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tial review of their report, there are several preliminary findings in our analysis that are consistent with their results:

• Both analyses found specialty hospitals generally treat less severe cases than community hospitals. The CMS analysis found this difference did not appear to be related to referrals by physician owners of less severe patients compared to referrals by other community physicians.

• Additionally, MedPAC's analysis of the payer shares for specialty and community hospitals is consistent with the CMS finding that specialty hospitals provide less uncompensated care than community hospitals as a whole. In addition, the CMS analysis found that specialty hospitals pay a substantial proportion of their net revenues in taxes, so that total payments for uncompensated care plus taxes are a higher proportion of total revenues at specialty hospitals.

• MedPAC's analysis also found large differences in relative profitability across severity classes within DRGs, which create financial incentives to select low severity patients. MedPAC has recommended refining the DRGs to reduce these incentives and we are currently evaluating their recommendations. Conclusion

Madame Chair, thank you for this opportunity to discuss the technical findings that will be incorporated into our report on physician-owned specialty hospitals. We have been thoroughly studying this important topic, with extensive collection and analysis of new data, as part of our ongoing efforts to provide a strong factual foundation for implementing policy decisions that help patients get the high quality health care possible at the lowest cost. We will act expediently to incorporate these findings to complete our study and prepare our final results and recommendations for your review. As part of our careful evaluation of this multi-dimensional issue, we are also assessing what authority we have in this area to assure the best possible alignment of Medicare's financial incentives with our goal of improving quality of care provided to our beneficiaries while avoiding unnecessary costs. CMS looks forward to continuing to work with you closely on this issue. I thank the committee for its time and would welcome any questions you may have.

Chairman JOHNSON. Thank you very much, both of you. I appreciate your testimony and the thoughtfulness of it and the data you have been able to develop. It does leave holes, and my conclusion is we are well down the road but we have a lot of work to do. Mr. Hackbarth, I am very interested int refining of the DRGs that you propose. I do think that we need to know more about the winners and losers, and I wonder whether MedPAC had discussed or thought through the issue of budget neutrality?

Mr. HACKBARTH. Since these are changes in the DRG weights and the severity adjustment, these would be budget neutral changes. They redistribute payments within the system in a budget neutral way to better match payments to expect a cost for different types of patients. So, yes, it is budget neutral.

Chairman JOHNSON. It is my recollection that MedPAC has commented on the growing number of negative margin hospitals or low margin hospitals, and I personally am watching a lot more very ill medical patients stay in the hospital longer, Medicare medical patients. And I hate to see yet another mechanism that attributes more money to something we can calculate and takes it from these longer-held patients who are sick but are not having operations, procedures, you know, the kind of thing that attract dollars. I think we really have to look at that as we move forward.

Mr. HACKBARTH. Could I just make a comment on that? One of the types of problems that we see in the current system is that since the DRG weights are based on charges, we think we are overpaying for services, DRGs, where there are lots of ancillary services involved. And surgical cases would be one example of that, where

we think that there might be a pattern of overpayment. By the same token we may be underpaying for patients that have a different mix of services, medical patients of various types. So, we think that there are obviously some mistakes in the system and some types of patients aren't carrying enough dollars with them, and the purpose of these refinements is to level out that playingfield, again, not just for specialty hospitals, but even among community hospitals.

Chairman JOHNSON. I think that could be very useful. It just has to be done with a lot of thought and I am not sure budget neutrality is fair or right. Your testimony, however, appears to me not to address the other half of the problem which is selection by payor, and there is some evidence that these hospitals do select not only the payors, the people who pay, as opposed to the people who don't, but the payors that pay better than the payors who pay worse. I don't see anything in your proposals that really well addresses this aspect of the disparity, because as we have talked about a number of times, occupancy is crucial to a hospital's profitability and occupancy by paying patients is crucial to a community hospital's well-being.

Mr. HACKBARTH. Consistent with our statutory assignment, MMA, we looked at how Medicare pays these institutions, and also at the number of Medicaid patients they treat. And as I reported, we found that they do care for disproportionately fewer Medicaid patients. We did not look specifically at uncompensated care, nonpaying patients, because that assignment was given to CMS.

Chairman JOHNSON. Do you have any comment on that, Dr. Gustafson?

Mr. GUSTAFSON. Yes. We did discover some information about uncompensated care. I summarized the point a few minutes ago, and the report will go into this in greater detail.

