.

There are many others: foreign bodies left in patients after surgery, mismatched blood transfusions, major medication errors,

major pressure ulcers acquired during a hospital stay, and preventable post-operative deaths.

Paying for ‘‘never’’ events, and in many cases paying more for

such events, is contrary to the goal of getting better-quality care

through how we pay. We just cannot afford to keep paying for

things that should not be happening.

We cannot afford it from the standpoint of Medicare’s finances

and, more importantly, we cannot afford it from the standpoint of

our beneficiaries’ health. We want to eliminate payments for

‘‘never’’ events, and we want to work with you to make this happen.

CMS has also taken more immediate steps designed to improve

quality by more accurately reflecting the cost of providing care in

hospitals. Payments that accurately reflect resource needs create a

level financial playing field for all hospitals and discourage hospitals from concentrating on certain services because they are more

profitable rather than because they are more needed by patients.

In particular, we have proposed the most important reforms in

the Diagnosis-Related Group payment system for hospitals since

this system was created more than 20 years ago. CMS has also responded to concerns raised by Congress and others regarding physician-owned specialty hospitals.

CMS implemented the whole hospital exception moratorium that

you mentioned earlier, Mr. Chairman, for new specialty hospitals

16

as part of the Medicare Modernization Act. That moratorium began

on December 8, 2003 and ended on June 8, 2005.

During this period of time, new physician-owned specialty hospitals, except those that were found to be in existence or under development as of November 18, 2003, were unable to take advantage

of the whole hospital exception of the physician self-referral law.

In other words, these physician-owned specialty hospitals were

prohibited from billing Medicare for services furnished to patients

referred to the specialty hospital by a physician owner. It is important to be clear that the moratorium did not prevent these hospitals from opening or from receiving a Medicare provider number.

It also did not prevent the physician-owned specialty hospitals

from billing Medicare so long as the services were provided to patients other than those referred to the specialty hospital by its

owners.

Now, although CMS did not have the regulatory authority to extend this moratorium, we took action after it expired to suspend

the enrollment of all new specialty hospitals while we reviewed our

enrollment procedures.

The Deficit Reduction Act built on this action by the agency. It

continued our enrollment suspension until we developed the strategic and implementing plan you mentioned regarding physician

investment in specialty hospitals, and I look forward to discussing

that with you further.

In response to this mandate, we issued an interim report last

week, as you referenced. The report described the legislative and

administrative action taken to date regarding specialty hospitals. It

outlined the data that the agency needs to address the investment

issues, including the transparency you mentioned, as raised in the

Deficit Reduction Act.

As part of the interim report, CMS is now surveying specialty

and general acute care hospitals about physician investment interests and the provision of care to low-income and charity patients.

This survey will be used to develop the final report and the strategic plan that we will release later this year, and we look forward

to your strong interest in this issue and your continued input in

making sure that that strategic plan is implemented effectively.

We are also very interested in comments from others in the public on how we can promote the availability of accurate information

and disclosure of physician investments in hospitals, and how we

can support enforcement against improper investment.

Evaluating the propriety of financial investment goes beyond our

usual mandate at CMS, and goes beyond our capacities to promote

quality care and to pay appropriately for care provided to our beneficiaries.

Consequently, we are also assessing the extent to which the Office of the Inspector General and other Federal agencies, as well as

State agencies, have authorities that can be supported by the information that we develop to prevent investments that are not bona

fide or that have dubious rates of return. Again, we look forward

to continuing to work with you closely as we finalize our strategic

plan.

I want to thank you for this opportunity to discuss our efforts to

improve quality of care in hospitals. I am very sorry about the ocVerDate 11-MAY-2000 15:50 Jun 18, 2007 Jkt 095484 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 35439.000 SFIN1 PsN: SFIN1
17

casion that brings us together, but, again, if there is a silver lining

here, it is that we can find better ways to use our limited resources

to move forward with major reforms to our payment systems to improve quality and assure a level playing field.

As I have made clear today, these reforms should also include

eliminating payments to hospitals for ‘‘never’’ events. I want to

thank the committee for its attention to these crucial quality

issues, and I welcome any questions that you have.

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

The CHAIRMAN. I will not go back through the dates about the

moratorium, because I think they are well in your mind.

Dr. MCCLELLAN. Yes.

The CHAIRMAN. We heard testimony earlier about the death of a

patient resulting from treatment at Physicians’ Hospital. This hospital received its provider number in January 2005, right in the

middle of the moratorium.

It is my understanding that CMS is collecting in excess of

$500,000 in payments made by Medicare during the moratorium.

Further, it has come to our attention that CMS is seeking in excess

of $100,000 for Medicare payments from another moratorium violator.

According to your agency’s own data, 43 new specialty hospitals

have opened since the moratorium, 9 during the CMS administrative moratorium. Can you tell me why CMS did not enforce the

moratorium, except in two instances after Congress pointed out the

lack of enforcement?

Dr. MCCLELLAN. That is a very good question that goes to understanding exactly what was and was not included in the moratorium

enacted by Congress and the Medicare Modernization Act.

That was a moratorium on the so-called ‘‘whole hospital exception’’ under the Stark referral law. What that means is, specialty

hospitals that had not opened before November 18, 2003 were not

able to bill for patients who had been referred to those hospitals

by a physician owner.

It was not a prohibition on opening. It was not a prohibition on

getting a Medicare provider number. It was not even a prohibition

on billing Medicare at all. But it was a prohibition, a moratorium,

on billing for patients who had been referred by the owners of the

hospital.

So, because we take our enforcement of this moratorium seriously, and we know this is extremely important to you, we have

gone back and looked carefully at the billing that has occurred to

Medicare by physician-owned hospitals during this time period.

We have investigated, as you said, and found two hospitals, including this one in Oregon, that were billing improperly for patients who had been referred by the physician owners. So we are

collecting that money back.

That is the way our billing systems work, as you know. We conduct fraud and program integrity protections by reviewing the billing information that comes in.

So, we have been collecting that money from the hospitals that

billed improperly, and we are continuing to look closely at whether

there were any other improper billings. As you mentioned, the hosVerDate 11-MAY-2000 15:50 Jun 18, 2007 Jkt 095484 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 35439.000 SFIN1 PsN: SFIN1
18

pital included here had significant billings, half a million dollars,

over the first half of 2005.

The CHAIRMAN. Then could you tell me, why did you choose to

enforce the administrative moratorium more stringently than the

Congressionally passed moratorium?

Dr. MCCLELLAN. Well, we believe that there do need to be a

number of important changes related to payment, oversight, and

disclosure for specialty hospitals, and that is reflected in the interim report that we issued earlier this month. It is also reflected

in my prior testimony on this issue, and the testimony of other

members of my staff at CMS.

The moratorium that we imposed was on issuing new provider

numbers. We did not have the statutory authority to discontinue

an exception to the Stark law. That is something that is set in statute. That whole hospital exception is a feature of the statute and

is not something we can change administratively.

But we felt we did have the authority to suspend new enrollments in the Medicare program of new specialty hospitals, and that

is what we did last year. That moratorium on new enrollments is

continuing, in effect, right now until we finish this specialty hospital strategic plan.

The CHAIRMAN. Yes.

Dr. McClellan, as you mentioned, the Deficit Reduction Act included a requirement that CMS issue a strategic and implementing

plan for specialty hospitals. When Congress included this provision,

we discussed that this strategic plan would be more than a report.

You gave me your personal guarantee that this would include

meaningful disclosure requirements for physician investors in specialty hospitals, as well as enforced prohibitions on shaky backdoor investment deals in specialty hospitals.

You just testified, I believe, that you would proceed with more

than just mere disclosure requirements. Will you publicly reaffirm

that guarantee that you made to me, that this strategic plan will

be more than another report and require more than just disclosures, and also include enforcement against improper investments?

Dr. MCCLELLAN. Well, we definitely intend for this report to be

more than just another paper that gathers dust on a shelf. It is already including the most fundamental reforms in Medicare’s payment mechanisms for hospitals in more than 20 years to get at this

issue of some patients just being inherently too profitable under

our current payment mechanisms.

It includes new requirements on specialty hospitals under the socalled EMTALA law, and right now we are conducting a major survey of financial investments by physician owners in these hospitals.

We intend to use that information, as I mentioned in my testimony, and share it with the Office of Inspector General and other

State and Federal regulatory agencies that have oversight ability

for improper investments, for kickbacks and other investments that

should not take place in our health care system.

