Too POSH for the public: Are physician-owned specialty hospitals a drain on emergency care?
Article Outline
- Countrymen or corporate citizens?
- A long and storied past
- If it walks like a duck, quacks like a duck…
- A new phenomenon
- The POSH apologist
- The debate over patient outcomes
- Bail or abandon ship?
- Enemies within the gates?
- Bond ratings and a bill on the hill
- References
- Further reading
While a federal moratorium continues on new physician-owned specialty hospitals, Congress, bureaucrats, academics and the private sector hotly debate whether they are an innovative health care blessing or a cream-skimming curse.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 imposed an18-month moratorium on the “whole hospital” exemption in the so-called Stark law, which bans Medicare or Medicaid payments – and hence drastically cuts referrals – to hospitals in which the referring physician has a financial interest. Along with effectively halting the opening of new specialty hospitals (existing ones were grandfathered), the 2003 act also mandates studies of such institutions by both the Medicare Payment Advisory Commission (MedPAC) and the Centers for Medicare and Medicaid Services (CMS, under the Secretary of Health and Human Services) within this period.
The moratorium expired on June 8, 2005, but CMS has maintained a de facto moratorium since then through an administrative decision to process no new Medicare provider enrollment applications for specialty hospitals. CMS administrator Mark McClellan, MD, PhD, has expressed interest in whether these institutions meet the definition of “hospital” for Medicare purposes.1 The 2005 Deficit Reduction Act calls for a final CMS report on the subject by August 8, 2006.
Countrymen or corporate citizens?
By offering advantages to some physicians, while attracting the ire of others, specialty hospitals raise the question of whether the house of medicine more closely resembles a nation, combining diverse but interdependent elements in a common purpose, or a diversified corporation, marketing a range of products produced by different divisions, any of which might spin off from the central organization if it speculated that severing ties would better serve its interests. Opinions on these institutions tend to be vehement, because the controversies surrounding them are intertwined with deeply held beliefs about the relations of human needs and economic markets. Their defenders describe their opponents as hidebound obstructionists who would rather regulate an innovative form of organization to death than respond to its competitive challenge.
Many physicians with a loyalty to traditional full-service hospitals, in contrast, view specialty-hospital proprietors as selfish secessionists who siphon lucrative components of medical practice away from community institutions that are already hard-pressed for resources. Both camps claim that the other’s position is ultimately detrimental to patients.
The phenomenon in question is relatively new but is becoming well-established enough for preliminary quantitative study. As in many debates over such ideologically charged topics, it may take a while for the research to catch up to the opinions.
A long and storied past
Specialty hospitals have a long history. Institutions focusing on particular clinical categories existed long before Medicare, Medicaid, the Stark conflict-of-interest laws, and all the other administrative complications of today’s health care system. Specialty hospitals in pediatrics, obstetrics, surgery, psychiatry, otorhinolaryngology, and other fields include some of the nation’s most distinguished, such as the Brigham and Women’s, Children’s Hospital of Philadelphia, New York Eye and Ear Infirmary, and the Hospital for Special Surgery. These, however, are not the institutions currently making enemies.
Defining the controversial hospitals is itself controversial. Unlike their predecessors, the new institutions focus on “specialized needs that are disproportionately profitable under a Medicare-driven reimbursement scheme,” in the words of past American College of Emergency Physicians President Robert E. Suter, DO, MHA. In determining whether a given hospital fits the description, commentators occasionally apply a subjective test akin to Supreme Court Justice Potter Stewart’s famous description of pornography: “I know it when I see it.”2
If it walks like a duck, quacks like a duck
…
Investment by physicians is an important distinguishing feature, though not a definitive one, since other entities also attract such investment. One major study of practice patterns by physicians with and without ownership interests in specialty hospitals attracted methodological critiques because its author, in the absence of state-reported ownership records, had to use indirect inferential methods to determine which physicians were in the critical “owner” and “nonowner” categories.3 Other criteria such as for-profit or not-for-profit status also fail to draw unambiguous categorical borders around these hospitals.
