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PHYSICIAN-OWNED SPECIALTY HOSPITALS HEARING BEFORE THE COMMITTEE ON WAYS AND MEANS HOUSE OF REPRESENTATIVES U.S. ONE HUNDRED NINTH CONGRESS FIRST SESSION MARCH 8, 2005 Serial No. 109-37 Printed for the use of the Committee on Ways and Means PROPERTY OF JUN 2 0 REC'D HCFA LIBRARY U.S. GOVERNMENT PRINTING OFFICE 26-371 WASHINGTON 2006 : ForsalebytheSuperintendentofDocuments,U.S.GovernmentPrintingOffice Internet:bookstore.gpo.gov Phone:tollfree(866)512-1800;DCarea(202)512-1800 Fax:(202)512-2250 Mail:StopSSOP,Washington,DC20402-0001 COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California WALLY HERGER, California SANDER M. LEVIN, Michigan JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland DAVE CAMP, Michigan JIM MCDERMOTT, Washington JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas MICHAEL R. MCNULTY, NewYork ROB PORTMAN, Ohio WILLIAM J. JEFFERSON, Louisiana PHIL ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee J.D. HAYWORTH, Arizona XAVIER BECERRA, California JERRYWELLER, lUinois LLOYD DOGGETT, Texas KENNY C. HULSHOF, Missouri EARL POMEROY, North Dakota RON LEWIS, Kentucky STEPHANIE TUBBS JONES, Ohio MARK FOLEY, Florida MIKE THOMPSON, CaHfornia KEVIN BRADY, Texas JOHN B. LARSON, Connecticut THOMAS M. REYNOLDS, NewYork RAHM EMANUEL, Ilhnois PAUL RYAN, Wisconsin ERIC CANTOR, Virginia JOHN LINDER, Georgia BOB BEAUPREZ, Colorado MELISSAA. HART, Pennsylvania CHRIS CHOCOLA, Indiana Allison H. Giles, ChiefofStaff Janice Mays, Minority ChiefCounsel SUBCOMMITTEE ON HEALTH NANCY L. JOHNSON, Connecticut, Chairman JIM MCCRERY, Louisiana FORTNEY PETE STARK, California SAM JOHNSON, Texas JOHN LEWIS, Georgia DAVE CAMP, Michigan LLOYD DOGGETT, Texas JIM RAMSTAD, Minnesota MIKE THOMPSON, California PHIL ENGLISH, Pennsylvania RAHM EMANUEL, Ilinois J.D. HAYWORTH, Arizona KENNY C. HULSHOF, Missouri Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process ofconverting betweenvariouselectronicformats mayintroduceunintentionalerrorsoromissions. Suchoccur- rences are inherent in the current publication process and should diminish as the process isfurtherrefined. ii CMS Library C2-07-13 7500 Security Blvd. Saltimore, Mafy^nd 21244 CONTENTS AdvisoryofMarch 1, 2005 announcingthe hearing 2 WITNESSES Medicare PaymentAdvisoryCommission, Glenn M. Hackbarth, Chairman 5 Centers for Medicare and Medicaid Services, Center for Medicare Manage- ment, Tom Gustafson, Ph.D., DeputyDirector 16 SaintDavid's Healthcare Partnership, Jon Foster 36 AmericanMedicalAssociation, William G. Plested III, M.D 41 Cedars-Sinai Medical Center, WilhamW. Brien, M.D 49 MedCath Corporation, Jamie Harris 53 BaylorHealthcare System, GaryBrock 61 SUBMISSIONS FOR THE RECORD Bettis, Richard, Texas HospitalAssociation,Austin, Texas, letter 77 Calkins, D.J., Guadalupe Valley Hospital Board ofManagers, Seguin, Texas, statement 83 Castle, James, Ohio HospitalAssociation, Columbus, Ohio, letter 84 Coyle, Carmela, American HospitalAssociation, statement 86 Dauphine, Damien, NorthTexas hospital, Lewisville, Texas, letter 91 Fetter, Trevor, TenetHealthcare Corporation, Dallas, Texas, statement 92 Friesen, Shawn,American College ofSurgeons, statement 95 Grant, James,American Surgical HospitalAssociation, San Diego, statement 97 Johnston, Jr., Ben, Focus on Therapeutic Outcomes, Knoxville, Tennessee, letter 130 Jones, Steven, Little Rock, Arkansas, statement 134 Kerrigan, Karen, Small Business & Entrepreneurship Council, statement 135 Orient, Jane, Association of American Physicians & Surgeons, Tucson, Ari- zona, statement 136 StrayerIII,John, National CenterforPolicyAnalysis, statement 137 iii PHYSICIAN-OWNED SPECIALTY HOSPITALS TUESDAY, MARCH 8, 2005 U.S. House of Representatives, Committee on Ways and Means, Subcommittee on Health, Washington, DC. The Subcommittee met, pursuant to notice, at 4:07 p.m., in Room B-318, Rayburn House Office Building, Hon. Nancy L. Johnson, (Chairman ofthe Subcommittee) presiding. [The advisory announcing the hearing follows:] (1) 2 ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS SUBCOMMITTEE ON OVERSIGHT FOR IMMEDIATE RELEASE CONTACT: (202) 225-1721 March 8, 2005 No. HL-2 Johnson Announces Hearing on Physician-Owned Specialty Hospitals Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on Health ofthe Committee onWays and Means, today announced thatthe Subcommittee will hold a hearing on physician-owned specialty hospitals, following the release ofthe 2005 report ofthe Medicare Payment Advisory Commission (MedPAC). The hearing will take place on Tuesday, March 8, 2005, in B-318 Rayburn House Of- ficeBuilding,beginningat4:00p.m. In view of the limited time available to hear witnesses, oral testimony at this hearing will be from invited witnesses only. Witnesses will include Glenn Hackbarth, Chairman of MedPAC, and representatives from groups affected by Medicare's payment policies. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee andforinclusioninthe printedrecord ofthe hearing. BACKGROUND ; In recent years, there has been increasing growth of specialty hospitals owned, in part, by physicians. Such facilities focus primarily on the performance ofcardiac, surgical and orthopedic procedures. Proponents contend that these facilities provide a range ofbenefits, including increased efficiency, competition, better medical outcomes, and improved patient satisfaction. Critics ofspecialty hospitals contend that physician owners at these facilities select more profitable patients and procedures, which adversely impacts the resources ofcommunity hospitals. Critics also believe physician ownership creates conflicts of interest and may increase utilization and spending of services. Medicare payments for inpatient procedures at hospitals are determined by grouping medical procedures into more than 500 diagnosis-related groups (DRGs), with the goal ofproviding appropriate payments based on the type ofmedical condition andresources requiredtotreatthe condition. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) (P.L. 108-173) responded to questions surrounding the growth ofthese fa- cnmiieltiwttieefdsacibelxyiitsiitemsipnoignsiswpnhegicicaahlmtaoyrphahotysospriicitiaualmsnumtnoatiionlpteJaruianntees.a8,Anl2soo0w,0n5et,rhesthhMaitpMpiArnotherrieebqsiutt.isrTetshheeMoMepdMePnAiAnCpgerto-of issue areportbyMarch 8, 2005, on cost differences, the financial impact ofspecialty htohsepiDtRalGssotnruccotmurmeu.nIintyadhdoistpiiotna,lst,hepaMtiMenAtrseelqeucitrieosn,thaendSercerceotmarmyenodfatthieoUn.sS.toDueppdaartte- ment ofHealth and Human Services to issue a report by March 8, 2005, on in part, quality and differences in uncompensated care between specialty and commimity hospitals. FOCUS OFTHE HEARING ; The hearing will focus on physician-owned specialty hospitals, identification ofpo- tential problems and an examination of potential solutions. The MedPAC will present findings from its report to Congress on physician-owned specialty hospitals. The second panel will provide input from affected parties, including testimony from . 3 witnesses with experience in specialty hospitals, community hospitals and physician-referralissues. DETAILS FOR SUBMISSIONOFWRITTENCOMMENTS : Please Note:Any person(s) and/or organization(s)wishingto submitforthehear- ing record must follow the appropriate link on the hearing page ofthe Committee website and complete the informational forms. From the Committee homepage, http:llwaysandmeans.house.gov, select 109th Congress from the menu entitled, "Hearing Archives" ihttp://waysandmeans.house.gov/Hearings.asp?congress=17.) Se- lect the hearing for which you would like to submit, and click on the link entitled, "Click here toprovide a submission for the record." 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All exhibit material not meeting these specifications will be maintained in the Committee files for review and use bytheCommittee. 3. All submissions must include a list ofall clients, persons, and/or organizations on whose behalfthe witness appears. A supplemental sheet must accompany each submission listingthe name,company,address,telephoneandfaxnumbersofeachwitness. Note: All Committee advisories and news releases are available on the World WideWeb athttp://waysandmeans.house.gov The Committee seeks to make its facilities accessible to persons with disabilities. Ifyou are in need ofspecial accommodations, please call 202-225-1721 or 202-226- 3411 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special acc commodation needs in general (including avail- ability ofCommittee materials in alternative formats) may be directed to the Com- mittee as noted above. Chairman JOHNSON. Welcome everyone. We gather today to discuss the serious issue ofphysician-owned specialty hospitals. We will begin to explore today the results ofthe Medicare Payment Ad- visory Commission's (MedPAC), the report to Congress on physician-owned specialty hospitals. We will also hear from a represent- ative of the Centers for Medicaid and Medicare Services regarding their preliminary results and the perspectives ofvarious interested parties. In recent years there has been increasing growth in the specialty hospital area. Such facilities focus on the performance or cardiac, 4 surgical and orthopedic procedures. Proponents contend that these facilities provide a wide range of benefits, including increased efficiency, competition, better medical outcomes, improved patient and provider satisfaction. Critics of specialty hospitals contend that physician owners at these facilities select more profitable patients and procedures which adversely