We are going to help provide them with the information they

need to enforce those investments properly, so that means we are

going to be going beyond just issuing a report. We are going to be

taking some important steps to get to more disclosure of relevant

19

information so that we can help prevent any improper investments

in hospitals.

The CHAIRMAN. And then you would enforce against the improper investment?

Dr. MCCLELLAN. Well, we use the enforcement authority that we

have under the law. As you know, there are two kinds of statutory

authorities that I think are relevant here. One is our authority

under the whole hospital exception, the Stark law, to enforce restrictions against improper referral.

So if a physician owner makes a referral that is not accepted

under the Stark law, then we are able to recoup those payments,

as we are doing in the case of certain specialty hospitals, and make

sure that Medicare payments do not go to physicians who are referring patients to their own facilities improperly.

But the other relevant law here is the anti-kickback law that is

enforced by the Office of Inspector General, and that law is designed to prevent improper investments to help promote bona fide

investments and prevent excessive rates of return, again, for financial gain. So we will be working with the OIG to make sure that

those provisions are enforced effectively.

The CHAIRMAN. I think you are telling me what I want to hear,

but I want to——

Dr. MCCLELLAN. Well, I am trying to. It is a little bit complicated.

The CHAIRMAN. Between the two approaches, you are telling me

that what we have talked about, that we will have enforcement one

way or the other against improper investments.

Dr. MCCLELLAN. And that we will need to work with the Office

of Inspector General. I know you worked closely with that office

and have an excellent relationship with them as well. We will need

to work with them because their office, and other Federal and

State agencies, have the enforcement authority for kickbacks and

related improper investments.

The CHAIRMAN. While Senator Baucus is asking his questions, I

will find out if that is enough of an answer for me.

Dr. MCCLELLAN. All right.

Senator BAUCUS. Thank you, Mr. Chairman.

Is it true, Dr. McClellan, that specialty hospitals care for

healthier, more profitable patients compared with other hospitals?

Dr. MCCLELLAN. They do, according to a lot of the studies that

have been performed, including one that we did.

Senator BAUCUS. Why do you suppose that is?

Dr. MCCLELLAN. Well, for a couple of reasons. Different hospitals

specialize in different kinds of patients. There are not just specialty

hospitals, but limited service, general hospitals, critical access hospitals in rural areas that do not have a full line of medical services

for the most severely ill patients.

Senator BAUCUS. I am talking about in a metropolitan area. I am

not talking about rural areas. I am talking about metropolitan

areas with a lot of hospitals. Is it not true that specialty hospitals

tend to get the healthier, more profitable patients?

Dr. MCCLELLAN. Well, I think what you are getting at is the

other reason I was going to mention, and that is our payment systems, right now, pay better for certain kinds of patients.

20

Senator BAUCUS. All right.

Dr. MCCLELLAN. There are patients who are less severely ill who

need elective procedures that tend to be lower cost. Right now, our

reimbursement system pays more for those kinds of patients.

Senator BAUCUS. How many general practitioner/family practitioner specialty hospitals are there, where that is all they do?

Dr. MCCLELLAN. Very few. The specialty hospitals do specialize.

Senator BAUCUS. And again, why do they specialize? It is money.

Let us be honest about it. It is money. That is where the money

is. What are the procedures generally at specialty hospitals that

are compensated a lot more? What are they?

Dr. MCCLELLAN. Well, that is why we need to change our payment systems.

Senator BAUCUS. Tell me what they are. They are cardiac.

Dr. MCCLELLAN. Cardiac, orthopedic.

Senator BAUCUS. Orthopedic.

Dr. MCCLELLAN. Some specialize in other types of relatively

minor general surgical procedures.

Senator BAUCUS. Because that is where the money is.

Dr. MCCLELLAN. That is where the money is.

Senator BAUCUS. It is kind of like Willy Sutton.

Dr. MCCLELLAN. Yes. I agree completely with that, so I am not

disagreeing with you. I would just also add that there are other facilities that are not specialty hospitals that also specialize or expand into other kinds of services.

Senator BAUCUS. But for other reasons. Not to get money, but for

other reasons. You mentioned critical access. Let us be honest here.

Please be straight with me on this. You mentioned critical access.

That is irrelevant to the question we are addressing here. You are

going to find no specialty hospitals out in Circle, MT.

Dr. MCCLELLAN. Right. There are none.

Senator BAUCUS. Those are critical access, a different kind of

provider.

Dr. MCCLELLAN. Getting back to urban areas——

Senator BAUCUS. Let us get back to big, urban areas.

Dr. MCCLELLAN [continuing]. There are, in addition to specialty

hospitals that have increased service for certain kinds of patients,

general hospitals that have built new wings that specialize in the

same kinds of patients. They have increased their capacity for the

same types of specialized services.

I do think that there is a financial problem here and that we are

paying too much for these kinds of patients, and that is why we

have to reform our payment system.

Senator BAUCUS. So what are you going to do about that? How

much are you going to knock down DRG payments to these specialists? What percentage, roughly?

Dr. MCCLELLAN. In the inpatient rule that we announced, I believe the reduction for some of the types of specialty hospitals is on

the order of 11 percent, so that is a big difference in payments. According to MedPAC, these steps would make a huge difference in

getting rid of the over-payments that now exist for certain kinds

of patients.

Senator BAUCUS. And what do you think the over-payment rate

is today?

21

Dr. MCCLELLAN. According to MedPAC, I think their estimates

were in the 9 percent range. So we are aiming to get at most, if

not all, of this differential between payments that we are making

and the cost of caring for the patients.

Senator BAUCUS. But that is not going to address the separate

problem here, and that is self-referral. You can get the rates down

all even-Steven, but then you have the self-referral problem. That

is, where there is a financial interest to refer to me because I get

paid more if you do it in my facility.

Dr. MCCLELLAN. That is right. The Stark law, as you know, the

self-referral law, puts a lot of restrictions on how physicians can

refer patients for services that they own.

Senator BAUCUS. That is correct.

Dr. MCCLELLAN. But there is a whole hospital exception built

into the law.

Senator BAUCUS. I am just talking about policy for a moment.

We have self-referrals to labs that are banned. Is that not correct?

Dr. MCCLELLAN. Right. That is correct.

Senator BAUCUS. And what other medical services are there with

self-referral?

Dr. MCCLELLAN. Imaging procedures. Restrictions exist for imaging procedures.

Senator BAUCUS. Imaging is another one. What else?

Dr. MCCLELLAN. Well, one of the major cases that is allowed is

the whole hospital exception. Most other types of physician selfreferral are restricted under the law.

Senator BAUCUS. But if there are restrictions on self-referral

there, why should there not be restrictions on self-referral with respect to specialty hospitals? Just as a matter of policy, what is different?

Dr. MCCLELLAN. Well, I believe the policy intent is, because the

investment is in a whole hospital, a whole set of procedure services

for patients, there is not the same kind of narrow, direct ties that

there would be with an imaging machine or——

Senator BAUCUS. I am talking about specialty hospitals, like Physicians’.

Dr. MCCLELLAN. Right. I think that is what I am talking about

as well. The investment is in the whole facility. I think many of

the physician owners would argue that, because they are involved

in decisions about the management of the hospital rather than—

I have talked to a lot of these physicians myself.

They do not like what they call the ‘‘suits’’ in hospital management. They think that physicians should be in charge of making

decisions about what is best for the hospital, what types of activities the hospital should engage in to serve patients the best. They

would rather have physicians involved in management decisions

than non-physicians who are focused more on finances.

Senator BAUCUS. You are not answering my question.

Dr. MCCLELLAN. I am trying to.

Senator BAUCUS. I know, but you are trying to in a certain little

very clever way. I am not asking you what physicians want. I am

asking you, what is good public policy?

Dr. MCCLELLAN. And I think that is the argument. Look, right

now for general hospitals there is a disconnect. We pay physicians

22

in one way, we pay the hospitals another way. There are a lot of

good reasons for that.

On the other hand, it can get in the way of the managers in a

hospital working, as well as possible, aligning as well as possible,

with the physicians to promote quality care and avoid unnecessary

costs.

Now, we do not have a health care system that does that today.

There are a lot of good ideas, I think, and you will hear some on

the next panel, how hospitals might be better able to support physicians to deliver quality care more effectively if we had better payment systems there as well. But that is why we need the kinds of

reforms in our payment system that I have just been talking about.

Senator BAUCUS. To be honest, I think the reforms in the payment system that you are talking about are within the context totally in the current system. They do not get at what you just mentioned, where doctors can be involved. It is a whole zero-sum game,

kind of a holistic sense of health care in the institution. That is a

whole different thing.