“Everybody kind of knows what they are,” says Peter Cram, MD, MBA, of the University of Iowa, “but nobody can agree on a definition.” Dr. Cram’s research on specialty hospitals develops a practical definition by asking a series of questions about ownership, the percentage of business derived from the proclaimed specialty, the availability of general care, educational activity (these are never teaching hospitals), and membership in certain professional organizations.
To distinguish the new generation of institutions from their uncontroversial predecessors without unduly complex terminology, the phrase “physician-owned specialty hospitals” may suffice. Critics allege that these hospitals’ raison d’ être has less to do with clinical considerations than with profitability, which makes the ensuing acronym POSH doubly appropriate. So do their amenities: a major report by the CMS calls attention to patients’ enjoyment of “large private rooms, quiet surroundings, adjacent sleeping rooms for their family members if needed, easy parking, and good food.”4
A new phenomenon
Whatever else the POSH may be, they are young. They have primarily arisen in the past two decades, as discrepancies have arisen between payments and anticipated costs of treatment in certain diagnosis-related groups (DRGs). Medicare’s fee schedule uses relative value units (RVUs) to quantify relative work, practice expenses, and malpractice costs for different services, adjusted by DRG and region; cardiac, orthopedic, and surgical conditions have consistently been among the most lucrative DRGs. Other factors in the growth of POSH, observes Georgetown economist Jean Mitchell, PhD, include the loss of specialist fees with the implementation of Medicare’s fee schedule since the mid-1990s, phased in by 1998, and the subsequent collapse of the stock market, which performed well enough in that decade to mask those losses temporarily, but then left investors looking for fresh opportunities.
Critics claim that the new hospitals exist more to exploit regulatory anomalies, particularly a loophole in the Stark laws, than to serve medical needs. Provisions in the Omnibus Budget Reconciliation Acts of 1989 and 1993, named for sponsoring Rep. Pete Stark (D-Calif.), ban referral of Medicare and Medicaid patients by physician-investors to laboratories or other facilities in which they have a financial interest. The Stark prohibitions include a “whole hospital” exception allowing such referrals if the physician’s ownership interest is in an entire institution. The reasoning behind this exception is that a physician’s financial share of a hospital is unlikely to be large enough to generate the same material incentives that would result if he or she invested in a laboratory, diagnostic imaging facility, or procedure center, then referred patients to it. Some 50 to 100 new specialty hospitals nationwide have arisen in the post-Stark II era, chiefly in cardiac, orthopedic, and surgical care, and often on a scale closer to divisions than full-scale hospitals. Over half, particularly in the surgical and orthopedic fields, lack emergency departments (EDs): just 45% of specialty hospitals examined in 2003 by the General Accounting Office (GAO) had an ED, versus 92% of general hospitals.5
The argument that the POSH are more a regulatory artifact than an improvement in the delivery of care is consistent with their clustering in states without certificate-of-need laws. Of 48 such hospitals studied by MedPAC, nearly 60% are located in four states (Kansas, Oklahoma, South Dakota, and Texas), and almost all are in no-certificate states.6 The GAO study used broader criteria and examined 100 specialty hospitals, finding two-thirds in seven states (the above four plus Arizona, California, and Louisiana). The CMS study counted 67 and studied 11 intensively, with site visits in 6 market areas. Cram notes the preponderance of POSH in electoral red states, where the desirability of market mechanisms is practically an article of faith, rather than blue states, which are less hesitant about using regulation to protect public interests.
The POSH apologist
As executive director of the American Surgical Hospital Association (ASHA), Molly Gutierrez, JD, has heard specialty hospitals called every name in the book: cherry-pickers, cream skimmers, procedure mills, parasites. Physician investment in the hospitals ASHA represents does not strike her as an ethical minefield. She trumpets its virtues.
Gutierrez greets practically every critique with a brisk dismissal, sometimes with a statistical rebuttal, and occasionally with a paean to the virtues of ownership-driven innovation, or a blast at certificate-of-need laws as “very stifling to competitive growth.” Responding to those who view the shifting of lucrative procedures from community hospitals to POSH as an inherent conflict, she denies an effect on referral patterns after physicians become owners.
