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21–822 PDF 2005

S. Hrg. 109–140

OVERVIEW OF THE COMPETITIVE EFFECTS OF

SPECIALTY HOSPITALS

HEARING

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, AND INTERNATIONAL SECURITY

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 24, 2005

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel 

TRINA D. TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND 

INTERNATIONAL SECURITY 

TOM COBURN, Oklahoma, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

THOMAS CARPER, Delaware 

CARL LEVIN, Michigan 

DANIEL AKAKA, Hawaii 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey

KATY FRENCH, Staff Director 

SEAN DAVIS, Legislative Assistant 

SHEILA MURPHY, Minority Staff Director 

JOHN KILVINGTON, Minority Deputy Staff Director 

LIZ SCRANTON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coburn ................................................................................................. 1

Senator Carper ................................................................................................. 3

WITNESSES 

TUESDAY, MAY 24, 2005

John Graubert, Principal Deputy General Counsel, Federal Trade Commission ........................................................................................................................ 5

Mark E. Miller, Executive Director, Medicare Payment Advisory Commission . 7

Regina E. Herzlinger, Ph.D., Nancy R. McPherson Professor of Business 

Administration, Harvard Business School, Boston, Massachusetts ................ 20

Stan Pelofsky, M.D., President, Neuroscience Specialists, and Physician 

Owner, Oklahoma Spine Hospital, Oklahoma City, Oklahoma ....................... 22

John T. Thomas, Senior Vice President and General Counsel, Baylor Health 

Care System, Dallas-Fort Worth, Texas ............................................................ 24

James E. Cain, M.D., Practice in Family Medicine, Lampasas County, Texas .. 26

Ed Jungbluth, Heart Patient, Heart Hospital of New Mexico, Albuquerque, 

New Mexico ........................................................................................................... 28

William G. Plested, III, M.D., Immediate Past Chair, Board of Trustees, 

American Medical Association ............................................................................ 30

ALPHABETICAL LIST OF WITNESSES

Cain, James E., M.D.: 

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 96

Graubert, John: 

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

Prepared statement .......................................................................................... 37

Herzlinger, Regina E., Ph.D.: 

Testimony .......................................................................................................... 20

Prepared statement .......................................................................................... 74

Jungbluth, Ed: 

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

Prepared statement .......................................................................................... 100

Miller, Mark E., Ph.D.: 

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

Prepared statement .......................................................................................... 63

Pelofsky, Stan, M.D.: 

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

Prepared statement .......................................................................................... 81

Plested, William G., III, M.D.: 

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

Prepared statement with attachments ........................................................... 103

Thomas, John T.: 

Testimony .......................................................................................................... 24

Prepared statement .......................................................................................... 88

APPENDIX

John W. Strayer III, National Center for Policy Analysis, prepared statement 141

Thomas C. Howard, M.D., President of the McBride Clinic Inc., Oklahoma 

City, Oklahoma, prepared statement with an attachment ............................... 143

Page

IV

Sean Parnell, Vice President—External Affairs, The Heartland Institute, Chicago, Illinois, prepared statement ....................................................................... 151

Jane Orient, M.D., Executive Director of the Association of American 

Phyusicians and Surgeons, prepared statement ............................................... 161

Karen Kerrigan, President and CEO, Small Business and Entrepreneurship 

Council, Washington, DC .................................................................................... 163

Letter to Mark Miller, from Senators Grassley and Baucus, dated May 5, 

2005, with attachments ....................................................................................... 167

Questions and responses from: 

Mr. Graubert ..................................................................................................... 172

Mr. Miller .......................................................................................................... 175

Dr. Pelofsky ....................................................................................................... 182

(1)

OVERVIEW OF THE COMPETITIVE EFFECTS 

OF SPECIALTY HOSPITALS 

TUESDAY, MAY 24, 2005

U.S. SENATE, SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY, OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:15 p.m., in room 

SD–562, Dirksen Senate Office Building, Hon. Tom Coburn, Chairman of the Subcommittee, presiding. 

Present: Senators Coburn and Carper. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. The hearing will come to order. We attempted 

to delay to wait for Senator Carper. Hopefully, he will be here soon. 

I would like to welcome each of you here. 

The subject of today’s hearing is an important one. Congress will 

soon need to make a decision about continuing a moratorium to 

prohibit new specialty hospitals from opening. It is my belief that 

if our Nation is to continue having the world’s best healthcare system, we must carefully consider how our actions will impact the 

healthcare marketplace in both the long and the short term. 

This hearing will primarily focus on the effects of competition between and among hospitals in the delivery of medical and surgical 

services. We will examine a number of issues related to effectiveness and quality of care provided by specialty hospitals, including 

morbidity and mortality, operating time and time under anesthesia, nursing turnover, patient satisfaction, and efficiency. 

Our first panel will include witnesses from the Federal Trade 

Commission and the Medicare Payment Advisory Commission. We 

are pleased to have these witnesses give the Subcommittee their 

views on competition between and among specialty hospitals and 

community hospitals. 

In July 2004, the FTC and the Department of Justice issued a 

joint report on the role of competition in the healthcare delivery 

system, ‘‘Improving Health Care: A Dose of Competition.’’ This report is the culmination of a 2-year review of our Nation’s 

healthcare system. It discusses the balance that must be struck between competition and regulation in the healthcare marketplace, 

the impact of certificate of need policies on competition, and hospital subsidies of the uninsured and under-insured in non-profitable areas such as trauma centers. 

2

In March 2005, MedPAC released its study of physician-owned 

specialty hospitals. The purpose of the study was to compare and 

contrast the differences between heart, orthopedic and surgical 

physician-owned specialty hospitals, and community hospitals. 

Regrettably, the Federation of American Hospitals and the American Hospital Association declined our invitation to be here today. 

It is our intention to provide a balanced hearing, including all parties, prior to the June moratorium. The purpose of this hearing is 

to allow a record to be laid down in the Senate which can be used 

for future legislative development or to analyze current and future 

legislation. 

This hearing is intended to allow the Senate to consider arguments explaining that specialty hospitals have a pro-competitive effect on the healthcare industry, and that their elimination will reduce competition, decrease quality of medical and surgical care, 

and eliminate efficiencies produced by these institutions. 

I believe that unless we find a way to add a ‘‘true dose’’ of competition to the Nation’s healthcare marketplace, the consumer will 

bear the brunt of our action or inaction. I also want our panelists 

and the Senate to know that I believe where we stand in 

healthcare in America today is at a crossroads. We spend 40 percent more per capita on healthcare than any Nation in the world. 

Yet, our healthcare is not better. 

The question is not competition versus no competition. The question is how do we spend the money the best way to get the most 

people cared for in the most efficient way with the fewest errors 

and not have redundancy of service and inefficiency as we deliver 

that care. 

Seven percent of the cost of healthcare today is because of the 

wrong incentives, the incentive of physicians ordering tests not because their patients need it, but because they feel a need to protect 

themselves from malpractice. 

If you look at the cost of pharmaceuticals in our country and the 

lack of true competition among branded items and patented items 

that all do the same thing, what you find is there is no competition 

in those particular brand name drugs treating the same disease 

under different chemical modalities. 

The fact is that competition is the very thing that has been lacking in healthcare. The idea that you can’t rate a physician—consumers need to be able to rate their physicians. They need to know 

if they are a good physician or a bad physician. If they are a bad 

physician, they need to get better or get out. That is what American consumers deserve. That is what we ought to give them. 

So the purpose of this hearing is to allow a good body of information on competition to come before the Senate as we start down the 

first track—this is not the last; this is the first time, and it is my 

goal that we will inform the Senate as to the information it needs 

to make good decisions on how we truly allocate this scarce resource. To not do so, means that for those people who don’t have 

access today, who are under-treated and have minimal access or 

have lack of affordability, we will be letting down. 

I would like to recognize Senator Carper for an opening statement. 

Senator Carper, welcome. I am glad you made it. 

3

OPENING STATEMENT OF SENATOR CARPER 

Senator CARPER. Mr. Chairman, how are you doing? I apologize 

for running a few minutes late. We just finished our caucus luncheon and I came as quickly as I could. Thank you to our witnesses 

for being here. 

Mr. Chairman, I am happy to be with you today and our witnesses and our guests to discuss the issue of specialty hospitals 

and their role and impact on our healthcare system. One of the 

great things about this job is you learn a lot literally everyday. 

Sometimes, we learn things we didn’t want to know. I didn’t know 

a whole lot about specialty hospitals, so one of the good things that 

has come out of this is I have learned a good deal. I have got a 

lot more to learn, I am sure. 

We appreciate our witnesses being here and testifying. Just by 

looking at the expressions on their faces, I can tell they are delighted to be here. Our audience cannot see that, but these guys 

are happy campers. Particularly, I want to thank Mark Miller and 

all the folks at MedPAC for the hard work that they have done 

over the past year and a half since the MMA mandated that they 

study this issue. One of the things I learned is MedPAC is not a 

political action committee. My staff said, no, they are not; if they 

were they wouldn’t be coming to this hearing. 

We know we have a big task ahead of us to complete in just 15 

months, but you have risen to the challenge and we appreciate all 

the work that you do not just for the Congress, but really for our 

country. 

I am sure we all know that this has been a controversial issue. 

Over the past decade or so, we have seen the number of specialty 

hospitals, I think, triple. We don’t have any in Delaware, but I understand they have a few in Oklahoma. Proponents of specialty 

hospitals tell us that they give doctors more say in the management of hospitals, that they provide better quality, more efficiency 

and higher patient satisfaction. They also say that they inject competition into the healthcare marketplace. 

However, I think we ought to keep in mind that in 2003 there 

were a couple of GAO studies that lead to concerns about specialty 

hospitals’ rapid growth, about the possible conflicts of interest that 

could exist when physicians have an ownership interest in the hospitals to which they refer, and whether specialty hospitals might 

represent an unfair kind of competition that could harm community hospitals, and in turn harm our communities by making it 

harder for hospitals to provide needed care. 

These concerns led the Congress to include a provision—I think 

it was in the 2003 Medicare Modernization Act—which placed an 

18-month moratorium on physician self-referral to new specialty 

hospitals. This provision was meant to serve as a sort of coolingoff period during which the Congress could further study the relevant issues. 

The moratorium, I think, is set to expire next month, and I am 

pleased that we are continuing to examine the issue so that we can 

decide how best to proceed. The focus of today’s hearing is the role 

that specialty hospitals play in healthcare competition and whether 

this is the type of competition that we want to foster. 

4

We are going to hear today about whether specialty hospitals do, 

in fact, result in lower costs or better quality, as their proponents 

claim, and we are going to hear some different perspectives on 

that, which is good. MedPAC’s work, for example, has shown that 

care provided by specialty hospitals, in their view, might actually 

cost more than care provided in community hospitals. Other recently published research has shown that specialty hospitals do not 

necessarily provide higher quality care. 

I, myself, am all for competition as long as it is fair competition. 

I suspect I speak for most of the people in this room. When it 

comes to specialty hospitals, I have heard from some people that 

the competition may not be taking place on a level playing field because specialty hospitals can essentially select their patients, while 

community hospitals treat everyone in the community, and also 

have to provide many unprofitable services like emergency care 

and intensive care services. 

However, I have also heard from physicians who believe that investment in specialty hospitals gives them an opportunity to play 

a larger role in making decisions about how best to provide care. 

Ultimately, I believe that a shared goal of all involved is to provide 

the best possible care for all patients, for all conditions, in all facilities. The question we must answer is are we doing just that. 

In closing, Mr. Chairman, let me just say I think we would also 

agree that as a Nation we need to reduce healthcare costs and improve healthcare quality in all sectors of healthcare. We will spend 

over $1.5 trillion on healthcare in this country this year. Yet, despite this spending, 45 million Americans lack health insurance. 

For Americans who do have health insurance, premiums continue 

to rise. Rising healthcare costs are becoming an increasing burden 

on small businesses and big ones, too, making us less competitive 

around the world. 

One of the things that I hear most, whether it is in Delaware or 

all around the country, is the need to control rising healthcare 

costs and improve outcomes. These increasing costs don’t correspond to increased quality. Research has shown that the quality 

of healthcare in the United States varies widely, and as many as 

98,000 deaths a year are caused by preventible medical errors. 