Dr. MCCLELLAN. It is, but with the steps that we are taking right

now because of, frankly, your leadership and Chairman Grassley’s,

we are much closer than ever before.

You all had a landmark piece of legislation last year on paying

for better performance in health care generally, including in hospitals, where hospitals and the doctors would get paid more when

patients have better outcomes and when overall costs of care are

lower.

That is what we ought to be aiming for. And you are right that

we are in a payment system right now that is a long way from

there, but we have made a lot of progress, and I think we should

keep making more.

Senator BAUCUS. My time is about to expire, but I have one more

question, if I might.

The CHAIRMAN. Yes.

Senator BAUCUS. That is, you administratively extended the moratorium, and then Congress came along and said, yes, that is the

right thing to do.

Now, what was your authority to administratively extend that

moratorium?

Dr. MCCLELLAN. We have the authority to determine circumstances under which Medicare issues Medicare provider numbers for participation in the program. We have regulatory authority

there to determine some aspects, at least, of what constitutes an

appropriate provider in the Medicare program.

We believe that we needed to review our Medicare provider enrollment process in light of further developments in the hospital industry, and this is including some of these developments related to

specialty hospitals. So, that is the authority that we use.

Senator BAUCUS. Will you have the same authority on August

10?

Dr. MCCLELLAN. Well, a lot of the reason for our moratorium on

issuing enrollment numbers was because we wanted to review

whether our definition of a hospital was keeping up with the care

that should be provided in hospitals today, because many specialty

hospitals, for example, offer a lot of outpatient care as well.

23

Part of the question was whether a better definition of a hospital

might limit enrollment as an inpatient hospital for certain kinds of

facilities. We have looked at that a lot since then.

There does not seem to be an easy definition based on something

like percentage of inpatient services, so we have reached some conclusions about whether or not our enrollment rules are appropriate,

and I do not think that is something we can continue indefinitely.

It depends on whether there are any very important unresolved

issues about whether our current Medicare enrollment rules are

adequate.

Senator BAUCUS. So what is the answer?

Dr. MCCLELLAN. So I do not think the same kind of reasons——

Senator BAUCUS. I did not ask that.

Dr. MCCLELLAN. No, I do not think so, not past August.

Senator BAUCUS. You feel, even though you had the prior authority on your own administratively, are you telling this committee

now that when the legislatively mandated authority expires on,

what is it, August 8, 9, something like that, you are telling me that

although you had the administrative power before, that you do not

have the administrative power?

Dr. MCCLELLAN. Senator, the reason we used that administrative

power before is, we had some unanswered questions about the adequacy of our definition.

Senator BAUCUS. If I might ask, what are the questions and

what are the answers?

Dr. MCCLELLAN. The question was, is our definition of a hospital

appropriate given some of the recent trends in the hospital industry? So we looked at whether we should change that definition to

exclude hospitals, for example, that had below a certain percentage

of inpatient services.

On looking more closely, there are many hospitals, including

some in the rural areas, including some in urban areas, that specialize in certain types of care, much of which is delivered on an

outpatient basis today.

We did not see a way of changing our definition that would not

also have excluded many general hospitals or many hospitals in

rural areas that we think are providing legitimate and effective

services. So, I do not think we can extend the same thing.

Senator BAUCUS. I am asking you to revisit that question, to

keep an open mind.

Dr. MCCLELLAN. All right.

Senator BAUCUS. And I am asking you just that.

Dr. MCCLELLAN. I will keep in touch with you about that.

Senator BAUCUS. Keep revisiting that question. I am quite disappointed for you to summarily say you do not have the power

now, but you had then. I just ask you to keep looking at that.

Dr. MCCLELLAN. I will do so. We will keep talking with you

about that.

Senator BAUCUS. And not have a closed mind about that.

Dr. MCCLELLAN. All right.

Senator BAUCUS. Because you are going to hear from us.

Dr. MCCLELLAN. I know I will. [Laughter.]

Senator BAUCUS. Thank you.

Thank you, Mr. Chairman.

24

The CHAIRMAN. Yes. Thank you, Senator Baucus.

I have just a couple of questions to finish up here. One of them

is a carry-on where I left off with you. Nothing you said is inaccurate, but I want to kind of clarify a couple of things in regard,

first of all, to what you said about working with the Office of Inspector General.

So, referring violations to the OIG for enforcement of criminal

violations of the anti-kickback statute is good, but there is a very

high standard in criminal violation, and it is a big challenge to

take action under the anti-kickback statute. So, that is the criminal

aspect of it.

Now, you have civil enforcement authority at CMS, and your

commitment to me was civil enforcement by CMS. Are you committed to that?

Dr. MCCLELLAN. Well, we absolutely want to use the civil enforcement authorities we have. I believe those civil enforcement authorities are under the Stark rule, which goes to payments for patients who are referred by physician owners, not in the same way

the OIG has enforcement authority. But I would be delighted to

work more closely with you on examining just how far we can take

our authorities.

The CHAIRMAN. You have general civil enforcement authority,

and that was the authority used for the moratorium that Senator

Baucus was talking about, why you cannot continue that.

So we are asking you, within the same realm of authority that

you had to do that, to make sure that we have civil enforcement

against improper investments.

Dr. MCCLELLAN. I would need to talk with you further about how

that civil authority would work toward improper investments. It

certainly works towards violations of the Stark rule, so that is exactly the authority that we are using to recapture these payments

that went out to this hospital in Oregon that we are in the process

of terminating, and that has happened improperly in at least one

other instance.

So, we are definitely using our civil authorities there, and we will

use them to the maximum extent. I would be happy to discuss with

you and your staff further how we can continue to do so.

The CHAIRMAN. Well, then I think I read you as saying, in principle, you are willing to work with us and make it work so that we

can have, without a doubt, enforcement against improper investment.

Dr. MCCLELLAN. Well, I know how important this issue is to you.

We are, as you know, in the process of gathering a lot of information right now on the kinds of investments that are occurring in

specialty hospitals.

That, and further discussion with the OIG and other State and

Federal agencies, we hope, by working with you, can lead to a very

effective and comprehensive approach to these investment issues.

The CHAIRMAN. Then my last question is an understanding that

CMS, MedPAC, and the Government Accountability Office found

that physician-owned limited service hospitals provide a lower percentage of care to Medicaid patients, or poor people generally.

For instance, USMD Hospital in Texas, the hospital that Dr.

John House, one of our witnesses on the next panel, represents,

25

has less than 1 percent of its admissions coming from Medicaid.

This is another form of patient selection. Fixing the Medicare payment system will not address that issue.

So the question is, is this not an indication that there are broader issues involving physician self-referral that should be addressed,

issues that go beyond CMS’s recommendations to date? What actions is CMS considering to address this issue?

Dr. MCCLELLAN. Well, we are doing, as part of that survey I

mentioned, a review of the uncompensated care, and also Medicaid

services provided by both specialty hospitals and general hospitals

in the same areas.

There has been a fair amount of evidence developed on this already. I think while there are in many cases the circumstances

that you describe of limited use of Medicaid in some of the specialty hospitals, there definitely are exceptions to that.

Some specialty hospitals are providing more care to Medicaid patients, and specialty hospitals as a whole are providing a lot of contributions to the community in the form of tax revenues that local

governments and State governments obtain from the specialty hospitals that they do not obtain from the general hospitals that have

the nonprofit status exception.

In fact, in the study that we did last year, if you put the two together, uncompensated care and contributions through tax revenues, the specialty hospitals, on average, are putting in more

money than the general hospitals.

So, this is an issue that we need to look at more closely, but I

want to make sure we do it comprehensively and that is why we

are gathering more information in a survey right now.

The CHAIRMAN. Well, then let me ask you, yes or no, whether or

not you are basically then concerned about the referral of most of

these Medicaid and poor people to general hospitals.

Dr. MCCLELLAN. I am concerned about that. That is one reason

we are taking our action under the EMTALA rules, to make clear

that if a specialty hospital can treat an unstable patient or a patient who needs services, regardless of their ability to pay, the specialty hospital needs to take them.

The CHAIRMAN. All right.

Did you have something else?

Senator BAUCUS. Just a couple questions, Mr. Chairman.

The CHAIRMAN. Go ahead.

Senator BAUCUS. Dr. McClellan, is it not true that the specialties

we are talking about here are not whole hospitals, and that therefore the whole hospital exception should not apply?

Dr. MCCLELLAN. Well, we have looked very closely at this definition of a hospital. We have just been around the block on this right

now.

