Angioplasty procedures are slower to replace more profitable coronary artery bypass surgeries in specialty hospitals compared with other hospitals, according to MedPAC's ¹ March 2005 report to Congress on physician-owned specialty hospitals.

While CABG surgeries decreased in all hospital settings due to increasing use of angioplasty, "the rate of CABG surgeries per 1,000 beneficiaries declined more slowly in heart hospital markets than in other markets" - a statistically significant finding, according to the report.

Critics of physician-owned specialty hospitals contend that physicians can pre-select more profitable patients for treatment. With CABG procedures, for example, the DRG payment in 2002 (the most recent year that data are available), was roughly $24,000, according to MedPAC, with a marginal profit of $9,600 per patient.

"If 10 cardiologists owned a 3% interest each, and they all induced one additional surgery per year, each cardiologist's income would increase by $2,880," MedPAC calculates.

Although the findings were not statistically significant, angioplasty procedures and defibrillator implantation showed trends of faster and slower growth, respectively, in specialty-hospital markets compared with other hospitals, as would be expected based on 2002 financial incentives.

"The small changes in utilization are always in the direction that would be predicted by looking at financial incentives," the report notes.

Although the commission concludes that "the degree to which physicians will alter their behavior when faced with financial incentives of this magnitude is not clear," the report does find that specialty hospitals generally "treat patients who are generally less severe cases" and "concentrate on particular DRGs, some of which are relatively more profitable."

Overall, physician-owned heart hospital markets only had 4% more surgeries than otherwise would be expected, despite capturing between 20% and 45% of the cardiovascular surgeries in their markets.

Consequently, physician-owned heart hospitals have garnered the majority of their patients by taking market share away from community hospitals, the MedPAC document finds.

Community hospitals are making up for the lost revenue by cutting staff, implementing aggressive pricing strategies to raise revenue from private payors, and expanding into more profitable areas, including pain management, neurosurgery and medical imaging.

During a March 8 Senate Finance Committee hearing to discuss the specialty-hospital report, MedPAC Chairman Glenn Hackbarth explained the report's recommendations, including a series of changes to the payment system's DRGs to pay hospitals more for treating sicker patients.

The recommendations, Hackbarth said, "will reduce the potential to profit from patients and DRG selection and will result in payments that more closely reflect the costs of care while still retaining the incentive for efficiency" in the payment system.

He added that the DRG refinements would improve Medicare payments and that the commission would have suggested them even without the specialty hospital issue.

In addition, Hackbarth warned against taking drastic actions against the physician-owned specialty hospital industry, saying not enough data are available to determine if the facilities are creating significant competitive disadvantages for community hospitals and causing inappropriate hospital admissions.

"We are not quite prepared to reach the conclusion that they ought to be outlawed," Hackbarth stated. While the facilities tend to treat fewer Medicaid patients and pull more lucrative patients from community hospitals, Hackbarth said they also may provide higher-quality care at lower costs. "We don't know the answer to that today," Hackbarth said of the questions of quality and costs, "but we will in the very near future."

Finance Committee Chairman Charles Grassley (R-Iowa) and Ranking Member Max Baucus (D-Mont.) are developing a bill addressing specialty hospitals.

MedPAC also recommends extending an 18-month Medicare Modernization Act-implemented moratorium on physician-owner referrals to specialty hospitals for Medicare patients. The commission advocates applying the ban until Jan. 1, 2007.

MedPAC DRG Reform Proposals May Impact Specialty-Hospital Cardiac Trends

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