<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:21822.wais]
S. Hrg. 109-140
OVERVIEW OF THE COMPETITIVE EFFECTS OF SPECIALTY HOSPITALS
=======================================================================
HEARING
before the
FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL
SECURITY
of the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 24, 2005
__________
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
TOM COBURN, Oklahoma THOMAS R. CARPER, Delaware
LINCOLN D. CHAFEE, Rhode Island MARK DAYTON, Minnesota
ROBERT F. BENNETT, Utah FRANK LAUTENBERG, New Jersey
PETE V. DOMENICI, New Mexico MARK PRYOR, Arkansas
JOHN W. WARNER, Virginia
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Trina D. Tyrer, Chief Clerk
FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL
SECURITY
TOM COBURN, Oklahoma, Chairman
TED STEVENS, Alaska THOMAS CARPER, Delaware
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
LINCOLN D. CHAFEE, Rhode Island DANIEL AKAKA, Hawaii
ROBERT F. BENNETT, Utah MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia
Katy French, Staff Director
Sean Davis, Legislative Assistant
Sheila Murphy, Minority Staff Director
John Kilvington, Minority Deputy Staff Director
Liz Scranton, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Coburn............................................... 1
Senator Carper............................................... 3
WITNESSES
Tuesday, May 24, 2005
John Graubert, Principal Deputy General Counsel, Federal Trade
Commission..................................................... 5
Mark E. Miller, Executive Director, Medicare Payment Advisory
Commission..................................................... 7
Regina E. Herzlinger, Ph.D., Nancy R. McPherson Professor of
Business Administration, Harvard Business School, Boston,
Massachusetts.................................................. 20
Stan Pelofsky, M.D., President, Neuroscience Specialists, and
Physician Owner, Oklahoma Spine Hospital, Oklahoma City,
Oklahoma....................................................... 22
John T. Thomas, Senior Vice President and General Counsel, Baylor
Health Care System, Dallas-Fort Worth, Texas................... 24
James E. Cain, M.D., Practice in Family Medicine, Lampasas
County, Texas.................................................. 26
Ed Jungbluth, Heart Patient, Heart Hospital of New Mexico,
Albuquerque, New Mexico........................................ 28
William G. Plested, III, M.D., Immediate Past Chair, Board of
Trustees, American Medical Association......................... 30
Alphabetical List of Witnesses
Cain, James E., M.D.:
Testimony.................................................... 26
Prepared statement........................................... 96
Graubert, John:
Testimony.................................................... 5
Prepared statement........................................... 37
Herzlinger, Regina E., Ph.D.:
Testimony.................................................... 20
Prepared statement........................................... 74
Jungbluth, Ed:
Testimony.................................................... 28
Prepared statement........................................... 100
Miller, Mark E., Ph.D.:
Testimony.................................................... 7
Prepared statement........................................... 63
Pelofsky, Stan, M.D.:
Testimony.................................................... 22
Prepared statement........................................... 81
Plested, William G., III, M.D.:
Testimony.................................................... 30
Prepared statement with attachments.......................... 103
Thomas, John T.:
Testimony.................................................... 24
Prepared statement........................................... 88
Appendix
John W. Strayer III, National Center for Policy Analysis,
prepared statement............................................. 141
Thomas C. Howard, M.D., President of the McBride Clinic Inc.,
Oklahoma City, Oklahoma, prepared statement with an attachment. 143
Sean Parnell, Vice President--External Affairs, The Heartland
Institute, Chicago, Illinois, prepared statement............... 151
Jane Orient, M.D., Executive Director of the Association of
American Phyusicians and Surgeons, prepared statement.......... 161
Karen Kerrigan, President and CEO, Small Business and
Entrepreneurship Council, Washington, DC....................... 163
Letter to Mark Miller, from Senators Grassley and Baucus, dated
May 5, 2005, with attachments.................................. 167
Questions and responses from:
Mr. Graubert................................................. 172
Mr. Miller................................................... 175
Dr. Pelofsky................................................. 182
OVERVIEW OF THE COMPETITIVE EFFECTS OF SPECIALTY HOSPITALS
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TUESDAY, MAY 24, 2005
U.S. Senate,
Subcommittee on Federal Financial Management,
Government Information, and International Security,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:15 p.m., in
room SD-562, Dirksen Senate Office Building, Hon. Tom Coburn,
Chairman of the Subcommittee, presiding.
Present: Senators Coburn and Carper.
OPENING STATEMENT OF SENATOR COBURN
Senator Coburn. The hearing will come to order. We
attempted to delay to wait for Senator Carper. Hopefully, he
will be here soon. I would like to welcome each of you here.
The subject of today's hearing is an important one.
Congress will soon need to make a decision about continuing a
moratorium to prohibit new specialty hospitals from opening. It
is my belief that if our Nation is to continue having the
world's best healthcare system, we must carefully consider how
our actions will impact the healthcare marketplace in both the
long and the short term.
This hearing will primarily focus on the effects of
competition between and among hospitals in the delivery of
medical and surgical services. We will examine a number of
issues related to effectiveness and quality of care provided by
specialty hospitals, including morbidity and mortality,
operating time and time under anesthesia, nursing turnover,
patient satisfaction, and efficiency.
Our first panel will include witnesses from the Federal
Trade Commission and the Medicare Payment Advisory Commission.
We are pleased to have these witnesses give the Subcommittee
their views on competition between and among specialty
hospitals and community hospitals.
In July 2004, the FTC and the Department of Justice issued
a joint report on the role of competition in the healthcare
delivery system, ``Improving Health Care: A Dose of
Competition.'' This report is the culmination of a 2-year
review of our Nation's healthcare system. It discusses the
balance that must be struck between competition and regulation
in the healthcare marketplace, the impact of certificate of
need policies on competition, and hospital subsidies of the
uninsured and under-insured in non-profitable areas such as
trauma centers.
In March 2005, MedPAC released its study of physician-owned
specialty hospitals. The purpose of the study was to compare
and contrast the differences between heart, orthopedic and
surgical physician-owned specialty hospitals, and community
hospitals.
Regrettably, the Federation of American Hospitals and the
American Hospital Association declined our invitation to be
here today. It is our intention to provide a balanced hearing,
including all parties, prior to the June moratorium. The
purpose of this hearing is to allow a record to be laid down in
the Senate which can be used for future legislative development
or to analyze current and future legislation.
This hearing is intended to allow the Senate to consider
arguments explaining that specialty hospitals have a pro-
competitive effect on the healthcare industry, and that their
elimination will reduce competition, decrease quality of
medical and surgical care, and eliminate efficiencies produced
by these institutions.
I believe that unless we find a way to add a ``true dose''
of competition to the Nation's healthcare marketplace, the
consumer will bear the brunt of our action or inaction. I also
want our panelists and the Senate to know that I believe where
we stand in healthcare in America today is at a crossroads. We
spend 40 percent more per capita on healthcare than any Nation
in the world. Yet, our healthcare is not better.
The question is not competition versus no competition. The
question is how do we spend the money the best way to get the
most people cared for in the most efficient way with the fewest
errors and not have redundancy of service and inefficiency as
we deliver that care.
Seven percent of the cost of healthcare today is because of
the wrong incentives, the incentive of physicians ordering
tests not because their patients need it, but because they feel
a need to protect themselves from malpractice.
If you look at the cost of pharmaceuticals in our country
and the lack of true competition among branded items and
patented items that all do the same thing, what you find is
there is no competition in those particular brand name drugs
treating the same disease under different chemical modalities.
The fact is that competition is the very thing that has
been lacking in healthcare. The idea that you can't rate a
physician--consumers need to be able to rate their physicians.
They need to know if they are a good physician or a bad
physician. If they are a bad physician, they need to get better
or get out. That is what American consumers deserve. That is
what we ought to give them.
So the purpose of this hearing is to allow a good body of
information on competition to come before the Senate as we
start down the first track--this is not the last; this is the
first time, and it is my goal that we will inform the Senate as
to the information it needs to make good decisions on how we
truly allocate this scarce resource. To not do so, means that
for those people who don't have access today, who are under-
treated and have minimal access or have lack of affordability,
we will be letting down.
I would like to recognize Senator Carper for an opening
statement.
Senator Carper, welcome. I am glad you made it.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Mr. Chairman, how are you doing? I
apologize for running a few minutes late. We just finished our
caucus luncheon and I came as quickly as I could. Thank you to
our witnesses for being here.
Mr. Chairman, I am happy to be with you today and our
witnesses and our guests to discuss the issue of specialty
hospitals and their role and impact on our healthcare system.
One of the great things about this job is you learn a lot
literally everyday. Sometimes, we learn things we didn't want
to know. I didn't know a whole lot about specialty hospitals,
so one of the good things that has come out of this is I have
learned a good deal. I have got a lot more to learn, I am sure.
We appreciate our witnesses being here and testifying. Just
by looking at the expressions on their faces, I can tell they
are delighted to be here. Our audience cannot see that, but
these guys are happy campers. Particularly, I want to thank
Mark Miller and all the folks at MedPAC for the hard work that
they have done over the past year and a half since the MMA
mandated that they study this issue. One of the things I
learned is MedPAC is not a political action committee. My staff
said, no, they are not; if they were they wouldn't be coming to
this hearing.
We know we have a big task ahead of us to complete in just
15 months, but you have risen to the challenge and we
appreciate all the work that you do not just for the Congress,
but really for our country.
I am sure we all know that this has been a controversial
issue. Over the past decade or so, we have seen the number of
specialty hospitals, I think, triple. We don't have any in
Delaware, but I understand they have a few in Oklahoma.
Proponents of specialty hospitals tell us that they give
doctors more say in the management of hospitals, that they
provide better quality, more efficiency and higher patient
satisfaction. They also say that they inject competition into
the healthcare marketplace.
However, I think we ought to keep in mind that in 2003
there were a couple of GAO studies that lead to concerns about
specialty hospitals' rapid growth, about the possible conflicts
of interest that could exist when physicians have an ownership
interest in the hospitals to which they refer, and whether
specialty hospitals might represent an unfair kind of
competition that could harm community hospitals, and in turn
harm our communities by making it harder for hospitals to
provide needed care.
These concerns led the Congress to include a provision--I
think it was in the 2003 Medicare Modernization Act--which
placed an 18-month moratorium on physician self-referral to new
specialty hospitals. This provision was meant to serve as a
sort of cooling-off period during which the Congress could
further study the relevant issues.
The moratorium, I think, is set to expire next month, and I
am pleased that we are continuing to examine the issue so that
we can decide how best to proceed. The focus of today's hearing
is the role that specialty hospitals play in healthcare
competition and whether this is the type of competition that we
want to foster.
We are going to hear today about whether specialty
hospitals do, in fact, result in lower costs or better quality,
as their proponents claim, and we are going to hear some
different perspectives on that, which is good. MedPAC's work,
for example, has shown that care provided by specialty
hospitals, in their view, might actually cost more than care
provided in community hospitals. Other recently published
research has shown that specialty hospitals do not necessarily
provide higher quality care.
I, myself, am all for competition as long as it is fair
competition. I suspect I speak for most of the people in this
room. When it comes to specialty hospitals, I have heard from
some people that the competition may not be taking place on a
level playing field because specialty hospitals can essentially
select their patients, while community hospitals treat everyone
in the community, and also have to provide many unprofitable
services like emergency care and intensive care services.
However, I have also heard from physicians who believe that
investment in specialty hospitals gives them an opportunity to
play a larger role in making decisions about how best to
provide care. Ultimately, I believe that a shared goal of all
involved is to provide the best possible care for all patients,
for all conditions, in all facilities. The question we must
answer is are we doing just that.