Senator BAUCUS. No, no, no. Let us be honest. We are generally

talking about specialties, the nature of Physicians’. When people

talk about the whole hospital exception, that is a larger hospital

owned by physicians.

The rationale is, the physicians have the entire facility and lots

of different procedures are performed, and it is all diluted—that is

the argument—and so that is different, that is ‘‘all right.’’ I have

26

a question about that, personally, but I am just giving you the rationale.

Whereas, the specialties, it is like, four or five beds, or six beds,

or a wing of a hospital. That is what we are talking about, generally, when we are talking about specialties. Is there not a difference in referral to a whole hospital compared with referral to an

orthopedics hospital or a cardiac-only hospital?

Dr. MCCLELLAN. There are a broad range of facilities out there

now delivering health services, and some of this diversity is unquestionably good. We are seeing more specialization, more localized care for many patients. You do not have to go 20 miles downtown to a major teaching center to get the care that you need.

Now, some of these facilities are clearly not inpatient hospitals,

and we have recently turned down a number that sound just like

what you described, a facility that is operating a 25-bed emergency

ward, plus two inpatient beds. We turn that down and say that

does not meet what we view as a definition of a hospital.

But I think there are some legitimate hospitals, specialty or otherwise, that focus on certain kinds of patients that deliver inpatient and outpatient care together, maybe deliver mostly outpatient

care, but that still are providing valuable hospital services.

Senator BAUCUS. How much outpatient care is provided at Physicians’ Hospital?

Dr. MCCLELLAN. Off the top of my head, I do not know. I expect

a large part of the care that they delivered was outpatient care.

They had a medical ward and a surgical ward, but they do have

a lot of outpatient care, too.

Senator BAUCUS. I was trying to get at, they are small organizations that serve the wealthier, the healthier, and therefore the

more profitable, where physicians not only provide some service,

but also to make a buck, more than they otherwise would make as

physicians. That is what I am focusing on.

Dr. MCCLELLAN. Right.

Senator BAUCUS. And I think there is way too much self-referral.

It is going to be almost impossible to guard against. That is why

we have self-referral prohibitions for imaging, lab, and so forth.

Even with all the disclosure and so forth in the Congress, the country has decided that is not a good thing to do.

So I am asking, why is it not also good public policy with respect

to the smaller kinds of specialties we are talking about today represented by physicians?

Dr. MCCLELLAN. Well, again, I do think some specialization is

good in 2006, in modern medicine.

Senator BAUCUS. You are not answering my question. That is not

the question I asked. I am not talking about ‘‘some’’ are. I did not

ask about ‘‘some.’’ I am asking about these.

Dr. MCCLELLAN. Well, I think if we change our payment system

so that the patients who currently are profitable under the mechanism that Medicare uses to pay, because of the way we pay, if we

are paying a lot more than it costs to treat a patient, that is just

wrong. We need to change that. That is why we are implementing

these major reforms in our payment system.

Senator BAUCUS. If these doctors get two fees, are reimbursed

twice, one for the procedure—and is there not something else? I

27

forgot what the phrase is. Some kind of transaction fee. There is

a certain separate amount that physicians who own specialties get

in addition to performing the services.

Dr. MCCLELLAN. Well, they get the usual Medicare payments for

their surgical services.

Senator BAUCUS. Right. Right.

Dr. MCCLELLAN. And they will get the payment, their share,

their revenues from the payments to the hospital in which they are

a part owner. That is the ownership piece.

Senator BAUCUS. There is no other Medicare payment?

Dr. MCCLELLAN. Our payments in traditional Medicare are feefor-service based.

Senator BAUCUS. What are facility fees?

Dr. MCCLELLAN. Facility fees? I do not think we have a separate

category of facility payments to physicians. We make payments to

the provider. We will make a payment to the hospital for the hospital admission and we will make a payment to the surgeon for the

delivery of the surgical service, sort of a global fee for performing

the surgery and any of the peri-operative care.

Senator BAUCUS. Say if this procedure were at Adventist Hospital. Would the same exact fees be paid to that hospital?

Dr. MCCLELLAN. Well, maybe this is what you are getting at. If

a service is not performed in a hospital, the payment rate may be

different. There may be a technical component that we include with

the physician fee that covers the cost of the ambulatory center or

the place where they are delivering the service.

I am sorry if I am not getting at what you want to know, but

I would be happy to follow up with your staff afterwards on the

total payment.

Senator BAUCUS. Well, the lady behind you is giving me information by nodding her head. The answer to my question is that, no,

there is no difference, according to her, if that is accurate.

Dr. MCCLELLAN. All right. All right. That makes sense to me.

Senator BAUCUS. All right. Thank you. [Laughter.] Well, it is the

answer that you would like her to give, that is right. Exactly. My

time has expired.

My basic point is this. We are the hired hands. I work for people,

the public. You work for the public. It sounds corny, but it is true.

We are supposed to do the right thing. That is what it comes down

to.

We can parse this thing all kinds of ways. We hear all kinds of

people, special pleaders, coming in saying, you have to do this, you

have to do that, and they have all kinds of rationalizations why

they should be paid this, paid that, and so forth, and we have to

be fair, clearly.

But our default should be what is right for the people we serve.

That is the default. That is the bias we should have. I would just

encourage you, when you are thinking through all this and you are

getting all the pressures on you, just remember the people we

serve. That is all it comes down to. It is not all the economic interests, but it is the people. So, please, I know you will do the right

thing. Thank you.

Dr. MCCLELLAN. Thank you.

28

The CHAIRMAN. Yes. Well, you have always been very cooperative

with our committee, and thank you for your cooperation today. We

will be in touch. This is an ongoing issue.

Dr. MCCLELLAN. It is.

The CHAIRMAN. We will talk to you.

Dr. MCCLELLAN. I will look forward to that. Thank you.

The CHAIRMAN. Our next panel is Ms. Cindy Morrison, vice president of public policy, Sioux Valley Hospital, Sioux Falls, SD; Dan

Mulholland, attorney at Horty, Springer & Mattern, a law firm

based in Pittsburgh; Dr. John House, urologic surgeon and founder

of USMD, a company that helps physicians develop specialty hospitals; and Dr. James Cobey, an orthopedic surgeon who practices

at Washington Hospital Center in Washington, DC.

I am going to have you testify in the order I stated. If you folks

have a longer statement than the 5 minutes we gave you to summarize, the longer statement will be printed in the record. So, we

would ask you to stay within your 5 minutes so Senator Baucus

and I could have time to ask questions.

We are going to go in the order you were introduced, so we will

start with Ms. Morrison.

STATEMENT OF CINDY MORRISON, VICE PRESIDENT,

SIOUX VALLEY HOSPITAL, SIOUX FALLS, SD

Ms. MORRISON. Thank you, Mr. Chairman. My name is Cindy

Morrison, and I am vice president of public policy at Sioux Valley

Health System in South Dakota. We are an integrated system with

24 hospitals and 300 physicians located in South Dakota, Iowa, Nebraska, and Minnesota.

South Dakota has a population of only 750,000, and we have

eight physician-owned specialty hospitals. I am here today on behalf of a grassroots coalition of community hospitals which was

formed to raise awareness of the problems like those faced by

Helen Wilson and her family, problems associated with physician

self-referral.

The coalition has over 100 hospitals located in 20 States. Many

of these hospitals have been impacted by physician-owned facilities.

My testimony today will focus on three key points. The first is

physician self-referral. There is no greater market force in health

care than the ability of physicians to admit patients to hospitals.

This market force cannot be competed with and can, in effect,

eliminate the patients’ free market choice when physician owners

direct patients to hospitals they own.

Second, community hospitals have been negatively impacted by

the entrance of physician-owned specialty hospitals in several

ways, including weakened financial condition, ER crises, and recruitment challenges, to name a few.

Third, payment changes alone will not address physician selfreferral problems because of the physicians’ unique ability to react

to payment changes that community hospitals simply cannot do.

Physicians alone are the only persons with the authority to admit

a patient to a hospital.

This unique responsibility is placed solely with the physician and

puts the physician owners of specialty hospitals in a position to

29

self-refer patients away from community hospitals to be admitted

to specialty hospitals they own.

Because community hospitals cannot admit patients, the hospital

is at a tremendous competitive disadvantage. Community hospitals

simply cannot compete with the power of a physician’s admitting

privileges. In effect, the community hospital is dealing with a competitor that is also in control of its business.

