Proposing legislation to expand Certificate of Need (CON) requirements to include other physician-owned facilities such as ambulatory surgery centers and diagnostic imaging facilities. (Minnesota)

• Resisting efforts to repeal CON legislation. (Iowa)

Proposing legislation and or regulations requiring specialty hospitals (but not other hospitals) to provide emergency departments and/or accept Medicare, Medicaid, and uninsured patients. (Washington)

• Individual general hospitals have implemented a variety of strategies and tactics to discourage members of their medical staff from investing in competing physician-owned specialty hospitals. These initiatives include, but are not limited, to the following (See also Exhibit A):

Adopting economic/exclusive credentialing/conflict of interest policies and medical staff development plans that revoke or refuse to grant medical staff membership or clinical privileges to any physicians or other licensed independent practitioner that has an indirect or direct financial investment in a competing entity.

Hospital-owned managed care plans denying patient admissions to competing specialty hospitals.

Requiring health plans to sign an exclusive managed care contract or otherwise discouraging them from contracting with competing facilities.

• Removing physicians that have a financial interest in a competing facility from their referral and on-call panels. Refusing to cooperate with specialty hospitals, (i.e., refusing to sign transfer agreements).

• Requiring primary care physicians employed by the hospital or vertically integrated delivery system to refer patients to their facilities or those specialists that are closely affiliated with the hospital/health care delivery system. Requiring subspecialists to utilize the hospital/vertically integrated delivery systems facilities for all of their medical group's referrals, for specified services such as outpatient surgery and procedures, all imaging and laboratory work, therapy, and inpatient admissions.

• Hiring in-house specialists to build "centers of excellence" or service lines, sometimes intentionally competing with its own medical staff members.

• Limiting access to operating rooms and cardiac catheterization labs of those physicians that have a financial interest in a competing entity.

• Removing competing physicians from extra assignments at the hospital, such as directors of departments or reading EKGs, ultrasounds, echocardiography, and

X-rays.

The hospital industry's overarching message is that physicians who invest in a specialty hospital have a conflict of interest. They use this to justify their strategies to eliminate legitimate competition. However, physicians are ethically and legally permitted to invest in and refer patients to health facilities.

Current public policy generally prohibits physicians from profiting from their referral decisions absent a legitimate justification for the referral. AMA ethical opinion E-8.032, "Conflicts of Interest: Health Facility Ownership by a Physician," delineates two scenarios where physicians may appropriately make patient referrals to health facilities in which they have an ownership interest. First, it sets forth a general rule that physicians may appropriately make such referrals if they directly provide care or services at the facility in which they have an ownership interest. Second, it describes a separate situation where physicians may appropriately make such referrals, which arises when a needed facility would not be built if referring physicians were prohibited from investing in the facility. In the latter case, the appropriateness of the referrals would not depend upon whether the physicians have personal involvement with the provision of care at the facility, but whether there is a demonstrated need for the facility. Physician ownership of specialty hospitals and referral of patients for treatment at such facilities fits squarely within this ethical opinion.8

8 The hospital associations, however, claim otherwise by distorting AMA ethical opinion E8.032. They claim that it prohibits physician referrals to facilities in which they have an ownership interest unless there is a demonstrated need in the community. (July 6, 2004 letter to members of Congress from the Federation of American Hospitals (FAH) and the American Hospital Association (AHA)) The AMA quickly set the record straight, but the hospital associations continue to distort AMA policy. (August 4, 2004 letters from Michael D. Maves, MD, MBA to House Energy and Commerce Committee, House Ways and Means Committee and Senate Finance Committee.) Although a demonstrated need in the community is one ethical justification for a referral to a facility that one owns, it is a mischaracterization of AMA ethical opinion to state that it is the only justification.

In addition to ethical policy, physician self-referral laws and other fraud and abuse laws, such as the federal anti-kickback statute, permit physician ownership of treatment facilities and referrals to such facilities under various circumstances. The physician self-referral law, for instance, permits physician ownership and referral of patients to hospitals where the physician is authorized to perform services at that hospital. The hospital associations refer to this exception as a "loophole" to bolster their efforts to eliminate the ability of physician owned facilities to compete with their member hospitals. Yet, the exceptions and safe harbors have been carefully enacted and promulgated over the years. There is no data to support hospital industry claims that physicians are inappropriately referring their patients to specialty hospitals.