Chairman JOHNSON. Thank you. Now, did either of you look at selection amongst payors, not the government, private payors, and the variation amongst payors? There is some indication that organizations are sensitive to who are the good payors and who are the bad payors.

Mr. HACKBARTH. We did not look at that. Given the amount of time available and the resources, we focused on the narrow statutory mandate.

Chairman JOHNSON. And also I am not so sure that this was common in 2002. It may have been some enrichment in the art.

Mr. GUSTAFSON. I think we examined it only to the extent that we looked at the Medicare share and consequently the complement of that is that provided by either Medicaid or private payors or by uncompensated care. So, I believe our report will provide some detail on that, but we didn't go into it in depth.

Chairman JOHNSON. This issue of the length of stay and the failure to show any reduction in cost is a concern because if competition is to improve quality and reduce costs, and the quality jury, I will be interested to see your report in greater detail. But I would have to say that in extensive talks with thoracic surgeons, which I hope to share with the Subcommittee Members in a seminar setting. It was very interesting the tremendous progress they have made in quality, and they can make it in a community hos

pital setting just as easily in a brandnew facility. Which I think leads us to the question of if investing in this new capital from our point of view does not result in a reduction in costs, the what are the implications of that for the overall cost of the Medicare system? Mr. HACKBARTH. Well, because unfortunately the limited data at our disposal, the small number of hospitals and so on, as I said, we couldn't draw definitive conclusions about how costs compared. We did find that the costs were higher, not lower, but that was not a statistically significant result. So, that is the sort of question that with more time and more data we might be able to provide a more compelling answer.

Chairman JOHNSON. And last, very briefly, did you look at whether or not there were waiting lists at the existing cardiac programs that the specialty hospital then served, or was it—it is a little hard to look at this in 2002 because there was not much time— but you are saying that the community hospital recovered from the blows. There are two things that it seems to me we don't know. We don't know whether they recovered from the blow by substituting higher cost services that we will now pay for, and dropping services to low income pieces that were-we don't know whether they lost their ability to cross-subsidize Ob/Gyn wards or particularly OB wards of pediatric wards. So, I think we need to look at lot more. Did you look at that at all, Dr. Gustafson?

Mr. GUSTAFSON. I am not aware that we did, although the site visits I believe were fairly comprehensive. I didn't go on any of them myself.

Chairman JOHNSON. I think we do need more information about what happened at these community hospitals. I think we need more information about whether there were waiting lists for current services, whether this was a need induced response or whether this was a profit induced response. Thank you. And I have taken too much time, so you do not need to respond to that. Mr. Stark?

Mr. STARK. Mr. Hackbarth, has MedPAC closed the door on a future recommendation that the whole hospital exemption be eliminated, or is that still open?

Mr. HACKBARTH. No, we haven't closed that door. We would like to make a final recommendation as it were on that based on more definitive evidence on cost and quality in specialty hospitals. Mr. STARK. Specialty hospitals that are fueled by self-referral or specialty hospitals in which

Mr. HACKBARTH. Here I am talking specifically about the physician-owned specialty hospitals.

Mr. STARK. Do you have a concern or do you share my concern about allowing the moratorium to expire before Congress passes or CMS acts without legislation and payment changes are recommended?

Mr. HACKBARTH. Very much so.

Mr. STARK. So, you think we should keep the

Mr. HACKBARTH. We think it is very important to extend the moratorium.

Mr. STARK. Until such time as we resolve the issue?
Mr. HACKBARTH. Yes.

Mr. STARK. Is MedPAC still concerned in general about self-referral to physician-owned facilities or these diagnostic facilities or whatever? Is there still some evidence that ownership tends to encourage higher utilization?

Mr. HACKBARTH. Yes. We are concerned about that. We are open to the possibility that specialization and the sort of engagement that you get through ownership could help improve efficiency and quality, and we don't think that we had sufficient information to reach definitive judgments on those issues. And as we have discussed often in these hearings, our view of the status quo is that it is not all that great. There is a lot of inefficiency in the system and a lot of unevenness in quality, so we don't want to definitively rule out a development that may help us on those fronts unless we have really compelling information to do so.

Mr. STARK. There has been some discussion in somebody's testimony about the fact that the specialty hospitals do better, and they perhaps have equivalent mortality. Dr. Gustafson, you only looked at four heart hospitals, right?