Community hospitals of all types and sizes have been impacted:

urban and rural hospitals, nonprofit, and for-profit hospitals. Typically, physician owners come from the community hospital setting,

and once their facility is built and opened, the community hospital

is essentially drained of its profitable services.

In Ruston, LA, 65 percent of the community hospital’s active

medical staff became investors in a physician-owned specialty hospital. Once financially healthy, Lincoln General Hospital, the community hospital, lost $8 million in operating margin in just one fiscal year after the emergence of Green Clinic Specialty Hospital. That is $8 million that could have been reinvested back into the

community, spent on disaster preparedness, emergency room improvements, and other community health care needs.

In Rapid City, SD, the community hospital was unable to maintain emergency room neurosurgery coverage when the neurosurgeon owners built a specialty hospital and abandoned taking ER

calls.

As a result, patients were transported hundreds of miles away

when gaps in neurosurgery coverage occurred. This situation created disturbing consequences for patients and families.

While others have asserted that there has been no impact on

community hospitals, that is simply not true. Financial challenges,

recruitment problems, staffing issues, and a whole host of other

challenges have impacted community hospitals in markets where

physician-owned specialty hospitals have emerged.

Although inpatient payment changes have been recommended

that would remove some of the financial incentives associated with

physician-owned specialty hospitals, coding and payment changes

alone will not address self-referral.

In publicly reported documents, the before-tax margins of two

specialty hospitals in South Dakota are 49.4 percent and 45.6 percent, respectively. Looking at cost report data, the proposed payment reductions to these two physician-owned facilities would be

minimal, at a 2- to 3-percent reduction.

Physician owners could also compensate for lower procedure payments by recommending the patient undergo more outpatient procedures and ancillary tests that are paid separately from the procedure.

Further, only physicians have the ability to react to payment

changes that others do not because of their singular and unique

role in prescribing treatment. Physicians are the gatekeepers to

health care services. Only they have the ability to admit patients

to hospitals, prescribe treatment, and to order services.

Physician-owned facilities, by themselves, are not the problem.

The problem lies in physician self-referral practices that create conflicts of interest, with disturbing results for patients, families, and

community hospitals.

30

I would be happy to answer any questions.

The CHAIRMAN. Thank you, Ms. Morrison.

[The prepared statement of Ms. Morrison appears in the appendix.]

The CHAIRMAN. Mr. Mulholland?

STATEMENT OF DAN MULHOLLAND, HORTY, SPRINGER &

MATTERN, P.C., PITTSBURGH, PA

Mr. MULHOLLAND. Thank you, Mr. Chairman and Senator Baucus. It is a pleasure to be here today. My name is Dan Mulholland.

I am an attorney from Pittsburgh, PA with the law firm of Horty,

Springer & Mattern.

Our firm practices exclusively in the area of health care law. We

represent hospitals and health care systems around the country. I

routinely provide advice to them about financial relationships with

physicians, other relationships with physicians, and also represent

them in litigation when those relationships break down.

Based on my experience in the health care field for about 30

years, a number of things have come to my attention in terms of

how specialty hospitals that are owned by physicians operate and

their impact on the health care system.

First of all, physician-owned hospitals run counter to the letter

and the spirit of the fraud and abuse laws. Second, they raise serious ethical issues relative to the disclosure of ownership, or the

lack thereof. Third, they have an unfair competitive advantage over

their full-service community hospital—often nonprofit hospital—

competitors.

It is important to understand how the relationship between hospitals and doctors has evolved and how the phenomenon of physician ownership of hospitals has had a negative impact on that relationship.

Most physicians are not employed by hospitals. They are simply

granted medical staff appointment and clinical privileges to practice medicine at the hospital. They get to use the hospital’s space,

equipment, and personnel, and in return they provide services for

the hospital in terms of covering the emergency room, providing

peer review, and other services.

But the payment system has really driven a wedge between doctors and hospitals. Not only does the payment system permit, but

it actually encourages, physicians to own hospitals, surgi-centers,

and in-office ancillary equipment. That has created a lot of problems, not only the kind of tension that Ms. Morrison mentioned,

but also some serious problems with respect to how the laws are

implemented.

Now, it is important to understand that the anti-kickback statute

and the physician self-referral law were initially designed to address this inherent conflict of interest when a doctor has an ownership interest in a hospital or any other facility, as were existing

AMA ethical standards that would only suggest that physicians

should have an ownership in a hospital or health care facility when

there is a clear need in the community.

The whole hospital exception in the physician’s self-referral law

was initially intended only as a grandfather clause for physicianowned hospitals in small communities where access would be

31

threatened if they were shut down. It had nothing to do with the

kind of operations that you now see with or without the moratorium.

It is fairly easy, based on the exceptions and the safe harbors

that exist under these statutes, to design a structure for a specialty

hospital that would either meet the requirements of the existing

legislation or skirt around the edges of them.

We have seen a number of examples of this. Promoters of specialty hospitals make no bones about the fact that the reason that

they are promoting physician ownership is to increase referrals and

to get better financial return.

They are often structured in a way to make it easy for the doctors to come in. For instance, most of the financing in a lot of these

hospitals is provided by debt rather than equity, so the doctors

have little risk up front.

Then they are often given assistance by the promoters, sometimes actually a joint venture partner that is a hospital in the community, to come in and have an investment interest without having

to provide any guarantees of the large amount of debt on the facility. There are also pre-determined buy-out arrangements.

Now, the OIG has said that this can raise some serious issues

under the anti-kickback law. But during the moratorium and after

it, some new hospitals that were clearly specialty hospitals tried to

pretend that they were general hospitals, either to avoid the moratorium or to gain financing that might have been difficult to get because of the moratorium’s effect and the possibility it would be extended.

Many others have been reluctant to reveal that physicians have

an ownership interest, either to the public, but more importantly

to the patients, which can result in the kind of tragic situation that

Rev. Wilson described to the committee. This not only raises ethical

issues, but creates an unfair competitive advantage for these hospitals over their community hospital competitors.

Community hospitals are ill-equipped to fight back because oftentimes these doctors are on the medical staff of the community hospital, and take advantage of that relationship by essentially having

a free ride on the community hospital to the community hospital’s

detriment and to the advantage of their financial investment.

When physicians are called on this by community hospitals who

raise a question about the possible conflict of interest, they will

often accuse the community hospital of economic credentialing or

some other pejorative term.

So to address this problem, I would strongly suggest that Congress consider repealing the whole hospital exception, or at least

bring it back to its original intent to just ensure access in smaller

communities.

Short of that, Congress should require full disclosure to the public and patients of ownership, and also allow hospitals to respond

to the conflict of interest by physicians on the medical staff who

compete with them.

Thank you very much. I will be glad to answer your questions

as well.

The CHAIRMAN. Thank you.

32

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

The CHAIRMAN. Now, Dr. House?

STATEMENT OF JOHN M. HOUSE, M.D., MANAGING PARTNER,

UROLOGY ASSOCIATES OF NORTH TEXAS; AND CHAIRMAN

OF THE BOARD, USMD HOSPITAL, REPRESENTING THE

AMERICAN SURGICAL HOSPITAL ASSOCIATION, SIOUX

FALLS, SD

Dr. HOUSE. Thank you, Mr. Chairman and members of the committee.

My name is John House. I am a practicing urologist from Irving,

TX, and a member of the board of USMD Hospital in Arlington,

TX. I am one of the many physician investors in that facility.

SMD is a member of the American Surgical Hospital Association,

which represents physician-owned hospitals with specialized capabilities. I am testifying today on behalf of ASHA.

Let me begin by explaining one major reason why my colleagues

and I developed our hospital. It is a simple story. Our urology

group asked three hospitals to acquire new robotic technology to

improve treatment for prostate cancer, a common disease and a

major cause of cancer deaths among men.

This technology is a major advance in surgical care, allowing

men who undergo radical surgery shorter hospital stays, fewer

complications, and the ability to return to normal activities much

faster.

We wanted to use this technology to further our mission of delivering world-class care to our patients. Those hospitals told us the

technology was too expensive and they refused to obtain the equipment.

So my group went out and we bought the robot, spending over

$1.2 million. Along with other physicians and Texas Health Resources, the largest not-for-profit in North Texas, we acquired a

hospital.

Today, USMD Hospital has one of the world’s finest centers for

robotic surgery for the treatment of prostate cancer and the world’s

leading program for cryosurgery for the treatment of renal and

prostate cancer, and provides excellent care in many other areas of

medicine.

Physician ownership and initiative made possible this quantum

leap in surgical quality.

