Generous Medicare Payments Spur Specialty Hospital Boom

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http://www.nytimes.com/2003/10/26/business/26HOSP.html?th

 

October 26, 2003RE-EXAMINING MEDICARE Generous Medicare Payments Spur Specialty

Hospital BoomBy REED ABELSON

 

NDIANAPOLIS — The hospitals here — hospitals across the United States, for that

matter — covet patients like Robert E. Wilson. Mr. Wilson, 79, has had two

open-heart operations, five angioplasties, three cardiac catheterizations and an

implanted defibrillator. Just last month, he checked into the Heart Center of

Indiana to get his first stent, a tiny bit of wire scaffolding that helps keep

arteries open.

 

Mr. Wilson's primary health insurance is Medicare, and Medicare pays generously

for cardiac care — so generously that hospitals and doctors scramble after the

business.

 

The Heart Center, a 60-bed hospital that cost $60 million and boasts not just

the most sophisticated new imaging technology but an executive chef and what it

calls " room service, " opened last December. Indeed, all four major hospital

groups in Indianapolis are investing in new heart hospitals, collectively

spending $215 million on multistory buildings with catheterization labs and

bedside computers.

 

Cranes have been raised over construction sites in places like Milwaukee,

Phoenix and Houston, too, with money flowing into new hospitals specializing not

just in cardiac care, but in other well-reimbursed specialties like orthopedics

and surgery. In a report this month, the General Accounting Office, the

investigative arm of Congress, counted at least 26 specialty hospitals under

construction across the country.

 

Medicare — which pays for some $100 billion of inpatient hospital care annually,

and sets the pattern for many private insurers, as well — is not the sole driver

of this investment. But health executives say that Medicare's payment system for

hospitals, with its emphasis on procedures and its weak ties to the actual costs

of providing care, exerts a strong influence on which medical needs in a

community are met.

 

Amid the building boom here in Indianapolis, some hospitals are laying off

employees or scaling back programs, like psychiatric care, that are less

generously reimbursed. Preventive care and case management, health experts add,

get short shrift.

 

" The incentives are terribly misaligned, " said Samuel R. Nussbaum, a doctor and

former hospital executive who is now the chief medical officer of Anthem, a

large health insurer here.

 

Creating Excess Demand A study of Indianapolis health care last year concluded

that the construction of so many new heart hospitals could create excess demand

for treatment rather than produce better cardiac care.

 

" Improving clinical quality did not appear to be a driving force for new

facilities or services, " said the report, by the Center for Studying Health

System Change, a nonprofit research group. " Given these market conditions,

provider competition could, alternatively, result in higher use rates and

costs. "

 

In Washington, lawmakers rushing to complete a compromise bill that would

establish a Medicare prescription drug benefit are now turning their attention

to the growth of specialty hospitals. The Senate version of the Medicare bill

would make it harder for doctors to invest in and refer patients to such

hospitals, and full-service hospitals are lobbying hard for the provision.

 

Hospitals will typically not disclose how much they profit from a particular

procedure, like a coronary bypass or angioplasty. And Medicare — with little

information about the cost of treatment — cannot say, either. But one

full-service medical center that is leading the lobbying campaign against

specialty hospitals, Sioux Valley Hospital in South Dakota, estimates that it

makes nearly $1,500 for a typical coronary bypass under Medicare, while it loses

almost $1,800 treating a case of simple pneumonia and $2,500 on a patient with

kidney failure.

 

Cardiac procedures " are absolutely our highest margin business, " said Becky

Nelson, the president of Sioux Valley, who estimates that they account for 13

percent of the hospital's patient volume but 28 percent of its profits. Costs

and payment levels vary so widely around the country that Dr. John Birkmeyer, a

surgeon who studies health care at Dartmouth Medical School, estimates that some

hospitals may make nearly $20,000 on a coronary bypass.

 

In Indianapolis, there is recognition that reimbursement levels have influenced

hospitals' behavior.