In closing, Mr. Chairman, let me just say I think we would
also agree that as a Nation we need to reduce healthcare costs
and improve healthcare quality in all sectors of healthcare. We
will spend over $1.5 trillion on healthcare in this country
this year. Yet, despite this spending, 45 million Americans
lack health insurance. For Americans who do have health
insurance, premiums continue to rise. Rising healthcare costs
are becoming an increasing burden on small businesses and big
ones, too, making us less competitive around the world.
One of the things that I hear most, whether it is in
Delaware or all around the country, is the need to control
rising healthcare costs and improve outcomes. These increasing
costs don't correspond to increased quality. Research has shown
that the quality of healthcare in the United States varies
widely, and as many as 98,000 deaths a year are caused by
preventible medical errors.
Finally, I am interested to learn the role that specialty
hospitals might have to play in this effort. However, I believe
that any competition between specialty hospitals and our full-
service hospitals must take place on a level playing field. I
am interested to hear the perspectives of all of our witnesses
regarding this important issue, and I thank you for coming and
for this opportunity.
Thank you.
Senator Coburn. Thank you, Senator Carper.
I am going to ask our witnesses to limit their oral
testimony to 5 minutes. Your complete statements will be made a
part of the record, and we will hold our questions until our
first two witnesses have finished their testimony.
I first would like to recognize John Graubert. He is the
Principal Deputy General Counsel of the Federal Trade
Commission. Mark Miller is the Executive Director of the
Medicare Payment Advisory Commission.
Mr. Graubert.
TESTIMONY OF JOHN GRAUBERT,\1\ PRINCIPAL DEPUTY GENERAL
COUNSEL, FEDERAL TRADE COMMISSION
Mr. Graubert. Thank you, Mr. Chairman, and I appreciate the
opportunity to appear before you today to discuss new entry
into hospital competition and related issues.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Graubert appears in the Appendix
on page 37.
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The Federal Trade Commission has gained familiarity with
these issues through the hearings held together with the
Antitrust Division of the Department of Justice which led to
the report which the Chairman mentioned, ``Improving Health
Care: A Dose of Competition,'' issued jointly by the Commission
and the Department of Justice in July 2004, as well as through
the Commission's substantial experience in enforcing the
antitrust laws in healthcare markets.
The joint hearings and the joint report broadly examined
the state of the healthcare marketplace and the role of
competition and consumer protection in satisfying the
preferences of Americans for high-quality, cost-effective
healthcare. The joint hearings took place over 27 days, from
February through October 2003, following a Commission-sponsored
workshop on healthcare issues in September 2002.
The Commission and the Department heard testimony from
about 240 panelists, including representatives of various
provider groups, insurers, employers, lawyers, patient
advocates, and leading scholars on subjects ranging from
antitrust and economics to healthcare quality and informed
consent.
Together, the hearings and workshop elicited 62 written
submissions from interested parties. Almost 6,000 pages of
transcripts of the hearings, and all written submissions are
available on the Commission's website. In addition, staff of
the Federal Trade Commission and the Department of Justice
undertook independent research for the report.
Our written statement for this hearing focuses specifically
on a few of the issues addressed in this report that relate to
new entry among hospitals, and I would emphasize three main
points.
First, vigorous competition can have important benefits in
the hospital arena just as it has in the multitude of markets
in the U.S. economy that rely on competition to maximize the
welfare of consumers. Competitive pressure can lead hospitals
to lower costs, improve quality, and compete more efficiently.
Competitive pressure also may spur innovation and new types of
competition.
In hospital markets today, some new entrants specialize and
provide only a limited portion of the in-patient and out-
patient services that general hospitals tend to provide. Of
course, specialty hospitals are not new. In recent years,
however, an increasing number of single-specialty hospitals
have entered or attempted to enter particular markets to
compete with hospitals in providing certain types of hospital
services such as cardiac or orthopedic surgery.
Ambulatory surgery centers have emerged to perform surgical
procedures on patients who do not require an overnight stay in
the hospital, thus providing additional competition to hospital
services in this area. Testimony at our hearings reported that
this entry has had a number of beneficial consequences for
consumers who receive care from these providers.
Second, when new firms enter or threaten to enter a market,
incumbent firms may seek to deter or prevent that new
competition. Such conduct is by no means unique to healthcare
markets. It is a typical reaction of incumbents to possible new
competitors in any market. In certain circumstances, such
conduct may violate the antitrust laws. Antitrust scrutiny,
however, sometimes may not reach certain anti-competitive
conduct.
For example, the Noerr Pennington doctrine immunizes from
antitrust scrutiny conduct that constitutes petitioning of the
government, even when such petitioning is done to restrain
competition or to gain advantage over competitors. Moreover,
the State action doctrine shields from antitrust scrutiny a
State's activities when acting in its sovereign capacity.
In the context of hospital competition, the combination of
these two doctrines can offer antitrust immunity to hospitals
or other groups that wish to lobby State officials to deny a
potential entrant, such as a single-specialty hospital, the
Certificate of Need it may require to open its doors. State CON
programs generally prevent firms from entering certain areas of
the healthcare market unless they can demonstrate to State
authorities an unmet need for their services. The FTC and DOJ
report concluded that market incumbents can too easily use CON
procedures to forestall competitors from entering an
incumbent's market.
Not all States have CON requirements. Indeed, almost all of
the recent entry by single-specialty hospitals has taken place
in States that do not have CON requirements. Our report
recommended that States with CON programs should reconsider
whether these programs best serve their citizens' healthcare
needs.
Finally, policymakers should consider the extent to which
regulatory distortions may affect competition among hospitals
and other firms. Although entry by single-specialty hospitals
and ambulatory surgery centers has provided consumer benefits,
Medicare's administered pricing system has driven in
substantial part the emergence of such facilities. Medicare's
administered pricing system, albeit inadvertently, can make
some services very profitable and others unprofitable.
Several panelists at our hearings expressed concern that
single-specialty hospitals and ambulatory surgery centers would
siphon off the most profitable patients and procedures under
Medicare reimbursement policies, leaving general hospitals with
less money to cross subsidize other socially valuable, but less
profitable, care.
The FTC/DOJ report pointed out that, generally speaking,
competitive markets will eventually compete away the higher
profits and super-competitive profits that are necessary to
sustain such subsidies. And we concluded that, in general, it
is more efficient to provide subsidies directly to those who
should receive them rather than to obscure cross subsidies and
indirect subsidies in transactions that are not transparent.
The FTC/DOJ report recommended that governments should
reexamine the role of subsidies in healthcare markets in light
of their inefficiencies and potential to distort competition.
Indeed, I note that CMS has underway, as everyone knows, a
study of Medicare payment rates that may address some of those
issues.
I would like to thank the Subcommittee for inviting the FTC
to participate and taking the time to consider our report, and
we will be happy to answer any questions later.
Senator Coburn. Mr. Miller.
TESTIMONY OF MARK E. MILLER, PH.D.,\1\ EXECUTIVE DIRECTOR,
MEDICARE PAYMENT ADVISORY COMMISSION
Mr. Miller. Chairman Coburn and Ranking Member Carper, I am
Mark Miller, the Executive Director of the Medicare Payment
Advisory Commission, which is called MedPAC. MedPAC is a small
congressional support agency that advises Congress on a range
of Medicare issues. The staff reports to 17 commissioners who
use our work to make those recommendations to Congress.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Miller appears in the Appendix on
page 63.
---------------------------------------------------------------------------
The Commission is comprised of 17 members with rotating
terms that are appointed by the Government Accountability
Office. They come from various parts of the health delivery
system and from the health policy sector. For example, there
are five physicians, three managers of hospitals and home
health agencies, two nurses, a former Senator, a former CMS
administrator and two health economists. The Commission was
mandated by the Congress in the MMA to report on cardiac,
orthopedic and surgical physician-owned hospitals, and I would
like to briefly review what we found for you.
The Commission found strong evidence, as did CMS, that
specialty hospitals focus on less complicated patients than
community hospitals. As you know, Medicare pays a fixed price
for an admission at a hospital. In our analysis of the payment
system, we found that Medicare systematically overpays for less
complicated patients. And the reverse is also true; Medicare
underpays for more complicated patients.
We found that physicians are investing in specialty
hospitals that focus on the type of patient that Medicare
overpays. Since Medicare overpays for these less complex
patients, specialty hospitals have a greater ability to earn
profit whether or not they develop efficiencies.
In the Commission's view, this is an unlevel playing field.
Our report contains a set of payment recommendations that would
create a more level playing field among all hospitals. A fair
payment system would allow hospitals to profit through
efficiency rather than simply through the patients that they
focus on.
There were several other questions in the mandate, and to
touch on those, the Commission found mixed results on whether
specialty hospitals are more efficient than community
hospitals. On the one hand, they did find that they had shorter
lengths of stay, which is a measure of efficiency. However, we
could not establish that they had lower costs per case. It is
important to note that this is the kind of result that could
change if one examined this market later in its development,
the specialty hospital market.
The Commission report finds that the appearance of a
specialty hospital in a market generally did not increase the
number of services provided per beneficiary, which is one of
the fears that people had. However, what this means is that
specialty hospitals tend to get most of their business from
community hospitals that are existing in the market.
Turning to another question that the Congress asked us, the
impact on community hospitals, we found that they experience
small reductions in their Medicare revenues, but they appear,
so far, to be able to compensate for this loss. We reached that
conclusion because their overall profitability appeared to be
unaffected by the entrance of the specialty hospitals in their
markets. Once again, it is important to note that this is the
kind of result that could change, depending on how mature the
market was.
The Commission found that specialty hospitals serve fewer
Medicaid patients than community hospitals, although there is
some variation depending on whether a specialty hospital runs a
fully operating emergency room. The Commission found that
cardiac hospitals get about two-thirds of their patients from
Medicare and orthopedic and surgical hospitals get about two-
thirds of their patients from private payers.
The Commission recommended that the current moratorium be
extended another 18 months beyond the 18 months that were
included in the MMA. The Commission reached this conclusion for
several reasons: The evidence that I pointed out that specialty
hospitals tend to focus on patients where Medicare overpays,
and wanted to give the Congress and the Secretary time to make
changes to the payment system because the evidence on specialty
hospitals' efficiency was mixed.
At the time that we completed our report and turned it in,
there were no results on quality. Neither the Cram study, nor
CMS's work had been published. Our mandate did not include us
looking at quality. It is important to point out that there is
continued interest on the part of the Commission in examining
the issue of physician investment and its impacts on efficiency
in the delivery of care.
One final point about our report. The Commission
recommended that the opportunities for gain-sharing be
encouraged. Physicians and hospitals should be allowed to share
in savings from improved efficiencies, and under current law
physicians are often prevented from sharing in those gains.
The specialty hospital physicians we talked to on our site
visits often noted that they wanted to work with community
hospitals, but pointed out frustrations with the community
hospitals and certain barriers. One of those barriers can be
addressed by the Congress and the Secretary by expanding gain-
sharing.
In summary, I want to be clear. Competition and
specialization are not the problem, and specialty hospitals may
be an important contribution to competition. However, the
immediate problem is that there is an unlevel playing field in
Medicare reimbursement that rewards focusing on patients where
Medicare overpays and discourages efficiency.
I look forward to your questions.
Senator Coburn. Well, thank you for your testimony.
Let me go to you, Dr. Miller, first. Since there are no new
specialty hospitals out there, how is 18 months more going to
help you make a better decision? I know we have to do some
payment changes, but how does 18 more months of no new
competition in healthcare make a difference in terms of the
data that you are going to collect?
Mr. Miller. Actually, there is additional data that would
come in. We had to look at 2002 data for the purposes of doing
our analysis because many of the questions that Congress asked
us were empirical in nature. Between 2002 and 2003, there are
more specialty hospitals that actually entered the market. I
think our sample size could actually be significantly larger
and would allow us to look at more hospitals.
Senator Coburn. What is ``significantly'' to you?
