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H E A L T H  T R A C K I N G :
F R O M  T H E  F I E L D
 
25 October 2005  
  

The Rise Of The 
Entrepreneurial Physician

Physicians’ demands for more clinical and economic autonomy
will not go away if specialty hospitals are “banned.”


by Allen Dobson and Randall Haught


ABSTRACT:

The policy issues surrounding physician-owned specialty hospitals are highly controversial. Central to the controversy is the trade-off between the role these hospitals might play in increasing competition and the impact they might have on community hospitals’ ability to cross-subsidize unfunded missions. Key policy questions relate to quality, efficiency, and the degree to which specialty hospitals are fairly paid for their services. This commentary reviews Jean Mitchell’s basic thesis in relation to both the emerging specialty hospital literature and earlier work performed by the Lewin Group for MedCath, a corporation that owns and manages heart specialty hospitals.

The paper by Jean Mitchell contributes to the growing body of evidence on physician-owned specialty hospitals.¹ It notes that physician-owners and nonowners of these hospitals behave differently, presumably because of ownership incentives. Key to Mitchell’s presentation is the description of owners versus nonowners. She states that “considerable evidence indicates that ownership of limited-service hospitals is only offered to physicians who can both refer and treat patients at the facility.” She then defines a physician as a “nonowner” if “he or she treated at least six cardiac [diagnosis-related group] cases in one or more of the community hospitals and no cardiac DRG cases at the [physician-owned] heart hospital in a given year.” Similarly, a physician is defined as an “owner” if “the physician treated at least six cardiac DRG cases in a given year across all hospitals in the market area, and…treated at least 10 percent of his or her cardiac DRG cases at the heart hospital.” The hypothesis that these assumptions reflect actual ownership was never verified.

We present relevant data from heart hospitals. MedCath, a corporation that owns and manages heart specialty hospitals, reports that of the 262 credentialed physicians at the Arizona Heart Hospital (one of the two limited-service hospitals Mitchell studied), only 17 were investors with true ownership interest; thus, many key admitters are not investors. In addition, MedCath reports fifty-two owner-investors at the Tucson Heart Hospital, which is very different from the number of physician-owners estimated in Mitchell’s report. Even if physician-owners could be identified, Mitchell’s study data indicate the attending physician and not the referring physician. There is no credible way to positively identify self-referrals. MedCath data show that more than 40 percent of patients are admitted through the emergency department or as transfers.² Although these patients might have been treated by physician-owners, they are not self-referrals.

Interpreting The Data

Given the difficulty of defining “owners” versus “nonowners” by assumption, the conclusions that owners’ self-referral patterns based on economic interests led to (1) a higher proportion of surgical cases, (2) a less severe case-mix, and (3) a higher proportion of patients with generous insurance are open to alternative interpretation.

First, the premise that cardiac specialty hospitals treat more surgical cases is an inevitable result of their design and intent. These hospitals were designed to specialize in highly technical procedural cases. To find that their physician-owners did not treat a higher proportion of procedural cases than nonowners would be counterintuitive.

Second, the finding that cardiac specialty hospital physicians (and presumably owners) treat less severely ill patients is by now well documented.³ The explanation of this finding is likely more complex than physician ownership alone. The Centers for Medicare and Medicaid Services (CMS), for instance, was “unable to conclude that referrals were driven primarily based on incentives for financial gain.” It also noted that owners are “constrained in where they refer patients by several factors including a) patient preferences, b) presence of managed care networks, c) specialty care hospital location and d) taking emergency room ‘calls’ in local competitor hospitals.”⁴ Similarly, we believe that referrals to cardiac specialty hospitals likely reflect community physicians’ preferences to send more complex patients to hospitals that offer a wider range of specialty services and that the primary care physicians “owning” these patients refer them to those hospitals where they practice.

