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PERSPECTIVEIntolerable Risk, Irreparable Harm: The Legacy Of Physician-Owned Specialty Hospitals
Issues of physician ownership and referral could cause major shifts in the structure of medical care and make the financing of U.S. hospital services problematic. The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 mandated research on this matter and applied an eighteen-month moratorium against self-referral to allow policymakers to consider the issue. Research findings thus far confirm that physicians’ ownership and referral present conflicts of interest through medical and economic patient selection and potentially excessive utilization. The policy response must prevent these results and preserve fair competition among hospitals.
A PRIMARY QUESTION about hospitals facing policymakers is how U.S. society pays for the hospital care that all Americans need. Another key question is how U.S. hospital care is organized. Specifically, will the full-service community hospital remain the centerpiece of community health care, or will needs best be met by dissecting medical services into many parts, with all of the attendant economic consequences? The second question is manifest in physician-owned specialty hospitals. Many see these facilities as mere lucrative wards that undermine health care by siphoning away vital finances needed to support essential but low-margin services. Others contend that they benefit society by increasing hospital competition.
The physician-owned specialty hospital model emerged with laws enacted fifteen years ago that prohibit physicians from referring their patients to facilities or services in which they are invested. However, Congress included a "whole hospital exception" allowing physicians to self-refer to "whole hospitals," but not a "subdivision." The rationale was that hospitals were typically multiservice community hospitals and that no one physician (or group) with an ownership interest would realize a financial gain through a specific referral. Today’s physician-owned model was virtually unknown then. Lawmakers could not anticipate that this exception would spur the proliferation of facilities that mimic the very hospital wards to which the law prohibits self-referral. Indeed, although these facilities hold state hospital licenses, they bear little resemblance to the full-service community hospitals envisioned by Congress. As such, some have argued that they should be subject to enforcement, not sanction.1 Hospitals generally offer a full array of services to meet virtually all challenges; maintain full-service "24/7" emergency departments (EDs); and provide care to Medicaid recipients and the uninsured. Development of specialty hospitals has accelerated recently, particularly in states without certificate-of-need laws, as fees paid to physicians failed to keep pace with physicians’ income expectations or the costs of practicing medicine. Development stalled with the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, which contained a moratorium (since expired) on physician self-referral to new specialty hospitals.
MMA also mandated studies by the Medicare Payment Advisory Commission (MedPAC) and the Centers for Medicare and Medicaid Services (CMS), which were released in March and June 2005, respectively. MedPAC’s report was characteristically thorough and quantitatively rigorous.2 And yet MedPAC had to work with limited, even obsolete, data. For example, it had to use 2002 Medicare Provider Analysis and Review (MEDPAR) data. Through expansion and evolution, the specialty hospital world is much different today. The CMS report broke new ground on quality and community benefit.3 Yet it, too, was constrained by time and data. In addition, it suffers from a lack of descriptive detail on various methodological approaches, which compromises certain findings. For example, there is not an adequate explanation about why the CMS excluded tax-paying, for-profit, full-service community hospitals in its community-benefit analysis. Such hospitals prevail in the markets studied, pay taxes, and, as the U.S. Government Accountability Office (GAO) has documented, shoulder uncompensated care burdens at a level approaching that of nonprofit hospitals.4 Also, the CMS report glosses over how specialty hospitals, with limited emergency services, exacerbate the current ED on-call crisis imposed by the Emergency Medical Treatment and Active Labor Act (EMTALA). Community hospitals now have to pay specialists for their availability, and, as noted in a representative national survey, some specialists are refusing to be on call entirely, in part because of "financial incentives that reward specialist physicians for performing more procedures in...specialty hospitals."5 The CMS report, however, curiously suggests that specialty hospitals’ physician-owners are part of the solution, not the problem.
