Kevin Conlin has a problem. Physicians in Wichita have been catching a bug. An entrepreneurial bug. One that compels them to build highly specialized hospitals, diagnostic imaging facilities stocked with next-generation scanners, and same-day surgery centers that have hotel-like touches. Conlin, CEO of the $1.2 billion nonprofit Via Christi Health System in Kansas, complains that these outfits are competing unfairly against St. Francis and St. Joseph, his two general hospitals in Wichita. And he intends to do something about it. Via Christi provided Kansans with some $30 million in charity care and $33 million in unpaid Medicaid services this year. Conlin says Via Christi can no longer afford those costs if it keeps losing money to the new guys. "We're left with no option," says Conlin, "but to set a limit on how much of this kind of work we're going to do. Only then will we have a public conversation about the issues this phenomenon raises."
That phenomenon has sparked a war between hospitals and doctors across the country that is transforming the landscape of the U.S. health-care system--while not necessarily improving it. Hospital bosses say doctors, who wield huge influence over their patients, steer the most profitable procedures to facilities they own and shunt the least lucrative ones to the general hospital. This threatens the ability of the general hospital to provide money-losing services like emergency care, which it subsidizes in part with profits from procedures like cardiac surgery. The specialty competitors deny that they are the problem. Quite the opposite. "We raise the bar for the community," says Ed French, CEO of MedCath, which runs 12 specialty hospitals. "Everybody invests in more equipment and focuses more on nursing care because we set the competitive standard."
But researchers led by Paul Ginsburg at the Center for Studying Health System Change (HSC) in Washington find that this standard is fueling a de facto medical arms race, a competition that, perversely, increases health-care costs. Competition is not supposed to do that, but in the topsy-turvy U.S. health economy, excess supply often induces demand.
Hospital executives are responding to the assault of specialists by building and aggressively marketing profitable "service lines," like cancer, heart and brain centers. They're snapping up $1.4 million computed tomography (CT) scanners, which produce palpably detailed, 3-D pictures of bones and organs, and $2.2 million "high field" MRI machines that can watch the brain at work. The inflationary dynamic spawned by this expansion of health-care capacity exposes flaws in the payment system that sustains U.S. health care. Those flaws partly explain why Americans spend $2 trillion, or 16% of their GDP, for medical care, an outlay that's increasing roughly 7% annually.
There are only about 130 specialty hospitals in the U.S., compared with some 5,000 community hospitals, but dozens more are in the works since Congress this summer lifted a three-year moratorium on Medicare payments to new specialty hospitals. These typically focus on orthopedic and cardiac surgeries--which account for more than half the profits of many hospitals--and most lack costly emergency rooms. As these and other doctor-owned facilities spread and tensions soar, hospitals are finding it harder to get specialists on call in their ERs, reports HSC researcher Dr. Robert Berenson in a study published on the Web this week by Health Affairs.
Ambulatory Surgery Centers (ASCs), which compete with hospital outpatient departments for procedures that don't require overnight stays, like colonoscopies and some joint surgeries, are hollowing out hospitals as well. There are almost 5,000 ASCs today, nearly twice as many as a decade ago. Four in five are at least partly owned by physicians, many in partnership with hospitals seeking to minimize losses. The number of imaging centers has climbed to 6,037, up from 4,159 in 2001, according to the data firm Verispan. The scanning machines are costly to maintain, but once those costs are covered, the machines mint money. "There's an intense market-share competition taking place between hospital outpatient departments and imaging centers," says John Donahue, chairman of National Imaging Associates, which manages radiology for insurers in 36 states. "This battle is under way in Florida, Texas and virtually every state in which we operate."
Wichitans have had front- row seats to the war. In 1997, disgruntled cardiologists led by Dr. Gregory Duick approached Via Christi about establishing a heart hospital. "There was no grand conspiracy to make more dollars for doctors," says Duick. "It was fanned by frustration with the hospitals' inability to get things done and a lack of input from physicians on administration." When Via Christi declined, the doctors tapped local investors, and in 1999 opened the smartly designed, one-story Kansas Heart Hospital in a tony northeastern quadrant of town.