Finally, I am interested to learn the role that specialty hospitals 

might have to play in this effort. However, I believe that any competition between specialty hospitals and our full-service hospitals 

must take place on a level playing field. I am interested to hear 

the perspectives of all of our witnesses regarding this important 

issue, and I thank you for coming and for this opportunity. 

Thank you. 

Senator COBURN. Thank you, Senator Carper. 

I am going to ask our witnesses to limit their oral testimony to 

5 minutes. Your complete statements will be made a part of the 

record, and we will hold our questions until our first two witnesses 

have finished their testimony. 

I first would like to recognize John Graubert. He is the Principal 

Deputy General Counsel of the Federal Trade Commission. Mark 

Miller is the Executive Director of the Medicare Payment Advisory 

Commission. 

Mr. Graubert. 

5

1The prepared statement of Mr. Graubert appears in the Appendix on page 37. 

TESTIMONY OF JOHN GRAUBERT,1 PRINCIPAL DEPUTY 

GENERAL COUNSEL, FEDERAL TRADE COMMISSION 

Mr. GRAUBERT. Thank you, Mr. Chairman, and I appreciate the 

opportunity to appear before you today to discuss new entry into 

hospital competition and related issues. 

The Federal Trade Commission has gained familiarity with these 

issues through the hearings held together with the Antitrust Division of the Department of Justice which led to the report which the 

Chairman mentioned, ‘‘Improving Health Care: A Dose of Competition,’’ issued jointly by the Commission and the Department of Justice in July 2004, as well as through the Commission’s substantial 

experience in enforcing the antitrust laws in healthcare markets. 

The joint hearings and the joint report broadly examined the 

state of the healthcare marketplace and the role of competition and 

consumer protection in satisfying the preferences of Americans for 

high-quality, cost-effective healthcare. The joint hearings took place 

over 27 days, from February through October 2003, following a 

Commission-sponsored workshop on healthcare issues in September 2002. 

The Commission and the Department heard testimony from 

about 240 panelists, including representatives of various provider 

groups, insurers, employers, lawyers, patient advocates, and leading scholars on subjects ranging from antitrust and economics to 

healthcare quality and informed consent. 

Together, the hearings and workshop elicited 62 written submissions from interested parties. Almost 6,000 pages of transcripts of 

the hearings, and all written submissions are available on the 

Commission’s website. In addition, staff of the Federal Trade Commission and the Department of Justice undertook independent research for the report. 

Our written statement for this hearing focuses specifically on a 

few of the issues addressed in this report that relate to new entry 

among hospitals, and I would emphasize three main points. 

First, vigorous competition can have important benefits in the 

hospital arena just as it has in the multitude of markets in the 

U.S. economy that rely on competition to maximize the welfare of 

consumers. Competitive pressure can lead hospitals to lower costs, 

improve quality, and compete more efficiently. Competitive pressure also may spur innovation and new types of competition. 

In hospital markets today, some new entrants specialize and provide only a limited portion of the in-patient and out-patient services that general hospitals tend to provide. Of course, specialty hospitals are not new. In recent years, however, an increasing number 

of single-specialty hospitals have entered or attempted to enter 

particular markets to compete with hospitals in providing certain 

types of hospital services such as cardiac or orthopedic surgery. 

Ambulatory surgery centers have emerged to perform surgical 

procedures on patients who do not require an overnight stay in the 

hospital, thus providing additional competition to hospital services 

in this area. Testimony at our hearings reported that this entry 

has had a number of beneficial consequences for consumers who receive care from these providers. 

6

Second, when new firms enter or threaten to enter a market, incumbent firms may seek to deter or prevent that new competition. 

Such conduct is by no means unique to healthcare markets. It is 

a typical reaction of incumbents to possible new competitors in any 

market. In certain circumstances, such conduct may violate the 

antitrust laws. Antitrust scrutiny, however, sometimes may not 

reach certain anti-competitive conduct. 

For example, the Noerr Pennington doctrine immunizes from 

antitrust scrutiny conduct that constitutes petitioning of the government, even when such petitioning is done to restrain competition or to gain advantage over competitors. Moreover, the State action doctrine shields from antitrust scrutiny a State’s activities 

when acting in its sovereign capacity. 

In the context of hospital competition, the combination of these 

two doctrines can offer antitrust immunity to hospitals or other 

groups that wish to lobby State officials to deny a potential entrant, such as a single-specialty hospital, the Certificate of Need it 

may require to open its doors. State CON programs generally prevent firms from entering certain areas of the healthcare market 

unless they can demonstrate to State authorities an unmet need for 

their services. The FTC and DOJ report concluded that market incumbents can too easily use CON procedures to forestall competitors from entering an incumbent’s market. 

Not all States have CON requirements. Indeed, almost all of the 

recent entry by single-specialty hospitals has taken place in States 

that do not have CON requirements. Our report recommended that 

States with CON programs should reconsider whether these programs best serve their citizens’ healthcare needs. 

Finally, policymakers should consider the extent to which regulatory distortions may affect competition among hospitals and other 

firms. Although entry by single-specialty hospitals and ambulatory 

surgery centers has provided consumer benefits, Medicare’s administered pricing system has driven in substantial part the emergence 

of such facilities. Medicare’s administered pricing system, albeit inadvertently, can make some services very profitable and others unprofitable. 

Several panelists at our hearings expressed concern that singlespecialty hospitals and ambulatory surgery centers would siphon 

off the most profitable patients and procedures under Medicare reimbursement policies, leaving general hospitals with less money to 

cross subsidize other socially valuable, but less profitable, care. 

The FTC/DOJ report pointed out that, generally speaking, competitive markets will eventually compete away the higher profits 

and super-competitive profits that are necessary to sustain such 

subsidies. And we concluded that, in general, it is more efficient to 

provide subsidies directly to those who should receive them rather 

than to obscure cross subsidies and indirect subsidies in transactions that are not transparent. 

The FTC/DOJ report recommended that governments should reexamine the role of subsidies in healthcare markets in light of their 

inefficiencies and potential to distort competition. Indeed, I note 

that CMS has underway, as everyone knows, a study of Medicare 

payment rates that may address some of those issues. 

7

1The prepared statement of Mr. Miller appears in the Appendix on page 63. 

I would like to thank the Subcommittee for inviting the FTC to 

participate and taking the time to consider our report, and we will 

be happy to answer any questions later. 

Senator COBURN. Mr. Miller. 

TESTIMONY OF MARK E. MILLER, PH.D.,1 EXECUTIVE 

DIRECTOR, MEDICARE PAYMENT ADVISORY COMMISSION 

Mr. MILLER. Chairman Coburn and Ranking Member Carper, I 

am Mark Miller, the Executive Director of the Medicare Payment 

Advisory Commission, which is called MedPAC. MedPAC is a small 

congressional support agency that advises Congress on a range of 

Medicare issues. The staff reports to 17 commissioners who use our 

work to make those recommendations to Congress. 

The Commission is comprised of 17 members with rotating terms 

that are appointed by the Government Accountability Office. They 

come from various parts of the health delivery system and from the 

health policy sector. For example, there are five physicians, three 

managers of hospitals and home health agencies, two nurses, a 

former Senator, a former CMS administrator and two health economists. The Commission was mandated by the Congress in the 

MMA to report on cardiac, orthopedic and surgical physician-owned 

hospitals, and I would like to briefly review what we found for you. 

The Commission found strong evidence, as did CMS, that specialty hospitals focus on less complicated patients than community 

hospitals. As you know, Medicare pays a fixed price for an admission at a hospital. In our analysis of the payment system, we found 

that Medicare systematically overpays for less complicated patients. And the reverse is also true; Medicare underpays for more 

complicated patients. 

We found that physicians are investing in specialty hospitals 

that focus on the type of patient that Medicare overpays. Since 

Medicare overpays for these less complex patients, specialty hospitals have a greater ability to earn profit whether or not they develop efficiencies. 

In the Commission’s view, this is an unlevel playing field. Our 

report contains a set of payment recommendations that would create a more level playing field among all hospitals. A fair payment 

system would allow hospitals to profit through efficiency rather 

than simply through the patients that they focus on. 

There were several other questions in the mandate, and to touch 

on those, the Commission found mixed results on whether specialty 

hospitals are more efficient than community hospitals. On the one 

hand, they did find that they had shorter lengths of stay, which is 

a measure of efficiency. However, we could not establish that they 

had lower costs per case. It is important to note that this is the 

kind of result that could change if one examined this market later 

in its development, the specialty hospital market. 

The Commission report finds that the appearance of a specialty 

hospital in a market generally did not increase the number of services provided per beneficiary, which is one of the fears that people 

had. However, what this means is that specialty hospitals tend to 

8

get most of their business from community hospitals that are existing in the market. 

Turning to another question that the Congress asked us, the impact on community hospitals, we found that they experience small 

reductions in their Medicare revenues, but they appear, so far, to 

be able to compensate for this loss. We reached that conclusion because their overall profitability appeared to be unaffected by the 

entrance of the specialty hospitals in their markets. Once again, it 

is important to note that this is the kind of result that could 

change, depending on how mature the market was. 

The Commission found that specialty hospitals serve fewer Medicaid patients than community hospitals, although there is some 

variation depending on whether a specialty hospital runs a fully 

operating emergency room. The Commission found that cardiac 

hospitals get about two-thirds of their patients from Medicare and 

orthopedic and surgical hospitals get about two-thirds of their patients from private payers. 

The Commission recommended that the current moratorium be 

extended another 18 months beyond the 18 months that were included in the MMA. The Commission reached this conclusion for 

several reasons: The evidence that I pointed out that specialty hospitals tend to focus on patients where Medicare overpays, and 

wanted to give the Congress and the Secretary time to make 

changes to the payment system because the evidence on specialty 

hospitals’ efficiency was mixed. 

At the time that we completed our report and turned it in, there 

were no results on quality. Neither the Cram study, nor CMS’s 

work had been published. Our mandate did not include us looking 

at quality. It is important to point out that there is continued interest on the part of the Commission in examining the issue of physician investment and its impacts on efficiency in the delivery of 

care. 

One final point about our report. The Commission recommended 

that the opportunities for gain-sharing be encouraged. Physicians 

and hospitals should be allowed to share in savings from improved 

efficiencies, and under current law physicians are often prevented 

from sharing in those gains. 

The specialty hospital physicians we talked to on our site visits 

often noted that they wanted to work with community hospitals, 

but pointed out frustrations with the community hospitals and certain barriers. One of those barriers can be addressed by the Congress and the Secretary by expanding gain-sharing. 

In summary, I want to be clear. Competition and specialization 

are not the problem, and specialty hospitals may be an important 

contribution to competition. However, the immediate problem is 

that there is an unlevel playing field in Medicare reimbursement 

that rewards focusing on patients where Medicare overpays and 

discourages efficiency. 

I look forward to your questions. 

Senator COBURN. Well, thank you for your testimony. 

Let me go to you, Dr. Miller, first. Since there are no new specialty hospitals out there, how is 18 months more going to help you 

make a better decision? I know we have to do some payment 

changes, but how does 18 more months of no new competition in 

9

healthcare make a difference in terms of the data that you are 

going to collect? 

Mr. MILLER. Actually, there is additional data that would come 

in. We had to look at 2002 data for the purposes of doing our analysis because many of the questions that Congress asked us were 

empirical in nature. Between 2002 and 2003, there are more specialty hospitals that actually entered the market. I think our sample size could actually be significantly larger and would allow us 

to look at more hospitals. 

Senator COBURN. What is ‘‘significantly’’ to you? 

Mr. MILLER. We have 48 specialty hospitals in our sample. I 

think we could have that number again if we looked at an additional year. 

Senator COBURN. And what would you expect to change in that 

year? 

Mr. MILLER. There are two or three things that I think potentially could change. The finding on cost, for example, when I laid 

that out for you—it is actually more subtle than that. We found 

that costs in specialty hospitals were actually higher than community hospitals, which is completely counterintuitive. And as analysts, we entered this analysis expecting to find the opposite. It 

may very well be that in a more mature specialty hospital market, 

that result would be different. 