“A specialty hospital,” she says, “is really no different from an ambulatory surgical center,” traditionally considered an extension of a physician’s practice. “General hospitals are just crying foul because of the competition.”
Advocates of the specialized facilities point to benefits from procedural specialization (both subjective and measurable), including low mortality and complication rates, high patient satisfaction, efficient throughput, and positive correlations between volumes of procedures performed and expertise gained. Greater independence in matters of administration and governance also carries considerable weight with some physicians; for veterans of large hospitals in the managed care era, a smaller institution controlled by a few colleagues has an undeniable appeal. Todd Taylor, MD, vice-president for public affairs of the Arizona College of Emergency Physicians, adds that lighter Emergency Medical Treatment and Active Labor Act duties and more efficient operating room scheduling add to the incentives to practice at POSH. “Specialty hospitals in and of themselves are not bad,” he says, just tangled in poorly designed regulatory and payment mechanisms.
The debate over patient outcomes
Critics acknowledge the volume effects and the congenial atmosphere but contend that the most important advantage, clinical outcome data, reflects patient selection rather than inherently better care. The POSH, most analysts agree, preferentially take cases with lower severity and comorbidity, with fewer admissions through emergency departments. Controlling such comparisons for case mix, severity, and procedural volume, in this view, eliminates the greatest benefit claimed for POSH. The large study of cardiac revascularization procedures by Cram and colleagues in 2005 supports this contention, finding “no definitive evidence that cardiac specialty hospitals provide better or more efficient care than general hospitals with similar procedural volumes.”7
Moreover, the financial advantages of lower-acuity cases lead many commentators to ask whether the reimbursement tail is wagging the clinical dog. To Professor Mitchell, this is inevitable, given the payment schedules and physicians’ power to guarantee a demand for services through referrals. “I’m an economist; everybody responds to financial incentives,” she says. “Why are physicians immune?”
As the author of a Florida study that was the basis of Stark II,8 Mitchell advised the Florida legislature not to exempt hospitals, because self-referrals for procedures would simply shift to the hospitals – predicting exactly what happened in many states. Studying orthopedic, spinal, and cardiac procedures in Arizona and Oklahoma at the time POSH entered these areas, she has observed sharp differences in practice patterns after physicians became facility owners, including spikes in utilization of orthopedic and spine procedures, cherry-picking of low-severity cardiac cases, and cream-skimming of patients with better insurance coverage, whether Medicare or private. “If you’re not an owner, you’re only going to send people when they really need the procedure. [Ownership] does cloud judgment.” She finds physician ownership of facilities an unambiguous conflict of interest and favors an outright ban, with no exemptions and no grandfathering of existing institutions.
Bail or abandon ship?
ACEP’s Suter understands that some pro-POSH arguments, particularly the desire for more influence over hospital governance, are well-grounded in experience. He recalls the days when hospital executives all had medical backgrounds, laments the ceding of control to nonphysicians, and recommends that today’s physicians become more active in guiding and reforming their institutions. Still, he charges, specialist separatism reflects “an expatriate argument: instead of making things better, they’re going to escape it, rather than rolling their sleeves up and doing the hard work to fix the problem.” The focus on the most lucrative diagnostic categories strikes him as the clincher. “What I have said to people who support specialty hospitals,” he recounts, “is that when you show me someone opening an abdominal pain hospital, then I will back off the [claim] that this is profit-driven.”
The consequences for community hospitals — still handling the full range of cases in all their complexity — arouse fervent debate. Anecdotal reports of EDs left with sicker, poorer, costlier patients are hard to corroborate statistically, though Cram’s research found that POSH were admitting patients who not only were healthier but lived in wealthier zip codes (possibly an effect of local catchment rather than selective admissions, since many POSH gravitate to upscale neighborhoods). He is cautious about general conclusions about effects on general hospitals and emergency care: “I tend to be a pretty data-driven guy, and my answer is ‘we don’t know.’ …The data just isn’t yet available, because the phenomenon is so new.”
Enemies within the gates?
