A Health Economists Perspective on the Medical Arms Race

1
A Health Economists Perspective on the Medical
Arms Race

• Paul B. Ginsburg, Ph.D.

National Institute of Health Policy Webinar,
September 29, 2006
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Center for Studying Health System Change (HSC)

• Local and national changes in financing and
  delivery of health care
• Surveys of households, physicians, employers
• Site visits to 12 representative metropolitan
  areas
• Active dissemination program
• Following in policy world, industry, researchers,
  educators
• www.hschange.org
• Principally funded by The Robert Wood Johnson
  Foundation
• Other foundations and government agencies

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Notion of a Medical Arms Race

• Providers invest in facilities beyond what is
  needed to meet demands for services
• Presence of facilities leads to excess use of
  services
• Cost of underused capacity is passed on to payers
  and ultimately purchasers of health care

4
MAR in 1970s and 1980s

• Little competition among providers on basis of
  price
• Insurance benefit structures did not promote
  consumer sensitivity
• Passive reimbursement systems for hospitals and
  other facilities
• Reimbursement of costs
• Payment of charges
• But hospitals competed for doctors allegiance
• Not a normal market
• Facilities and technology a key tool available
• Higher costs in more competitive markets

5
MAR in Era of Managed Care

• Concerns about MAR greatly diminished
• Greater health plan influence over utilization of
  services
• Authorization requirements
• Substantial excess capacity caused by declining
  utilization rates discouraged expansions
• Hospital revenues were highly constrained
• Medicare prospective payment
• Health plan negotiation of payment rates
• Costs of excess capacity could not be passed on
  to payers

6
Return of Medical Arms Race

• Health care construction boom in recent years
• Focused on specialty services
• Specialty hospitals in some communities
• Physician-owned outpatient facilities
• Migration of high-tech services into physician
  offices

7
Environment in 2006

• Providers more responsive to market signals
• Specializing in what is profitable
• Providers more entrepreneurial
• Constraints on physician fees for professional
  services
• Advances in medical technology permit more
  services to be offered outside of hospital
  settings
• Innovations in capital markets to fund new
  competitors
• Capital costs generally low

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Specialty Hospitals

• Focused on services that are most profitable
• And patients that are most profitable
• Potential for innovating on delivery as a focused
  factory
• Physician-owners involved in management
• Processes more oriented to supporting physician
  productivity
• Potential to increase efficiency through
  physician involvement
• Community hospitals face more obstacles in
  involving physicians
• Gain sharing restrictions

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Hospital Specialty Lines Strategy (1)

• Identify service lines that are profitable and
  can be expanded
• Develop brand for the service line
• Name (ABC Heart Institute), recognized leaders,
  marketing
• Range of organizational structures
• Separate physical area, hospital within a
  hospital, specialty hospital
• Often employ top specialists to draw referrals

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Hospital Specialty Lines Strategy (2)

• Ubiquity of service line strategy
• All 12 CTS markets
• In 33 interviewed hospital systems
• 33 heart service lines
• 24 cancer
• 18 orthopedics
• The norm in hospital management
• I became the CEO, started the service lines, got
  the ship profitable.
• in response to question on capital spending
  priorities I line up the services according to
  profitability and go down the list until the
  capital budget is exhausted.

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Physician-Owned Facilities

• Ambulatory surgical centers
• Same motivations and issues as with specialty
  hospitals
• Equipment in physician offices
• Technology permits viable smaller scale
  operations
• Mergers of single specialty groups to achieve
  scale needed for equipment ownership to be viable
• Self-referral incentives
• More ordering of tests
• Shift services from hospital facilities

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Hospital Responses to Threats from Physicians

• Loss of most profitable services a major threat
• Loss of margin
• More limited ability to provide cross subsidies
• More difficulty covering the ED
• Joint ventures with physicians
• Economic credentialing
• Increasing employment of specialists

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Health Plan Perspectives

• More competitors and greater capacity should be
  basis for lower prices--but
• Hospital ability to negotiate its network
  participation for all services
• Increase in volume more than offsets the lower
  prices achieved

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Why Are Some Services More Profitable than
Others? (1)

• Medicare goals for payment structure
• Fairness
• Neutral incentives for providers
• Prospective payment systems dependence on charge
  data
• Hospital profitability varies systematically due
  to
• Market-driven differences in markups
• Productivity trends impact

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Why Are Some Services More Profitable than
Others? (2)

• Problems in physician RVS when equipment involved
• Assumptions on rates of use and interest rates
• Private payers either follow Medicare or pay
  discounted charges
• Similar distortions in private payment structures
• Little private payer innovation in reimbursement
• Some steps to limit sites where high-end imaging
  will be paid for

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Policy Options to Address MAR More Accurate
Payment Structure (1)

• Conservatives and liberals can come together on
  this level playing field
• Implementing this not as easy
• Very limited funding for these activities
• Political sway of losers
• Urgency typically not high
• But major threat to academic medical centers or
  community hospitals can galvanize action
• Medicare inpatient hospital payment
• MedPAC findings about systematic variation in
  profitability
• Motivation by specialty hospital issue

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Policy Options to Address MAR More Accurate
Payment Structure (2)

• General hospitals gain in the aggregate at
  expense of specialty hospitals
• But general hospitals urged delay and phase in
• Winners and losers among general hospitals
• Many have not faced threats from specialty
  hospitals
• Device makers concerned about payment rates for
  DRGs where devices used

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Policy Options to Address MAR Restrictions on
Self-Referral

• Physicians offices excluded from self-referral
  restrictions
• Traditionally, increased service volume limited
  by physician time
• But increasingly, self referral incentives apply
  to more services, including some that are very
  costly, e.g. high end imaging

19
Policy Options to Address MAR Limits on Capital
Spending

• Medicare moratorium on specialty hospital
  construction
• States considering reviving Certificate of Need
  laws
• Spearheaded by general hospitals
• Support by payers

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Summary MAR in 2006 vs. 1970s

• More focused on responding to market incentives
• Specializing in profitable services
• Physician groups are major players now
• More potential to expand capacity
• More services influenced by self-referral
  incentives