SPECIALTY HOSPITALS: FOCUSED FACTORIES OR CREAM SKIMMERS?

1. SPECIALTY HOSPITALS: FOCUSED FACTORIES OR CREAM SKIMMERS? Presented to theHSC Specialty Hospitals Conference April 15, 2003 Kelly J. Devers, Ph.D.

2. Objectives • Prevalence and Characteristics • Drivers of Development • Vital Signs to Monitor • Policy Implications

3. Number of Specialty Hospitals Increasing Rapidly • Since 1997, 11 freestanding specialty hospitals have opened or are planned in the 12 CTS site visit communities • Cardiac and orthopedic procedures are the most common focus • Over 50 specialty hospitals are estimated to exist nationally and more are underway

4. Key Characteristics • Ownership arrangements are diverse • National for-profit firms, general hospitals, physicians, or combinations of these groups • Partial physician ownership is common • Scope of services provided varies • Emergency department • Other services

5. Drivers of Development • Relatively high reimbursement for some procedures • Physicians’ desire to increase control over decisions affecting their work environment • Physicians’ desire to increase their income • Higher productivity increases income from professional fees • Facility fees can add additional income

6. Indianapolis: A Case Study • In the last two years, 5 specialty hospitals have been opened or planned • Building boom began when specialists threatened to partner with MedCath • 2 joint ventures; 2 solely owned by general hospitals; and 1 solely owned by physicians • All add some new bed capacity

7. General Hospitals’ Response • Aggressively compete • Establish own specialty hospital to avoid or counter physician defection • Fight back • Economic credentialing of physicians • Discourage plans from contracting with competing specialty hospitals • Joint venture with physicians • Keep at least “half a loaf”

8. Focused Factories’ Promise • Improve quality and reduce costs by: • Performing a high volume of select procedures • Building optimal facilities for delivering these select procedures • Selecting the best staff and motivating physicians through ownership • Innovating and continuously improving care delivery

9. Concerns about Cream-Skimming • Specialty facilities might succeed primarily by selecting: • Better paying services • Better paying patients • Relatively healthy patients

10. Will Demand Increase Enough to Fill Additional Capacity? • Proponents say yes • If not in local market, they can draw patients from other markets • Critics say no • Specialty hospitals will have to take patient volume from general hospitals

11. Vital Signs to Monitor • Quality • Cost and price • Access

12. Quality • Specialty hospitals can use focused-factory techniques to improve quality • Yet specialty hospitals may lead to similar or poorer quality by: • Spreading the same volume over more facilities • Inappropriate utilization of services • Not providing a full range of services

13. Per-Case Costs • Specialty hospitals can use the same focused factory techniques to achieve lower per-case costs • Critics contend specialty hospitals may lead to similar or higher per-case costs by: • Spreading the same volume over more facilities • Creating excess capacity (i.e.,empty beds)

14. Total Costs • Total costs may stay the same or fall because: • Per-case costs could decline enough to offset any utilization increases • Yet specialty hospitals may increase total costs by: • Creating excess capacity • Over-utilization of services • General hospitals increasing prices for other services

15. Price • More competitors and capacity will spur greater price competition • But price competition may be constrained by: • Large, general hospital systems’ negotiating rates for owned specialty facilities and... • …discouraging plans from contracting with competing facilities

16. Access • Improved access to specialty services, particularly for some types of patients • But general hospitals risk losing ability to provide less-profitable but essential services • Some services may be closed or scaled back • May have greater impact on Medicaid and uninsured patients

17. Policy Challenge • Allow competition and innovation, while guarding against potential problems

18. Policy Options • Revise Medicare payment policy • Develop new ways to preserve access to essential services besides cross-subsidies • Regulate specialty hospitals • E.g., Stark, certificate-of-need, quality and patient-safety standards

19. HSC, FUNDED EXCLUSIVELY BY THE ROBERT WOOD JOHNSON FOUNDATION, IS AFFILIATED WITH MATHEMATICA POLICY RESEARCH, INC.