Mr. Miller. We have 48 specialty hospitals in our sample. I
think we could have that number again if we looked at an
additional year.
Senator Coburn. And what would you expect to change in that
year?
Mr. Miller. There are two or three things that I think
potentially could change. The finding on cost, for example,
when I laid that out for you--it is actually more subtle than
that. We found that costs in specialty hospitals were actually
higher than community hospitals, which is completely
counterintuitive. And as analysts, we entered this analysis
expecting to find the opposite. It may very well be that in a
more mature specialty hospital market, that result would be
different.
To give you another side of the argument, we also found
that there was no impact on community hospitals, and here again
the results were trending in a direction showing that Medicare
revenues, for example, were being affected. That may be the
kind of thing that, over time, you saw a clearer impact of the
specialty hospitals on community hospitals.
Senator Coburn. Let me ask you a question about level
playing field. You are stating that maybe the payment rates are
too high for certain procedures and that those tend to be moved
to a specialty hospital. And therefore they have revenue with
less costs associated with them, but yet they are not more
efficient by your own testimony. That doesn't create an unlevel
playing field.
If, in fact, their costs are higher, it is not an unlevel
playing field if the margin between them is less for those that
are going to a specialty hospital by your very testimony. So
if, in fact, that is the case and we continue to study this for
18 months, how would you account for the fact that the
community hospitals don't pay income taxes and don't pay
property taxes? That is an unlevel playing field in the
opposite direction.
So when you size it all up, how do you get 18 months more
data that shows a significant level or unlevel playing field?
It seems to me you can take that argument either way. It is
unlevel in terms of the tax structure afforded to community
hospitals in property tax and income tax versus supposedly a
cost benefit in a private hospital, which your own study says
wasn't the case. It is not more efficient, although their
length of stay is significantly less, their complications are
significantly less, their infection is less, but their cost
isn't less. Explain that to me.
Mr. Miller. You have a lot of questions in there, so let me
just get this down. The first thing I want to address is the
notion of the tax treatment. This is not an area that we have
studied. In terms of whether that is fair or unfair, there is
nothing that the Commission has done that----
Senator Coburn. Well, let me interrupt you for a minute. If
you are going to look at level playing fields and you are going
to look at revenues versus costs, versus bottom line, because
that is where capital comes from to reinvest in the healthcare
field, how can you say that on one end we are going to look at
an area that creates an unlevel field and in another area we
are not going to look at an area that creates an unlevel
playing field?
Mr. Miller. Well, our mandate was to look at specialty
hospitals and their role in Medicare, and I think the FTC is
also pointing that out. A lot of people view the Medicare
payment system as one of the stimuli in this marketplace that
drives the development of these hospitals.
Senator Coburn. Is it your viewpoint that one of the main
stimuli is Medicare payment rates?
Mr. Miller. I think it plays a substantial role, yes. Now,
to your point on cost, I think the concern is when we found
this result that they had higher costs, we were a little
perplexed by it and so we talked to people in the specialty
hospital industry. They said there could be a lot of things
going on. We have higher start-up costs. We may have more
staff. We may be paying our staff more. We certainly have more
amenities, those types of things.
I don't think those are bad things at all, but the point is
that if two hospitals are competing and you are going to
provide more amenities, it should be, in our view, on the basis
of having a comparable payment for a comparable patient. And if
you can produce efficiencies that allow you to provide those
amenities, then you should prevail in the market and you should
be able to do well. But what happens now is if the specialty
hospitals focus on less complicated patients, their payments
far exceed what their costs actually are even when they have
higher costs.
Senator Coburn. Do you think that the heart hospitals focus
on less complicated patients?
Mr. Miller. Yes. I think there are two things that happen
in the heart hospitals, and it is a little bit complicated.
They pick DRGs, the payment categories, that are more
profitable and then within that there is some patient
selection. For orthopedic and surgical, the story is a little
bit different. The payment categories they pick are about
average, but they definitely have stronger selection where they
pick less complex patients.
Senator Coburn. So if the payment changes were made, is it
your feeling that we would see less incentive into specialty
hospitals?
Mr. Miller. That is our strong view, and the most important
point that our report is trying to make is that a lot of this
signal can be removed by re-torquing and re-balancing the
payment system.
Senator Coburn. Well, my time is up. We will come back.
Having been a practicing physician, I will tell you it doesn't
have anything to do with it. The only thing a doctor has to
sell is their time, and having that time scheduled efficiently
and effectively to where you get time utilization is why
doctors--where 6 may own a hospital, but 60 go there to
practice, it is because they are accommodating the physicians'
efficient utilization of their time.
Senator Carper.
Senator Carper. Dr. Miller, go back. What was the last
thing you said about the most important finding? Say that
again.
Mr. Miller. I am not sure I remember. I am sorry.
[Laughter.]
Senator Carper. Neither do I, but I want to.
Mr. Miller. In response to this, I think the last thing I
said was our most important finding was that we felt that the
payment system was distorted and sending an improper signal.
Based on the type of patient that specialty hospitals focus on,
Medicare tends to overpay. And we believe that through the
series of recommendations that are included in our report, you
can correct most of that.
Senator Carper. Run through some of those recommendations
in the report for me.
Mr. Miller. There are three or four recommendations, and I
won't get really detailed, but the first and foremost to track
on is that you would have an adjustment for the severity of the
patient that you see. So the way it stands right now,
Medicare's DRG is based on an average, but within that average
there is a range of patients. So there are systems that allow
you to tailor your payment more precisely to the type of
patient you pick up.
Second, these are pretty technical--in constructing the
weights, the relative weights paying more for this surgery,
less for that, you would use cost instead of charges. We
believe there are distortions being entered into those weights
because of hospital charging practices.
Third, and this is highly technical--you would derive the
average first at the hospital level and aggregate up to the
national level instead of starting at the national level. There
are a whole bunch of reasons that you do that, but one is that
it eliminates some of the differences in charging behavior
among the hospitals.
Finally, we make a recommendation that you should adjust
the outlier policy to have it tailored more precisely to the
category of patient that experiences the outliers. And it is
kind of complicated, but the way it currently----
Senator Carper. Try to say this in a way that even I could
understand it, OK?
Mr. Miller. I will try. As it currently stands, it distorts
some of the weights.
Senator Carper. All right, thank you.
Mr. Graubert, a question, if I could, and I may ask Dr.
Miller to respond to this as well. Mr. Graubert, I think your
report cites testimony discussing specialty hospitals' better
outcomes, and I think better clinical standards and their
ability to produce services less expensively. Your testimony
also mentions that the entry of specialty hospitals has had a
number of beneficial consequences for consumers. However, I
don't believe that you elaborate a great deal on what those
beneficial consequences are.
Also, since the release of your report--I believe it was
last year, 2004--there have been a number of studies that don't
necessarily validate the claim that specialty hospitals have
higher-quality outcomes or lower costs. MedPAC's work, for
example, showed that specialty hospitals actually had, in their
view, higher costs, despite their shorter lengths of stay.
I think there was another study published by a Dr. named
Peter Cram in the New England Journal of Medicine that reported
that in hospitals with similar volumes, mortality for specialty
hospitals and general hospitals were really about the same
after adjusting for patient severity.
I just want to ask you, if I could, your reaction to some
of these newer findings, especially maybe Dr. Cram's work that
is published in the New England Journal of Medicine, and what
do you believe the beneficial consequences of specialty
hospitals are to consumers.
Mr. Graubert. Although it is true, Senator----
Senator Carper. That was a long question, wasn't it?
Mr. Graubert. I will do my best, Senator.
Senator Carper. Thank you.
Mr. Graubert. It is true that it is difficult to analyze
cost of service in this area because of the overlay of
administered pricing. What our report did was collect comments
of our panelists. We did not independently do a great deal of
analysis, and have not since. Our interest is in any meaningful
source of potential competition, and it was interesting, I
think, that there was quite a bit of testimony that this
competition actually was beneficial.
Most of the testimony--and this is cited on page 19 of
Chapter 3 of our report; I believe it is Chapter 3, yes--does
deal with patient satisfaction issues, quality of care issues.
That was predominantly where most of our testimony came. There
was not a lot of testimony, I don't believe I can recall
offhand, on the actual economic efficiencies of the specialty
services. But some of the points have already been mentioned, I
think, in terms of patient satisfaction, and also more
efficient use of physician services, more efficient scheduling
of physician services, more control by physicians over their
time.
There was testimony that the cost of care might eventually
be lowered because hospital stays were shorter and there were
fewer post-operative complications, which is a subject that Dr.
Miller had addressed. So I would have to defer to agencies with
more of a healthcare-specific mandate to determine, under an
administered pricing scheme, how the costs should be reflected.
From a general antitrust enforcement point of view,
obviously we believe that competition should solve these
problems to the maximum extent possible, and it is intriguing
to use that there is a potential here for such competition.
Senator Carper. Mr. Chairman, if I could, I would like to
ask Dr. Miller to comment on this Cram study, as well, whether
you believe from the available research that specialty
hospitals do provide better quality care.
Mr. Miller. This was not part of our mandate, but here is
what I know about what is out there. The New England Journal of
Medicine article that you refer to by Peter Cram went through
and compared Medicare patients in specialty and community
hospitals. He controlled for severity of patient and volume of
service. Actually starting off, he found that there was higher
quality in specialty hospitals.
Then when he controlled for severity and volume, he found
that those differences disappeared, and his conclusion is that
there is nothing peculiar to specialization that produces the
quality. It is the severity of the patient that you are dealing
with and the volume of service that you are providing.
There has been a longstanding point in the literature that
says if you treat more heart patients, you have better
outcomes. And his point was really those seem to be the drivers
here, not so much the specialization. That is one point.
You are certainly aware of the CMS report. The CMS report
found a couple of things on specialty hospitals. They found
that in-hospital mortality is, in fact, lower among specialty
hospitals when you control for severity. But they also found
that readmission rates were higher, and that patients were more
likely to have to go back into the hospital. So there was
something of a mix there, and that is what I understand from
CMS, but obviously they should speak for themselves.
Senator Carper. Good. Thanks very much.
Senator Coburn. Dr. Miller, you talked about the laws that
prevent physicians from sharing in cost savings that are in
hospitals today and incentivizing physician participation in
that. It strikes me as curious that we would say that would be
alright, but we have concerns with physician ownership in terms
of it might create some other obligation. In every other area
in our country where we have markets allocating resources, we
get pretty good efficiency.
If, in fact, CMS sends the signal that they are going to
readjust rates so that the rates are truly up for those with
higher severity of illness, more outliers, better payment for
the more complicated patients, significantly lower payment for
those with less complications, why in the world would we need
to study it any longer? Why wouldn't we want the market to go
on and just let it work?
If that is what is going to happen and we all know that is
what is going to happen, is that not a signal to the market
that people might pause and say if, in fact, I am only doing
this so I can cherry-pick patients, I wouldn't come into this
since I am not going to have any advantage from cherry-picking
patients? Would that not be a signal that would allow the
market to truly function as it should?
Mr. Miller. I think that is a fair point and I think that
in the Commission's deliberations, this point was made and
discussed many times. There is definitely a view among
commissioners that if you aggressively move on changing the
payment system, that alone will be sending signals to the
marketplace that say don't enter unless you are really here to
play for a more efficient or a different kind of product.
However, the Commission is comprised of 17 people, and as I
tried to lay out in my opening statement, there were still some
remaining concerns. There was this somewhat surprising result
that the costs were not lower. There was the surprising result
that the effects on the community hospital that people expected
to see didn't seem to materialize. So that left some
commissioners uneasy. There are also commissioners who--and I
tried to be direct about this--have concerns about physician
investment and the potential impact it has on delivery of care.
So those issues still remain for some commissioners.