Others are more willing to draw damning inferences. Cindy Morrison, vice president for public policy at the Sioux Valley Health System in Sioux Falls, S.D., and executive director of the Coalition of Full Service Hospitals, a national grassroots group, enumerates many direct and indirect forms of fallout when a POSH enters a community. South Dakota, population 750,000, has eight of them, giving it the nation’s highest number per capita (Sioux Falls is also the home of ASHA). Morrison’s group has seen physicians shift lucrative volume from the community hospital to their POSH, screening patients by payer and by comorbidity, meanwhile retaining privileges at the main hospital but doing little work there. The drain on revenue, volume, and key staff from community hospitals like Sioux Valley is substantial. “The physicians are right inside your hospital,” she says, “recruiting your staff! It’s one thing to be competitive for staff with an organization; it’s another thing to have the competitor right inside your walls.”
Other effects, she says, are even more insidious than the risk of losses, layoffs, and reductions in services. On-call requirements at many POSH are less rigorous – freedom from being on call, in fact, can be a recruiting tool for physician-owners – and communities can be caught short. “In Rapid City, SD, they had real difficulty with neurosurgery call.... What is the big thing that goes to the Black Hills of South Dakota every year? The Sturgis Bike Rally. Now you have this influx of 500,000 people on motorcycles. What’s the thing you’ve got to have? A neurosurgeon.”
Bond ratings and a bill on the hill
Small-market community hospitals are financially vulnerable on another front, Morrison points out, since many of them get funding through the bond market and are rated by Moody’s Investors Service or Standard and Poor’s. When a POSH takes revenue away, the community hospital’s rating suffers, and its cost to borrow rises. She points to specific language in Moody’s reports linking negative credit impact on community hospitals to pressure from POSH.9
Critics have raised enough concerns about distorted incentives and undesirable effects to place POSH under governmental scrutiny. Senators Charles Grassley (R-Iowa) and Max Baucus (D-Mont.), chairman and ranking member of the Senate Finance Committee, have introduced a bill to make the moratorium permanent. (One 2005 patient death in an Oregon POSH – which had opened in violation of the moratorium without applying for a waiver, had no physician onsite during the postsurgical crisis, and had to call 911 to handle it – figures prominently in the Senators’ public statements on the topic. This hospital, Gutierrez points out, was not an ASHA member.) The Grassley/Baucus Hospital Fair Competition Act of 2005 (S. 1002), along with revising DRG weights to account for real costs and severity of illness, would explicitly exclude POSH from the Stark law’s whole-hospital exemption. The bill remains in committee at this writing.
References
- . Specialty hospitals: assessing their role in the delivery of quality health care: testimony before the House Committee on Energy and Commerce . 2005; 12 May, 1. Available at: http://www.cms.hhs.gov/apps/media/press/testimony.asp?Counter=1459. Accessed May 15, 2006.
- Jacobellis v. Ohio, 378 U.S. 184 (1964).
- . Effects of physician-owned limited-service hospitals (evidence from Arizona) . 2005; Health Affairs (Oct. 25): 10.1377/hlthaff.w5.481. Available at: http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.481 Accessed May 15, 2006.
- Centers for Medicare & Medicaid Services. Study of physician-owned specialty hospitals required in Section 507(c)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.
- . Specialty hospitals (geographic location, services provided, and financial performance) . 2003; October
- . Report to the Congress (physician-owned specialty hospitals) . 2005; March
- . Cardiac revascularization in specialty and general hospitals . N Engl J Med . 2005;352:1454–1462
- . Consequences of physicians’ ownership of health care facilities — joint ventures in radiation therapy . N Engl J Med . 1992;327(21):1497–1501
- . Special Comment (Hot Topics in Health Care). Moody’s Investor Service . 2005; June
Further reading
This is Part I of a two-part article. Next month: the major studies (GAO, MedPAC, and HHS/CMS); the inferences that their results do and don’t support; the implications for federal, state, and professional-society policies; and the innovative steps some physicians are taking to optimize emergency care in today’s regulatory climate.
PII: S0196-0644(06)00698-6
doi:10.1016/j.annemergmed.2006.05.013