Third, the conclusion that physician-owners refer patients with more “generous” insurance coverage to their own hospitals can perhaps be partially explained by the fact that many specialty hospitals are locked out of health maintenance organization (HMO) contracts. Thus, in the case of the Arizona Heart Hospital, half of patients came from rural areas not supported by HMOs. Given the lack of HMO referrals, the preponderance of Medicare patients is not surprising. More telling is the issue of Medicaid patients, who tend to be underrepresented in cardiac specialty hospitals. Finally, Mitchell does not document actual generosity by payer, so it is difficult to assess the effect of the various payers.

Discussion

The early evidence on quality suggests that cardiac specialty hospitals have quality of care that is at least as good as, if not better than, that of “peer hospitals.”⁵ Lewin Group studies have consistently found lower case-mix-adjusted mortality rates and higher quality on numerous dimensions for cardiac specialty hospitals. A study by Peter Cram and colleagues shows that outcomes of such hospitals are as good as those of other high-volume hospitals.⁶

Evidence on efficiency is mixed. Results from a Medicare Payment Advisory Commission (MedPAC) study indicate higher case costs for cardiac specialty hospitals than for community hospitals providing community care, while Lewin estimates for cardiac hospitals show lower case costs after adjusting for start-up capital and interest expenses. MedPAC did not find evidence that specialty hospitals affect community hospitals financially.⁷

The evidence on patient severity is more consistent. Recent studies collectively point to the fact that patients at specialty hospitals are less severely ill than patients at comparable nonspecialty community hospitals.⁸ However, the causes are less certain. Mitchell contends that the primary cause is the economic incentives associated with physician self-referral. The CMS is careful in not ascribing economic intent as the primary cause of favorable patient selection. The MedPAC commissioners are “concerned with the issue of self-referral” but are also intrigued with the potential competitive effects of specialty hospitals.⁹ As noted above, physician referral patterns are complex, and plausible market reasons exist as to why specialty hospitals do not treat the sickest patients. In addition, the majority of cardiac specialty hospitals have round-the-clock emergency departments, which serve as an important patient referral service.

The role of specialty hospitals in promoting competition is widely discussed as a counterbalance to possible effects of physician self-referral. MedPAC noted recently that it does “not want to unnecessarily inhibit the development of organizational arrangements that may bring innovations to care delivery.”¹⁰ Similarly, the Federal Trade Commission and Department of Justice concluded that barriers to entry should be removed, and the existing players should not be allowed to block the entry of new competitors. They note that competition can be “quite unpleasant for competitors” and that the ultimate goal of competition is to allow winners and losers to emerge, so that providers can improve quality and efficiency, thus doing a “better job for consumers.”¹¹

Although the role of competition in health care is controversial, its merits as applied to specialty hospitals are worth considering. If patients’ preferences were the only guide, specialty hospitals are more than holding their own in the competitive process. The CMS found that “patients responded very favorably to specialty hospitals” and “value very highly the amenities and services” they provide, as well as their “greater predictability in scheduling and services.” However, the CMS also found high levels of patient loyalty to community hospitals.¹²

Mitchell notes that her findings support the moratorium in the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 on physician self-referral of Medicare and Medicaid patients to “limited-service” hospitals. MedPAC commissioners were more measured in that they extended the moratorium on specialty hospitals until January 2007 on the grounds that such hospitals might eventually “increase their efficiency and improve quality.”¹³ The CMS has taken a different approach, in that it recommends “closer scrutiny of whether entities meet the definition of a hospital” from the perspective of the CMS’s conditions of participation.¹⁴ Advocacy groups have taken many positions on the moratorium; however, federal policymakers thus far seem torn between protecting both the positive benefits of competition and community hospitals’ ability to cross-subsidize their missions.

Concluding Comments

The views of the benefits and costs of specialty hospitals are extreme, ranging from competitive theorists claiming these hospitals provide health care with a much-needed “wake-up call” to those who contend that specialty hospitals are undermining community hospitals’ financial stability. The literature at this point is not supportive of either extreme. Mitchell’s study shows how difficult it is to produce definitive evidence either way. She uses information from only two cardiac specialty hospitals for which the key distinction between physician-owners and nonowners has not been verified, and it draws conclusions about physician self-referral that other studies are hesitant to agree with.