To give you another side of the argument, we also found that 

there was no impact on community hospitals, and here again the 

results were trending in a direction showing that Medicare revenues, for example, were being affected. That may be the kind of 

thing that, over time, you saw a clearer impact of the specialty hospitals on community hospitals. 

Senator COBURN. Let me ask you a question about level playing 

field. You are stating that maybe the payment rates are too high 

for certain procedures and that those tend to be moved to a specialty hospital. And therefore they have revenue with less costs associated with them, but yet they are not more efficient by your own 

testimony. That doesn’t create an unlevel playing field. 

If, in fact, their costs are higher, it is not an unlevel playing field 

if the margin between them is less for those that are going to a 

specialty hospital by your very testimony. So if, in fact, that is the 

case and we continue to study this for 18 months, how would you 

account for the fact that the community hospitals don’t pay income 

taxes and don’t pay property taxes? That is an unlevel playing field 

in the opposite direction. 

So when you size it all up, how do you get 18 months more data 

that shows a significant level or unlevel playing field? It seems to 

me you can take that argument either way. It is unlevel in terms 

of the tax structure afforded to community hospitals in property 

tax and income tax versus supposedly a cost benefit in a private 

hospital, which your own study says wasn’t the case. It is not more 

efficient, although their length of stay is significantly less, their 

complications are significantly less, their infection is less, but their 

cost isn’t less. Explain that to me. 

Mr. MILLER. You have a lot of questions in there, so let me just 

get this down. The first thing I want to address is the notion of the 

tax treatment. This is not an area that we have studied. In terms 

10

of whether that is fair or unfair, there is nothing that the Commission has done that——

Senator COBURN. Well, let me interrupt you for a minute. If you 

are going to look at level playing fields and you are going to look 

at revenues versus costs, versus bottom line, because that is where 

capital comes from to reinvest in the healthcare field, how can you 

say that on one end we are going to look at an area that creates 

an unlevel field and in another area we are not going to look at 

an area that creates an unlevel playing field? 

Mr. MILLER. Well, our mandate was to look at specialty hospitals 

and their role in Medicare, and I think the FTC is also pointing 

that out. A lot of people view the Medicare payment system as one 

of the stimuli in this marketplace that drives the development of 

these hospitals. 

Senator COBURN. Is it your viewpoint that one of the main stimuli is Medicare payment rates? 

Mr. MILLER. I think it plays a substantial role, yes. Now, to your 

point on cost, I think the concern is when we found this result that 

they had higher costs, we were a little perplexed by it and so we 

talked to people in the specialty hospital industry. They said there 

could be a lot of things going on. We have higher start-up costs. 

We may have more staff. We may be paying our staff more. We certainly have more amenities, those types of things. 

I don’t think those are bad things at all, but the point is that if 

two hospitals are competing and you are going to provide more 

amenities, it should be, in our view, on the basis of having a comparable payment for a comparable patient. And if you can produce 

efficiencies that allow you to provide those amenities, then you 

should prevail in the market and you should be able to do well. But 

what happens now is if the specialty hospitals focus on less complicated patients, their payments far exceed what their costs actually are even when they have higher costs. 

Senator COBURN. Do you think that the heart hospitals focus on 

less complicated patients? 

Mr. MILLER. Yes. I think there are two things that happen in the 

heart hospitals, and it is a little bit complicated. They pick DRGs, 

the payment categories, that are more profitable and then within 

that there is some patient selection. For orthopedic and surgical, 

the story is a little bit different. The payment categories they pick 

are about average, but they definitely have stronger selection 

where they pick less complex patients. 

Senator COBURN. So if the payment changes were made, is it 

your feeling that we would see less incentive into specialty hospitals? 

Mr. MILLER. That is our strong view, and the most important 

point that our report is trying to make is that a lot of this signal 

can be removed by re-torquing and re-balancing the payment system. 

Senator COBURN. Well, my time is up. We will come back. Having been a practicing physician, I will tell you it doesn’t have anything to do with it. The only thing a doctor has to sell is their time, 

and having that time scheduled efficiently and effectively to where 

you get time utilization is why doctors—where 6 may own a hosVerDate 0ct 09 2002 12:15 Nov 18, 2005 Jkt 021822 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 C:\DOCS\21822.TXT SAFFAIRS PsN: PHOGAN
11

pital, but 60 go there to practice, it is because they are accommodating the physicians’ efficient utilization of their time. 

Senator Carper.

Senator CARPER. Dr. Miller, go back. What was the last thing 

you said about the most important finding? Say that again. 

Mr. MILLER. I am not sure I remember. I am sorry. [Laughter.] 

Senator CARPER. Neither do I, but I want to. 

Mr. MILLER. In response to this, I think the last thing I said was 

our most important finding was that we felt that the payment system was distorted and sending an improper signal. Based on the 

type of patient that specialty hospitals focus on, Medicare tends to 

overpay. And we believe that through the series of recommendations that are included in our report, you can correct most of that. 

Senator CARPER. Run through some of those recommendations in 

the report for me. 

Mr. MILLER. There are three or four recommendations, and I 

won’t get really detailed, but the first and foremost to track on is 

that you would have an adjustment for the severity of the patient 

that you see. So the way it stands right now, Medicare’s DRG is 

based on an average, but within that average there is a range of 

patients. So there are systems that allow you to tailor your payment more precisely to the type of patient you pick up. 

Second, these are pretty technical—in constructing the weights, 

the relative weights paying more for this surgery, less for that, you 

would use cost instead of charges. We believe there are distortions 

being entered into those weights because of hospital charging practices. 

Third, and this is highly technical—you would derive the average 

first at the hospital level and aggregate up to the national level instead of starting at the national level. There are a whole bunch of 

reasons that you do that, but one is that it eliminates some of the 

differences in charging behavior among the hospitals. 

Finally, we make a recommendation that you should adjust the 

outlier policy to have it tailored more precisely to the category of 

patient that experiences the outliers. And it is kind of complicated, 

but the way it currently——

Senator CARPER. Try to say this in a way that even I could understand it, OK? 

Mr. MILLER. I will try. As it currently stands, it distorts some of 

the weights. 

Senator CARPER. All right, thank you. 

Mr. Graubert, a question, if I could, and I may ask Dr. Miller to 

respond to this as well. Mr. Graubert, I think your report cites testimony discussing specialty hospitals’ better outcomes, and I think 

better clinical standards and their ability to produce services less 

expensively. Your testimony also mentions that the entry of specialty hospitals has had a number of beneficial consequences for 

consumers. However, I don’t believe that you elaborate a great deal 

on what those beneficial consequences are. 

Also, since the release of your report—I believe it was last year, 

2004—there have been a number of studies that don’t necessarily 

validate the claim that specialty hospitals have higher-quality outcomes or lower costs. MedPAC’s work, for example, showed that 

12

specialty hospitals actually had, in their view, higher costs, despite 

their shorter lengths of stay. 

I think there was another study published by a Dr. named Peter 

Cram in the New England Journal of Medicine that reported that 

in hospitals with similar volumes, mortality for specialty hospitals 

and general hospitals were really about the same after adjusting 

for patient severity. 

I just want to ask you, if I could, your reaction to some of these 

newer findings, especially maybe Dr. Cram’s work that is published 

in the New England Journal of Medicine, and what do you believe 

the beneficial consequences of specialty hospitals are to consumers. 

Mr. GRAUBERT. Although it is true, Senator——

Senator CARPER. That was a long question, wasn’t it? 

Mr. GRAUBERT. I will do my best, Senator. 

Senator CARPER. Thank you. 

Mr. GRAUBERT. It is true that it is difficult to analyze cost of 

service in this area because of the overlay of administered pricing. 

What our report did was collect comments of our panelists. We did 

not independently do a great deal of analysis, and have not since. 

Our interest is in any meaningful source of potential competition, 

and it was interesting, I think, that there was quite a bit of testimony that this competition actually was beneficial. 

Most of the testimony—and this is cited on page 19 of Chapter 

3 of our report; I believe it is Chapter 3, yes—does deal with patient satisfaction issues, quality of care issues. That was predominantly where most of our testimony came. There was not a lot of 

testimony, I don’t believe I can recall offhand, on the actual economic efficiencies of the specialty services. But some of the points 

have already been mentioned, I think, in terms of patient satisfaction, and also more efficient use of physician services, more efficient scheduling of physician services, more control by physicians 

over their time. 

There was testimony that the cost of care might eventually be 

lowered because hospital stays were shorter and there were fewer 

post-operative complications, which is a subject that Dr. Miller had 

addressed. So I would have to defer to agencies with more of a 

healthcare-specific mandate to determine, under an administered 

pricing scheme, how the costs should be reflected. 

From a general antitrust enforcement point of view, obviously we 

believe that competition should solve these problems to the maximum extent possible, and it is intriguing to use that there is a potential here for such competition. 

Senator CARPER. Mr. Chairman, if I could, I would like to ask Dr. 

Miller to comment on this Cram study, as well, whether you believe from the available research that specialty hospitals do provide 

better quality care. 

Mr. MILLER. This was not part of our mandate, but here is what 

I know about what is out there. The New England Journal of Medicine article that you refer to by Peter Cram went through and compared Medicare patients in specialty and community hospitals. He 

controlled for severity of patient and volume of service. Actually 

starting off, he found that there was higher quality in specialty 

hospitals. 

13

Then when he controlled for severity and volume, he found that 

those differences disappeared, and his conclusion is that there is 

nothing peculiar to specialization that produces the quality. It is 

the severity of the patient that you are dealing with and the volume of service that you are providing. 

There has been a longstanding point in the literature that says 

if you treat more heart patients, you have better outcomes. And his 

point was really those seem to be the drivers here, not so much the 

specialization. That is one point. 

You are certainly aware of the CMS report. The CMS report 

found a couple of things on specialty hospitals. They found that inhospital mortality is, in fact, lower among specialty hospitals when 

you control for severity. But they also found that readmission rates 

were higher, and that patients were more likely to have to go back 

into the hospital. So there was something of a mix there, and that 

is what I understand from CMS, but obviously they should speak 

for themselves. 

Senator CARPER. Good. Thanks very much. 

Senator COBURN. Dr. Miller, you talked about the laws that prevent physicians from sharing in cost savings that are in hospitals 

today and incentivizing physician participation in that. It strikes 

me as curious that we would say that would be alright, but we 

have concerns with physician ownership in terms of it might create 

some other obligation. In every other area in our country where we 

have markets allocating resources, we get pretty good efficiency. 

If, in fact, CMS sends the signal that they are going to readjust 

rates so that the rates are truly up for those with higher severity 

of illness, more outliers, better payment for the more complicated 

patients, significantly lower payment for those with less complications, why in the world would we need to study it any longer? Why 

wouldn’t we want the market to go on and just let it work? 

If that is what is going to happen and we all know that is what 

is going to happen, is that not a signal to the market that people 

might pause and say if, in fact, I am only doing this so I can cherry-pick patients, I wouldn’t come into this since I am not going to 

have any advantage from cherry-picking patients? Would that not 

be a signal that would allow the market to truly function as it 

should? 

Mr. MILLER. I think that is a fair point and I think that in the 

Commission’s deliberations, this point was made and discussed 

many times. There is definitely a view among commissioners that 

if you aggressively move on changing the payment system, that 

alone will be sending signals to the marketplace that say don’t 

enter unless you are really here to play for a more efficient or a 

different kind of product. 

However, the Commission is comprised of 17 people, and as I 

tried to lay out in my opening statement, there were still some remaining concerns. There was this somewhat surprising result that 

the costs were not lower. There was the surprising result that the 

effects on the community hospital that people expected to see didn’t 

seem to materialize. So that left some commissioners uneasy. There 

are also commissioners who—and I tried to be direct about this—

have concerns about physician investment and the potential impact 

14

it has on delivery of care. So those issues still remain for some 

commissioners. 

Senator COBURN. But doesn’t that disregard the fact that the 

vast majority of volume done in most of the specialty hospitals is 

done not by the owners, but by other physicians who are utilizing 

those hospitals? 

Mr. MILLER. I am not sure how to answer that question. I know 

from the CMS work that physician ownership is related to how 

much you refer to a specialty hospital. You may be correct that 

most of what goes on in specialty hospital is unrelated to the owners. 