Senator Coburn. But doesn't that disregard the fact that
the vast majority of volume done in most of the specialty
hospitals is done not by the owners, but by other physicians
who are utilizing those hospitals?
Mr. Miller. I am not sure how to answer that question. I
know from the CMS work that physician ownership is related to
how much you refer to a specialty hospital. You may be correct
that most of what goes on in specialty hospital is unrelated to
the owners.
Senator Coburn. But carry that to an extreme. Say I am a
cardiac surgeon and I am going to send this patient over there.
By the time you get down to the bottom line at a specialty
hospital, I might make $30 out of it, or $50 out of it or $70
out of it. What you are asking me to believe as a practicing
physician is that $70 times two a day, times 7 days a week, is
more important to me than my time efficiency and time
utilization.
I didn't see anything in either report, neither yours nor
CMS's or anybody else's, that has to do with one of the reasons
I think specialty hospitals came into existence, and it doesn't
have anything to do with money. It has to do with the ability
of physicians to be able to practice.
Mr. Miller. Can I say something about that? Because
actually I think our report does say something about that. I
think we were really on point on this. In addition to grinding
through all the claims data and doing all the empirical
analysis, we went out to specialty hospitals and community
hospitals and talked to people, and there was a very clear
message.
And I want to be clear about this, because I think you are
correct on this point that physicians are very frustrated with
community hospitals in certain circumstances and they do feel
that it is hard to come in and operate on a set schedule and be
efficient about moving that business through. And I think there
is some truth to that and I think there are community
hospitals, in our conversations with them, who acknowledged it
and said we had a wake-up call and we needed to change how we
were running our business in order to accommodate these
physicians.
Senator Coburn. Isn't that exactly what we want competition
to do?
Mr. Miller. Absolutely, but I also want to make another
point, which is you said that this was only worth a few
dollars. I mean, that is potentially the case, but think about
it this way. If we are talking about a payment rate that
significantly overpays on costs, let's hypothesize a group of
physicians. You have cleared your fixed costs in the hospitals.
You start filling those beds. It is not just $10 and $20 and
$30. It can really accumulate. And to be also direct on the
other side of the conversation, there were physicians in our
site visits who said point-blank, I am doing this in order to
increase my income.
Senator Coburn. Well, there is no question about that, but
that is why anybody does anything in a market economy. That is
why they take risks.
Mr. Miller. I am not taking issue with that.
Senator Coburn. Before the Hill-Burton Act, the vast
majority of the hospitals in this country were owned by
physicians.
Let me go back. I want to reinforce for the record that
sending a signal by CMS that the rates are going to change--
knowing that signal is out there, how will that change anything
in terms of your next 18 months of study in terms of anybody
coming into the market if there was not a moratorium?
If the rates are going to change, then people are going to
make their decisions based on what they perceive the declining
rate would be. Why would we want to study it longer when we can
have the market allocate much better than CMS has ever been
able to market healthcare? My contention is because we are
trying to manage this, we are having trouble--you would have to
admit we are having trouble managing healthcare costs because
we can't find every hole.
Why would we not want the market to allocate that resource,
since you are going to send the signal that the reimbursements
for those less complicated cases are going to go down?
Mr. Miller. The only answer that I can offer you is that we
at MedPAC agree with that part of your statement that the most
important thing to do is to aggressively move on changing the
payment system, because we think that there is a clear
distortion and we think it is the most important thing to do to
reset the clock here and make this work better.
However, I also have to say there are parts of the
Commission who remain concerned about the role of specialty
hospitals, for some of the reasons that I went through earlier
in my statement. That is about as direct as I can be with you
on that.
Senator Coburn. Senator Carper.
Senator Carper. Thanks, Mr. Chairman.
Mr. Miller, I think the MedPAC report recommended that the
moratorium on physician self-referral be extended until January
2007, but it did not go so far as to recommend that the
moratorium be extended permanently. I believe that the Chairman
and Ranking Democrat on the Finance Committee might be looking
at an approach that says let's extend the moratorium
permanently. I don't know if they have introduced that or not.
The MedPAC report, though, noted ``physician-owned
providers could have a competitive advantage over other
facilities because physicians influence where patients receive
care.''
Can you discuss with the Chairman, and me, MedPAC's
concerns with physician self-referral? Can MedPAC's concerns be
addressed solely through adjustments to the Medicare payment
system or is there just a larger issue at play?
Mr. Miller. Let me answer your questions.
Senator Carper. Thank you. [Laughter.]
Witnesses don't always do that, so it is welcome.
[Laughter.]
Mr. Miller. In fact, when they say that, they probably are
not going to.
Senator Carper. Or sometimes they answer questions, just
not the ones we ask.
Mr. Miller. I think it is important to point out that it is
correct that MedPAC did not say extend the moratorium
indefinitely, or ban specialty hospitals. In fact, I think the
quote is something along the lines of that would be too severe
of a remedy; there may be some promise here or there may be
some value here. But nonetheless, the Commission did say extend
the moratorium.
On self-referral, the best I could explain it to you, I
think, works like this. There were some studies somewhere in
the 1990's, I think, that looked at physician ownership of
laboratory and imaging services.
Senator Carper. I remember those.
Mr. Miller. OK, and if you remember those studies, then you
know that there were some eye-popping results there on how much
services were generated by physicians who owned imaging
services versus physicians who didn't for controlled
populations, similar patients, that type of thing, and I mean
eye-popping numbers--twice as many MRIs relative to physicians
who didn't own MRI machines, 29 percent more CT scans relative
to physicians who didn't own them.
Now, to be clear, the Commission also said we are not sure
that same concern arises where specialty hospitals are
concerned because surgery is often a different prospect than
just let's run another MRI on somebody. So it was that kind of
concern along with the uncertainty or the lack of clarity in
some of our findings on cost, the impact on the marketplace,
and the fact that no quality data existed at the time that we
finished the report. I think that configuration of results left
some of the commissioners concerned about it. But on self-
referral, it is the notion that somebody may be generating or
routing patients on less than completely clinical grounds.
There was one other thing. I think you said something about
would solely----
Senator Carper. What I said was could MedPAC's concerns be
addressed solely through adjustments in the Medicare payment
system or is there a larger issue at play.
Mr. Miller. And here is the best way I think I can explain
the situation on the Commission. It may be sufficient to fix
the payment system, but at the point when we issued the report
on the date it was due, some commissioners still had
outstanding concerns. So the report says we need these changes
to the payment system. The report even says the Congress could
consider lifting the moratorium if the payment system changes
and gain-sharing were in place, but also there are still these
concerns on self-referral and the Commission might come back to
that issue. So that was the best way I could explain how the
Commission broke down on that issue.
Senator Carper. Mr. Chairman, let me ask about just one
last issue, if I could, and I am going to direct this again to
you, Dr. Miller, and if time permits, I am going to ask Mr.
Graubert to comment, too.
One of the concerns that I have heard over and over again
about specialty hospitals is that they could be further
segmenting our healthcare delivery system, treating well-
insured, healthier patients at specialty hospitals, while
treating few, if any, Medicaid and uninsured patients. I am
concerned about this trend and I know some others are, too, and
concerned about an overall trend in our healthcare system of
wide health disparities between the insured and the uninsured,
and also minority patients.
It has been brought to my attention that MedPAC may have
data that specialty hospitals are treating half as many
uninsured minority patients as full-service hospitals. I
understand that even in the same market, among patients who all
have Medicare coverage, they are still treating half as many
minority patients.
Dr. Miller, can you shed any light at all on this issue?
Any idea why this is occurring, and should this be the subject
of some further study?
Mr. Miller. I am not sure I can shed light. Just to clarify
a couple of things, it is very clear from our analysis when we
look at discharge data that specialty hospitals are serving
significantly fewer Medicaid patients. There are lots of
reasons why that could be the case. We don't particularly have
a definitive analysis that says it is the location of the
hospital. It could be the contracts that they are involved in.
It could be any number of things.
On the issue of the mix of the patients by race, I think my
response is the same. Exactly what is generating that kind of
pattern is not something that we looked directly at. You can
observe it in the data. It is definitely there, as you said,
but what generates that actual result I don't think I could
say.
Senator Carper. Mr. Glauber, any idea why we are seeing
this kind of data?
Mr. Glauber. There is an interesting empirical question
there, Senator, and the only data that I can recall that we
dealt with in our report was the GAO data, which as I recall
showed, in fact, only very modest differences in the Medicare
rates of admissions. So as far as we were aware at the time we
wrote the report, there was not a very noticeable difference.
There might be other data that we are not aware of and
there might very well be a healthcare policy issue lurking
here. But, again, from a competition point of view, I don't
think that there is an independent problem in trying to
encourage competition to the extent possible in the marketplace
while simultaneously taking care of any other healthcare policy
concerns.
Senator Carper. Thank you. Thanks to both of you.
Senator Coburn. I just think for the record if you have
that data, we ought to have it in the record, if you can
substantiate that data. I believe that your report showed like
an 8- and a 12-percent community hospital Medicaid rate, and I
think there was a 2- or 3-percent difference in Medicare.
Do you have that number available?
Mr. Graubert. I am looking at a table on page 21 of Chapter
3 again, and in the orthopedic hospitals there was a difference
of between 8 and 10 percent, cardiac hospitals a difference
between 3 and 6 percent, and Medicaid admissions for women's
health was 37 to 28 percent.
Senator Coburn. But there is no data in your report or in
your report that shows a difference in minority utilization?
Mr. Graubert. I am not familiar with that.
Senator Coburn. And is there any published data that you
know that to be factual?
Mr. Miller. What Mr. Carper is referring to is that there
was a data request from the Senate Finance Committee that we
responded to, and I believe that is what he is referring to.
That was not in the report.
Senator Coburn. But there is no reported data that would
show that, in fact, is the case?
Mr. Miller. At the request of the Senate Finance Committee,
they asked us to review the admissions in a data set that is
called MedPAR, which is where the admissions come from, and
asked us to report it for them by race. The conclusions of that
analysis were that there was something like--and these are
using the categories that the MedPAR lists patients by. The
percentage black was like 3 percent for specialty hospitals,
compared to, if I am correct and remember correctly, about 9
percent for other hospitals.
Senator Coburn. And this is race-adjusted for the
communities that they are in?
Mr. Miller. Yes, and that is a really good question. It is
looking at hospitals within the given marketplace to control
for the fact that you have the mix within a----
Senator Coburn. Would you be so kind as to submit that to
this Subcommittee?
Mr. Miller. Absolutely.
Senator Coburn. Thank you very much.
Senator Carper. That would be good. Thanks.
Senator Coburn. I just have one other question, if I might
ask it, and this is for Mr. Graubert. In June, your report on
healthcare competition recommended repealing certificate of
need laws because of their anti-competitive effects. Have you
been able to quantify the cost that certificate of need laws
add to the healthcare system, and if not, are you aware of
other studies that have tried to measure this?
Mr. Graubert. I believe we do have some studies that
address this question, Mr. Chairman. Now, of course, I should
preface this by saying that it is very difficult to measure all
of the cost from lost competition because it also includes not
only higher prices, but lost innovation, product choice and
quality, things that if they are prevented, they are gone.
In our study, we cite a number of studies in Chapter 8,
particularly in footnote 37 which I would recommend to you.
There is an older study from 1987 that estimated price
increases between 4 and 5 percent resulting from the existence
of CON laws. A later 1991 study indicated hospital costs
approximately 10 percent higher in States that had had CON laws
in place for at least 10 years. Then one of the witnesses at
our hearings, Dr. Morrissey of the University of Alabama-
Birmingham, testified that his research had found price
increases up to 20 percent attributable to CON laws.
Senator Coburn. Thank you.
Dr. Miller, aren't all the sub-specialty hospitals or
specialty hospitals that receive Medicare reimbursement JCAHO-
approved?