 

" We're working on a payment system that has been jerry-rigged so many times,

we've been looking for the loopholes, " said Jack C. Frank, an executive at

Community Health Network, which opened the Indiana Heart Hospital this year in

partnership with local doctors.

 

Hospital Building Boom Just 20 minutes southeast of the Heart Center of Indiana,

Mr. Frank's $60 million center says it is the nation's first all-digital heart

hospital, using electronic patient records to track care. Roughly 45 minutes to

the south, construction is well under way on the latest — and most expensive —

competitor here, the St. Francis Cardiac and Vascular Care Center, expected to

cost about $65 million when it opens next year.

 

Even some of the people building the hospitals worry that Indianapolis may not

be able to support them all, though heart disease is the leading cause of death

among Indiana residents.

 

" It can't work, " said Daniel F. Evans Jr., the chief executive of Clarian Health

Partners, whose Clarian Cardiovascular Center is the most modest of the

undertakings, at $30 million, and the only one built within a full-service

hospital.

 

Executives, of course, vigorously defend the decisions to build their own

facilities. Heart hospitals, they say, help pay for money-losing cases, like

accident victims or patients with congestive heart failure.

 

" Cardiac care has been a source of some margin, which has been very important in

subsidizing some services, " said Robert J. Brody, the chief executive of St.

Francis Hospital and Health Centers.

 

Nothing in the Medicare legislation before Congress would directly alter the

hospital payment system. But advocates, mainly Republicans, for provisions aimed

at encouraging more beneficiaries to enroll in private health plans say that

bigger plans would have more leverage to negotiate better prices.

 

" The prices are being fixed " by the government, said Thomas A. Scully, who runs

Medicare as administrator of the government's Centers for Medicare and Medicaid

Services. Local insurance companies would be much better at deciding how to pay

doctors and hospitals to deliver quality care, he said.

 

Payment System Is Dated The current system was adopted in 1983, in an effort by

the federal government to control costs. Until then, Medicare basically

reimbursed hospitals for their costs of delivering care, an arrangement that

offered them no incentive to keep hospital stays short. The new plan established

fixed prices for treating a specific disease or performing a given procedure.

Some cases might cost more and some less, but the price Medicare paid was

supposed to represent the average.

 

As a cost-control mechanism, the system has been largely successful. The

problem, say hospital executives and industry analysts, is that after 20 years,

the payments are out of whack: Medicare frequently pays too much for some kinds

of care and too little for others.

 

To take account of the rapid changes in medicine, like new technologies and

treatments, Medicare collects data on hospital charges — essentially list prices

for everything from a cardiac catheterization to bypass surgery to treatment for

pneumonia. The agency then tweaks prices relative to one another, updating its

payment schedule once a year.

 

But charges often bear little relation to a hospital's actual costs, any more

than a car's sticker price directly indicates what it costs to build the car.

And hospitals rarely, if ever, lower their charges, say industry analysts, even

when their costs fall significantly.

 

" Administered price systems tend to break down over time, " said Joseph P.

Newhouse, a Harvard University professor of health policy who is a member of the

Medicare Payment Advisory Commission. " If you're overpaid, everybody smiles on

the way to the bank, and you may induce more services. "

 

Just how overpaid is unclear. Many hospitals lack the accounting systems to

determine their exact expenses for specific procedures. Hospitals also have

tremendous discretion in allocating expenses across departments, let alone

procedures.

 

In the case of a coronary bypass, for example, hospital charges increased nearly

30 percent from 1993 to 2001, even as the average hospitalization decreased to 9

days from nearly 12 days, according to data from the Healthcare Cost and

Utilization Project of the Agency for Healthcare Research and Quality, a

government group in Rockville, Md.

 

Profitability Varies Widely What seems certain is that there are wide variations

in the profitability of different hospital services under Medicare. Mark

Wietecha, who directs health care consulting for Kurt Salmon Associates,

estimates that the profit margin for surgery, including cardiovascular cases, is

about 15 percent for some hospitals, compared to just 2 percent for

gastrointestinal care.