Meanwhile, recent independent, peer-reviewed research reinforces that specialty hospitals engage in favorable selection. For example, a recent study of six years of discharge data from the cardiac surgical marketplaces in Tucson and Phoenix, Arizona, by Jean Mitchell shows that physician-owners of specialty hospitals are more likely than competitor community hospitals to treat low-acuity cases, which corroborates a key MedPAC finding that specialty hospitals treat patients who are less severe. Mitchell also shows that they treat higher percentages of patients with generous insurance coverage. These are important indicators of conflict of interest.6 Her finding on economic selection is likely linked to another MedPAC finding, confirming earlier work by the GAO, that specialty hospitals treat fewer Medicaid patients.7 MedPAC data show that physician-owned heart hospitals treat 75 percent fewer Medicaid patients, and orthopedic hospitals treat 94 percent fewer. This finding logically follows from another observation of the GAO and MedPAC: that specialty hospitals typically do not maintain fully staffed, round-the-clock EDs.8 EDs are often the gateway to health care for Medicaid and uninsured patients, who generally have higher-acuity conditions. The absence of emergency services, then, is a passive but effective way to ensure favorable medical and economic patient selection. Conflict of interest manifests itself in other ways. Consider, for example, what some might label a "triple-dip." MedPAC notes that physician-owners are paid for performing the procedure, receive a share of the facility profits, and benefit as the value of their investments increases. One study found that physician-investors are offered exclusive investments, well below market value, and assume only minimal risk, based solely on their ability to self-refer.9 The CEO of St. David’s HealthCare Partnership in Austin, Texas, testified before Congress about how the competing Austin Surgical Hospital claimed in an advertisement to selected physicians that a $4 million investment would earn $55 million over six years. By contrast, federal laws prohibit community hospitals from giving physicians more than $300 per year in gifts and anything for a referral.10 Specialty hospitals contend that they offer competition to community hospitals, but this is misleading because their business model—financial incentives to physician-owners who self-refer patients—provides a competitive advantage that community hospitals cannot legally match. Specialty hospitals also contend that they provide more-efficient and higher-quality care. However, existing research is contradictory and inconclusive. For example, MedPAC found that specialty hospitals cost more than community hospitals. And although the CMS study reports lower mortality rates for specialty hospitals, peer-reviewed research finds that lower unadjusted mortality rates in cardiac specialty hospitals are largely attributable to the fact that these facilities admit healthier patients. After adjusting for procedural volume and patient characteristics, mortality rates and outcomes were similar.11
In addition to recommending an eighteen-month extension to the moratorium, in part to gather more data on conflict of interest, MedPAC also recommended several diagnosis-related group (DRG) payment refinements to reduce profitability among and within DRGs and thereby discourage specialty hospitals from cherry-picking the highest-margin, lowest-acuity Medicare patients. Reforming DRG payment policy has its pluses and minuses. However, it does not address the underlying conflict-of-interest issue that leads to patient selection and potential overuse. Also, these changes do not address the economic issues that have led specialty hospitals to avoid Medicaid and uninsured patients. The reaction of John Casey, chairman of MedCath Corporation, a cardiac specialty hospital chain, to major payment refinements based on patient severity that the CMS put in place for fiscal year 2006 speaks volumes. Casey conceded that the effect of these changes would be negligible.12 His conclusion should be no surprise. Medicare payment refinements simply do not materially affect overall financing in a way that discourages self-selection. As MedPAC noted, "Opportunities for selection never fully disappear," because of differences in hospitals’ cost accounting data compared with Medicare and because "physicians always know more than CMS about individual patients’ expected costs." Consider the potential for excess utilization, another conflict-of-interest symptom. MedPAC’s report illustrates how financial incentives might induce increased utilization. It shows that if ten cardiologists each owned a 3 percent interest in a specialty hospital, and each performed one additional coronary artery bypass graft (CABG), each owner would pocket an additional $2,880 (plus the additional professional fee of approximately $2,000). Substituting 2006 payment policies, which incorporate patient-severity refinements for CABG, a cardiologist-owner would pocket an additional $2,680 (plus the additional professional fee) for each additional procedure. The potential financial incentive to increase use is as strong as ever, even with a payment system adjusted for patient severity. Consider, too, that physician-owners could compensate for losses from DRG payment refinements by increasing the volume of outpatient procedures and other tests not covered by the payment. A 1998 CMS study led the CMS to suggest that "physicians will increase the volume and intensity of Medicare claims... to offset between 30 percent and 50 percent of the revenue reductions."13 Indeed, the CMS has already expressed concern about the level of outpatient services in some specialty hospitals.14 And in an unpublished study, Mitchell notes that comparing "practice patterns of physician owners before and after they became owners shows that rates of use of [magnetic resonance imaging], physical therapy treatments, and [direct medical education] increased significantly."15 Finally, MedPAC found that the financial impact on community hospitals has been limited. However, MedPAC relied on older data that might not reflect today’s environment featuring far more specialty hospitals, and especially not in a future world where specialty hospitals would proliferate without constraint. Also, these raw financial data do not capture the public health costs when community hospitals often are forced to cut services to stay solvent. AS POLICYMAKERS deliberate, we must recognize that physicians are under many of the same financial constraints as community hospitals. Investing in and self-referring to limited-service facilities is an appealing way to bolster incomes by supplementing structurally inadequate Medicare and Medicaid fees. Clearly, the appropriate policy response is to address physicians’ income concerns directly and ensure that fees reflect the true cost and value of the services performed. Also, we must do more to align financial, quality-of-care, and operational incentives of physicians and hospitals. However, sanctioning a business model that perpetuates conflict of interest, violates congressional intent, increases utilization, and weakens community hospitals will create an intolerable risk of irreparable harm to community health care.
Chip Kahn (ckahn{at}fah.org) is president of the Federation of American Hospitals in Washington, D.C.
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Why the debate?
MedPAC and CMS reports.