Mr. Miller. Not every hospital in Medicare has to be JCAHO-
approved, but it does have to meet Medicare conditions of
participation.
Senator Coburn. Is one of those conditions quality control
in terms of surgical and medical procedures by the medical
staff?
Mr. Miller. I am not sure I could answer that.
Senator Coburn. I can answer it. Absolutely, if you don't
have control on that. The fact is in terms of self-referral for
cases that should not be done, in fact, you can't get
accredited if, in fact, you don't have a quality control
looking at that in terms of utilization review inside any
hospital in this country today.
For my profession, I just want to defend it for a minute.
Not everybody is a great actor in my profession. I understand
that, but I also understand the institutions that are out
there, and the physicians in this country are working hard
everyday to make sure physicians who are not doing it right are
held accountable for not doing it right. Procedures are rarely
done on people that are not needed. And I am referring to
hospitals; I am not referring to the others.
So I wanted to make the point for the record that the whole
purpose for accreditation is to make sure you have the controls
in place in a hospital setting to control behaviors that might
be susceptible to economic advantage through the lack of a
medical ethic that is proper for the care of that patient.
Mr. Miller. There should be nothing from my comments or the
Commission's comments that should be taken as an attack on the
medical profession. I don't think anything was meant to imply
that a patient in these hospitals was getting inappropriate
care. It was just that the patients that were going to those
hospitals were less complex and the payment system was missing
them.
And if I could just say one other thing, I think it is
important to point out that the Commission also looks at the
issues much more broadly. I think in the FTC report they say
something along the lines of you need to reward for quality.
Physicians are rational animals like anyone else and if you can
incent those types of things--and there were a series of
recommendations that MedPAC made for inside the Medicare
program to pay more on the basis of quality. So nothing should
be taken as an attack on the medical profession here.
Senator Coburn. No, but I think it is important for us when
we talk about self-referral in specialty hospitals. The people
I know who have an interest in specialty hospitals--it is about
giving their patient the best care and the most timely care and
the most efficient care, and controlling their own schedules in
doing that, rather than self-referral for their own advantage.
Now, there is no question that there is competitive
advantage. That is why they put their investment into the
hospital, but it goes back to the point I said earlier. In most
of the specialty hospitals in Oklahoma, the number of doctors
who are on staff who have no ownership far outweighs the number
of doctors who are on staff that have an ownership.
And you have to ask the question, why are they there? Why
are they coming? If they get nothing financially out of it, why
are they utilizing those services? That is an important
question that needs to be asked by you all as you look at this.
I have several questions I would like to submit for the
record and ask that you return them with answers within 2
weeks, if there is no objection by my counterpart. And I want
to thank you so much for your forthright testimony and the hard
work that you have done in this area.
Mr. Miller. Sure. I appreciate it.
Senator Coburn. Thank you. Let me welcome our second panel,
and I appreciate all of those of you who have traveled and made
an effort to be here for this Subcommittee hearing. Senator
Carper had to attend another hearing and will not be with us
for this second panel. However, your complete testimony will be
made a part of the record and I would ask you, if you would, to
limit your oral testimony to 5 minutes.
On our second panel is Regina Herzlinger. She is the Nancy
R. McPherson Professor of Business Administration, School of
Business, Harvard University. Next is a well-known acquaintance
of mine from Oklahoma, Dr. Stan Pelofsky, President,
Neuroscience Specialists, and owner of Oklahoma Spine Hospital,
and associated with a very good friend of mine, Dr. Jim Oder;
John Thomas, Senior Vice President and General Counsel, Baylor
Health Care System; Dr. James Cain, a practicing family
physician from Lampasas, Texas; Ed Jungbluth, heart patient,
Albuquerque, New Mexico--welcome; and Dr. Plested, Immediate
Past Chair, Board of Trustees, American Medical Association.
I welcome each of you, and Dr. Herzlinger, if you would
start, please.
TESTIMONY OF REGINA E. HERZLINGER, PH.D.,\1\ NANCY R. McPHERSON
PROFESSOR OF BUSINESS ADMINISTRATION, HARVARD BUSINESS SCHOOL,
BOSTON, MASSACHUSETTS
Ms. Herzlinger. Thank you, Dr. Coburn, ladies and
gentlemen. It is a pleasure to be here. I am going to talk
about healthcare competition from the perspective of healthcare
in our economy.
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\1\ The prepared statement of Ms. Herzlinger appears in the
Appendix on page 74.
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We are very fortunate to live in the United States. We are
fortunate in many ways, but we also have the highest GDP per
capita among the countries in the world. The reason we have it
is we have the highest rate of growth of productivity among
developed countries in the world. Productivity comes from
innovation.
It is unfortunate that this moratorium and the
recommendations by MedPAC to extend it kill off one of the best
chances for productivity in the healthcare system. It is
unfortunate because, although we have such record high GDP per
capita, our healthcare costs are killing national
competitiveness.
General Motors' financial problems can be traced directly
to its healthcare costs. It is difficult to compete with
countries that have far lower healthcare costs. At 15 percent
of GDP, one out of every seven dollars, our healthcare costs
are the highest in the world and they rise at record rates.
Hospitals account for the most significant portion of our
healthcare costs and they are the number one reason that they
are rising. Innovation in hospitals would lead to productivity
and productivity would increase our competitiveness when it
comes to healthcare costs.
Now, my colleagues here will talk about why specialization
in healthcare is so good, but generally, specialization in our
economy does two things. It makes things cheaper. It makes
things better.
When it comes to healthcare, specialization has another
asset that nobody has addressed and that is the infrastructure
of our nonprofit community hospitals is very old. It is going
to have to be replaced and it will cost the taxpayers a great
deal of money to do that. Specialty hospitals are investor-
owned. It will be the private sector that provides that capital
and not the public sector.
Now, what do we know about specialization from the rest of
our economy? We know it is critical. For example, Nucor, which
is a specialty steel company, almost singlehandedly revived the
steel sector. Here are some of the results from Nucor. It takes
one man-hour to make a ton of steel. The rest of the industry
takes three man hours. Its workers earn $60,000 per year,
mostly from bonuses based on productivity. They are treated
like owners, whereas the unionized workers in the rest of the
industry earn $50,000. Nucor made huge profits while the rest
of the industry lost an enormous amount of money.
What is the Nucor story? It is ``do good, do well.'' They
did great for the customer, lowered the price of steel; great
for their workers, higher wages; and great for their
shareholders. That is the story of specialization.
Another part of specialization is it is typically started
by people who know what they are doing. Thomas Edison was a
very famous inventor. He started a little business that is now
called General Electric. Bill Gates certainly knows a lot more
about computing than I do or than most people do. He started a
little business called Microsoft. Sam Walton, a fabulous
retailer, started a company called Wal-Mart. Typically,
specialization is led by people who own it, who know a great
deal about it. Many people may not know that Jack Welch, the
brilliant CEO of General Electric, had a doctorate in
engineering.
Yet when the hospitals complain about specialized
hospitals, they have valid points. It will hurt their
profitability; there is the danger of over-referral; and who
will care for the uninsured? Those complaints are quite valid.
But the diagnosis that it is the specialty hospital that is
causing these problems is not valid.
The profitability issue, as your two prior witnesses ably
testified, is caused by mispricing by CMS. It is caused by a
system in which a bunch of bureaucrats try to replace what the
market normally does.
The problem of over-referral is not caused by the fact that
physicians own facilities. Why don't people buy more steel than
they need to? Why don't they buy more products than they need
to? The answer is that the third-party system in healthcare
insulates consumers from the costs of their care and they may
buy more than they need to, and because it is a third-party
system, consumers don't have the kind of information that would
help them be very savvy in their buying.
Last, the issue of the uninsured. Is that an issue that
should be solved by suppressing efficient innovations, or is
that an issue that should be solved through another mechanism
by addressing the financing needs of the uninsured? Surely, it
should be the latter.
So what should the Congress do? It should lift the barrier
to competition. The moratorium is a way of suppressing the
competition that is so sorely needed in the hospital sector. It
should encourage market-based provider pricing and stop the
tinkering by a group of bureaucrats trying to emulate the
market. And lastly, it should address the issue of how to make
sure that the uninsured have as much access as anybody else.
Senator Coburn. Thank you, Dr. Herzlinger. Dr. Pelofsky.
TESTIMONY OF STAN PELOFSKY, M.D.,\1\ PRESIDENT, NEUROSCIENCE
SPECIALISTS, AND PHYSICIAN OWNER, OKLAHOMA SPINE HOSPITAL,
OKLAHOMA CITY, OKLAHOMA
Dr. Pelofsky. Dr. Coburn, my name is Dr. Stan Pelofsky. I
have been a practicing neurosurgeon for 35 years. I am a
physician owner of the Oklahoma Spine Hospital, and I truly
appreciate the invitation to appear before you and your
Subcommittee. I have submitted my written testimony and now
would like to present my thoughts concerning the Oklahoma Spine
Hospital.
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\1\ The prepared statement of Dr. Pelofsky appears in the Appendix
on page 81.
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I belong to a group of ten neurosurgeons, one of the
largest and most reputable neurosurgical groups in the country.
Ten years ago, my partners and I became extremely concerned
with the quality of care our patients were receiving at all the
large community hospitals in Oklahoma City. Staffing budgets
were being drastically reduced. Agency nurses were being
subcontracted to care for our patients not only on the floor,
but in the operating room, as well. Trying to obtain new
technology was like pulling teeth and often took 1 to 2 years.
Endless and mindless committee meetings were zapping our time
and our efficiency.
CEOs receiving high six-figure salaries were spending seven
figures annually on blatant advertisement. Inefficiencies were
built into the system. Surgeons were competing for operating
room time. The infection rate and complication rate was
unacceptable, and quality of care had deteriorated and costs
were skyrocketing.
My partners and I knew there had to be a better way. We had
a dream. We had a vision. We put together the Oklahoma Spine
Hospital model and offered it to just about every community
hospital in Oklahoma City. We were rejected and were told, what
do doctors know about running a hospital? Well, Dr. Coburn, it
turns out we knew a heck of a lot.
What is the Oklahoma Spine Hospital? It is a totally owned
and operated physician specialty hospital. It is a hospital
which specializes in the diagnosis and medical treatment of
spine disease. It is a world-class facility. And it is for
patients who have failed every effort at maximum aggressive
medical treatment. Surgery is never the first, second, or third
choice. We are a true hospital. We are not an ambulatory
surgical unit. We are licensed by the Oklahoma Health
Department and we belong to the Oklahoma Hospital Association.
Our patients stay 1 to 2 days in the hospital, some 3 to 4
days after complex surgery. When surgery becomes, and I must
stress this point, the last and only other choice for patients
who are suffering from spine disease with disability and with
pain, then expert surgeons with expert technology take care of
them.
Since our opening in November 1999, we have performed over
12,000 spine and complex spine surgeries, including
microsurgeries, fusion surgeries, and artificial disk
replacements. We are an 18-bed, 5-operating room hospital that
now employs over 200 Oklahomans. We are most proud of the fact
that we have been able to save literally thousands of patients
from surgical treatment by providing them a proper diagnosis
and medical treatment plan.
Well, what have we accomplished? Length of stay after
complex surgery, spine surgery, 1.6 days now on the average, a
0.11 percent infection rate, zero mortality rate, a nurse
turnover rate of 3.2 percent, 98 percent patient satisfaction
rate, 98 percent employee satisfaction rate, and I submit all
these factors not only improve quality, but they cut the cost
of healthcare to both Medicare as well as to the healthcare
industry.
We outsource all administrative functions. We have no six-
figure CEOs running the place. We spend nothing on
advertisement or marketing except to give each patient who
leaves our facility a pastel-colored T-shirt, their choice of
color, their choice of size, with our logo on it. We have, as
the physician owners, the ability to purchase state-of-the-art
equipment at any cost, change policies, increase salaries, AND
provide bonuses, literally overnight, without mindless,
wasteful meetings.