We are all saddened by the death of Helen Wilson following surgery at Physicians’ Hospital in Portland. Any unanticipated death

in a hospital is tragic. Unfortunately, these deaths occur in hospitals almost every day.

In April, HealthGrades released its report, ‘‘Patient Safety in

American Hospitals.’’ According to this report, if all hospitals performed at the level of the top 15 percent, 280,000 fewer patient incidents and 44,000 fewer deaths among Medicare patients would

have occurred, saving Medicare $2.45 billion in the years 2000

through 2004.

These facts, of course, in no way diminish the loss to Mrs. Wilson’s family and her friends. However, the HealthGrades report

33

should serve as a wake-up call that a much greater focus on quality

is needed.

When CMS looked at quality of care in specialty hospitals, it

found it to be equal to, and often superior to, the care provided in

general hospitals. An important reason for this is the level of nursing care we provide.

Simply adopting the average nurse-to-patient ratios found in specialty hospitals could significantly reduce errors and improve care.

Regrettably, too many hospitals refuse to adopt this basic strategy,

despite extensive research establishing the link between the number of nurses and patient outcomes. They choose to put profits before patients.

General hospitals come to Congress and complain that they cannot compete with physician-owned facilities, that we take away

funds needed to meet their community obligations. Perhaps they

should look more closely at how the money they have is spent.

For example, according to public records, Sioux Valley Hospital pays its administrator nearly $900,000 a year. This not-for-profit

hospital employs many physicians and pays them very, very well.

The hospital pays one cardiologist $1.8 million annually. A number of other physicians are paid salaries in excess of $1

million. Just imagine how many uninsured individuals in South

Dakota could have received care if the hospital were just a bit

thriftier. This is an institution that does not need the protection of

the Federal Government.

If you are concerned about potential conflicts of interest when

physicians have an ownership interest in a hospital, perhaps you

should look closely at the potential for conflict when the hospital

owns the physicians and restricts their ability to refer patients to

other facilities, as is the case in many general hospitals across this

country.

The Federal Government has conducted numerous studies of

physician-owned specialized hospitals. The net result is that there

is no evidence that ASHA members are harming general hospitals

financially. There is no evidence of over-utilization of services. It

has been firmly established that our members provide high-quality

medical care.

It has been shown that our physicians do not abandon the community, but continue to maintain privileges at local general hospitals. Our model is popular with other physicians who have no financial stake in the facility. These studies have rebutted virtually

every allegation that opponents of specialty hospitals have made

over the last 5 years.

Thank you. I would be pleased to answer any questions.

The CHAIRMAN. Thank you very much, Dr. House.

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

The CHAIRMAN. Dr. Cobey?

STATEMENT OF JAMES COBEY, M.D.,

ORTHOPEDIC SURGEON, WASHINGTON, DC

Dr. COBEY. Thank you, Senator Grassley and Senator Baucus, for

the chance to appear before this committee about an issue I have

been worried a lot about for the last 30 years that I have been in

practice. I practice at many hospitals in this city.

34

This is an issue of safety, specifically patient safety. In preparation for this testimony, I reviewed the case of Ms. Wilson and what

happened, the respiratory arrest she had after surgery. The staff

could not do CPR, or cardiopulmonary resuscitation.

No one was available to put an endotracheal tube in the patient

or give Narcain, which would have solved the problem in a few seconds. The patient died from anoxic brain injury.

We should expect any hospital providing major elective surgery

to have someone on the staff who can resuscitate a patient and

maintain an airway, especially in an urban environmental system.

When I look at my practice, the concept of orthopedic surgeons

owning hospitals for elective cases, I worry about the health care

of patients in these settings where we need other medical specialties around. Though 95 percent of my patients and patients of my

friends and colleagues have no problems, we must always be prepared for the unexpected emergency.

Let me give you some examples of my own. In the last 10 years,

I have had three patients, after total knee or total hip replacement,

develop acute abdominal obstruction and had to have emergency

abdominal surgery within 12 to 18 hours to save their lives.

I remember clearly one situation, after a total knee replacement,

the patient in the recovery room had no pulse in her foot, a rare

injury. She had a plaque under the tourniquet which we used

break off and clog the artery.

Within 20 minutes, we had a special vascular procedure, after

doing an arteriogram, and we returned flow back to the artery. If

we did not have a good vascular surgeon in-house to do that, she

would have lost the leg in about 2 hours.

I have informally canvassed a number of my colleagues in the

city, and we all agree there are real problems, especially in older

patients over age 65, with vascular, urinary, and abdominal problems.

A few more examples. One of my colleagues a few years ago, during an excellent operation changing a total knee, cut the major vessel to the leg—nothing he did wrong. It was repaired by a vascular

surgeon in the hospital within a half an hour. Again, she would

have lost a leg.

Another of my colleagues had almost an identical operation happen about 2 weeks ago. These are good, competent surgeons, and

unexpected things happen to patients who are older.

One could say that specialty hospitals should only do simple procedures and let the more difficult ones go to the community hospitals. That is not fair. Vascular compromise can happen to anybody in an unexpected way. Other specialists must be immediately

available in-house for big procedures.

The urinary system. Often during a total hip, total knee, or back

procedures, we put a catheter in before surgery. I have had five

cases in the last 10 months where that could not be done because

of totally unexpected strictures.

We were lucky to get a urologist in to put a catheter in or do

supra-pubic or transabdominal catheterizations. If that could not

have been done, we would have had to wake the patient up and

send them elsewhere, which is not a benign procedure.

35

Besides the life- and limb-threatening medical needs of patients

in major surgical procedures, I am worried about the financial viability of general hospitals. These have emergency rooms and end up

caring for many patients with no insurance. The multiple specialty

hospitals need the revenues submitted from elective surgery to survive to give care to the general community.

There is concern that most of these specialty hospitals take far

fewer Medicaid patients. According to a recent article in the New

England Journal of Medicine, since 1990 the number of U.S. specialty hospitals that are owned by physicians has tripled to over

100. Physicians are attracted for two reasons: to control the hospital setting and for income.

MedPAC has found, again, that generally these hospitals do not

take serious patients, and many hospitals have an average of only

16 beds. If you have a 16-bed specialty hospital, there is no way

you can afford to keep multiple specialties there. You cannot keep

vascular surgeons in-house. You cannot get high-tech radiologists

in-house to do angiograms. It is too small of a hospital to do that

kind of work. The sicker patients, therefore, end up in the community hospitals.

I have personally served on the board of a community hospital

for over 9 years. I know that hospitals cannot survive with Medicare and Medicaid alone. It is unfair of specialty hospitals to discriminate against Medicaid patients to the detriment of community

hospitals that are struggling to pay off their debt. So the major

hospitals in the city run an excess of 1.5 percent—a 1-percent operating margin. It is amazing they can survive at all.

In conclusion, all hospitals must be able to take care of the unexpected any time. They cannot let dollars get ahead of patient safety

and quality of issues.

Thank you.

The CHAIRMAN. Thank you.

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

The CHAIRMAN. Ms. Morrison, the Government Accountability

Office released a report I have referred to on the effect of physician-owned hospitals on community hospitals. The report did not

find that general hospitals made more competitive changes in response to specialty hospitals entering the market.

The Government Accountability Office also found no statistical

difference in terms of clinical or operational changes. Your testimony, however, provides specific examples of changes made because of specialty hospitals.

Would you comment on the GAO survey and its findings?

Ms. MORRISON. Yes. Sioux Valley, along with a number of our coalition hospitals, received that survey and responded to it. The survey itself was very general and it did not probe deep enough to undercover circumstances like those mentioned in my testimony.

It also appeared that the results of the GAO survey contradicted

some of Medicare’s findings that were just released last month. A

couple of those examples would be that heart hospitals do divert

patients away from community hospitals. Also, community hospitals have higher Medicaid populations and community hospitals

have lower margins.

The CHAIRMAN. Thank you.

36

Mr. Mulholland, CMS stated in its interim report that, outside

the whole hospital exception to self-referral law, there is no additional restriction in the self-referral statute or regulations regarding legality of physician investment.

However, in CMS’s own regulation implementing the self-referral

law, CMS also recognized that physician ownership of hospitals,

particularly specialty hospitals, could complicate the anti-kickback

statute.

CMS, in its final rule issued March, 2004, clearly saw the nexus

between the two laws. But today CMS tells us that the investigation and prosecution under these laws are beyond mandates and

someone else’s concerns, and that is the discussion I had with Dr.

McClellan about the role played by the Office of Inspector General.