In fact, it is disingenuous for the hospital industry to claim that physicians have a conflict of interest when many general hospitals engage in self-referral practices. One hospital association claims that a "community hospital that tried to buy admissions in this way would be outlawed." 10Ironically, however, general hospitals often channel patients to their facilities and services. They do this mainly by acquiring primary care physician practices or by employing primary care physicians, and requiring those physicians to refer all of their patients to their facilities for certain services such as x-ray, laboratory, therapy services, outpatient surgery, and inpatient admissions. They also require such referrals by physicians under certain contractual arrangements or by adopting policies that require members of the medical staff to utilize their facilities. (See Exhibit A)

Hospitals value these controlled referral arrangements to such a degree that they maintain them despite the fact that many of these primary care practices and other physician arrangements operate at a loss for the hospital. The hospitals are frequently willing to subsidize these practices with profits derived from other departments and services provided by the hospital or health system.

Hospital efforts to control referrals would pose as much a concern as would physician self-referral if it were proven that such referrals led to an inappropriate increase in utilization. Worse yet, by dictating to whom physicians may refer, the hospital governing body or administration takes medical decision-making away from physicians. This runs counter to patient expectations, introduces financial concerns into the patient-physician relationship, imposes upon the professionalism of physicians, and can run counter to what the physician believes is in the best interest of the patient. These hospital self-referral practices also limit patient choice.

The AMA is very concerned about efforts by hospitals and health systems to control physician referrals and believes they pose a number of significant concerns. To reduce the interference in the patient-physician relationship, the AMA believes that disclosure requirements for physician self-referral, where applicable, should also apply to hospitals and integrated delivery systems that own medical practices, contract with group practices or faculty practice plans, or adopt policies requiring members of the medical staff to utilize their facilities and services.

Despite claims by the hospital associations that physician ownership of specialty hospitals is a conflict of interest, the data does not support their assertions. The Medicare Payment Advisory Commission (MedPAC) found no evidence that overall utilization rates in communities with specialty hospitals rose more rapidly than in other communities. In addition, of the specialty hospitals identified by the GAO with some degree of physician ownership, the average share owned by an individual physician was less than two percent. Of particular significance, the GAO found that the majority of physicians who provided services at specialty hospitals had no ownership interest in the facilities. Overall, approximately 73 percent of physicians with admitting privileges at specialty hospitals were not investors in those hospitals. 11 Therefore, the vast majority of physicians who admit patients to specialty hospitals receive no additional financial incentives to do so. Further, of those physicians who do have an ownership interest in the hospital, there is no evidence that their referrals are inappropriate or have increased utilization.

Specialty hospitals with physician investors believe that the playing field is actually tilted in support of nonprofit hospitals. Nonprofit hospitals are exempt from federal and state income taxes and local property taxes and have access to tax-exempt financing. Most nonprofit hospitals also receive Medicare and Medicaid DSH payments.

On the whole, the impact of specialty hospitals has not proven to be harmful to patients or to general hospitals. Specialty hospitals represent about two percent of

9 See generally 42 U.S.C. 1395nn., 42 CFR 411.350-411.361, 42 U.S.C. 1320a-7b, and 42 CFR 1001.952.

10 Charles N. Kahn III, A Health-Care Loophole, Washington Times, February 3, 2005. 11 GAO, supra note 2.

all short-term, acute care hospitals. 12 The most recent Medicare discharge data indicate that the 80 specialty hospitals in existence in 2001 accounted for slightly less than one percent of Medicare spending for inpatient services. MedPAC also found that the financial impact on community hospitals in the markets where physician owned specialty hospitals are located has been limited. These hospitals have managed to compensate for any losses of patients and revenues and demonstrate financial performance comparable to other community hospitals. Another study found that general hospitals residing in markets with at least one specialty hospital actually have higher profit margins than those that do not compete with specialty hospitals.13 MedPAC also found that specialty hospitals have forced community hospitals to become more competitive, and that specialty hospitals are an attractive alternative for patients and their families.