We have a Level IV emergency room that is opened and
staffed by an on-call physician owner of the hospital 24/7,
365. Plus, every one of the physician owners at the Oklahoma
Spine Hospital participates in coverage in the emergency room
of Mercy Hospital, a large community hospital across the
street, 24/7, 365.
Last year, the Oklahoma Spine Hospital paid the following
taxes: Federal tax, $4.5 million; State tax, $770,000; sales
tax, $860,000; property tax, $225,000. And much of our taxes
have helped fund numerous State and Federal healthcare
problems.
The Oklahoma Spine Hospital brings value to our healthcare
system and improves quality and is cutting costs. It has raised
the bar. It has once again shown what American competition,
invention, and freedom can do.
However, our critics are not applauding our
accomplishments. Our critics, the American Hospital
Association, the Oklahoma Hospital Association, HCA, the $100
billion Goliath in the industry, Integris in Oklahoma City,
rather than embrace our model or compete against it, have
decided quite simply to try to legislate us out of business.
Here is our critics' spin versus the facts.
Spin number one, Oklahoma Spine Hospital physicians self-
refer and are essentially knife-happy in order to reap personal
financial rewards. This claim, based on our professional
integrity and national reputation, is not only outrageous, it
is insulting.
Spin number two of our critics, the Oklahoma Spine Hospital
physicians cherry pick our patients. Dr. Coburn, the fact is,
we cherry pick our doctors. We cherry pick our staff. We cherry
pick our nurses. We cherry pick our scrub techs. We never
cherry pick our patients. Here is the payer mix of Oklahoma
Spine Hospital: Private health insurance, 42 percent; workmans'
comp, 33 percent, Medicare and Medicaid, 17 percent; self-pay/
no-pay, 8 percent.
Spin number three of our critics, the physicians at
Oklahoma Spine Hospital don't cover the ERs. Fact: We cover our
ER, we cover Mercy's ER, again, 24/7, 365.
Spin number four, we are sapping much-needed financial
resources from our community hospitals and academic medical
centers. Fact: HCA, which has a joint operating agreement with
OU Medical Center, last year had a $47.5 million net profit, an
11.1 percent profit margin, probably the highest in the State.
Integris, Oklahoma City, made tens of millions of dollars in
profit and they are a nonprofit hospital. Fact: Every large
community hospital in Oklahoma City did extraordinarily well
financially last year and these Goliaths should not be
threatened by our 18-bed specialty hospital.
In summary, Dr. Coburn, we are extremely proud of our
accomplishments. We have created giant efficiencies with
wonderful outcomes, patient and staff satisfaction rates that
have been unheard of. Isn't that what being a doctor is all
about? Isn't that what America is all about, the freedom to
create, to compete, to raise the bar for everyone? What a
country.
Finally, two last points. Without grandstanding or
showboating, the physician-owners of the Oklahoma Spine
Hospital challenge any hospital in this country, any for-
profit, nonprofit, HCA, academic center, Integris, to go one-
on-one with us on a scientific study, a study that is
prospective, double-blinded, independently judged and analyzed,
peer reviewed, and with matched cohorts of patients looking at
just three parameters. What are these three parameters? The
parameters are outcomes, patient satisfaction, and cost. I will
tell you, if they go one-on-one with us, once again, David will
slay Goliath. [Laughter.]
Last point, Dr. Coburn. The future viability of specialty
hospitals rests largely within the control of the U.S. Congress
and the Center for Medicare and Medicaid Services. The current
moratorium is scheduled to end in just a few short weeks. On
behalf of the Oklahoma Spine Hospital and its physician owners,
I urge you to let this moratorium come to a permanent end. I
also hope that you will express your support of specialty
hospitals to CMS Administrator Mark McClellan and encourage the
agency not to impose further regulations that will, by de
facto, extend the moratorium beyond June 8.
Again, thank you for this opportunity to testify.
Senator Coburn. Dr. Pelofsky, thank you. I was somewhat
lenient. I would hope the rest of us would stay within the 5
minutes, if we could.
Mr. Thomas.
TESTIMONY OF JOHN T. THOMAS,\1\ SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, BAYLOR HEALTH CARE SYSTEM, DALLAS-FORT WORTH,
TEXAS
Mr. Thomas. Mr. Chairman, Members of the Subcommittee, my
name is John Thomas. I am the General Counsel of Baylor Health
Care System based in Dallas-Fort Worth, Texas.
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\1\ The prepared statement of Mr. Thomas appears in the Appendix on
page 88.
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Baylor is a 101-year-old faith-based institution with
strong ties to the Baptist General Convention of Texas. It is
an honor for me to address you today on behalf of Baylor and to
ask you to resist efforts to extend the moratorium on the
development and growth of physician-owned specialty hospitals
that will expire June 8 and to resist efforts to repeal the
whole hospital exception under the so-called Stark self-
referral law.
Baylor is the corporate sponsor of 13 nonprofit hospitals.
Our flagship, Baylor University Medical Center, is located in
downtown Dallas, a 1,000-bed quadenary teaching hospital with a
Level I trauma center that provides care to more penetrating
trauma victims than Dallas County's tax-supported Parkland.
Baylor has the largest neo-natal ICU in the Southwest and one
of the five largest organ transplant programs in the country.
Last year, we provided more than $240 million in community
benefits at cost, not including bad debt. Charity care is
provided under the most generous charity care financial
assistance policy among all Dallas-Fort Worth hospitals.
At the same time, Baylor has a long history of innovation.
In the early 1900's, Baylor developed the prepaid hospital
plan, which today operates as the Blue Cross-Blue Shield
Association. With the changes in medical practice, Baylor has
sought and continues to seek new and innovative ways to lower
the cost of delivery of care while improving quality, safety,
and satisfaction.
One of the most effective strategies Baylor has implemented
is partnering with physicians economically, and more
importantly, clinically, in the design, development, and
operation of ambulatory surgical centers, surgical hospitals,
and heart hospitals. Today, Baylor has an ownership interest in
25 facilities partnered with physicians. Over 2,000 physicians
actively practice at these facilities, while only about 500
have an ownership interest.
Texas Health Resources, the other major nonprofit system in
Dallas, also has a number of hospitals and facilities partnered
with physicians.
Five of Baylor's facilities are affected by the moratorium.
Three are surgical hospitals. Two are heart hospitals. Each is
critically important to the mission, but more importantly, is
critical to the advancement of healthcare competition and
improvements in quality, safety, patient satisfaction, and
access in Dallas-Fort Worth.
By 2020, the population of Dallas-Fort Worth is expected to
exceed ten million people, more than double the population
today. As Baylor projects the needs of our community to meet
this population growth and demand for access to healthcare
services, partnering with physicians not only brings capital to
help finance the response to those needs. More importantly,
economic investment motivates physicians to bring their time,
energy, and talent to the design, operation, and governance and
operation of more effective and efficient healthcare
facilities.
No example proves this point better than our Baylor Heart
and Vascular Hospital, a facility located on the inner-city
campus of our flagship, Baylor University Medical Center. The
quality of this facility is the highest in our healthcare
system and is among the highest rated heart programs in the
United States on CMS's website, hospitalcompare.hhs.gov. In my
written testimony, you will see a chart comparing that hospital
to the national average and the teaching hospitals.
Month after month, the Baylor Heart Hospital scores at or
near 100 percent on the CMS indicators for acute myocardial
infarction, congestive heart failure, and surgical infection
prevention standards. Emergency room Baylor Heart Hospital
protocols consistently result in ER patients going from the
door to the cath lab within 30 to 45 minutes of arrival, with
vessel inflation under 90 minutes. Patient satisfaction, as
measured by a national survey tool, exceeds the 96th percentile
in that national database. When patients are asked, ``Did you
feel the staff were knowledgeable and provided safe care?''
month after month, 100 percent of patients respond yes.
With physician alignment, the Baylor Heart Hospital has
seen dramatic improvements in cost reduction and efficiency. In
the first year of operation, over $12 million of costs were
eliminated from the cost to provide these services before the
heart hospital opened.
Dramatically, staff turnover is less than 11 percent per
year, while the rest of our community exceeds 20 percent. This
is an important indicator of both the quality of clinical
environment--the staff enjoys working there--and cost
containment. Baylor's cost to replace an R.N. approaches
$60,000 per nurse for recruiting, training, and retention. With
low turnover, these dollars are saved.
Finally, Baylor's specialty hospitals are the safest in the
system, with the Baylor Heart Hospital leading the way with no
medical liability claims ever in the history of that facility.
Baylor's other specialty hospitals also have much lower
liability claim rates.
Last, as the community focused on homeland security, the
Nation's trauma system is the backbone of effective response to
future incidents, if any. Baylor has used alignment of
physicians through specialty hospitals and ambulatory surgery
center joint ventures and other forms of effective alignment to
keep physicians engaged in the trauma system. These physicians
also commit to providing charity care under Baylor's charity
care and financial assistance policy. Unfortunately, 30 percent
of the Texas population is uninsured, with an even higher rate
in downtown Dallas, where the heart hospital is located.
We urge you to allow the moratorium on physician ownership
and development to end June 8. The moratorium has not been
benign and a continuation will be even worse. This has affected
our ability to expand our inner-city heart hospital to meet the
needs of that community. The moratorium has prevented Baylor
from bringing higher-quality heart and vascular care to Plano,
where heart disease remains the number one killer. And the
moratorium has prevented the Baylor-Frisco Medical Center from
expanding to provide obstetrics and other women's services to
one of the fastest-growing communities in the country.
Senator Coburn. Thank you, Mr. Thomas. Dr. Cain.
TESTIMONY OF JAMES E. CAIN, M.D.,\1\ PRACTICE IN FAMILY
MEDICINE, LAMPASAS COUNTY, TEXAS
Dr. Cain. Dr. Coburn, thank you for having me here today.
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\1\ The prepared statement of Dr. Cain appears in the Appendix on
page 96.
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Senator Coburn. I am glad you are here.
Dr. Cain. My name is James E. Cain. I am from Lampasas,
Texas, and I practice rural medicine. The first 18 years of my
life, I was raised in rural Arkansas, the next 18 years of my
life in Houston, Texas. My education was at Houston Baptist
University, Baylor College of Medicine, and University of Texas
Health Science Center.
When I finished my education, I chose to go back to rural
America and practice medicine. I live in Lampasas now, which is
about an hour north of Austin, an hour West of Fort Hood, and
about an hour South of a little town called Crawford, Texas. We
have about 20,000 people in our county. Our average income per
family there is about $30,000 per year.
My partners and I are about the only show in the county. We
also help the surrounding counties. Primary sources of income
are Medicare, Medicaid, Tricare, which is the military
insurance, a handful of commercial insurances, and private pay
insurances. We work on an average 12 hours a day and we don't
turn away anyone for their ability or lack of ability to pay.
A few weeks ago, someone asked me how Austin Heart Hospital
has affected my practice in Lampasas County, and the reasons I
gave and the answers I gave to those questions are why I am
here today.
I shared with them the scenario, and I share it with you
today. It plays out in my life on a weekly basis. I get a call
from the emergency room. A patient of mine is there and is not
doing well. I get in my truck--yes, I am from Texas and I drive
a pick-up truck, no hat---- [Laughter.]
Drive to the emergency room, and I call Austin Heart
Hospital. Within a few minutes, I have a cardiologist on the
line with me. They help me stabilize my patient, often
stabilizing me, as well. You can relate to that, I am sure. We
discuss transfer, ambulance, helicopter. The patient is
transferred. I go back to work or back home.