A question. Why is the government looking at physician investment in two different silos? What is the real connection between

the anti-kickback statute and the self-referral law, and why is the

government only using the one to enforce those arrangements?

Mr. MULHOLLAND. Well, I, of course, cannot speak for the government, but I can speak to my opinion as to how those two laws

intersect with one another.

Whenever you are looking at a financial relationship between a

doctor and a hospital, ownership, employment, whatever, you start

with the physician self-referral law, because unless you can fit

within an exception, then the doctor is prohibited from referring

patients to the hospital.

But you also have to look at the anti-kickback statute, because

as CMS recognized in the preamble to the March, 2004 regulations

under the referral law, the kickback law could still apply to physician ownership in hospitals, especially if the physician ownership

in the equity that the doctors had invested was nominal or the equity investment was merely a way of directing a lot of revenue to

the doctors for relatively little up-front investment.

The Office of Inspector General recognized that last year, in its

compliance guidance for hospitals that came out in January, where

they said there are a number of things that they would look at in

any kind of joint venture, whether it is a hospital, a surgi-center,

a diagnostic treatment center, which is whether or not the doctors

have a bona fide investment, whether or not there is disproportionate return on investment.

So these issues have been around for a while, and I think that

both CMS and the Office of Inspector General would do well to coordinate, as I am sure they do, in terms of their enforcement policy

and in terms of how they would view these hospitals before they

are allowed to participate in the Medicare program.

The CHAIRMAN. Thank you.

Dr. House, MedPAC recently issued an update to its last report

on specialty hospitals. That report found that, compared to general

hospitals, specialty hospitals, on average, had a shorter length of

stay.

However, the report also found that these same surgical hospitals had costs that were significantly higher than general hospitals. How do you reconcile the difference?

Dr. HOUSE. I cannot reconcile the difference. I can only speak to

our particular hospital. We were part of the contractual arrangeVerDate 11-MAY-2000 15:50 Jun 18, 2007 Jkt 095484 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 35439.000 SFIN1 PsN: SFIN1
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ments with a big not-for-profit and we chose to go out and get contracts on our own, and we took a significant reduction in per-payment contracts with the insurance companies.

So in our particular hospital, what we have found is that we

have had to cut costs significantly to make up for those costs. Now,

how do we do that? This is an example of why physician ownership

of hospitals can have a very positive impact on the payment system.

We had a neurosurgeon who was part of our board. At our

monthly board meetings, we looked at our expense lines. Our neurosurgeon said, what is this expense here? We said, well, that is

the expense for the implants that you are putting in.

He said, well, how much are they? The administrator said, they are around $5,000 apiece. He said, $5,000 apiece for that? That is

ridiculous. Mind you, this is a neurosurgeon who has been in practice for probably 20 years in a community hospital and has really

never known what the cost of these implants were.

So what happened is the neurosurgeons all got together and they

went to the vendors and said, look, the quality difference between

all of these implants is negligible. We want the lowest price. We

subsequently cut the cost of our implants by approximately 50 percent. The surgeons did not trade off quality, but we certainly reduced the costs significantly.

Ultimately, the physician is going to be in charge and the physician is actually going to have to be with the patient if there is a

complication, so he has to make that choice of cost versus outcome,

and is in a better position to do that—reduce costs and still maintain outcomes—because he is ultimately liable and responsible for

the patient care.

The CHAIRMAN. All right.

Dr. Cobey, my last question for this panel is for you. Your testimony provided some insight into the potential dangers of limited

service facilities. Oftentimes, procedures performed at these facilities are complex, highly specialized, and invasive. Given the complexity of these procedures, do you believe that safe care can be

provided to patients at specialty hospitals?

Let me follow up at the same time. Keeping in mind that there

are many rural critical access centers without the ability to have

a physician on hand 24 hours a day, in your opinion should all hospitals conducting invasive procedures be required to have a physician on hand following a complex procedure?

Dr. COBEY. In terms of, can specialty hospitals safely function,

they do in terms of pediatric orthopedic hospitals. There is a network around the country of pediatric orthopedic hospitals that do

excellent work. Mainly, children do better than older adults with

complications, and they are well prepared for problems.

In terms of having a doctor on staff, in every rural hospital you

cannot afford it, but you must have somebody there 24 hours a day

who can resuscitate a patient. It can be a nurse, it can be a respiratory therapist, or a physician’s assistant.

You must have somebody who can resuscitate, be qualified in resuscitation, somebody who is trained by an anesthesiologist, possibly. Otherwise, you should not have the doors open.

The CHAIRMAN. Senator Baucus?

38

Senator BAUCUS. Thank you, Mr. Chairman.

Dr. House, I am just trying to explore why doctors want to form

these specialty hospitals, what is really going on here.

You mentioned in your testimony that you tried to get certain

equipment in your area, you went to the community hospitals and

they did not provide it, and so on, and so forth. So one reason, is

to get the best, latest available equipment. I assume that is one

reason why doctors do this.

Dr. HOUSE. Yes, sir.

Senator BAUCUS. Are there other reasons? What I am getting at

is, obviously, compensation. That is, to what degree is it that, generally, doctor’s frustrations that not only is it difficult with community hospitals to get the right equipment, but also compensation

and remuneration are just going south in the physician community,

whether it is medical malpractice premiums or whether it is inadequate Medicare reimbursement, or whatever it is? Why do doctors

want to form these arrangements?

Dr. HOUSE. I think you hit on it right away. A lot of it is frustration. We spend a lot of money on health care in this country,

$2 trillion, per capita more than any place in the entire world. Physicians, as far as physician reimbursement for their fees, is only

about 15 percent of that.

So, we really own and control only about 15 percent of the health

care system, but we are ultimately responsible and liable for the

outcomes that the patients have. In the hospitals that most of us

work in, we are still liable and responsible, but we do not have any

control. You can only have control through ownership.

You can be on committees, but when you are in control and you

are in charge, you can make changes. If I go up to the floor and

a nurse is not doing the proper thing, I can go directly to that administrator and say, this needs to change. We need to have something changed, and changed now. I do not have to go through a

bunch of committees. I do not have to go through all the typical

hospital bureaucracy. We can make the changes.

This frustration that we feel—and I know the hospitals are

under a lot of payment pressures as well and they have a lot of different decisions to make in trying to figure out where to allocate

their resources—but when we are the ones who are liable and responsible for the care of the patient and we really do not have any

control over that, where most of our health care is actually delivered in our hospital, then it becomes very frustrating. What is happening is the physicians are going out and saying, you know, we

have to change this.

Senator BAUCUS. All right. As I hear you, the frustration is essentially inadequate community hospital response to health care

needs. That is basically what I hear you saying.

Dr. HOUSE. I think that is a lot of it.

Senator BAUCUS. All the paperwork and all of the frustration and

so forth. So, what can be done at hospitals to address that?

Dr. HOUSE. Well, I think that alignment of the physicians’ and

the hospitals’ economic interests is valuable. There are a lot of

ways to do that. One is that the doctors can own the hospital, or

I have really no problem whatsoever with the hospitals owning the

doctors, as in Sioux Falls, because then the hospitals and the docVerDate 11-MAY-2000 15:50 Jun 18, 2007 Jkt 095484 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 35439.000 SFIN1 PsN: SFIN1
39

tors are all lined up together for exactly the same thing. We do not

need to be pulling apart, we need to be pulling together.

The economic interests of what we do, need to be lined up with

the economic interests of what the hospital does. I do not know, at

the end of the day, if we as the physicians who are in absolute control because we own the majority of it are going to be better than

the hospital administrators, but I think that we ought to have the

chance and the opportunity to try.

Senator BAUCUS. What if you did not own your hospitals, but

that when you had a legitimate concern about the quality of care

at a hospital, that was reasonably and well taken care of? Would

that be a better system?

Dr. HOUSE. I think it would be a great system to have. Whether

or not that is possible in a capitalist——

Senator BAUCUS. I am not asking that question. I am asking,

would that be better in terms of patient care?

Dr. HOUSE. Well, I think as long as the doctors truly had control.

I do not know how you can get control without ownership.

Senator BAUCUS. No. That is my question. Control is kind of an

interesting term. I am saying, if doctors’ legitimate concerns for the

well-being of their patients were addressed at a hospital, but doctors could not own the facilities, would that be a better system?

Dr. HOUSE. I think if we could figure out a way to do that, and

you guys are smarter than I am to try to figure it out——

Senator BAUCUS. No, we are in this together.