 

" People build their business plans and facilities on these profitabilities, " he

said.

 

In Indianapolis, the rush to build heart hospitals is leading to what appears to

be significant duplication of services.

 

Heart transplants are offered only by St. Vincent and Clarian, which is

affiliated with Indiana University, but many services are available at all four

heart hospitals. In fact, St. Vincent's new heart hospital, the Heart Center of

Indiana, competes directly with its parent hospital for patients. And some

doctors at Clarian who have invested in the Heart Center are sending profitable

cases there, according to Mr. Evans, Clarian's chief executive, working on only

the most difficult — and expensive — cases at his hospital.

 

The construction boom here was influenced by the threat of a new competitor, the

MedCath Corporation, a for-profit chain with 11 heart hospitals in nine states

that opened discussions with some local doctors. To avert MedCath's entry into

the market, Community Health and St. Vincent made deals of their own with

doctors to build facilities.

 

Hospital executives here are quick to agree that more needs to be done to help

people stop smoking or lose weight — steps that could help prevent the diseases

they make money treating. " Our reimbursement is all around acute care, " said

Sister Sharon Richardt, a St. Vincent executive. " I think where the flaw is we

need to keep people well. We need to start reimbursing for prevention. "

 

But Medicare was created nearly four decades ago to prevent the financial

catastrophe that often occurred when an older person suffered a heart attack or

when a disease like cancer was diagnosed. Payments are therefore " episodic "

rather than intended to encourage hospitals and doctors to prevent disease or

coordinate care, said Dr. Gerard F. Anderson, a former federal health official

who helped develop the system and now teaches at the Johns Hopkins Bloomberg

School of Public Health.

 

Patients Can Lose Patients like Corinne Walker, an 83-year-old Indianapolis

woman who suffers from congestive heart failure, are not always well served. In

late 2000, she developed cellulitis, a serious bacterial infection, in her legs,

and spent months in three hospitals. No one bothered talking to her personal

doctor, Ms. Walker said. To her, it seemed as if the people treating her

virtually ignored her heart condition, although it contributed to her

cellulitis.

 

" They were working on my legs, period, " Ms. Walker said. Only after she was sent

home, with a nurse orchestrating her care, was she finally able to get better,

Ms. Walker said.

 

In Indianapolis, the treatment of chronic conditions " has fallen through the

cracks, " acknowledged Mr. Frank, the Community Health Network executive. With

long hospital stays and few options for aggressive intervention, congestive

heart failure is a particularly money-losing diagnosis, executives say; the

Sioux Falls hospital says it loses $1,200 on the average case.

 

Even so, there is little constituency — outside a circle of policy analysts —

for overhauling a payment system that produces such results.

 

Many hospitals have figured out how to make the most of the status quo. Tenet

Healthcare has been formally accused of abusing the system by which Medicare

pays for the most expensive cases. But hospitals generally try to fit their care

into the most lucrative billing codes.

 

" In fact, you see a great deal of gaming going on, " said David Butz, a health

economist at the University of Michigan.

 

Lawmakers, meanwhile, focus on small fixes to the system. With cuts in spending

on cancer or heart disease politically unpalatable, they tend, under lobbying

pressure, to expand coverage or increase payments.

 

Impetus to refine the existing system has also been blunted by the unwillingness

of Congress to better analyze the cost of care, policy analysts say. Some

experts say that Medicare's administrative expenses — 2 to 3 percent of its

overall budget — have been kept too low.

 

Armed with more information, they say, Congress could realign the incentives to

cut costs and improve care.

 

" We have a limited budget, " Dr. Christopher M. Callahan, the director of the

Indiana University Center for Aging Research, said. " From a public health

perspective, " he added, the question is: " Where would those dollars best be

spent? "

 

Copyright 2003 The New York Times Company

 

 

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