Within a few hours, that cardiologist is generally calling
me, letting me know what happened to the patient, what kind of
care they received, and what kind of follow-up care they are
going to need. Within a few weeks, few days, the patient is
back in my office for follow-up, obviously very well cared for
and very impressed with the care that they have received there.
The most important things about the scenario that I have
laid out for you is that at no point in this conversation so
far has anyone asked me about my patient's insurance or their
ability to pay.
Second, the time with which they handle these cases is
second to none, and when you are an hour-and-a-half away from a
tertiary center, sometimes minutes do mean everything.
Compare that with what I get at most of the other hospitals
that I transfer to. Right off the bat, I get an administrator.
What is the first question she asks me? Who is paying? What is
the insurance? Of course. Then I get a utilization nurse, and
there is nothing wrong with that. I certainly can understand
this. When they find out the patient has Medicaid, or for God's
sake has no insurance, then the conversation turns to bed
availability, is the patient actually stable enough to transfer
to their facility, and are they actually the closest hospital
for me to transfer my patient to? In the end, if I get that
patient transferred to their facility, it is usually to the
emergency room department because the utilization review nurse
feels like a second workup will probably be better and in the
best interest of the patient, which means maybe we can find
something different, keep the patient out of the hospital, not
utilize resources that this patient obviously can't pay for.
It also frustrates me when I get a patient at another
facility after hours on the weekend. In a few hours, I call,
try to find someone. I usually get a nurse on the phone and I
am told the patient can't get a procedure tonight because they
don't do this after hours on the weekends. The patient is going
to have to wait until Monday to figure out what is going on
with them. They are stable, however. To me, that is two extra
days in the hospital, a calculated but small increased risk to
my patient, obviously an increased risk to the system.
My experiences with Austin Heart Hospital has been, like
the neurosurgeon down the table, a 7-day workweek, 24 hours a
day.
I am constantly seeing in the medical journals and in the
medical economic journals now medical models that are being
related to patient outcome. Then the insurance companies are
now reimbursing us based on patient outcome. I have included in
my written statement many of the studies and recognitions by
the reputable organizations that speak favorably of Austin
Heart Hospital, their length of stay, their patient outcome,
quality of care, so on and so forth, but it is my personal
experience and the experience of my patients that leave no
doubt in my mind that they are receiving the best possible care
that I can offer them at this institution.
In this day and age of frustrated physicians, skeptical
patients, confused administrators and politicians, trying to
figure out how to make these dollars cover expenses, it is very
easy to become cynical. I assure you, I am no cynic. I still
love what I do. I enjoy going to work every day. I am proud to
be a country doctor.
I ask that you guys look at the information, look at the
data that institutions such as the Heart Hospital of Austin are
giving you. Look at the effective care that they are
delivering. Look at their patient outcome data. I believe, as
many of us in the business, that good patient outcome and
effective care in the end is what is going to stretch these
dollars.
I appreciate your time and thank you for your patience.
Senator Coburn. Thank you, Dr. Cain. Mr. Jungbluth.
TESTIMONY OF ED JUNGBLUTH,\1\ HEART PATIENT, HEART HOSPITAL OF
NEW MEXICO, ALBUQUERQUE, NEW MEXICO
Mr. Jungbluth. Thank you, Mr. Chairman. My name is Ed
Jungbluth and I am a 71-year-old heart patient and I think I am
one of the patients that everybody is talking about today,
actually, although you may be jumping around it. I have had a
heart attack, angioplasty, and an AICD, automatic internal
coronary defibrillator. I am sure you know what that is.
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\1\ The prepared statement of Mr. Jungbluth appears in the Appendix
on page 100.
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Senator Coburn. I do.
Mr. Jungbluth. Make that three AICDs. I have always been an
active person and enjoyed life to the very fullest, so needless
to say, the onset of my first heart attack was a bit discerning
to both me and my wife, Mimi.
In 1988, I had a heart attack while living and working in
the tourism industry in Estes Park, Colorado. After
experiencing chest pains, we went to the local emergency
department, where I was stabilized and transported to St.
Luke's Hospital in Denver, Colorado, where I had an
angioplasty. Though the care at the emergency room in Estes
Park was good, the hospital was not equipped to do any
interventional procedure. I have termed this as a ``pack and
ship'' operation. That is what I got a lot of, pack and ship.
Because I love life and because my wife took advice to heart,
we modified our eating and exercise habits and took the steps
necessary to give my heart the best chance for recovery.
It wasn't until 2000 that I began to experience other heart
problems, though this time it was rhythm problems. While
spending time in Phoenix for Major League Baseball spring
training, I had my first bout with v-tach, ventricular
tachycardia. It was a Sunday afternoon and I ended up at Mesa
General in the Phoenix area and spent many days in intensive
care while my condition was being diagnosed and I was
stabilized. Again, I happened to land in a facility where there
was not specialty care available for my heart problems.
Finally, I was transported to another facility in Phoenix
where I received my first AICD. The care was adequate, but
neither facility really had the extensive type of cardiac care
that I required. I was released and I was able to travel back
home to Gallup, New Mexico, on the next day after the implant.
Soon after arriving home, I had my first experience as a
patient at Rehoboth McKinley Christian Hospital in Gallup. I
had a tremendous pain in my left arm and went to the emergency
room. The diagnosis was a blood clot in my arm. Unfortunately,
I was told that they could not treat me--a higher level of
cardiac care was necessary---and was instructed to go to
Albuquerque for treatment.
As you can imagine, these weeks were traumatic and I was
concerned about my heart. I am a Medicare-insured patient and I
knew that I could have access to any facility in Albuquerque.
At that point, I heard about the Heart Hospital of New Mexico
and that if I went there, I would have access to all heart
specialists and decided to get myself there as quickly as
possible. I was driven by a friend and arrived about 3 a.m.
that morning. I spent 9 days at Heart Hospital of New Mexico
and have never felt so safe and secure and confident that I was
receiving the specialty treatment that my condition required. I
was not sent by investor physicians, but rather chose to go
because I had investigated and learned that they provide the
highest quality heart care. It is important when you live in a
rural area to educate yourself and be prepared to make life and
death decisions in terms of healthcare.
The story continues. In 2002, while in Santa Fe on
business, my AICD fired for the very first time. That is really
a thrill. I went to St. Vincent's, the sole community hospital.
Again, I was stabilized overnight and released with follow-up
instructions to see a New Mexico Heart Institute
electrophysiologist in Albuquerque.
My condition became more of a concern, and throughout the
year of 2002, I experienced numerous firings of the AICD while
living in Gallup. On each occasion, I had to get to the
emergency department at Rehoboth while I was being stabilized,
and because they were unable to treat me, I was transferred,
packed and shipped, by air to the Heart Hospital of New Mexico.
Fortunately, through the relationship of Dr. Swaminathan, a
New Mexico Heart Institute cardiologist who practices in
Gallup, and Heart Hospital of New Mexico's quick transfer
initiative, I was able to arrive with specialists waiting as
quickly as possible. In one instance, while in the ambulance en
route to the airport in Gallup, my AICD fired four times and I
had to return to the hospital to be stabilized again before I
could be flown to the Heart Hospital of New Mexico (HHNM). Upon
arrival at HHNM, it was determined that the unit installed in
Phoenix had failed and I received a new AICD. Because my v-tach
is severe, I have had numerous firings over the past few years
and in each case was transferred.
Upon concern for my health and well-being, for the peace of
mind for both my wife and I, we decided we wanted to move to
Albuquerque to be close to Heart Hospital of New Mexico. We
feel at home, safe, and secure. With the experience we have had
as an inpatient, I know that care is always timely, with the
most specialized staff.
As it has turned out, our decision was the right one. Since
moving, I have had the fortune of being close to the Heart
Hospital of New Mexico and have experienced treatment in their
emergency department. They know that time means muscle, heart
muscle, and life when it comes to heart patients. I have had
more problems with v-tach and have been rushed twice over a 2-
month period to the Heart Hospital emergency department. I know
from experience that the timeliness of care and expertise of
all physicians have allowed me to maintain an active and normal
life. The emergency department physicians have deep experience
and have immediate access to the specialized cardiologists. On
both occasions, my treatment was quick, technically superb, and
compassionate. In fact, my wife, who is an accomplished artist,
was scheduled to participate in an art show in California, felt
comfortable with me in HHNM that she went on to the art show.
Senator Coburn. Could you sum up for us?
Mr. Jungbluth. I am going to do that. In April 2005, I
received a replacement AICD from the Heart Hospital. They put
patient care first. I am a chronic heart patient. I suffer from
congestive heart failure. Am I concerned? Yes, but worried, no.
Thank you.
Senator Coburn. Thank you. Dr. Plested.
TESTIMONY OF WILLIAM G. PLESTED, III, M.D.,\1\ IMMEDIATE PAST
CHAIR, BOARD OF TRUSTEES, AMERICAN MEDICAL ASSOCIATION
Dr. Plested. Thank you, Chairman Coburn. My name is Bill
Plested. I am Immediate Past Chair of the Board of Trustees of
the American Medical Association and a practicing thoracic and
cardiovascular surgeon from Santa Monica, California.
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\1\ The prepared statement of Dr. Plested appears in the Appendix
on page 103.
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First, I want to thank you for calling this important
hearing. The AMA believes that competition is absolutely vital
to ensuring high quality, cost effective healthcare for
America's patients. And competition from physician-owned
hospitals is key. Why? It means more choices for patients,
improvements and innovations, increased quality of care,
extremely high patient satisfaction, and healthcare decisions
that are made by patients and their physicians.
Physicians who invest in specialty hospitals increase
productivity and efficiency, improve scheduling of procedures,
maintain desired staffing levels, purchase state-of-the-art
lifesaving equipment. Competition from specialty hospitals has
even been a self-admitted wake-up call for some general
hospitals, forcing them to innovate in order for them to stay
competitive.
Studies support the premise that focus on a specific area
of service can lead to higher quality and lower costs as a
result of more expert and efficient care. By performing high
volumes of specific services, specialty hospitals perfect those
tasks, increase accountability for the quality of patient care,
lower fixed costs, quickly respond to patients' needs, and
modify care delivery, as necessary.
CMS found that quality measures at specialty heart
hospitals were equal to or better than general hospitals. It
also found lower rates of infection. Post-operative hip
fracture, deep-vein thrombosis, and sepsis were also lower at
specialty hospitals. In addition, mortality rates were
significantly lower at specialty hospitals, even when adjusted
for severity.
Numerous studies, including CMS and MedPAC studies, found
that patient satisfaction at specialty hospitals is extremely
high. Greater convenience and comfort, higher nurse-to-patient
ratios, and knowledgeable specialized nurses all contribute to
these extremely high levels of satisfaction reported by
patients and their families.
Despite these benefits to patients, the continued existence
of specialty hospitals is in jeopardy. The hospital
associations and many general hospitals are vigorously
attempting to eliminate competition. They attack physician
ownership of specialty hospitals and engage in numerous
practices to simply stifle competition.
For example, general hospitals revoke or refuse medical
staff membership or clinical privileges to physician investors
and they advance State laws to ban physician ownership of
hospitals. General hospitals also force health plans to sign
exclusive contracts that shut out competing specialty
hospitals. They refuse to cooperate with specialty hospitals in
ways such as declining transfer agreements for emergency care.
These practices interfere with the patient-physician
relationship and they adversely affect patients.
General hospitals claim that competition from specialty
hospitals will hurt them financially by reducing some of their
most profitable services which they use to subsidize
unprofitable services. However, MedPAC found that general
hospitals that compete with specialty hospitals have
demonstrated financial performance that is comparable to other
general hospitals.
But even assuming that a hospital could prove it incurred
financial harm, the answer is not to eliminate competition and
support cross-subsidization. The answer is exactly the
opposite. It is to support competition and eliminate cross-
subsidization. The Federal Trade Commission and the Department
of Justice share this view.