impacts the resources of community hospitals. Critics also believe physician ownership creates a conflict of interest and may increase utilization and spending on services. These issues are important, and given the nature of the facilities and treatments at issue, compel us to consider the manner in which Medicare pays for inpatient procedures at hospitals and whether changes to the payment system are needed to provide accuracy and prevent waste. The Medicare Prescription Drug Improvement and Modernization Act of 2003 imposed a moratorium until June 8th, 2005 that prohibits the opening ofnew specialty hospitals while allowing existing specialty hospitals to operate, and allowing those under development to apply for a waiver. The moratorium expires and is something we must consider soon. We appreciate the efforts ofMedPAC in issuing its timely report on physician-owned hospitals. MedPAC makes a variety offindings and recommendations which we will explore today. On our first panel we are happy to have MedPAC's Chairman, Mr. Glenn Hackbarth, here today with us to discuss the findings set forth in MedPAC's report. In addition, although we have been advised that the Secretary's report on specialty hospitals is not yet available, we are pleased to hear comments from Mr. Thomas Gustafson, who is the Deputy Director of the Center for Medicare Management and for the Centers of Medicaid and Medicare Services, who will provide limited testimony on their preliminary research data. His testimony will not and is not intended to provide any conclusions about the data, and is not to be considered a substitute for the Sec- retary's report, which we anticipate to be issued in the near future. On our second panel we are pleased to hear from representatives from the physician hospital and specialty hospital communities. They will provide varied perspectives on physician-owned specialty hospitals, the Medicare payment structure and potential improve- ments to the system for the benefit of Medicare beneficiaries, providers and taxpayers. Mr. Stark, I now welcome you. Mr. STARK. Thank you. Madam Chair. You are quite right, it is an important topic. My concern is that the growth of specialty hospital phenomena or whatever you choose to call it, could impact the structure of our medical care delivery system. In essence these facilities are pulling profit centers out of community hospitals and over time could cause a real disruption in the financing and the fis- cal health, financial health ofthese hospitals. There aren't many of these specialty hospitals now, but if financial incentives are motivating a lot of for-profit corporations and physicians to team up and create heart hospitals, orthopedic hospitals, surgery hospitals, and the moratorium we passed has stalled this, but I do not think we have much time to act. The industry publications indicate there could be 100 institutions waiting in the wings to jump if in fact the moratorium expires, and I expect we would have trouble putting that genie back in the bottle once it 5 opened. The specialty hospitals generate huge returns for their in- vestors, mostly doctors, the other halfby the people who have orga- nized them. The question is, I do not know ifthere is any informa- tion that they are any better for patients. The food I understand is better, but that is hardly the issue. And are they good for the medical care delivery system as a whole? That I think is the real question. We enacted the Physician Self-Referral Laws because of over- whelming evidence that health care providers who personally profit from referrals will increase the number of such referrals, not sur- prising I don't suppose to any ofus. When those laws were enacted physician-owned specialty hospitals basically did not exist. We included the whole hospital exception in the law because ofthe broad based entities in which it would be hard to prove that ownership caused inappropriate referral patterns, but we explicitly prohibited ownership in a subdivision of that hospital, as we say, a hospital within a hospital, and because it would cause just such a conflict. I submit to you that today's physician-owned specialty hospitals are nothing more than freestanding subdivisions ofa hospital. I would like to go on record in support ofthe petition by the Fed- eration of American Hospitals urging Health and Human Services to update their regulations to make clear that these physician- owned specialty hospitals do not meet the whole hospital exception. Today we will hear from MedPAC about their recommendations. I believe their proposal to readjust the payment system to eliminate the obvious financial incentives that encourage these specialty hospitals make good sense. But I still believe that realigning the payment system won't be enough to solve the inherent