Policymakers continue to be perplexed by the range of contentions and allegations in light of the emerging literature. Thus far, however, policy responses have been measured and appropriate, given the limited number of facts at hand. Given the finding that cardiac specialty hospitals draw a less-severe patient caseload, the CMS’s call for cardiology payments that track both patient severity and comorbidities is a sensible first step, with more powerful payment adjustments certain to follow.

The CMS decision to more carefully consider which entities should be certified as Medicare providers goes right to the heart of the matter. If the CMS can decide what levels of care hospitals should provide, much of the policy debate would be resolved. Should hospitals provide a given percentage of inpatient care? Should hospitals have round-the-clock emergency departments? If we can answer these types of questions and get the payments right, the competitive playing field will be more balanced.

Finally, after reviewing the evidence, we note that physicians’ demands for more clinical autonomy and control over their incomes will not go away if specialty hospitals are “banned.” The emergence of specialty hospitals is a manifestation of a larger issue: the rise of the entrepreneurial physician. In response, community hospitals are partnering with physicians in numerous creative ways. Thus, the future outlets for physician demand for clinical and economic control may go beyond specialty hospitals to include variants of partnering between community hospitals and physicians, and perhaps gain-sharing arrangements or pay-for-performance systems as advocated by the CMS and MedPAC. This might suggest that the marketplace is already adapting to the competitive “threat” of physician-owned specialty hospitals and emerging government regulation in this area is probably adequate.

The views expressed here are those of the authors and do not reflect the views of the Lewin Group or its clients.

NOTES

1. J.M. Mitchell, “Effects of Physician-Owned Limited-Service Hospitals: Evidence from Arizona,” Health Affairs, 25 October 2005, content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.481.
2. Internal correspondence between the Lewin Group and MedCath Corporation.
3. A. Dobson, R. Haught, and N. Sen, “Specialty Heart Hospital Care: A Comparative Study,” American Heart Hospital Journal 1, no. 1 (2003): 21–29; M.O. Leavitt, Study of Physician-Owned Specialty Hospitals Required in Section 507(c)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, May 2005,
www.cms.hhs.gov/media/press/files/052005/RTC-StudyofPhysOwnedSpecHosp.pdf (4 October 2005); U.S. Government Accountability Office, Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance, Pub. no. GAO-04-167 (Washington: GAO, October 2003); Medicare Payment Advisory Commission, Report to the Congress: Physician-Owned Specialty Hospitals (Washington: MedPAC, March 2005); and P. Cram et al., “Cardiac Revascularization in Specialty and General Hospitals,” New England Journal of Medicine 352, no. 14 (2005): 454–462.
4. Leavitt, Study of Physician-Owned Specialty Hospitals.
5. Ibid.; Dobson et al., “Specialty Heart Hospital Care”; and Cram et al., “Cardiac Revascularization.”
6. Cram et al., “Cardiac Revascularization.”
7. Dobson et al., “Specialty Heart Hospital Care”; and MedPAC, Report to the Congress.
8. Ibid.; GAO, Specialty Hospitals: Information on National Market Share, Physician Ownership, and Patients Served, Pub. no. GAO-03-683 (Washington: GAO, April 2003); and Leavitt, Study of Physician-Owned Specialty Hospitals.
9. MedPAC, Report to the Congress.
10. Ibid.
11. Federal Trade Commission and U.S. Department of Justice, Improving Health Care: A Dose of Competition (Washington: FTC/DOJ, July 2004).
12. Leavitt, Study of Physician-Owned Specialty Hospitals.
13. MedPAC, Report to the Congress.
14. Leavitt, Study of Physician-Owned Specialty Hospitals.

Read related papers by Jean Mitchell and Jack Hadley and Stephen Zuckerman.

Allen Dobson (al.dobson{at}lewin.com) is senior vice president of the Lewin Group in Falls Church, Virginia. Randall Haught is a senior scientist there.

DOI: 10.1377/hlthaff.w5.494
©2005 Project HOPE–The People-to-People Health Foundation, Inc.