MedPAC recommends that CMS change Medicare hospital DRG
payments to more accurately reflect the relative costs of
hospital care, thus eliminating cross-subsidization, and the
AMA supports these changes.
The AMA strongly supports and encourages competition as a
means of promoting high quality, cost effective healthcare. We
believe that patients should continue to benefit from increased
choice and competition that result from specialty hospitals.
Therefore, the AMA believes patients will be better served
if neither Congress nor the Administration acts to extend the
moratorium on physician referrals to specialty hospitals, and
CMS makes payment and policy changes recommended by MedPAC, and
finally, healthy competition is not stifled. Thank you, sir.
Senator Coburn. Thank you, Dr. Plested.
For any of you that want to answer this question, we heard
today that the study from MedPAC says that it is not
necessarily cheaper, even though the number of hospital days is
less. In any of your experience, can you relate to that at all?
Dr. Herzlinger.
Ms. Herzlinger. I teach accounting as well as healthcare at
the Harvard Business School. The MedPAC method that was used to
calculate costs is archaic. It is no longer used by
corporations. The cost techniques that corporations now used is
called activity-based costing and many of the cost data that
come about from this methodology differ substantially from the
old way that companies used to allocate their costs, which is
the technique that MedPAC used.
So, first of all, I question whether they accurately
measured the costs of the general hospital. Of course, they
measured accurately the costs of the specialty hospital because
it does only one thing. But in a community hospital, in order
to identify the costs of that one thing, you have to allocate a
lot of joint costs and the methodology that was used is
antiquated.
Second, the specialty hospitals have to spend a tremendous
amount of money in order to get through the thicket of
regulations that would justify their existence. In MedCath,
which is a heart hospital, the average expenditure just to
enable it to exist, just to satisfy the myriad regulations it
must go through, is about $200,000 a year.
Third, depreciation, which is a major element of cost, is
measured on the basis of historical cost, the plant and
equipment, and community hospitals are often much older than
the plant and equipment in specialty hospitals. So when
specialty hospitals depreciate, those dollars are going to be
much more expensive.
Fourth, specialty hospitals have a cost of capital. They
borrow money at non-subsidized rates. They have equity costs.
Nonprofit community hospitals have none of those costs.
The comparison is heavily flawed and until it is corrected,
I don't think that it stands to support the allegation that one
is more or less efficient than the other. Specifically, what
MedPAC should do is adopt activity-based costing techniques in
order to better understand what the costs of community
hospitals are in providing the specific kind of care that
special purpose specialty hospitals do.
Senator Coburn. Thank you, Dr. Herzlinger. Dr. Pelofsky.
Dr. Pelofsky. It just doesn't compute, Dr. Coburn, for
those of us in the trenches. When you can have a patient out of
the hospital in 1\1/2\ days after complex spine surgery with
instrumentation, or the placement of an artificial disk, when
you have an 0.11 percent infection rate compared to national 2
to 5 percent, every time there is an infection, that is 7 more
days of hospitalization at a cost of, what, $1,000 a day with
antibiotics? If you could cut your infections, your
complications, your days in the hospital, your readmission
rate, you have to be saving the system money. It just simply
doesn't compute.
Senator Coburn. Mr. Thomas.
Mr. Thomas. Mr. Chairman, the Baylor Heart Hospital
experience was vastly different than MedPAC reported. As I
testified, we reduced $12 million of cost directly out of the
heart service that was once controlled and owned completely by
our nonprofit hospital and then it was moved across the street.
We have very accurate apples-to-apples comparisons.
And then, second, with MedPAC's conclusion about the full-
day lower length of stay, on the managed care side, where you
have per diem contracts and other forms of payment as opposed
to a DRG fixed-base system, that is a 25 percent reduction in
the cost to the payer and the individual patient.
So, again, with us, it doesn't compute, either. Our
hospital was open the year after MedPAC's study was--they
looked at 2002. Ours is 2003. So we think that is an inaccurate
conclusion that they reached.
Senator Coburn. So maybe his comments about start-up costs
and things like that may have been theirs, too?
Mr. Thomas. Sure.
Senator Coburn. All right. Does anybody else want to answer
on that, comment on it?
I want to make one observation and then I will ask a
question. Dr. Cain, as a primary care doctor myself, dealing
mainly in obstetrics but doing everything, my biggest
frustration is the lack of accountability at the interface of
where hospital employees interface with my patient. I don't
know if you have experienced that. I know Dr. Pelofsky has. But
there is no control by physicians anymore in terms of getting
written orders done on their patients on a timely basis because
the management in the hospital setting often does not compare
to that of a specialty hospital.
Any comments about accountability of ancillary personnel,
in your hospital or in the Baylor or in the Austin Heart
Hospital in terms of efficiency, of responsibility?
Dr. Pelofsky. Yes. I brought 500 patient surveys that will
deal with that issue. We at the Oklahoma Spine Hospital have
happy faces, efficient people working at the top of their level
of accomplishment and knowledge. If they don't, they are gone.
We fire people if they don't perform our orders in the
appropriate manner, or in the appropriate way.
Senator Coburn. When all the hospitals are struggling to
have nurses today, how is it that you can fire somebody and get
a replacement?
Dr. Pelofsky. Because we have a waiting list of nurses
and----
Senator Coburn. And that is because?
Dr. Pelofsky. Because we pay better, we have better
benefits, they have a better job, they have a better quality of
life, and they are part of a team. They are part of every
decision we make.
I had a scrub tech tell me--we have a suggestion box. He
tells me, Dr. Pelofsky, for your complex spine cases, you open
up three packages of suture and you only usually use one. That
was on my computer card. So we only open up one. We save two
packages of suture, $15 each, $30 a case, 10 cases a week, $300
a week times 52 weeks. On just me, we saved $15,000 in cost.
So our people are part of the team. They are part of the
creation of this model and it works. They are incentivized. It
is America.
Senator Coburn. All right. Mr. Thomas, any comment?
Mr. Thomas. I think the team approach is exactly what we
experienced. There is a waiting list to move from our other
hospitals to our heart hospital and our specialty hospitals and
the turnover rate--and the treatment by the physicians, again,
as part of that team approach, there is much more
accountability and the accountability flows both ways. The
staff like working there. And again, the turnover rate has been
very low.
Senator Coburn. Let me ask those of you that are involved--
did you want to answer, Dr. Plested?
Dr. Plested. Well, I just wanted to say that in my visits
to the specialty hospitals, the thing that I am struck with and
has been of interest to me my whole life is the level of
esprit. I have always thought that people need to love what
they do, and we heard that very well from Dr. Cain.
In the general hospital, we have a continuing problem. I
have to continually meet with nurses to tell them how important
they are. They don't feel like they belong. They are shuffled
off here and there and they are short here today and they are
short there the next day. In the specialty hospitals, they are
where they want to be. They are important members of the team,
and this esprit is there. It is palpable, and I think that is
incredibly important, and the question you have about turnover.
Senator Coburn. Why is it there and not in the general
hospital, in your opinion?
Dr. Plested. Well, my personal opinion is that is a matter
of leadership, and I just think that--what Stan said about
happy faces, I think it just goes all the way. If you walk into
the general hospital today, nobody is happy. I mean, walk into
the admissions thing. You are greeted by the most dour, unhappy
people, who don't like their job, they don't want to be there.
They wonder why you are there. I have spent my life working on
this in my hospital and I wish I could say it was different,
but it isn't.
Senator Coburn. All right. Dr. Pelofsky.
Dr. Pelofsky. Dr. Coburn, I think the difference is that
doctors get it. We are not administrators. We have no
administration at our hospital. It is doctor-owned, doctor-run,
and we know how valuable nurses are. They will make or break
our case. They will get us sued or they will get us glorified.
They are our left hand and our right hand and we treat them
that way.
Senator Coburn. Which would say that maybe they are not
treated that way in the other hospitals?
Dr. Pelofsky. They all have left the other hospitals
because----
Senator Coburn. OK. The question, what I want to get to is
here is another advantage of specialty hospitals. What is the
problem in the general hospitals with morale, turnover,
training, competence, and efficiency?
Dr. Pelofsky. The problem is that the CEO never goes up to
the floor, never goes into the operating room, never goes into
the doctor's lounge. I am thoroughly convinced it is so
bureaucratic and it is such a dinosaur. The organization of
today's community hospitals have got to change. They are 100
years behind the time.
Senator Coburn. Dr. Herzlinger.
Ms. Herzlinger. I think there is analogy to other parts of
the economy. For example, the department store is a failing
economic entity and it has been supplanted by targeted, focused
lifestyle stores.
For example, I go to a store that is called Talbot's, which
is a store that specializes in career dressing. That means dark
pantsuits with long jackets for women with hips. [Laughter.]
My daughter, who is a physician, she goes to Ann Taylor,
which is a store that specializes in clothes for young career
women. I don't know if you have Office Max or Office Depot or
Staples in Oklahoma, but they are an example----
Dr. Coburn. We are not quite that backward. We do have
them. [Laughter.]
Mr. Herzlinger. I didn't mean it that way. I didn't say--it
is very complicated. [Laughter.]
Senator Coburn. Markets work everywhere.
Ms. Herzlinger. The point is, why did the department store
fail? It failed to please its customers and it was because the
scope was too big. It was beyond the ability of managers to
manage it, and so the salespeople were unhappy. The merchandise
was stale. It was just too much. These focused lifestyle-
oriented stores are very successful. They are successful in any
way you count it.
Now, McKensie did a study of why we have such great
increases in productivity in our country. There were six
industries that accounted for all the increases. Number one was
the retailing industry, and the retailing industry is very
surprising because it is a service industry and it is consumer-
driven. Why retailing? Because it reorganized itself from being
everything for everybody kind of department stores that nobody
could manage to much more feasible entities that were focused
on things from the consumers' point of view.
Senator Coburn. So higher unit sales per volume of work.
Ms. Herzlinger. They do. They certainly do.
Mr. Jungbluth. From the patient's perspective, Mr.
Chairman, having been a very frequent visitor of the Heart
Hospital, I see many of the same faces time and time again, not
only the doctor staff, I also am talking about the nurses, I
also am talking about the techs. I am talking about the people
that sweep your floors and mop your floors every single day.
I can only guess the reason that they are still there is
that they are happy, because the tendency in this country is if
you are not happy, you move on. And they must be fairly well
paid, again, because the tendency is to move on if you are not
well paid.
I can't speak enough for at least this specialty hospital,
and I know in talking with Dr. Cain about the Heart Hospital in
Austin, the two are run by the same company. We both
experienced the same thing in my conversation. It is the same
feeling throughout each of these institutions--that there is
just a different feeling there.
It is not a ``pack and ship'' operation, and I say that
with somewhat affection. It is not that type of operation at
all. You are welcomed. The emergency rooms are great. I see the
same people in the emergency rooms, because that is the only
way I get in, is through the emergency room because I am an
emergency case every time I go.
Senator Coburn. Thank you. Let me thank each of you for
being here. You will be submitted some questions for most of
you and we would hope that you would respond to those within 2
weeks.
I would also make note that this country's economic model
was based on the concept of competition, fair and open
competition, and it is very concerning to me that the very
thing that I think we need the most to control the cost in
healthcare is the very thing that is probably going to be
limited, at least over the next 6 months, through bureaucratic
fiat associated with CMS. That costs us a lot. And if you are
wondering how that can happen, all you have to do is look
around at the power of lobbying and bureaucracies in Washington
rather than the power of true competition and an honest and
forthright discussion.
My hope is that we see much more competition in healthcare,
and I do not mean just at the hospital level, I mean at every
level of healthcare--putting the consumer in the game. I know
they know how to buy, and I know that we can compete. Good
competition produces better quality, better price allocation,
and better outcomes.
I thank each of you for being here.
[Whereupon, at 4:12 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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