Dr. HOUSE. Well, I have been in practice for 18 years, and it is

getting increasingly more difficult.

Senator BAUCUS. We do not have a lot of time here. I would like

to ask Ms. Morrison, and maybe Dr. Cobey, what about doctors’

frustrations that, hey, we cannot get this equipment, or patients

need this, and so on and so forth?

Dr. COBEY. I have been in practice 30 years. I know nursing

staff; my wife is a nurse. I know the hospital. When I have a problem, I have no problem going to the chief nurse of the hospital, a

900-bed hospital, or the hospital administrator and talking with

them in solving the problem. My experience is, the administration

is very open to physicians who have suggestions on how to give better care.

Senator BAUCUS. All right.

Ms. Morrison?

Ms. MORRISON. Just one addition to that. I cannot comment on

Dr. House’s situation, but I can tell you that it is in the best interests of the community hospital to have a good relationship with

their physicians.

After all, it is the physicians who have the admitting power that

puts the patients into the hospital. So in my experience, the administration has been very open to the requests of the physicians and

has been responsive.

Senator BAUCUS. I know it is kind of hard to answer this question, but just your honest kind of subjective assessment. To what

degree are these specialty hospitals formed because of the frustration that doctors have with the administration? On the other hand,

to what degree is it because it is an opportunity to not only have

more control generally, but also to increase their income?

40

Ms. MORRISON. My personal opinion?

Senator BAUCUS. Yes, I am asking your personal opinion.

Ms. MORRISON. My personal opinion is that, in my experience, it

is not about frustration, it is about the financial incentives that are

associated with a specialty hospital.

Senator BAUCUS. Dr. House, you were quite critical of Ms. Morrison’s hospital’s CEO’s remuneration. How much did you say it was?

Dr. HOUSE. Almost $900,000 a year.

Senator BAUCUS. And that is public information, is it not?

Dr. HOUSE. Yes, it is.

Senator BAUCUS. What do you make a year?

Dr. HOUSE. My group——

Senator BAUCUS. Total. What you, Dr. House, make a year.

Dr. HOUSE. In my practice?

Senator BAUCUS. Associated with your practice.

Dr. HOUSE. Approximately $500,000.

Senator BAUCUS. And what do the other doctors make?

Dr. HOUSE. We all pretty much are paid the same. Our average

partner income is about $500,000 a year. That is probably the top.

We are in a very, very relatively wealthy area, like you mentioned

earlier. We do not have a huge Medicaid/Medicare population. We

are probably in the top 95th percentile of physicians as far as our

practice income is concerned.

Senator BAUCUS. Right.

Dr. HOUSE. Which, when I saw that the doctors in South Dakota

make $1.8 million, that just sort of shocked me.

Senator BAUCUS. You have to move! [Laughter.]

Dr. HOUSE. Yes. I actually went to school there. I went to undergraduate school there, and I went to 2 years of medical school there

in South Dakota, and maybe I should think about going back.

Senator BAUCUS. Well, I do not know a lot about your financial

arrangements, obviously. But that figure you gave, is that in addition to or does that include, say, Medicare fees or other payments

you get as a physician?

Dr. HOUSE. It is from hospital distributions and everything.

Senator BAUCUS. That is total.

Dr. HOUSE. Yes. Our clinical income is probably—well, income is

not cash, of course, because we actually take less cash than income,

because much of our income goes back into investment.

For instance, if we have to make principal payments to the hospital, that is income to us, but we do not actually get the cash. So

I think last year, $500,000 was our income, but our cash was probably around $390,000.

Senator BAUCUS. Do you have any investment income from the

hospital?

Dr. HOUSE. Yes.

Senator BAUCUS. And that is included?

Dr. HOUSE. Well, hopefully some day. Our net cash flow since we

opened the hospital to the physicians, we are on the hook for about

$41 million. We leveraged our entire group, and most of the physicians did. Our net cash flow—I actually got this number from my

CFO—as of April 30, 2006 is minus $12 million as far as what we

put in versus what we have gotten out.

41

Senator BAUCUS. Mr. Chairman, I do not want to take a lot of

time here, but I want to ask one more question.

Let me ask this question. How much time do you and your associates spend on management issues as opposed to health care

issues?

Dr. HOUSE. I personally have a significant input because I am

the managing partner of our urology group. We have a very large

group. We have 48 urologists, the biggest urology group in the

country. As the managing partner, and the fact that I am also on

the board of the hospital itself, then I personally have a significant

amount of time.

We were fortunate in that when we purchased the hospital we

had an administrator of our practice, our CEO, who had extensive

hospital administrative experience before he came to our practice,

so we moved him over to the CEO position of our hospital.

So, I have a day-to-day working relationship with him from a

long-term relationship when he was the administrator of our practice. So, I personally do have a fair amount.

Senator BAUCUS. All right.

Are you aware of any AIDS specialty hospitals?

Dr. HOUSE. Excuse me?

Senator BAUCUS. Any hospitals that specialize in AIDS?

Dr. HOUSE. No, sir. I am not aware of that.

Senator BAUCUS. Are there any hospitals that specialize with

pneumonia care?

Dr. HOUSE. I am not aware of that.

Senator BAUCUS. There are not any, that I am aware of. Why do

you suppose that is?

Dr. HOUSE. There are a lot of reasons. Probably if someone tried

to specialize in pneumonia care alone, which would probably be a

very good thing for the patients——

Senator BAUCUS. Or AIDS.

Dr. HOUSE. Or AIDS, too. If you had a hospital that specialized

and focused just on AIDS treatment, I can almost assure you that

the treatment would be better.

It is probably, however, very, very difficult for that particular facility, under the payment system we live under, to actually get paid

enough money for that to make sense. They probably economically

could not do it.

All institutions, all hospitals have to put more money on the

books than expenses or they would not survive. Maybe that is

something that we should think about, the way the payment system is, and we could encourage more specialization, specialty hospitals in AIDS, pneumonia, and some other diseases.

Senator BAUCUS. Well, I thank you, Mr. Chairman, for being so

indulgent. Frankly, this whole area is raising lots of provocative

questions which we do not have time to get into right now. I wish

we did, frankly.

Dr. HOUSE. Yes, sir.

Senator BAUCUS. I wish we had a lot of time, Mr. Chairman, to

get into our health care system and address costs and reimbursement. There are a lot of things here, because our system is really

strained a lot.

42

You said yourself, Dr. House, you had a figure that we have

twice as much per capita health care in this country.

Dr. HOUSE. Than anywhere in the world. We are not getting the

bang for our buck.

Senator BAUCUS. And we are not twice as healthy.

Dr. HOUSE. Yes, sir. That is absolutely right.

Senator BAUCUS. And it is a huge issue.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

I have a summation. First of all, for members who have questions or prepared remarks, I would like to have them submitted no

later than May 26th.

It is important, first and foremost, for us to strengthen oversight

of all hospitals to ensure that no patient is provided care that fails

to meet basic standards for quality and safety.

Also, it is clear from today’s testimony that something other than

just another report needs to be done, so I have asked the Office of

Inspector General to review patient safety and quality care at specialty hospitals.

Further, I have asked the Government Accountability Office to

review financial arrangements to ensure that these complex business deals are not providing sweetheart deals in exchange for patient referral.

The committee also anxiously awaits the Strategic and Implementing Plan that I talked to Dr. McClellan about. We trust that

CMS will provide some real reforms in the final version.

Payment reforms are only part of the solution. Clear disclosure

to patients about the investment interest physicians have in specialty hospitals will provide much-needed transparency that is

needed for peace of mind for patients.

CMS also needs to enact regulations preventing sweetheart deals

from being a key financial arrangement for these facilities. Physicians’ investments which could lead to conflict of interest need to

be disclosed, just like conflict of interest for lawyers and accountants.

These investments should be bona fide to ensure that it is not

just a cash pay-out in disguise. Physicians’ disclosures should not

be limited to finance. Informed consent for patients should include

information regarding the quality of care that patients will receive.

CMS should make serious commitments to oversight of specialty

hospitals, and more generally the Stark law as a whole. This oversight should include providing clear, universal guidance in the form

of regulations.

These regulations should address the disclosure of investment interests, penalties under 18 U.S.C. 1001 for failing to disclose, and

implementing systems and controls to ensure that abusive practices and fraudulent activities are quickly detected and prosecuted.

I thank all of you for participating in this panel. The hearing is

adjourned. Thank you very much.

[Whereupon, at 12:21 p.m., the hearing was concluded.]

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198

199

200

(201)

COMMUNICATIONS

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

Æ