Kansas Heart triggered a cascade. This quiet, airy city of 540,000 already had--besides Via Christi's hospitals--the Wesley Medical Center, part of the for-profit HCA chain. Wichita now has five doctor-owned hospitals as well, along with a dozen ASCs and at least 10 free-standing diagnostic imaging centers, eight of which have physician investors. (Via Christi has a share in four of them, as it does in one ASC and a specialty hospital.) "The fear that emergency rooms and cardiovascular programs would close at community hospitals," says Duick, "has not been borne out over seven years in Wichita."
Money isn't the only motivator. Entrepreneurial physicians say they're tired of waiting for inefficiently scheduled hospital ORs to open up, that they're more productive and have better nursing support at their own facilities. Scott Barlow, CEO of the Central Utah Clinic in Provo, which runs an ASC, says that until the clinic bought its own imaging machines, patients had to wait up to 24 days to get a diagnostic scan at the nearby hospital. "This is about convenience, lower cost and higher quality," says Glen Tullman, CEO of Allscripts, an electronic-medical-records firm that works with ASCs and specialty hospitals. "Nobody in health care wants to be on the wrong side of that equation."
But is the competition fair? Within two years after Galichia Heart Hospital opened in Wichita in 2001, Wesley's net revenues from its cardiovascular program plummeted from a notch above $18 million to roughly $2 million. In 2003 the Kansas Spine Hospital opened, and in a year Wesley's neurosurgery revenues dropped $8.8 million, to roughly $1 million. Via Christi cardiovascular surgeries declined from 4,334 in 1998 to an estimated 2,950 this year. In that period, its executives say, the number of nonsurgically treated cardiac patients--who, say, have heart failure--remained relatively steady, around 4,300.
This matters, as Medicare reimburses most surgeries above the cost of care and nonsurgical treatments at lower rates, sometimes below cost. Hospitals make up the losses--and those from treating the uninsured--largely with profits from surgeries. They also hike the prices they charge insurers and employers, who give hospitals a 22% margin, according to researchers at the Lewin Group, a consultancy, helping cover overall losses of 5% or more from Medicare and Medicaid. That comes back to the rest of us as higher insurance premiums, making health care all the more costly to employers.
Physician-owned facilities do less charity care and treat fewer Medicaid patients than community hospitals do, government research shows. And they treat healthier (hence more profitable) patients, or--as in the case of heart hospitals--favor well-remunerated treatments. Not surprisingly, doctors who own a piece of the action are more likely to send patients to their own facilities.
The shift of patients can be devastating. Regionally owned Lincoln General Hospital in Ruston, La., lost about $2.5 million in business a year to imaging centers and an ASC, but was managing to stay afloat, according to CEO Tom Stone. Then, in 2003, the 40 physicians who ran the ASC opened the Green Clinic Surgical Hospital. Lincoln's inpatient and ambulatory surgeries halved, and by 2005 the hospital was $8 million in the red. "They've gone beyond cherry-picking," says Stone. "They've removed virtually everything they could take out of this facility." He is selling the hospital to a for-profit chain.
Green Clinic's CEO, Robert Goodwill, says Lincoln just screwed up. Its board declined an offer to invest in the specialty hospital, he says, and the hospital's losses stem from a "spending binge" Stone began in his attempt to compete. "Patients are choosing us because we're vastly superior," Goodwill says. But hospital bosses say this choice isn't a real one. "You're not going to disagree with the guy who's going to be cuttin' on you," says John Goodnow, CEO of Benefis Healthcare, a hospital system in Great Falls, Mont., that tried unsuccessfully to shut down a specialty hospital opened by half the city's doctors. "You can say patients have choice. Yes, theoretically. But c'mon, who's going to go against their own physician?"