Senator COBURN. But carry that to an extreme. Say I am a cardiac surgeon and I am going to send this patient over there. By the 

time you get down to the bottom line at a specialty hospital, I 

might make $30 out of it, or $50 out of it or $70 out of it. What 

you are asking me to believe as a practicing physician is that $70 

times two a day, times 7 days a week, is more important to me 

than my time efficiency and time utilization. 

I didn’t see anything in either report, neither yours nor CMS’s 

or anybody else’s, that has to do with one of the reasons I think 

specialty hospitals came into existence, and it doesn’t have anything to do with money. It has to do with the ability of physicians 

to be able to practice. 

Mr. MILLER. Can I say something about that? Because actually 

I think our report does say something about that. I think we were 

really on point on this. In addition to grinding through all the 

claims data and doing all the empirical analysis, we went out to 

specialty hospitals and community hospitals and talked to people, 

and there was a very clear message. 

And I want to be clear about this, because I think you are correct 

on this point that physicians are very frustrated with community 

hospitals in certain circumstances and they do feel that it is hard 

to come in and operate on a set schedule and be efficient about 

moving that business through. And I think there is some truth to 

that and I think there are community hospitals, in our conversations with them, who acknowledged it and said we had a wake-up 

call and we needed to change how we were running our business 

in order to accommodate these physicians. 

Senator COBURN. Isn’t that exactly what we want competition to 

do? 

Mr. MILLER. Absolutely, but I also want to make another point, 

which is you said that this was only worth a few dollars. I mean, 

that is potentially the case, but think about it this way. If we are 

talking about a payment rate that significantly overpays on costs, 

let’s hypothesize a group of physicians. You have cleared your fixed 

costs in the hospitals. You start filling those beds. It is not just $10 

and $20 and $30. It can really accumulate. And to be also direct 

on the other side of the conversation, there were physicians in our 

site visits who said point-blank, I am doing this in order to increase my income. 

Senator COBURN. Well, there is no question about that, but that 

is why anybody does anything in a market economy. That is why 

they take risks. 

Mr. MILLER. I am not taking issue with that. 

15

Senator COBURN. Before the Hill-Burton Act, the vast majority of 

the hospitals in this country were owned by physicians. 

Let me go back. I want to reinforce for the record that sending 

a signal by CMS that the rates are going to change—knowing that 

signal is out there, how will that change anything in terms of your 

next 18 months of study in terms of anybody coming into the market if there was not a moratorium? 

If the rates are going to change, then people are going to make 

their decisions based on what they perceive the declining rate 

would be. Why would we want to study it longer when we can have 

the market allocate much better than CMS has ever been able to 

market healthcare? My contention is because we are trying to manage this, we are having trouble—you would have to admit we are 

having trouble managing healthcare costs because we can’t find 

every hole. 

Why would we not want the market to allocate that resource, 

since you are going to send the signal that the reimbursements for 

those less complicated cases are going to go down? 

Mr. MILLER. The only answer that I can offer you is that we at 

MedPAC agree with that part of your statement that the most important thing to do is to aggressively move on changing the payment system, because we think that there is a clear distortion and 

we think it is the most important thing to do to reset the clock here 

and make this work better. 

However, I also have to say there are parts of the Commission 

who remain concerned about the role of specialty hospitals, for 

some of the reasons that I went through earlier in my statement. 

That is about as direct as I can be with you on that. 

Senator COBURN. Senator Carper. 

Senator CARPER. Thanks, Mr. Chairman. 

Mr. Miller, I think the MedPAC report recommended that the 

moratorium on physician self-referral be extended until January 

2007, but it did not go so far as to recommend that the moratorium 

be extended permanently. I believe that the Chairman and Ranking Democrat on the Finance Committee might be looking at an approach that says let’s extend the moratorium permanently. I don’t 

know if they have introduced that or not. 

The MedPAC report, though, noted ‘‘physician-owned providers 

could have a competitive advantage over other facilities because 

physicians influence where patients receive care.’’

Can you discuss with the Chairman, and me, MedPAC’s concerns 

with physician self-referral? Can MedPAC’s concerns be addressed 

solely through adjustments to the Medicare payment system or is 

there just a larger issue at play? 

Mr. MILLER. Let me answer your questions. 

Senator CARPER. Thank you. [Laughter.] 

Witnesses don’t always do that, so it is welcome. [Laughter.] 

Mr. MILLER. In fact, when they say that, they probably are not 

going to. 

Senator CARPER. Or sometimes they answer questions, just not 

the ones we ask. 

Mr. MILLER. I think it is important to point out that it is correct 

that MedPAC did not say extend the moratorium indefinitely, or 

ban specialty hospitals. In fact, I think the quote is something 

16

along the lines of that would be too severe of a remedy; there may 

be some promise here or there may be some value here. But nonetheless, the Commission did say extend the moratorium. 

On self-referral, the best I could explain it to you, I think, works 

like this. There were some studies somewhere in the 1990’s, I 

think, that looked at physician ownership of laboratory and imaging services. 

Senator CARPER. I remember those. 

Mr. MILLER. OK, and if you remember those studies, then you 

know that there were some eye-popping results there on how much 

services were generated by physicians who owned imaging services 

versus physicians who didn’t for controlled populations, similar patients, that type of thing, and I mean eye-popping numbers—twice 

as many MRIs relative to physicians who didn’t own MRI machines, 29 percent more CT scans relative to physicians who didn’t 

own them. 

Now, to be clear, the Commission also said we are not sure that 

same concern arises where specialty hospitals are concerned because surgery is often a different prospect than just let’s run another MRI on somebody. So it was that kind of concern along with 

the uncertainty or the lack of clarity in some of our findings on 

cost, the impact on the marketplace, and the fact that no quality 

data existed at the time that we finished the report. I think that 

configuration of results left some of the commissioners concerned 

about it. But on self-referral, it is the notion that somebody may 

be generating or routing patients on less than completely clinical 

grounds. 

There was one other thing. I think you said something about 

would solely——

Senator CARPER. What I said was could MedPAC’s concerns be 

addressed solely through adjustments in the Medicare payment 

system or is there a larger issue at play. 

Mr. MILLER. And here is the best way I think I can explain the 

situation on the Commission. It may be sufficient to fix the payment system, but at the point when we issued the report on the 

date it was due, some commissioners still had outstanding concerns. So the report says we need these changes to the payment 

system. The report even says the Congress could consider lifting 

the moratorium if the payment system changes and gain-sharing 

were in place, but also there are still these concerns on self-referral 

and the Commission might come back to that issue. So that was 

the best way I could explain how the Commission broke down on 

that issue. 

Senator CARPER. Mr. Chairman, let me ask about just one last 

issue, if I could, and I am going to direct this again to you, Dr. Miller, and if time permits, I am going to ask Mr. Graubert to comment, too. 

One of the concerns that I have heard over and over again about 

specialty hospitals is that they could be further segmenting our 

healthcare delivery system, treating well-insured, healthier patients at specialty hospitals, while treating few, if any, Medicaid 

and uninsured patients. I am concerned about this trend and I 

know some others are, too, and concerned about an overall trend 

17

in our healthcare system of wide health disparities between the insured and the uninsured, and also minority patients. 

It has been brought to my attention that MedPAC may have data 

that specialty hospitals are treating half as many uninsured minority patients as full-service hospitals. I understand that even in the 

same market, among patients who all have Medicare coverage, they 

are still treating half as many minority patients. 

Dr. Miller, can you shed any light at all on this issue? Any idea 

why this is occurring, and should this be the subject of some further study? 

Mr. MILLER. I am not sure I can shed light. Just to clarify a couple of things, it is very clear from our analysis when we look at discharge data that specialty hospitals are serving significantly fewer 

Medicaid patients. There are lots of reasons why that could be the 

case. We don’t particularly have a definitive analysis that says it 

is the location of the hospital. It could be the contracts that they 

are involved in. It could be any number of things. 

On the issue of the mix of the patients by race, I think my response is the same. Exactly what is generating that kind of pattern 

is not something that we looked directly at. You can observe it in 

the data. It is definitely there, as you said, but what generates that 

actual result I don’t think I could say. 

Senator CARPER. Mr. Glauber, any idea why we are seeing this 

kind of data? 

Mr. GLAUBER. There is an interesting empirical question there, 

Senator, and the only data that I can recall that we dealt with in 

our report was the GAO data, which as I recall showed, in fact, 

only very modest differences in the Medicare rates of admissions. 

So as far as we were aware at the time we wrote the report, there 

was not a very noticeable difference. 

There might be other data that we are not aware of and there 

might very well be a healthcare policy issue lurking here. But, 

again, from a competition point of view, I don’t think that there is 

an independent problem in trying to encourage competition to the 

extent possible in the marketplace while simultaneously taking 

care of any other healthcare policy concerns. 

Senator CARPER. Thank you. Thanks to both of you. 

Senator COBURN. I just think for the record if you have that 

data, we ought to have it in the record, if you can substantiate that 

data. I believe that your report showed like an 8- and a 12-percent 

community hospital Medicaid rate, and I think there was a 2- or 

3-percent difference in Medicare. 

Do you have that number available? 

Mr. GRAUBERT. I am looking at a table on page 21 of Chapter 3 

again, and in the orthopedic hospitals there was a difference of between 8 and 10 percent, cardiac hospitals a difference between 3 

and 6 percent, and Medicaid admissions for women’s health was 37 

to 28 percent. 

Senator COBURN. But there is no data in your report or in your 

report that shows a difference in minority utilization? 

Mr. GRAUBERT. I am not familiar with that. 

Senator COBURN. And is there any published data that you know 

that to be factual? 

18

Mr. MILLER. What Mr. Carper is referring to is that there was 

a data request from the Senate Finance Committee that we responded to, and I believe that is what he is referring to. That was 

not in the report. 

Senator COBURN. But there is no reported data that would show 

that, in fact, is the case? 

Mr. MILLER. At the request of the Senate Finance Committee, 

they asked us to review the admissions in a data set that is called 

MedPAR, which is where the admissions come from, and asked us 

to report it for them by race. The conclusions of that analysis were 

that there was something like—and these are using the categories 

that the MedPAR lists patients by. The percentage black was like 

3 percent for specialty hospitals, compared to, if I am correct and 

remember correctly, about 9 percent for other hospitals. 

Senator COBURN. And this is race-adjusted for the communities 

that they are in? 

Mr. MILLER. Yes, and that is a really good question. It is looking 

at hospitals within the given marketplace to control for the fact 

that you have the mix within a——

Senator COBURN. Would you be so kind as to submit that to this 

Subcommittee? 

Mr. MILLER. Absolutely. 

Senator COBURN. Thank you very much. 

Senator CARPER. That would be good. Thanks. 

Senator COBURN. I just have one other question, if I might ask 

it, and this is for Mr. Graubert. In June, your report on healthcare 

competition recommended repealing certificate of need laws because of their anti-competitive effects. Have you been able to quantify the cost that certificate of need laws add to the healthcare system, and if not, are you aware of other studies that have tried to 

measure this? 

Mr. GRAUBERT. I believe we do have some studies that address 

this question, Mr. Chairman. Now, of course, I should preface this 

by saying that it is very difficult to measure all of the cost from 

lost competition because it also includes not only higher prices, but 

lost innovation, product choice and quality, things that if they are 

prevented, they are gone. 

In our study, we cite a number of studies in Chapter 8, particularly in footnote 37 which I would recommend to you. There is an 

older study from 1987 that estimated price increases between 4 

and 5 percent resulting from the existence of CON laws. A later 

1991 study indicated hospital costs approximately 10 percent higher in States that had had CON laws in place for at least 10 years. 

Then one of the witnesses at our hearings, Dr. Morrissey of the 

University of Alabama-Birmingham, testified that his research had 

found price increases up to 20 percent attributable to CON laws. 

Senator COBURN. Thank you. 

Dr. Miller, aren’t all the sub-specialty hospitals or specialty hospitals that receive Medicare reimbursement JCAHO-approved? 

Mr. MILLER. Not every hospital in Medicare has to be JCAHOapproved, but it does have to meet Medicare conditions of participation. 