COMPETITION SHOULD BE PROMOTED AND CROSS-SUBSIDIES SHOULD BE ELIMINATED

The AMA continues to have serious concerns about the tactics being employed by hospitals in their attempts to eliminate competition by prohibiting physician referrals to specialty hospitals in which they have an ownership interest. The AMA believes that the growth in specialty hospitals is an appropriate market-based response to a mature health care delivery system and a logical response to incentives in the payment structure for certain services. If general inefficiencies exist in thẹ hospital industry, this type of market response will create an incentive for general hospitals to increase efficiencies to compete. If the cross-subsidies that hospitals use from profitable services are truly enabling them to provide unprofitable services, these cross-subsidies should be eliminated by making payments adequate for all

services.

The Center for Studying Health System Change, Professor Ted Frech (Department of Economics, University of California at Santa Barbara), the Federal Trade Commission (FTC) and the Department of Justice (DOJ) believe there are inherent problems in using higher profits in certain areas of care to cross-subsidize uncompensated care and essential community services. Recommendation 3 of the July 2004 FTC/DOJ Report on Competition and Health Care states:

Governments should reexamine the role of subsidies in health-care markets in light of their inefficiencies and the potential to distort competition. Health-care markets have numerous cross subsidies and indirect subsidies. Competitive markets compete away the higher prices and profits needed to sustain such subsidies. Competition cannot provide resources to those who lack them, and it does not work well when providers are expected to use higher profits in certain areas to cross-subsidize uncompensated care. În general, it is more efficient to provide subsidies directly to those who should receive them to ensure transparency. 14

Support for specialty hospitals in no way diminishes the important role of the general hospital in the community. Emergency and safety net care are important and necessary aspects of hospital care and general and non-profit hospitals should be adequately reimbursed for these and other essential services. The AMA does not believe that cross-subsidization by high-profit service lines is the appropriate method to fund community health and medical services. To ensure that hospital payments better compensate for these services so that safety-net hospitals receive proper funding, Congress should change the Medicare Hospital Prospective Payment System to minimize the need for cross-subsidization and accurately reflect relative costs of hospital care.

MedPAC is expected to recommend that CMS improve payment accuracy in the hospital inpatient prospective payment system (PPS) by refining the hospital Diagnosis Related Group (DRG) payments to more fully capture differences in severity of illness among patients, basing the DRG relative weights on the estimated cost of providing care rather than on charges, and basing the weights on the national average of hospitals' relative values in each DRG. MedPAC will also recommend that Congress give the Secretary the authority to adjust the DRG relative weights to account for differences in the prevalence of high cost outlier cases. Finally, MedPAC will recommend that Congress and the Secretary should implement the case mix measurement and outlier policies over a transitional period.

The AMA supports such recommendations and believes that such payment changes will go a long way towards leveling the playing field and promoting full and

12 Id.

13 Schneider, et al., supra note 4.

14 Federal Trade Commission and Department of Justice, Improving Health Care: A Dose of Competition, July 23, 2004.

fair competition in the market for hospital services. Consistent with Council on Ethical and Judicial Affairs Opinion E-8.032, the AMA supports health facility ownership by physicians if they directly provide care or services at the facility. The AMA also supports competition between and among health care facilities because it promotes the delivery of high-quality, cost-effective health care.

In addition, the AMA believes that further policy changes are necessary to protect America's public safety net hospitals. Safety-net hospitals provide a significant level of care to low-income, uninsured, and/or vulnerable populations. Public hospitals in the largest metropolitan areas are considered key safety-net hospitals. These hospitals make up only about 2% of all the nation's hospitals, yet they provide more than 20% of all uncompensated care. Compared with other urban general hospitals, safety-net hospitals are nearly five times as likely to provide burn care, four times as likely to provide pediatric intensive care, and more than twice as likely to provide neonatal intensive care. Safety-net hospitals are also more likely than other urban general hospitals to offer HIV/AIDS services, crisis prevention, psychiatric emergency care, and other specialty care.

Safety-net hospitals rely on a variety of funding sources. However, to finance the significant portion of uncompensated care, safety-net hospitals rely on local or state government subsidies, Medicaid and Medicare Disproportionate Share Hospital (DSH) payments, cost shifting, and other programs. As a group, safety-net hospitals are in a precarious financial position because they are uniquely reliant on governmental sources of financing.