problem of self- interest, and it is a positive change and one we should proceed with. MedPAC has also recommended and extension of the moratorium. At a minimum it is vital that we extend this moratorium until we have a legislative solution to the very real problems posed by the physician-owned specialty hospitals. Finally, I would like to note that we have a wide breadth of groups in agreement that something should be done to curb the growth of these physician- owned specialty hospitals. I would like to point to page 145 of the President's Budget, where it states, quote, "The Administration will seek to refine the inpatient hospital payment system and related provisions of regulations to ensure a more level playingfield between specialty and non-specialty hospitals." On the day when Pete Stark, Chip Kahn and President Bush all agree that something needs to be done, I think we can create a policy that Congress can pass, and I look forward to hearing from the witnesses today. Thank you. Madam Chair. Chairman JOHNSON. Thank you, Pete. Mr. Hackbarth? STATEMENT OF GLENNM. HACKBARTH, J.D., CHAIRMAN, MEDICARE PAYMENTADVISORY COMMISSION Mr. HACKBARTH. Chairman Johnson, Mr. Stark, other mem- bers of the Subcommittee, it is good to see you again and I appreciate the opportunity. Chairman Johnson well summarized the basic issues here, the view of the proponents of physician-owned specialty hospitals as well as the opponents. 6 Our findings on the performance of physician-owned specialty hospitals are based on data drawn from 2002. That was the most recent data available when we began our study. In the 2002 data there were 48 hospitals that met our test for specialization and minimum Medicare volume. In addition to looking at that data, we also conducted site visits to Austin, Texas, Wichita, Kansas, and Sioux Falls, South Dakota. The data that we have before us are limited in three important respects. First of all we have a small number of hospitals, 48 hospitals, and many ofthose hospitals are very small institutions. Sec- ond, 2002 was at an early stage in the development ofthe specialty hospital phenomenon. Third, MedPAC did not look at any data on quality of care in specialty hospitals since that assignment was given to CMS under the MMA mandate. As was alluded to earlier, we also make recommendations on re- fining the payment system for hospitals overall. I want to be clear that those recommendations are not based on this limited data set, but rather on a broader analysis of Medicare claims and cost re- ports, so the foundation for those recommendations we think is very strong indeed. As I proceed with my comments if it is okay I will make reference to a couple of figures that are in the testimony that I hope everybody has in front ofthem. On page 3 ofmy testimony, there is a map that shows you where specialty hospitals are located, both the ones that we studies in 2002 and ones that we know of that have been developed since 2002. In 2002 almost 60 percent ofthe specialty hospitals were in four States, South Da- kota, Kansas, Oklahoma and Texas, so they were quite concentrated. Even if you look at the hospitals that have been developed since they are still quite geographically concentrated. You can see many States have no physician-owned specialty hospitals for a variety ofreasons. Today we estimate that there are more than 100 physician- owned specialty hospitals, and more, as Mr. Stark pointed out, may be in the wings. Our findings were as follows. Heart hospitals tend to focus on diagnosis-related groups (DRGs), with a greater than average expected profit. On the other hand, orthopedic and surgical specialty hospitals tend to focus on DRGs that have a slightly less than average expected profit. All three types of specialty hospitals, heart, orthopedic and surgical, however, tend to treat patients within those diagnosis categories that are less severe cases, and as a result have higher expected profits. Ifyou turn to page 7 in my testimony, you will find Table 1 that summarizes the data that we found on this issue, and pardon me for how detailed and complicated it is. But the basic point is that the column labeled DRGs has a factor that describes the expected profitability based on the diagnosis of the patient. So, if you look at heart hospitals and then specialty, under the DRG column it says 1.06. So, that means if the hospital had an average level of cost just based on the diagnosis of the patients, the DRGs they are in, the expected profitability would be 6 percent above average. The next column over labeled "Patient severity" says that if you look at the patients within any given DRG and the severity oftheir illness, what is the effect of that on expected profitability. So, in the case of specialty heart hospitals the patient severity factor is