Senator COBURN. Is one of those conditions quality control in 

terms of surgical and medical procedures by the medical staff? 

19

Mr. MILLER. I am not sure I could answer that. 

Senator COBURN. I can answer it. Absolutely, if you don’t have 

control on that. The fact is in terms of self-referral for cases that 

should not be done, in fact, you can’t get accredited if, in fact, you 

don’t have a quality control looking at that in terms of utilization 

review inside any hospital in this country today. 

For my profession, I just want to defend it for a minute. Not everybody is a great actor in my profession. I understand that, but 

I also understand the institutions that are out there, and the physicians in this country are working hard everyday to make sure 

physicians who are not doing it right are held accountable for not 

doing it right. Procedures are rarely done on people that are not 

needed. And I am referring to hospitals; I am not referring to the 

others. 

So I wanted to make the point for the record that the whole purpose for accreditation is to make sure you have the controls in 

place in a hospital setting to control behaviors that might be susceptible to economic advantage through the lack of a medical ethic 

that is proper for the care of that patient. 

Mr. MILLER. There should be nothing from my comments or the 

Commission’s comments that should be taken as an attack on the 

medical profession. I don’t think anything was meant to imply that 

a patient in these hospitals was getting inappropriate care. It was 

just that the patients that were going to those hospitals were less 

complex and the payment system was missing them. 

And if I could just say one other thing, I think it is important 

to point out that the Commission also looks at the issues much 

more broadly. I think in the FTC report they say something along 

the lines of you need to reward for quality. Physicians are rational 

animals like anyone else and if you can incent those types of 

things—and there were a series of recommendations that MedPAC 

made for inside the Medicare program to pay more on the basis of 

quality. So nothing should be taken as an attack on the medical 

profession here. 

Senator COBURN. No, but I think it is important for us when we 

talk about self-referral in specialty hospitals. The people I know 

who have an interest in specialty hospitals—it is about giving their 

patient the best care and the most timely care and the most efficient care, and controlling their own schedules in doing that, rather 

than self-referral for their own advantage. 

Now, there is no question that there is competitive advantage. 

That is why they put their investment into the hospital, but it goes 

back to the point I said earlier. In most of the specialty hospitals 

in Oklahoma, the number of doctors who are on staff who have no 

ownership far outweighs the number of doctors who are on staff 

that have an ownership. 

And you have to ask the question, why are they there? Why are 

they coming? If they get nothing financially out of it, why are they 

utilizing those services? That is an important question that needs 

to be asked by you all as you look at this. 

I have several questions I would like to submit for the record and 

ask that you return them with answers within 2 weeks, if there is 

no objection by my counterpart. And I want to thank you so much 

20

1The prepared statement of Ms. Herzlinger appears in the Appendix on page 74. 

for your forthright testimony and the hard work that you have 

done in this area. 

Mr. MILLER. Sure. I appreciate it. 

Senator COBURN. Thank you. Let me welcome our second panel, 

and I appreciate all of those of you who have traveled and made 

an effort to be here for this Subcommittee hearing. Senator Carper 

had to attend another hearing and will not be with us for this second panel. However, your complete testimony will be made a part 

of the record and I would ask you, if you would, to limit your oral 

testimony to 5 minutes. 

On our second panel is Regina Herzlinger. She is the Nancy R. 

McPherson Professor of Business Administration, School of Business, Harvard University. Next is a well-known acquaintance of 

mine from Oklahoma, Dr. Stan Pelofsky, President, Neuroscience 

Specialists, and owner of Oklahoma Spine Hospital, and associated 

with a very good friend of mine, Dr. Jim Oder; John Thomas, Senior Vice President and General Counsel, Baylor Health Care System; Dr. James Cain, a practicing family physician from Lampasas, 

Texas; Ed Jungbluth, heart patient, Albuquerque, New Mexico—

welcome; and Dr. Plested, Immediate Past Chair, Board of Trustees, American Medical Association. 

I welcome each of you, and Dr. Herzlinger, if you would start, 

please. 

TESTIMONY OF REGINA E. HERZLINGER, PH.D.,1 NANCY R. 

McPHERSON PROFESSOR OF BUSINESS ADMINISTRATION, 

HARVARD BUSINESS SCHOOL, BOSTON, MASSACHUSETTS 

Ms. HERZLINGER. Thank you, Dr. Coburn, ladies and gentlemen. 

It is a pleasure to be here. I am going to talk about healthcare competition from the perspective of healthcare in our economy. 

We are very fortunate to live in the United States. We are fortunate in many ways, but we also have the highest GDP per capita 

among the countries in the world. The reason we have it is we have 

the highest rate of growth of productivity among developed countries in the world. Productivity comes from innovation. 

It is unfortunate that this moratorium and the recommendations 

by MedPAC to extend it kill off one of the best chances for productivity in the healthcare system. It is unfortunate because, although 

we have such record high GDP per capita, our healthcare costs are 

killing national competitiveness. 

General Motors’ financial problems can be traced directly to its 

healthcare costs. It is difficult to compete with countries that have 

far lower healthcare costs. At 15 percent of GDP, one out of every 

seven dollars, our healthcare costs are the highest in the world and 

they rise at record rates. 

Hospitals account for the most significant portion of our 

healthcare costs and they are the number one reason that they are 

rising. Innovation in hospitals would lead to productivity and productivity would increase our competitiveness when it comes to 

healthcare costs. 

21

Now, my colleagues here will talk about why specialization in 

healthcare is so good, but generally, specialization in our economy 

does two things. It makes things cheaper. It makes things better. 

When it comes to healthcare, specialization has another asset 

that nobody has addressed and that is the infrastructure of our 

nonprofit community hospitals is very old. It is going to have to be 

replaced and it will cost the taxpayers a great deal of money to do 

that. Specialty hospitals are investor-owned. It will be the private 

sector that provides that capital and not the public sector. 

Now, what do we know about specialization from the rest of our 

economy? We know it is critical. For example, Nucor, which is a 

specialty steel company, almost singlehandedly revived the steel 

sector. Here are some of the results from Nucor. It takes one manhour to make a ton of steel. The rest of the industry takes three 

man hours. Its workers earn $60,000 per year, mostly from bonuses 

based on productivity. They are treated like owners, whereas the 

unionized workers in the rest of the industry earn $50,000. Nucor 

made huge profits while the rest of the industry lost an enormous 

amount of money. 

What is the Nucor story? It is ‘‘do good, do well.’’ They did great 

for the customer, lowered the price of steel; great for their workers, 

higher wages; and great for their shareholders. That is the story 

of specialization. 

Another part of specialization is it is typically started by people 

who know what they are doing. Thomas Edison was a very famous 

inventor. He started a little business that is now called General 

Electric. Bill Gates certainly knows a lot more about computing 

than I do or than most people do. He started a little business called 

Microsoft. Sam Walton, a fabulous retailer, started a company 

called Wal-Mart. Typically, specialization is led by people who own 

it, who know a great deal about it. Many people may not know that 

Jack Welch, the brilliant CEO of General Electric, had a doctorate 

in engineering. 

Yet when the hospitals complain about specialized hospitals, they 

have valid points. It will hurt their profitability; there is the danger of over-referral; and who will care for the uninsured? Those 

complaints are quite valid. But the diagnosis that it is the specialty 

hospital that is causing these problems is not valid. 

The profitability issue, as your two prior witnesses ably testified, 

is caused by mispricing by CMS. It is caused by a system in which 

a bunch of bureaucrats try to replace what the market normally 

does. 

The problem of over-referral is not caused by the fact that physicians own facilities. Why don’t people buy more steel than they 

need to? Why don’t they buy more products than they need to? The 

answer is that the third-party system in healthcare insulates consumers from the costs of their care and they may buy more than 

they need to, and because it is a third-party system, consumers 

don’t have the kind of information that would help them be very 

savvy in their buying. 

Last, the issue of the uninsured. Is that an issue that should be 

solved by suppressing efficient innovations, or is that an issue that 

should be solved through another mechanism by addressing the financing needs of the uninsured? Surely, it should be the latter. 

22

1The prepared statement of Dr. Pelofsky appears in the Appendix on page 81. 

So what should the Congress do? It should lift the barrier to competition. The moratorium is a way of suppressing the competition 

that is so sorely needed in the hospital sector. It should encourage 

market-based provider pricing and stop the tinkering by a group of 

bureaucrats trying to emulate the market. And lastly, it should address the issue of how to make sure that the uninsured have as 

much access as anybody else. 

Senator COBURN. Thank you, Dr. Herzlinger. Dr. Pelofsky. 

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

SPINE HOSPITAL, OKLAHOMA CITY, OKLAHOMA 

Dr. PELOFSKY. Dr. Coburn, my name is Dr. Stan Pelofsky. I have 

been a practicing neurosurgeon for 35 years. I am a physician 

owner of the Oklahoma Spine Hospital, and I truly appreciate the 

invitation to appear before you and your Subcommittee. I have submitted my written testimony and now would like to present my 

thoughts concerning the Oklahoma Spine Hospital. 

I belong to a group of ten neurosurgeons, one of the largest and 

most reputable neurosurgical groups in the country. Ten years ago, 

my partners and I became extremely concerned with the quality of 

care our patients were receiving at all the large community hospitals in Oklahoma City. Staffing budgets were being drastically 

reduced. Agency nurses were being subcontracted to care for our 

patients not only on the floor, but in the operating room, as well. 

Trying to obtain new technology was like pulling teeth and often 

took 1 to 2 years. Endless and mindless committee meetings were 

zapping our time and our efficiency. 

CEOs receiving high six-figure salaries were spending seven figures annually on blatant advertisement. Inefficiencies were built 

into the system. Surgeons were competing for operating room time. 

The infection rate and complication rate was unacceptable, and 

quality of care had deteriorated and costs were skyrocketing. 

My partners and I knew there had to be a better way. We had 

a dream. We had a vision. We put together the Oklahoma Spine 

Hospital model and offered it to just about every community hospital in Oklahoma City. We were rejected and were told, what do 

doctors know about running a hospital? Well, Dr. Coburn, it turns 

out we knew a heck of a lot. 

What is the Oklahoma Spine Hospital? It is a totally owned and 

operated physician specialty hospital. It is a hospital which specializes in the diagnosis and medical treatment of spine disease. It is 

a world-class facility. And it is for patients who have failed every 

effort at maximum aggressive medical treatment. Surgery is never 

the first, second, or third choice. We are a true hospital. We are 

not an ambulatory surgical unit. We are licensed by the Oklahoma 

Health Department and we belong to the Oklahoma Hospital Association. 

Our patients stay 1 to 2 days in the hospital, some 3 to 4 days 

after complex surgery. When surgery becomes, and I must stress 

this point, the last and only other choice for patients who are sufVerDate 0ct 09 2002 12:15 Nov 18, 2005 Jkt 021822 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 C:\DOCS\21822.TXT SAFFAIRS PsN: PHOGAN
23

fering from spine disease with disability and with pain, then expert 

surgeons with expert technology take care of them. 

Since our opening in November 1999, we have performed over 

12,000 spine and complex spine surgeries, including microsurgeries, fusion surgeries, and artificial disk replacements. We are an 

18-bed, 5-operating room hospital that now employs over 200 Oklahomans. We are most proud of the fact that we have been able to 

save literally thousands of patients from surgical treatment by providing them a proper diagnosis and medical treatment plan. 

Well, what have we accomplished? Length of stay after complex 

surgery, spine surgery, 1.6 days now on the average, a 0.11 percent 

infection rate, zero mortality rate, a nurse turnover rate of 3.2 percent, 98 percent patient satisfaction rate, 98 percent employee satisfaction rate, and I submit all these factors not only improve quality, but they cut the cost of healthcare to both Medicare as well as 

to the healthcare industry. 

We outsource all administrative functions. We have no six-figure 

CEOs running the place. We spend nothing on advertisement or 

marketing except to give each patient who leaves our facility a pastel-colored T-shirt, their choice of color, their choice of size, with 

our logo on it. We have, as the physician owners, the ability to purchase state-of-the-art equipment at any cost, change policies, increase salaries, AND provide bonuses, literally overnight, without 

mindless, wasteful meetings. 