The AMA believes that ČMS should correct the flawed methodology for allocating DSH payments to help ensure the financial viability of safety-net hospitals so they can continue to provide adequate access to health care for indigent patients. In addition, the current reporting mechanism should be modified to accurately monitor the provision of care by hospitals to economically disadvantaged patients so that policies and programs targeted to support the safety net and the populations these hospitals serve can be reviewed for effectiveness. Medicare and Medicaid subsidies and contracts related to the care of economically disadvantaged patients should be sufficiently allocated to hospitals on the basis of their service to this population in order to prevent the loss of services provided by these facilities. The AMA recognizes the special mission of public hospitals and supports federal financial assistance for such hospitals, and believes that where special consideration for public hospitals is justified in the form of national or state financial assistance, it should be implemented.

CONCLUSION

There is no evidence that general hospitals are suffering as a result of the growth of physician owned specialty hospitals. Specialty hospitals increase competition in the hospital industry and provide patients with more choice-forcing existing hospitals to innovate to keep consumers coming to them. This is a win-win situation for patients. Supporting health delivery innovations that enhance the value of health care for patients is the only way to truly improve quality of care while reigning in health care costs.

Based on the MedPAC and FTC/DOJ recommendations and the limited data currently available on physician ownership of specialty hospitals, the AMA believes that patients will be better served if Congress does not act to extend the moratorium on physician referrals to specialty hospitals in which they have an ownership interest. After the payment changes take effect, MedPAC, HHS and others should continue to monitor specialty hospitals and the impact on general hospitals and patient care.

We appreciate the opportunity to testify on this important issue. We urge the Subcommittee and Congress to consider the recommendations we have discussed today. We are happy to work with the Subcommittee and Congress as it considers these important matters.

Chairman JOHNSON. Thank you very much, Dr. Plested. Dr. Brien?

STATEMENT OF WILLIAM W. BRIEN, M.D., CEDARS-SINAI MEDICAL CENTER, LOS ANGELES, CALIFORNIA

Dr. BRIEN. Madam Chairman, Mr. Stark, Members of the Subcommittee, I am Dr. William Warren Brien, director of orthopedic

surgery and the clinical chief of the Department of Surgery at Cedars-Sinai Medical Center in Los Angeles. I am here today to share my concerns about the impact physician-owned, limited-service hospitals can have on patient access to essential medical services.

As an orthopedic surgeon, I have a unique perspective on today's topic. Several of the physician-owned, limited-service hospitals were started by orthopedic surgeons. But let me be clear. Many physicians do not agree with the practices of some of our colleagues who own these hospitals and exploit a loophole in the Federal law by referring carefully selected patients to their own facilities. This raises serious concerned about conflicts of interest, a physician's own financial interest versus the best care for patients. Of equal concern is the impact on our broader health care system, in particular, how these practices threaten the Los Angeles' already fragile emergency and trauma care system.

Cedars-Sinai Medical Center is a 900-bed, not-for-profit, fullservice hospital that serves as a local community hospital, a tertiary regional referral center for complex patient care, a Level I trauma center, and a major research, education, and training hospital. Each year we provide about $100 million in charity care. As a Level I trauma center, we are required to have physicians on call 24 hours a day, 7 days a week in all of our departments. Last year, we treated more than 75,000 people in our emergency Department and handled an additional 1,500 trauma cases, half involving uninsured patients.

Los Angeles' physician-owned, limited-service hospitals offer no trauma care and only severely limited emergency services, if at all. In my opinion, they should not even be called "hospitals" but, rather, be called "limited-access facilities." The physicians who own them carefully select and refer only those patients with private, commercial, or Medicare health coverage. The only services they offer are high-revenue-producing surgical procedures. In the last 2 years, nine community hospitals in the Los Angeles area closed. Last year, the county closed the Level I trauma center at the Martin Luther King, Jr., Medical Center. These losses have created a significant strain on the Los Angeles County trauma system and the Cedars-Sinai participation in this trauma system and raised serious access-to-care issues that will only worsen if limited-access facilities are allowed to proliferate.

Some existing community hospitals will close their high-cost emergency rooms. Others will close altogether because they cannot remain financially solvent. Our area's trauma system would face a complete collapse as fewer hospitals are left to handle an increased number of emergency cases. Fewer operational trauma centers mean more patients will die needlessly during longer transports in search of the available trauma centers. limited-access facilities also jeopardize general emergency care for everyone. Physicians who own them often refuse to participate in emergency on-call duty at other community hospitals, leaving full-service hospitals struggling to maintain specialty coverage in their emergency departments. And Los Angeles is not the only place in the country where this is a problem.

As a physician, I also worry about the safety of some of our patients treated by limited-access facilities which often treat only sin