Specialty hospital moratorium revisited, future uncertain

Specialty hospitals, which provide less than 1% of hospital cardiac care in the United States, are leading to fundamental changes.

The moratorium on development of specialty hospitals with physician investors imposed by the Medicare Modernization Act 18 months ago expired on June 8, 2005. MedPAC, an independent federal advisory body, recommended extending the moratorium until January 2007 to allow time for CMS to improve the inpatient DRG system.

It is unlikely that Congress will act on this matter until fall, leaving several months of uncertainty. Senator Charles Grassley, chairman of the Senate Finance Committee, recently introduced legislation that would not only implement MedPac’s recommended payment reforms, but would also make permanent the moratorium on new specialty hospitals and freeze activities of existing specialty hospitals.

While there is general acknowledgement that specialty hospitals deliver high-quality, efficient care, concern remains that patients treated in specialty hospitals may be less severely ill and more profitable than those cared for in general hospitals. Specialty hospitals could thus divert revenue from general hospitals, which need to offset losses in their other lines of business. To better capture severity of illness differences, MedPAC recommended basing DRG relative weights on estimated costs rather than charges and using the national average of hospitals’ relative values in each DRG.

Samuel Wann

Mandated report

MedPAC released its congressionally mandated report in March 2005, including a comparison of 12 physician-owned heart hospitals to 400 nonprofit hospitals. The statistical significance of the report is clouded by the small number of heart hospitals included, many of them recently opened and early in their experience (data was from 2002).

Heart hospitals were lumped together with orthopedic and surgical specialty hospitals, most of which do not have full- service emergency rooms, a standard practice with specialty heart hospitals, which promote emergency cardiac care, including rapid percutaneous intervention for acute MI.

MedPAC reported that the small number of specialty hospitals with physician investors in their study 1) treated slightly less severely ill patients and concentrated on more profitable DRGs, 2) treated relatively fewer Medicaid patients and a higher percentage of Medicare patients, and 3) had costs for Medicare patients that were similar to other hospitals, but lengths of stay that were shorter. MedPac found no evidence that specialty hospitals had caused financial harm to nonprofit general hospitals.

Separate CMS study

A separate CMS study on quality, cost and referral patterns found that specialty heart hospitals “differ substantially” from surgical and orthopedic facilities in that they tend to have higher average daily census, emergency departments and community outreach programs. The report also found that complication and mortality rates for treating Medicare cardiac patients were lower at heart hospitals than general hospitals, after adjusting for severity.

CMS also acknowledged that specialty hospitals devoted substantial revenue to both uncompensated care and taxes in amounts that “significantly exceeded” amounts nonprofit general hospitals spent. However, CMS announced in May that it would delay approval of any new specialty facilities until the end of the year, as it re-evaluates its reimbursement methodologies.

Competition

In a recent symposium published in the May/June issue of Health Affairs, the seminal question seemed to be whether or not to focus first on “leveling the playing field” between for-profit and nonprofit hospitals, protecting nonprofit from competition in the interim, or to first allow competition provided by new for-profit specialty hospitals that might generate momentum for system change. Little doubt was expressed that the “focused factory” model of specialty hospitals leads to superior care, aggressive pricing and greater efficiency.

The concern was that, because of these competitive attributes, specialty hospitals would deprive general hospitals of profits needed to support care of uninsured patients and other unprofitable care. Stuart Altman, PhD, chair of the Council on Health Care Policy and Economics, sponsor of the symposium, admitted that he would accept second- or third-rate cardiac care in order to preserve cross-subsidies of general hospitals. The American Hospital Association, which represents nonprofit general hospitals, has been lobbying Congress heavily to prevent competition from for-profit specialty hospitals.

Specialty hospitals with physician investors, which provide less than 1% of hospital cardiac care in the United States, already seem to have served as the kind of “disruptive innovation” that tends to foster fundamental change. General hospitals are also raising the bar for customer service and directly addressing physician satisfaction with their workplace, incorporating elements of the “focused factory” model into their own environments to provide both patients and physicians the tools and processes for efficient, high-quality care.

The specialty hospital concept is also flourishing internationally. For instance, England’s National Health Service has announced plans to open 50 facilities to treat 300,000 patients annually for specialized treatment such as hip and knee replacements and cardiac surgeries.

Charitable care

Inherent in many of the arguments against specialty hospitals with physician investors is the assumption that nonprofit hospitals deliver much more charitable care than for-profit hospitals. There is probably considerable variation in providing charitable care among both for-profit and nonprofit hospitals.

Led by California Republican Bill Thomas, the U.S. House Ways and Means Committee is holding a hearing to evaluate the tax exempt status of nonprofit organizations, including nonprofit hospitals, which receive tax exemptions based on a “community benefit standard” that has not been precisely defined.

Congress in March asked the General Accounting Office, its investigative arm, to review the amount of charity care provided by nonprofit hospitals, with an eye toward tightening the requirements for charitable institutions to avoid paying taxes. It is estimated that the federal government provides direct and indirect subsidies to tax-exempt nonprofit hospitals in the amount of $350 billion per year, with little or no accountability for the amount of charitable care delivered.

Uncertain future

While the future of for-profit specialty hospitals with physician investors remains uncertain, it is clear that many of the concepts introduced in heart hospitals, including an integrated medical-surgical service lines, vertical integration of care and streamlined, physician-and patient-oriented administrative structure, can be achieved within a general hospital, as well as in a free-standing facilities, and organized in a variety of economic models, with or without physician investors.

Current emphasis on cost and quality transparency to enable consumers to make better choices and assume greater responsibility for purchasing their own health care will undoubtedly flavor future debate.

Samuel Wann, MD, is chairman, department of cardiovascular medicine, Wisconsin Heart Hospital, Wauwatosa. He is editor of Cardiology Today’s Health Policy, Patient and Practice Issues section.