We have a Level IV emergency room that is opened and staffed 

by an on-call physician owner of the hospital 24/7, 365. Plus, every 

one of the physician owners at the Oklahoma Spine Hospital participates in coverage in the emergency room of Mercy Hospital, a 

large community hospital across the street, 24/7, 365. 

Last year, the Oklahoma Spine Hospital paid the following taxes: Federal tax, $4.5 million; State tax, $770,000; sales tax, $860,000; 

property tax, $225,000. And much of our taxes have helped fund 

numerous State and Federal healthcare problems. 

The Oklahoma Spine Hospital brings value to our healthcare system and improves quality and is cutting costs. It has raised the 

bar. It has once again shown what American competition, invention, and freedom can do. 

However, our critics are not applauding our accomplishments. 

Our critics, the American Hospital Association, the Oklahoma Hospital Association, HCA, the $100 billion Goliath in the industry, 

Integris in Oklahoma City, rather than embrace our model or compete against it, have decided quite simply to try to legislate us out 

of business. Here is our critics’ spin versus the facts. 

Spin number one, Oklahoma Spine Hospital physicians self-refer 

and are essentially knife-happy in order to reap personal financial 

rewards. This claim, based on our professional integrity and national reputation, is not only outrageous, it is insulting. 

Spin number two of our critics, the Oklahoma Spine Hospital 

physicians cherry pick our patients. Dr. Coburn, the fact is, we 

cherry pick our doctors. We cherry pick our staff. We cherry pick 

our nurses. We cherry pick our scrub techs. We never cherry pick 

our patients. Here is the payer mix of Oklahoma Spine Hospital: 

Private health insurance, 42 percent; workmans’ comp, 33 percent, 

Medicare and Medicaid, 17 percent; self-pay/no-pay, 8 percent. 

24

1The prepared statement of Mr. Thomas appears in the Appendix on page 88. 

Spin number three of our critics, the physicians at Oklahoma 

Spine Hospital don’t cover the ERs. Fact: We cover our ER, we 

cover Mercy’s ER, again, 24/7, 365. 

Spin number four, we are sapping much-needed financial resources from our community hospitals and academic medical centers. Fact: HCA, which has a joint operating agreement with OU 

Medical Center, last year had a $47.5 million net profit, an 11.1 

percent profit margin, probably the highest in the State. Integris, 

Oklahoma City, made tens of millions of dollars in profit and they 

are a nonprofit hospital. Fact: Every large community hospital in 

Oklahoma City did extraordinarily well financially last year and 

these Goliaths should not be threatened by our 18-bed specialty 

hospital. 

In summary, Dr. Coburn, we are extremely proud of our accomplishments. We have created giant efficiencies with wonderful outcomes, patient and staff satisfaction rates that have been unheard 

of. Isn’t that what being a doctor is all about? Isn’t that what 

America is all about, the freedom to create, to compete, to raise the 

bar for everyone? What a country. 

Finally, two last points. Without grandstanding or showboating, 

the physician-owners of the Oklahoma Spine Hospital challenge 

any hospital in this country, any for-profit, nonprofit, HCA, academic center, Integris, to go one-on-one with us on a scientific 

study, a study that is prospective, double-blinded, independently 

judged and analyzed, peer reviewed, and with matched cohorts of 

patients looking at just three parameters. What are these three parameters? The parameters are outcomes, patient satisfaction, and 

cost. I will tell you, if they go one-on-one with us, once again, David 

will slay Goliath. [Laughter.] 

Last point, Dr. Coburn. The future viability of specialty hospitals 

rests largely within the control of the U.S. Congress and the Center 

for Medicare and Medicaid Services. The current moratorium is 

scheduled to end in just a few short weeks. On behalf of the Oklahoma Spine Hospital and its physician owners, I urge you to let 

this moratorium come to a permanent end. I also hope that you 

will express your support of specialty hospitals to CMS Administrator Mark McClellan and encourage the agency not to impose further regulations that will, by de facto, extend the moratorium beyond June 8. 

Again, thank you for this opportunity to testify. 

Senator COBURN. Dr. Pelofsky, thank you. I was somewhat lenient. I would hope the rest of us would stay within the 5 minutes, 

if we could. 

Mr. Thomas. 

TESTIMONY OF JOHN T. THOMAS,1 SENIOR VICE PRESIDENT 

AND GENERAL COUNSEL, BAYLOR HEALTH CARE SYSTEM, 

DALLAS-FORT WORTH, TEXAS 

Mr. THOMAS. Mr. Chairman, Members of the Subcommittee, my 

name is John Thomas. I am the General Counsel of Baylor Health 

Care System based in Dallas-Fort Worth, Texas. 

25

Baylor is a 101-year-old faith-based institution with strong ties 

to the Baptist General Convention of Texas. It is an honor for me 

to address you today on behalf of Baylor and to ask you to resist 

efforts to extend the moratorium on the development and growth 

of physician-owned specialty hospitals that will expire June 8 and 

to resist efforts to repeal the whole hospital exception under the socalled Stark self-referral law. 

Baylor is the corporate sponsor of 13 nonprofit hospitals. Our 

flagship, Baylor University Medical Center, is located in downtown 

Dallas, a 1,000-bed quadenary teaching hospital with a Level I 

trauma center that provides care to more penetrating trauma victims than Dallas County’s tax-supported Parkland. Baylor has the 

largest neo-natal ICU in the Southwest and one of the five largest 

organ transplant programs in the country. Last year, we provided 

more than $240 million in community benefits at cost, not including bad debt. Charity care is provided under the most generous 

charity care financial assistance policy among all Dallas-Fort 

Worth hospitals. 

At the same time, Baylor has a long history of innovation. In the 

early 1900’s, Baylor developed the prepaid hospital plan, which 

today operates as the Blue Cross-Blue Shield Association. With the 

changes in medical practice, Baylor has sought and continues to 

seek new and innovative ways to lower the cost of delivery of care 

while improving quality, safety, and satisfaction. 

One of the most effective strategies Baylor has implemented is 

partnering with physicians economically, and more importantly, 

clinically, in the design, development, and operation of ambulatory 

surgical centers, surgical hospitals, and heart hospitals. Today, 

Baylor has an ownership interest in 25 facilities partnered with 

physicians. Over 2,000 physicians actively practice at these facilities, while only about 500 have an ownership interest. 

Texas Health Resources, the other major nonprofit system in 

Dallas, also has a number of hospitals and facilities partnered with 

physicians. 

Five of Baylor’s facilities are affected by the moratorium. Three 

are surgical hospitals. Two are heart hospitals. Each is critically 

important to the mission, but more importantly, is critical to the 

advancement of healthcare competition and improvements in quality, safety, patient satisfaction, and access in Dallas-Fort Worth. 

By 2020, the population of Dallas-Fort Worth is expected to exceed ten million people, more than double the population today. As 

Baylor projects the needs of our community to meet this population 

growth and demand for access to healthcare services, partnering 

with physicians not only brings capital to help finance the response 

to those needs. More importantly, economic investment motivates 

physicians to bring their time, energy, and talent to the design, operation, and governance and operation of more effective and efficient healthcare facilities. 

No example proves this point better than our Baylor Heart and 

Vascular Hospital, a facility located on the inner-city campus of our 

flagship, Baylor University Medical Center. The quality of this facility is the highest in our healthcare system and is among the 

highest rated heart programs in the United States on CMS’s 

website, hospitalcompare.hhs.gov. In my written testimony, you 

26

1The prepared statement of Dr. Cain appears in the Appendix on page 96. 

will see a chart comparing that hospital to the national average 

and the teaching hospitals. 

Month after month, the Baylor Heart Hospital scores at or near 

100 percent on the CMS indicators for acute myocardial infarction, 

congestive heart failure, and surgical infection prevention standards. Emergency room Baylor Heart Hospital protocols consistently 

result in ER patients going from the door to the cath lab within 

30 to 45 minutes of arrival, with vessel inflation under 90 minutes. 

Patient satisfaction, as measured by a national survey tool, exceeds 

the 96th percentile in that national database. When patients are 

asked, ‘‘Did you feel the staff were knowledgeable and provided 

safe care?’’ month after month, 100 percent of patients respond yes. 

With physician alignment, the Baylor Heart Hospital has seen 

dramatic improvements in cost reduction and efficiency. In the first 

year of operation, over $12 million of costs were eliminated from 

the cost to provide these services before the heart hospital opened. 

Dramatically, staff turnover is less than 11 percent per year, 

while the rest of our community exceeds 20 percent. This is an important indicator of both the quality of clinical environment—the 

staff enjoys working there—and cost containment. Baylor’s cost to 

replace an R.N. approaches $60,000 per nurse for recruiting, training, and retention. With low turnover, these dollars are saved. 

Finally, Baylor’s specialty hospitals are the safest in the system, 

with the Baylor Heart Hospital leading the way with no medical 

liability claims ever in the history of that facility. Baylor’s other 

specialty hospitals also have much lower liability claim rates. 

Last, as the community focused on homeland security, the Nation’s trauma system is the backbone of effective response to future 

incidents, if any. Baylor has used alignment of physicians through 

specialty hospitals and ambulatory surgery center joint ventures 

and other forms of effective alignment to keep physicians engaged 

in the trauma system. These physicians also commit to providing 

charity care under Baylor’s charity care and financial assistance 

policy. Unfortunately, 30 percent of the Texas population is uninsured, with an even higher rate in downtown Dallas, where the 

heart hospital is located. 

We urge you to allow the moratorium on physician ownership 

and development to end June 8. The moratorium has not been benign and a continuation will be even worse. This has affected our 

ability to expand our inner-city heart hospital to meet the needs of 

that community. The moratorium has prevented Baylor from bringing higher-quality heart and vascular care to Plano, where heart 

disease remains the number one killer. And the moratorium has 

prevented the Baylor-Frisco Medical Center from expanding to provide obstetrics and other women’s services to one of the fastestgrowing communities in the country. 

Senator COBURN. Thank you, Mr. Thomas. Dr. Cain. 

TESTIMONY OF JAMES E. CAIN, M.D.,1 PRACTICE IN FAMILY 

MEDICINE, LAMPASAS COUNTY, TEXAS 

Dr. CAIN. Dr. Coburn, thank you for having me here today. 

Senator COBURN. I am glad you are here. 

27

Dr. CAIN. My name is James E. Cain. I am from Lampasas, 

Texas, and I practice rural medicine. The first 18 years of my life, 

I was raised in rural Arkansas, the next 18 years of my life in 

Houston, Texas. My education was at Houston Baptist University, 

Baylor College of Medicine, and University of Texas Health Science 

Center. 

When I finished my education, I chose to go back to rural America and practice medicine. I live in Lampasas now, which is about 

an hour north of Austin, an hour West of Fort Hood, and about an 

hour South of a little town called Crawford, Texas. We have about 

20,000 people in our county. Our average income per family there 

is about $30,000 per year. 

My partners and I are about the only show in the county. We 

also help the surrounding counties. Primary sources of income are 

Medicare, Medicaid, Tricare, which is the military insurance, a 

handful of commercial insurances, and private pay insurances. We 

work on an average 12 hours a day and we don’t turn away anyone 

for their ability or lack of ability to pay. 

A few weeks ago, someone asked me how Austin Heart Hospital 

has affected my practice in Lampasas County, and the reasons I 

gave and the answers I gave to those questions are why I am here 

today. 

I shared with them the scenario, and I share it with you today. 

It plays out in my life on a weekly basis. I get a call from the emergency room. A patient of mine is there and is not doing well. I get 

in my truck—yes, I am from Texas and I drive a pick-up truck, no 

hat—— [Laughter.] 

Drive to the emergency room, and I call Austin Heart Hospital. 

Within a few minutes, I have a cardiologist on the line with me. 

They help me stabilize my patient, often stabilizing me, as well. 

You can relate to that, I am sure. We discuss transfer, ambulance, 

helicopter. The patient is transferred. I go back to work or back 

home. 

Within a few hours, that cardiologist is generally calling me, letting me know what happened to the patient, what kind of care they 

received, and what kind of follow-up care they are going to need. 

Within a few weeks, few days, the patient is back in my office for 

follow-up, obviously very well cared for and very impressed with 

the care that they have received there. 

