MedPAC Staff Review Utilization and Costs

at Physician-Owned Specialty Hospitals

Based in large part on efforts by the American Hospital Association (“AHA”), the Medicare Modernization Act of 2003 directed the Medicare Payment Advisory Commission (“MedPAC”) to study the impact of physician-owned specialty hospitals on the market for specialty hospital services. Specifically, concerns were raised that physician-ownership leads to overutilization of profitable services and cherry-picking of patients. Though AHA’s focus has been physician-owned specialty hospitals there has been concern expressed by some that the hospital industry might attempt to lodge similar complaints about physician-owned ambulatory surgery centers (“ASCs”).

In order to determine the merit of these concerns, Congress directed MedPAC to examine the costs, utilization rates, and practice patterns of physician-owned specialty hospitals as compared to full-service general hospitals. The law also requires the Centers for Medicare & Medicaid Services (CMS) to review quality of care at such facilities. In order to provide sufficient time to study the issues, Congress imposed an 18-month moratorium on Medicare payments to new specialty hospitals.

Last week, MedPAC reported its preliminary findings on three particular inquiries. First, the Commission examined whether physician-owned specialty hospitals provided care at lower costs than community hospitals. To do this, MedPAC compared Medicare inpatient costs (adjusted by length of stay) for physician-owned specialty hospitals, non-physician-owned specialty hospitals and community hospitals. Second, MedPAC examined the financial incentives for physicians to admit certain types of patients to a heart hospital in which they have an investment interest, and whether markets with physician-owned heart hospitals have higher than average utilization rates of profitable cardiac admissions. A profitable admission was defined as being surgical in nature rather medical and involving patients without significant co-morbidities. Lastly, MedPAC looked at the financial condition of community hospital competing with physician-owned hospitals.

Pending a full report in March 2005, MedPAC’s initial findings suggest that specialty heart hospitals are taking some business from full-service hospitals. It also found some evidence supporting the common criticism that single-specialty facilities “cherry-pick” the most lucrative patients from full-service community hospitals. Nevertheless, the latter do not appear to be suffering financially.

Utilization. In reviewing issues of utilization, MedPAC looked at physician-owned heart hospitals. They compared the number of cardiac surgeries per Medicare beneficiary in markets with physician-owned heart hospitals to communities without such hospitals. Staff concluded there was no statistically significant difference in the services provided between the two communities and there was no increase in Medicare costs in communities with physician-owned hospitals.

Case Referral. The MedPAC study of heart hospitals also looked at the types of cases physician-owned facilities referred to community hospitals and non-physician owned facilities. MedPAC staff found the average costs associated with patients transferred from physician-owned specialty hospitals were higher than those transferred by community hospitals and peer facilities (which are facilities that have a concentration in one specialty, but which are not owned by physicians). MedPAC staff did not attempt to characterize the motives behind the transfers. Specialty hospitals argue the transfers are often required because some complicated services are not available at physician-owned facilities. Community hospital advocates say the motives are financial.

Costs. Preliminary staff analysis also shows physician-owned specialty hospitals have higher costs than competitors, though they say the differences are not statistically significant. Specifically, costs at heart hospitals were 8 percent higher, 17 percent higher for orthopedic hospitals, and 33 percent higher for surgical hospitals.

MedPAC may begin submitting recommendation to Congress as early as December, however, some commissioners have voiced concern about making any recommendations based solely on financial data, and without the benefit of quality and outcomes data from specialty hospitals.

Based on these early findings, the impact of physician-owned specialty hospitals on the market for hospital services do not appear to be as dramatic as depicted. Notwithstanding, ASIPP will continue to follow this issue closely.