Mr. GUSTAFSON. On the quality measures we looked at all 15, sir.

Mr. STARK. All 15 what?

Mr. GUSTAFSON. All 15 heart hospitals.

Mr. STARK. There are only 15 of them?

Mr. GUSTAFSON. There were only 15 in 2003, sir. Actually, let me correct that. There were 16.

Mr. STARK. Did you look, Mr. Hackbarth, at the, I guess the invasiveness of the procedures? Has there been any study about whether more invasive procedures were used for somebody with the same diagnosis in one hospital or another?

Mr. HACKBARTH. What we did, Mr. Stark, was look at different types of patients, and we broke them in-we looked at all heart surgeries in general, and then we looked at three particular categories, one that we identified as a high profit type of case, and then a medium profit and a low profit, and tried to see whether the patterns of care differed in the communities where there were physician-owned specialty hospitals. And with one exception, we did not find a statistically significant difference.

Mr. STARK. I am going to ask you to comment on Mr. Gustafson's study here, but you are suggesting the mortality rate Mr. Gustafson suggested that the mortality rate between cardiac and community hospitals was similar when adjusted for severity, but that the readmission rate for cardiac specialty hospitals was higher on average I gather.

Mr. GUSTAFSON. That is correct.

Mr. STARK. So, if we already know that you are putting the more complex sicker patients in the community hospitals and the healthier patients in the cardiac hospitals, wouldn't you expect that they would have lower readmission rates in the specialty hospitals if their quality of service is as good? I mean there is something here about doing your callbacks, for which I suspect they get to charge again. They do not do callbacks free like my Ford dealer, do they? You go back a second time, you pay a second time, right? So, I know that maybe they didn't put the drain plug in properly,

so you can come back and get another oil change, but I mean, is it-did you take that into account, Dr. Gustafson?

Mr. GUSTAFSON. Well, I mean, we think the admissions would be a source of concern, certainly.

Mr. STARK. Okay. But, so you still think that all the readmissions for healthier patients didn't make the care worse in the cardiac hospital

Mr. GUSTAFSON. Well, I mean, it is a complex set of measures that were employed here insofar as the mortality seems to be one you would want to pay particularly close attention to, and so we did. Readmission is a different nature of problem. And I would say that the differences we are talking about here are not startling. They are significant, but not necessarily startling. And community hospitals vary a fair bit in some of these factors as well.

Mr. STARK. Mr. Hackbarth?

Mr. HACKBARTH. I just want it to be clear, the reason that I wasn't responding to your question is that the quality piece of the work was assigned to CMS. So, we did not specifically

Mr. STARK. No, I was asking you about readmissions, though, from a cost basis. I mean, if you have some guy coming back two and three times, and they are healthier, it sounds to me like that could be more cost

Mr. HACKBARTH. That is unquestionably a problem if that happens. The extent to which it does happen, I don't know, since we didn't look at that issue.

Mr. STARK. Thank you.

Chairman JOHNSON. Mr. McCrery.

Mr. MCCRERY. Thank you, gentlemen, for your testimony, although I must say it doesn't really tell us exactly where to go on this issue. And I hear you saying that you need more time and more resources to give us more definitive guidance-which is fine. And you are suggesting that we keep the moratorium in place until we can act on your recommendations, I suppose with respect to the DRG changes. How long do you anticipate keeping the moratorium in place? Is it totally dependent on congressional action, on the DRG front?

Mr. HACKBARTH. Our proposal is to extend it to January 1, 2007. Some of the changes that we propose could be done under existing statutory authority. One of the refinements that we propose requires new legislative authority, as we read the law. So, on some of them, as soon as CMS has the opportunity to review our work and reach conclusions about it, they could begin on today, tomorrow, whenever that point it. In terms of when we might know more, we used 2002 data because that was the most recent available when we began our study. As Tom reported, CMS, because they started a little bit later, had 2003 data. Before the end of this calendar year, we should have 2004 data, which would give us, obviously, a more significant database to look at some of these questions. So, I am not just saying somewhere out in the distant future. I think it need not be that far in the distant future.

Mr. MCCRERY. So, you are saying that the moratorium ought to be in place at least until we make the DRG changes and you have more time and more data to examine to report back to us once again on this issue.

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