The most important things about the scenario that I have laid 

out for you is that at no point in this conversation so far has anyone asked me about my patient’s insurance or their ability to pay. 

Second, the time with which they handle these cases is second 

to none, and when you are an hour-and-a-half away from a tertiary 

center, sometimes minutes do mean everything. 

Compare that with what I get at most of the other hospitals that 

I transfer to. Right off the bat, I get an administrator. What is the 

first question she asks me? Who is paying? What is the insurance? 

Of course. Then I get a utilization nurse, and there is nothing 

wrong with that. I certainly can understand this. When they find 

out the patient has Medicaid, or for God’s sake has no insurance, 

then the conversation turns to bed availability, is the patient actually stable enough to transfer to their facility, and are they actually 

the closest hospital for me to transfer my patient to? In the end, 

28

1The prepared statement of Mr. Jungbluth appears in the Appendix on page 100. 

if I get that patient transferred to their facility, it is usually to the 

emergency room department because the utilization review nurse 

feels like a second workup will probably be better and in the best 

interest of the patient, which means maybe we can find something 

different, keep the patient out of the hospital, not utilize resources 

that this patient obviously can’t pay for. 

It also frustrates me when I get a patient at another facility after 

hours on the weekend. In a few hours, I call, try to find someone. 

I usually get a nurse on the phone and I am told the patient can’t 

get a procedure tonight because they don’t do this after hours on 

the weekends. The patient is going to have to wait until Monday 

to figure out what is going on with them. They are stable, however. 

To me, that is two extra days in the hospital, a calculated but 

small increased risk to my patient, obviously an increased risk to 

the system. 

My experiences with Austin Heart Hospital has been, like the 

neurosurgeon down the table, a 7-day workweek, 24 hours a day. 

I am constantly seeing in the medical journals and in the medical 

economic journals now medical models that are being related to patient outcome. Then the insurance companies are now reimbursing 

us based on patient outcome. I have included in my written statement many of the studies and recognitions by the reputable organizations that speak favorably of Austin Heart Hospital, their length 

of stay, their patient outcome, quality of care, so on and so forth, 

but it is my personal experience and the experience of my patients 

that leave no doubt in my mind that they are receiving the best 

possible care that I can offer them at this institution. 

In this day and age of frustrated physicians, skeptical patients, 

confused administrators and politicians, trying to figure out how to 

make these dollars cover expenses, it is very easy to become cynical. I assure you, I am no cynic. I still love what I do. I enjoy going 

to work every day. I am proud to be a country doctor. 

I ask that you guys look at the information, look at the data that 

institutions such as the Heart Hospital of Austin are giving you. 

Look at the effective care that they are delivering. Look at their 

patient outcome data. I believe, as many of us in the business, that 

good patient outcome and effective care in the end is what is going 

to stretch these dollars. 

I appreciate your time and thank you for your patience. 

Senator COBURN. Thank you, Dr. Cain. Mr. Jungbluth. 

TESTIMONY OF ED JUNGBLUTH,1 HEART PATIENT, HEART 

HOSPITAL OF NEW MEXICO, ALBUQUERQUE, NEW MEXICO 

Mr. JUNGBLUTH. Thank you, Mr. Chairman. My name is Ed 

Jungbluth and I am a 71-year-old heart patient and I think I am 

one of the patients that everybody is talking about today, actually, 

although you may be jumping around it. I have had a heart attack, 

angioplasty, and an AICD, automatic internal coronary defibrillator. I am sure you know what that is. 

Senator COBURN. I do. 

Mr. JUNGBLUTH. Make that three AICDs. I have always been an 

active person and enjoyed life to the very fullest, so needless to say, 

29

the onset of my first heart attack was a bit discerning to both me 

and my wife, Mimi. 

In 1988, I had a heart attack while living and working in the 

tourism industry in Estes Park, Colorado. After experiencing chest 

pains, we went to the local emergency department, where I was 

stabilized and transported to St. Luke’s Hospital in Denver, Colorado, where I had an angioplasty. Though the care at the emergency room in Estes Park was good, the hospital was not equipped 

to do any interventional procedure. I have termed this as a ‘‘pack 

and ship’’ operation. That is what I got a lot of, pack and ship. Because I love life and because my wife took advice to heart, we modified our eating and exercise habits and took the steps necessary to 

give my heart the best chance for recovery. 

It wasn’t until 2000 that I began to experience other heart problems, though this time it was rhythm problems. While spending 

time in Phoenix for Major League Baseball spring training, I had 

my first bout with v-tach, ventricular tachycardia. It was a Sunday 

afternoon and I ended up at Mesa General in the Phoenix area and 

spent many days in intensive care while my condition was being 

diagnosed and I was stabilized. Again, I happened to land in a facility where there was not specialty care available for my heart 

problems. 

Finally, I was transported to another facility in Phoenix where 

I received my first AICD. The care was adequate, but neither facility really had the extensive type of cardiac care that I required. I 

was released and I was able to travel back home to Gallup, New 

Mexico, on the next day after the implant. 

Soon after arriving home, I had my first experience as a patient 

at Rehoboth McKinley Christian Hospital in Gallup. I had a tremendous pain in my left arm and went to the emergency room. The 

diagnosis was a blood clot in my arm. Unfortunately, I was told 

that they could not treat me—a higher level of cardiac care was 

necessary—-and was instructed to go to Albuquerque for treatment. 

As you can imagine, these weeks were traumatic and I was concerned about my heart. I am a Medicare-insured patient and I 

knew that I could have access to any facility in Albuquerque. At 

that point, I heard about the Heart Hospital of New Mexico and 

that if I went there, I would have access to all heart specialists and 

decided to get myself there as quickly as possible. I was driven by 

a friend and arrived about 3 a.m. that morning. I spent 9 days at 

Heart Hospital of New Mexico and have never felt so safe and secure and confident that I was receiving the specialty treatment 

that my condition required. I was not sent by investor physicians, 

but rather chose to go because I had investigated and learned that 

they provide the highest quality heart care. It is important when 

you live in a rural area to educate yourself and be prepared to 

make life and death decisions in terms of healthcare. 

The story continues. In 2002, while in Santa Fe on business, my 

AICD fired for the very first time. That is really a thrill. I went 

to St. Vincent’s, the sole community hospital. Again, I was stabilized overnight and released with follow-up instructions to see a 

New Mexico Heart Institute electrophysiologist in Albuquerque. 

My condition became more of a concern, and throughout the year 

of 2002, I experienced numerous firings of the AICD while living 

30

1The prepared statement of Dr. Plested appears in the Appendix on page 103. 

in Gallup. On each occasion, I had to get to the emergency department at Rehoboth while I was being stabilized, and because they 

were unable to treat me, I was transferred, packed and shipped, by 

air to the Heart Hospital of New Mexico. 

Fortunately, through the relationship of Dr. Swaminathan, a 

New Mexico Heart Institute cardiologist who practices in Gallup, 

and Heart Hospital of New Mexico’s quick transfer initiative, I was 

able to arrive with specialists waiting as quickly as possible. In one 

instance, while in the ambulance en route to the airport in Gallup, 

my AICD fired four times and I had to return to the hospital to 

be stabilized again before I could be flown to the Heart Hospital 

of New Mexico (HHNM). Upon arrival at HHNM, it was determined that the unit installed in Phoenix had failed and I received 

a new AICD. Because my v-tach is severe, I have had numerous 

firings over the past few years and in each case was transferred. 

Upon concern for my health and well-being, for the peace of mind 

for both my wife and I, we decided we wanted to move to Albuquerque to be close to Heart Hospital of New Mexico. We feel at 

home, safe, and secure. With the experience we have had as an inpatient, I know that care is always timely, with the most specialized staff. 

As it has turned out, our decision was the right one. Since moving, I have had the fortune of being close to the Heart Hospital of 

New Mexico and have experienced treatment in their emergency 

department. They know that time means muscle, heart muscle, and 

life when it comes to heart patients. I have had more problems 

with v-tach and have been rushed twice over a 2-month period to 

the Heart Hospital emergency department. I know from experience 

that the timeliness of care and expertise of all physicians have allowed me to maintain an active and normal life. The emergency department physicians have deep experience and have immediate access to the specialized cardiologists. On both occasions, my treatment was quick, technically superb, and compassionate. In fact, my 

wife, who is an accomplished artist, was scheduled to participate 

in an art show in California, felt comfortable with me in HHNM 

that she went on to the art show. 

Senator COBURN. Could you sum up for us? 

Mr. JUNGBLUTH. I am going to do that. In April 2005, I received 

a replacement AICD from the Heart Hospital. They put patient 

care first. I am a chronic heart patient. I suffer from congestive 

heart failure. Am I concerned? Yes, but worried, no. Thank you. 

Senator COBURN. Thank you. Dr. Plested. 

TESTIMONY OF WILLIAM G. PLESTED, III, M.D.,1 IMMEDIATE 

PAST CHAIR, BOARD OF TRUSTEES, AMERICAN MEDICAL ASSOCIATION 

Dr. PLESTED. Thank you, Chairman Coburn. My name is Bill 

Plested. I am Immediate Past Chair of the Board of Trustees of the 

American Medical Association and a practicing thoracic and cardiovascular surgeon from Santa Monica, California. 

First, I want to thank you for calling this important hearing. The 

AMA believes that competition is absolutely vital to ensuring high 

31

quality, cost effective healthcare for America’s patients. And competition from physician-owned hospitals is key. Why? It means 

more choices for patients, improvements and innovations, increased 

quality of care, extremely high patient satisfaction, and healthcare 

decisions that are made by patients and their physicians. 

Physicians who invest in specialty hospitals increase productivity 

and efficiency, improve scheduling of procedures, maintain desired 

staffing levels, purchase state-of-the-art lifesaving equipment. Competition from specialty hospitals has even been a self-admitted 

wake-up call for some general hospitals, forcing them to innovate 

in order for them to stay competitive. 

Studies support the premise that focus on a specific area of service can lead to higher quality and lower costs as a result of more 

expert and efficient care. By performing high volumes of specific 

services, specialty hospitals perfect those tasks, increase accountability for the quality of patient care, lower fixed costs, quickly respond to patients’ needs, and modify care delivery, as necessary. 

CMS found that quality measures at specialty heart hospitals 

were equal to or better than general hospitals. It also found lower 

rates of infection. Post-operative hip fracture, deep-vein thrombosis, and sepsis were also lower at specialty hospitals. In addition, 

mortality rates were significantly lower at specialty hospitals, even 

when adjusted for severity. 

Numerous studies, including CMS and MedPAC studies, found 

that patient satisfaction at specialty hospitals is extremely high. 

Greater convenience and comfort, higher nurse-to-patient ratios, 

and knowledgeable specialized nurses all contribute to these extremely high levels of satisfaction reported by patients and their 

families. 

Despite these benefits to patients, the continued existence of specialty hospitals is in jeopardy. The hospital associations and many 

general hospitals are vigorously attempting to eliminate competition. They attack physician ownership of specialty hospitals and 

engage in numerous practices to simply stifle competition. 

For example, general hospitals revoke or refuse medical staff 

membership or clinical privileges to physician investors and they 

advance State laws to ban physician ownership of hospitals. General hospitals also force health plans to sign exclusive contracts 

that shut out competing specialty hospitals. They refuse to cooperate with specialty hospitals in ways such as declining transfer 

agreements for emergency care. These practices interfere with the 

patient-physician relationship and they adversely affect patients. 

General hospitals claim that competition from specialty hospitals 

will hurt them financially by reducing some of their most profitable 

services which they use to subsidize unprofitable services. However, MedPAC found that general hospitals that compete with specialty hospitals have demonstrated financial performance that is 

comparable to other general hospitals. 

But even assuming that a hospital could prove it incurred financial harm, the answer is not to eliminate competition and support 

cross-subsidization. The answer is exactly the opposite. It is to support competition and eliminate cross-subsidization. The Federal 

Trade Commission and the Department of Justice share this view. 

32

MedPAC recommends that CMS change Medicare hospital DRG 

payments to more accurately reflect the relative costs of hospital 

care, thus eliminating cross-subsidization, and the AMA supports 

these changes. 

