Generous
Medicare
Payments
Spur
Specialty
Hospital
Boom
By
Reed Abelson, The
New York
Times
October
26, 2003
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?"
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