Hospitals are fighting back in none-too-subtle ways. Some won't let an ASC physician-investor admit patients in their wards. And powerful health systems often use their leverage to lock physician-owned competitors out of preferred networks of insurers. Via Christi owns Kansas' largest managed-care plan; Wesley has an exclusive contract in Wichita with the state's leading insurer, Blue Cross and Blue Shield. "It's brutal competition," says David Laird, CEO of the Heart Hospital of Austin, which competes with the Texas nonprofit Seton Medical Center. "They act like they have a halo over their heads."
Such competition is fueling the arms race. Via Christi is counterattacking with a new neuromedicine service line. The weapons: a 64-slice CT scanner; and a brand-new $3.5 million CyberKnife, an X-ray gun that zaps tumors with pinpoint precision, housed in its own $1.5 million building. It has set up a stroke-treatment center and brain-aneurysm lab. "This is one of the areas that we've beefed up since all the specialty stuff happened," says Larry Schumacher, CEO of Via Christi's Wichita operations. "We're trying very hard to protect that." Wesley, for its part, has remodeled its operating rooms, opened a $54 million, four-story critical-care building and invested in its own gadgetry. "We compete on technology and have to stay state of the art," says Francie Ekengren, chief medical officer.
And if they build it, we'll fill it. The Medicare Payment Advisory Commission found that health-care markets with specialty hospitals have roughly 6% more cardiac surgeries and 9% more bypasses than markets without them. It's not that doctors deliberately push unnecessary surgery, but when a choice of treatments exists, capacity and monetary incentives have been known to influence the choices physicians make.
Nowhere is this more apparent than in diagnostic imaging. Last year Americans spent more than $100 billion on outpatient scans. Medicare's imaging costs have been growing 16% a year, much faster than the 9.6% rise for all physician services. The most lucrative--MRI and CT--climbed 25% last year. A third of the testing, says Donahue of National Imaging, is inappropriate; doctors order unnecessary scans, or two when one would suffice. "This is one of the most unsavory and concerning areas of how imaging is delivered," he says. "It's when imaging studies are not based upon clinical needs but on entrepreneurial requirements." Much of the growth is coming from cardiologists and orthopedists, who increasingly own such devices. It angers radiologists, who rely on referrals, and even imaging-center executives. "There should be some relief on the physician self-referral problem," says Bret Jorgensen, CEO of the chain InSight Health. "It's the single biggest reason imaging centers have been growing so rapidly." Physicians say much of the supposedly excessive testing is defensive. "If you fail to do a test and there's a bad outcome," says Dr. Kim Allan Williams, a nuclear cardiologist at the University of Chicago, "you will get sued in this country."
Congress and the Centers for Medicare and Medicaid Services (CMS) have taken steps to rein in imaging. Beginning next year, imaging centers will see payment cuts that the industry and its manufacturing allies--GE, Siemens, Phillips--say will reduce some payments to 20% of the cost of doing them. To level the specialty-hospital playing field, CMS will pay hospitals more for their more complex cases. Similarly it proposes to pay ASCs at 62% the rate of hospital outpatient departments. The industry is asking for 75%. Lobbyists are racing to the scene.
Though these changes are probably a step in the right direction, they do not directly address the problem of physician self-referral--or the distorted economics that underpin the rise of specialty facilities. Next year Medicare will pay physicians more for the time they spend on their patients' well-being, but, HSC researcher Dr. Hoangmai Pham notes, it still rewards them far more generously for procedures than for cognitive services like diagnosis and management of disease. So Wichita, which 15 years ago had seven psychiatric inpatient facilities, now has one, run by Via Christi. It has six that do heart surgeries.
Further, since physicians get paid through fee-for-service rather than, say, for curing their patients, their primary incentive is to do more stuff. CMS is starting to experiment with pay-for-performance programs that address this concern. But such measures can work only if they are remunerative enough to counter the base incentives that drive excess care. "A few pennies here and there is not going to change what physicians do every day," says Pham. "They're not stupid, and they have business managers."
And political clout. As do the manufacturers of medical technology. So creating a payment system that makes competition work as it ought to--reducing costs rather than inflating them--won't be easy. But the same can be said for living in a society that can't afford its sick and dying.
With reporting by Pat Dawson/Billings, Hilary Hylton/Austin
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