The AMA strongly supports and encourages competition as a 

means of promoting high quality, cost effective healthcare. We believe that patients should continue to benefit from increased choice 

and competition that result from specialty hospitals. 

Therefore, the AMA believes patients will be better served if neither Congress nor the Administration acts to extend the moratorium on physician referrals to specialty hospitals, and CMS makes 

payment and policy changes recommended by MedPAC, and finally, 

healthy competition is not stifled. Thank you, sir. 

Senator COBURN. Thank you, Dr. Plested. 

For any of you that want to answer this question, we heard today 

that the study from MedPAC says that it is not necessarily cheaper, even though the number of hospital days is less. In any of your 

experience, can you relate to that at all? Dr. Herzlinger. 

Ms. HERZLINGER. I teach accounting as well as healthcare at the 

Harvard Business School. The MedPAC method that was used to 

calculate costs is archaic. It is no longer used by corporations. The 

cost techniques that corporations now used is called activity-based 

costing and many of the cost data that come about from this methodology differ substantially from the old way that companies used 

to allocate their costs, which is the technique that MedPAC used. 

So, first of all, I question whether they accurately measured the 

costs of the general hospital. Of course, they measured accurately 

the costs of the specialty hospital because it does only one thing. 

But in a community hospital, in order to identify the costs of that 

one thing, you have to allocate a lot of joint costs and the methodology that was used is antiquated. 

Second, the specialty hospitals have to spend a tremendous 

amount of money in order to get through the thicket of regulations 

that would justify their existence. In MedCath, which is a heart 

hospital, the average expenditure just to enable it to exist, just to 

satisfy the myriad regulations it must go through, is about 

$200,000 a year. 

Third, depreciation, which is a major element of cost, is measured on the basis of historical cost, the plant and equipment, and 

community hospitals are often much older than the plant and 

equipment in specialty hospitals. So when specialty hospitals depreciate, those dollars are going to be much more expensive. 

Fourth, specialty hospitals have a cost of capital. They borrow 

money at non-subsidized rates. They have equity costs. Nonprofit 

community hospitals have none of those costs. 

The comparison is heavily flawed and until it is corrected, I don’t 

think that it stands to support the allegation that one is more or 

less efficient than the other. Specifically, what MedPAC should do 

is adopt activity-based costing techniques in order to better understand what the costs of community hospitals are in providing the 

specific kind of care that special purpose specialty hospitals do. 

Senator COBURN. Thank you, Dr. Herzlinger. Dr. Pelofsky. 

Dr. PELOFSKY. It just doesn’t compute, Dr. Coburn, for those of 

us in the trenches. When you can have a patient out of the hospital 

33

in 11⁄2 days after complex spine surgery with instrumentation, or 

the placement of an artificial disk, when you have an 0.11 percent 

infection rate compared to national 2 to 5 percent, every time there 

is an infection, that is 7 more days of hospitalization at a cost of, 

what, $1,000 a day with antibiotics? If you could cut your infections, your complications, your days in the hospital, your readmission rate, you have to be saving the system money. It just simply 

doesn’t compute. 

Senator COBURN. Mr. Thomas. 

Mr. THOMAS. Mr. Chairman, the Baylor Heart Hospital experience was vastly different than MedPAC reported. As I testified, we 

reduced $12 million of cost directly out of the heart service that 

was once controlled and owned completely by our nonprofit hospital 

and then it was moved across the street. We have very accurate apples-to-apples comparisons. 

And then, second, with MedPAC’s conclusion about the full-day 

lower length of stay, on the managed care side, where you have per 

diem contracts and other forms of payment as opposed to a DRG 

fixed-base system, that is a 25 percent reduction in the cost to the 

payer and the individual patient. 

So, again, with us, it doesn’t compute, either. Our hospital was 

open the year after MedPAC’s study was—they looked at 2002. 

Ours is 2003. So we think that is an inaccurate conclusion that 

they reached. 

Senator COBURN. So maybe his comments about start-up costs 

and things like that may have been theirs, too? 

Mr. THOMAS. Sure. 

Senator COBURN. All right. Does anybody else want to answer on 

that, comment on it? 

I want to make one observation and then I will ask a question. 

Dr. Cain, as a primary care doctor myself, dealing mainly in obstetrics but doing everything, my biggest frustration is the lack of accountability at the interface of where hospital employees interface 

with my patient. I don’t know if you have experienced that. I know 

Dr. Pelofsky has. But there is no control by physicians anymore in 

terms of getting written orders done on their patients on a timely 

basis because the management in the hospital setting often does 

not compare to that of a specialty hospital. 

Any comments about accountability of ancillary personnel, in 

your hospital or in the Baylor or in the Austin Heart Hospital in 

terms of efficiency, of responsibility? 

Dr. PELOFSKY. Yes. I brought 500 patient surveys that will deal 

with that issue. We at the Oklahoma Spine Hospital have happy 

faces, efficient people working at the top of their level of accomplishment and knowledge. If they don’t, they are gone. We fire people if they don’t perform our orders in the appropriate manner, or 

in the appropriate way. 

Senator COBURN. When all the hospitals are struggling to have 

nurses today, how is it that you can fire somebody and get a replacement? 

Dr. PELOFSKY. Because we have a waiting list of nurses and——

Senator COBURN. And that is because? 

34

Dr. PELOFSKY. Because we pay better, we have better benefits, 

they have a better job, they have a better quality of life, and they 

are part of a team. They are part of every decision we make. 

I had a scrub tech tell me—we have a suggestion box. He tells 

me, Dr. Pelofsky, for your complex spine cases, you open up three 

packages of suture and you only usually use one. That was on my 

computer card. So we only open up one. We save two packages of 

suture, $15 each, $30 a case, 10 cases a week, $300 a week times 

52 weeks. On just me, we saved $15,000 in cost. 

So our people are part of the team. They are part of the creation 

of this model and it works. They are incentivized. It is America. 

Senator COBURN. All right. Mr. Thomas, any comment? 

Mr. THOMAS. I think the team approach is exactly what we experienced. There is a waiting list to move from our other hospitals 

to our heart hospital and our specialty hospitals and the turnover 

rate—and the treatment by the physicians, again, as part of that 

team approach, there is much more accountability and the accountability flows both ways. The staff like working there. And again, 

the turnover rate has been very low. 

Senator COBURN. Let me ask those of you that are involved—did 

you want to answer, Dr. Plested? 

Dr. PLESTED. Well, I just wanted to say that in my visits to the 

specialty hospitals, the thing that I am struck with and has been 

of interest to me my whole life is the level of esprit. I have always 

thought that people need to love what they do, and we heard that 

very well from Dr. Cain. 

In the general hospital, we have a continuing problem. I have to 

continually meet with nurses to tell them how important they are. 

They don’t feel like they belong. They are shuffled off here and 

there and they are short here today and they are short there the 

next day. In the specialty hospitals, they are where they want to 

be. They are important members of the team, and this esprit is 

there. It is palpable, and I think that is incredibly important, and 

the question you have about turnover. 

Senator COBURN. Why is it there and not in the general hospital, 

in your opinion? 

Dr. PLESTED. Well, my personal opinion is that is a matter of 

leadership, and I just think that—what Stan said about happy 

faces, I think it just goes all the way. If you walk into the general 

hospital today, nobody is happy. I mean, walk into the admissions 

thing. You are greeted by the most dour, unhappy people, who 

don’t like their job, they don’t want to be there. They wonder why 

you are there. I have spent my life working on this in my hospital 

and I wish I could say it was different, but it isn’t. 

Senator COBURN. All right. Dr. Pelofsky. 

Dr. PELOFSKY. Dr. Coburn, I think the difference is that doctors 

get it. We are not administrators. We have no administration at 

our hospital. It is doctor-owned, doctor-run, and we know how valuable nurses are. They will make or break our case. They will get 

us sued or they will get us glorified. They are our left hand and 

our right hand and we treat them that way. 

Senator COBURN. Which would say that maybe they are not 

treated that way in the other hospitals? 

Dr. PELOFSKY. They all have left the other hospitals because——

35

Senator COBURN. OK. The question, what I want to get to is here 

is another advantage of specialty hospitals. What is the problem in 

the general hospitals with morale, turnover, training, competence, 

and efficiency? 

Dr. PELOFSKY. The problem is that the CEO never goes up to the 

floor, never goes into the operating room, never goes into the doctor’s lounge. I am thoroughly convinced it is so bureaucratic and it 

is such a dinosaur. The organization of today’s community hospitals 

have got to change. They are 100 years behind the time. 

Senator COBURN. Dr. Herzlinger. 

Ms. HERZLINGER. I think there is analogy to other parts of the 

economy. For example, the department store is a failing economic 

entity and it has been supplanted by targeted, focused lifestyle 

stores. 

For example, I go to a store that is called Talbot’s, which is a 

store that specializes in career dressing. That means dark 

pantsuits with long jackets for women with hips. [Laughter.] 

My daughter, who is a physician, she goes to Ann Taylor, which 

is a store that specializes in clothes for young career women. I 

don’t know if you have Office Max or Office Depot or Staples in 

Oklahoma, but they are an example——

Dr. COBURN. We are not quite that backward. We do have them. 

[Laughter.] 

Mr. HERZLINGER. I didn’t mean it that way. I didn’t say—it is 

very complicated. [Laughter.] 

Senator COBURN. Markets work everywhere. 

Ms. HERZLINGER. The point is, why did the department store 

fail? It failed to please its customers and it was because the scope 

was too big. It was beyond the ability of managers to manage it, 

and so the salespeople were unhappy. The merchandise was stale. 

It was just too much. These focused lifestyle-oriented stores are 

very successful. They are successful in any way you count it. 

Now, McKensie did a study of why we have such great increases 

in productivity in our country. There were six industries that accounted for all the increases. Number one was the retailing industry, and the retailing industry is very surprising because it is a 

service industry and it is consumer-driven. Why retailing? Because 

it reorganized itself from being everything for everybody kind of department stores that nobody could manage to much more feasible 

entities that were focused on things from the consumers’ point of 

view. 

Senator COBURN. So higher unit sales per volume of work. 

Ms. HERZLINGER. They do. They certainly do. 

Mr. JUNGBLUTH. From the patient’s perspective, Mr. Chairman, 

having been a very frequent visitor of the Heart Hospital, I see 

many of the same faces time and time again, not only the doctor 

staff, I also am talking about the nurses, I also am talking about 

the techs. I am talking about the people that sweep your floors and 

mop your floors every single day. 

I can only guess the reason that they are still there is that they 

are happy, because the tendency in this country is if you are not 

happy, you move on. And they must be fairly well paid, again, because the tendency is to move on if you are not well paid. 

36

I can’t speak enough for at least this specialty hospital, and I 

know in talking with Dr. Cain about the Heart Hospital in Austin, 

the two are run by the same company. We both experienced the 

same thing in my conversation. It is the same feeling throughout 

each of these institutions—that there is just a different feeling 

there. 

It is not a ‘‘pack and ship’’ operation, and I say that with somewhat affection. It is not that type of operation at all. You are welcomed. The emergency rooms are great. I see the same people in 

the emergency rooms, because that is the only way I get in, is 

through the emergency room because I am an emergency case 

every time I go. 

Senator COBURN. Thank you. Let me thank each of you for being 

here. You will be submitted some questions for most of you and we 

would hope that you would respond to those within 2 weeks. 

I would also make note that this country’s economic model was 

based on the concept of competition, fair and open competition, and 

it is very concerning to me that the very thing that I think we need 

the most to control the cost in healthcare is the very thing that is 

probably going to be limited, at least over the next 6 months, 

through bureaucratic fiat associated with CMS. That costs us a lot. 

And if you are wondering how that can happen, all you have to do 

is look around at the power of lobbying and bureaucracies in Washington rather than the power of true competition and an honest 

and forthright discussion. 

My hope is that we see much more competition in healthcare, 

and I do not mean just at the hospital level, I mean at every level 

of healthcare—putting the consumer in the game. I know they 

know how to buy, and I know that we can compete. Good competition produces better quality, better price allocation, and better outcomes. 

I thank each of you for being here. 

[Whereupon, at 4:12 p.m., the Subcommittee was adjourned.] 

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