Fighting the competition

Hospital says businesses duplicate services; companies claim it's the American way

By William Kibler, bkibler@altoonamirror.com
Melody Hewitt isn’t sure what to think about for-profit medical centers that compete with community hospitals — taking a share of revenue the hospitals say they need to subsidize money-losing services like emergency care and helping the uninsured.

Not long ago, Hewitt underwent a procedure at Blair Gastroenterology’s new ambulatory surgery center on Valley View Boulevard. She had the same procedure done years ago as an outpatient at Altoona Hospital.

She found the surgery center nice, clean and bright.

She said the people there were friendlier, and parking was easier.

She liked having to wait less, the privacy of doing so in a curtained room and not having to go floor to floor.

“It was more personal,” Hewitt said.

And yet one time, in recent years, she needed a blood transfusion in the evening, and Altoona Regional Health System accommodated her immediately, she said.

She’s fortunate to have insurance to pay for Blair Gastro’s surgery center, and she’s pleased the hospital is available for others less fortunate.

Still, the community benefits from having centers like Blair Gastro, she said.

Maybe they will force the hospital to adapt, to begin offering similar amenities, she said.

“I think competition makes your service better,” she said.

Altoona Regional Chief Executive Officer Jim Barner said competition from Blair Gastroenterology, Laurel Eye Clinic and 611 MRI has weakened the hospital, contributing to a $1.8 million deficit through April of the current fiscal year, which ends June 30.

The hospital estimates that competition from Blair Gastro and Laurel Eye results in a net income loss of $1.1 million a year.

After Blair Gastro opened its ambulatory surgery center in January 2006, net income for endoscopies dropped from $1.8 million to $1 million a year, an $800,000 loss the hospital attributes to the Blair Gastro doctors doing fewer operations at the hospital.

After Laurel Eye Clinic opened its Duncansville ambulatory surgery center in January 2006, net income for eye surgery at the hospital by clinic surgeon-owner Stewart Van Horn dropped from $334,000 to $4,000 a year.

The hospital estimates that competition from 611 MRI, which opened in October 2004, has resulted in a loss of $1.4 million to $2 million a year, based on the medical facility’s reporting to the Mirror that it conducted 14,327 imaging studies last year.

Thus, the hospital estimates that the three medical centers may deprive it of $2.5 million to $3.1 million a year in net income.

In all three cases, the hospital no longer is receiving facility fees for serving as the “workbench” for services now being done often or exclusively at the freestanding centers, Barner said.

The medical centers now receive those facility fees, and the doctors who are among their owners share in the income.

Those doctors didn’t share in the facility fee income when they did those procedures at the hospital.

Facility fees supplement professional fees, which the doctors receive wherever they perform procedures.

Doctors who share ownership of medical centers eventually can benefit from sale of that ownership stake when they retire, said Ann Torregrossa, director of policy for the governor’s Office of Healthcare Reform.

Most of the data upon which the hospital based its loss-of-profit estimates are not available from the state Department of Health or the Pennsylvania Health Care Cost Containment Council, spokespeople from the hospital and those organizations said.

For example, for an analysis fee, the council could find the number of annual endoscopy cases performed at the hospital before and after the opening of Blair Gastro.

It also could say what the hospital charged for those cases.

But hospital charges, compared with actual revenues, vary greatly — from 2-1 to 8-1 — according to the council.

So the council can’t say what actual revenues the hospital received for those cases — much less what profits it made on them.

The hospital isn’t claiming that competition from medical centers is the only financial problem.

It recently reduced its work force setup by the equivalent of 95 full-time jobs, citing a 2.4 percent drop in inpatient admissions for the current fiscal year and increases in Medicare that fall 4.2 percent short of inflation.

The hospital also has struggled with Medicaid reimbursement about 75 percent of costs; and labor shortages that have driven up costs in professions such as registered nursing, pharmacy and some doctor specialities.

The competition with freestanding centers is wasteful because it results in duplication of resources, just as competition between the health system’s predecessor hospitals was wasteful before the 2004 merger, Barner said.

Ironically, this new duplication is making it harder for the hospital to complete its undoing of the old duplication: Aggravating the hospital’s financial difficulties made it harder to borrow the large amounts needed to consolidate facilities of the health system’s predecessor hospitals, Barner has said.

The competitive dynamic between the hospital and the medical centers is not unique to Altoona, but it is playing out around the country as entrepreneurial doctors see opportunities to take segments of business from otherwise monopolistic local health systems.

The American way

Some call it the American way, but as patients choose the new alternatives, hospital administrators are complaining.

They and some experts say freestanding medical centers mainly offer services well-reimbursed by insurers, while favoring overall healthy patients with good insurance plans.

By “cherry-picking” the best patients, centers leave hospitals with a higher concentration of sick and underinsured patients.

Those who undertake the competitive freestanding ventures and lawmakers who regulate health care need to contemplate the financial harm to hospitals and consider the greater good of the community, Barner said.

Ambulatory centers receive criticism for not accepting the sickest patients.

But their licenses don’t let them, said Rick Bloxdorf, president of the Pennsylvania Ambulatory Surgery Association.

Conversely, hospitals crow about their charitable care, he said.

But they also have exemptions from property, income and sales taxes, and they get annual tobacco-settlement payments to help compensate for that charitable care, Bloxdorf said.

For-profits do their own version of charity by writing off unpaid debts of patients without insurance, he said.

Barner dismisses the comparisons.

The $700,000 a year that health system gets in tobacco-settlement money and the benefits of not paying taxes are insignificant beside the full gamut of its charitable obligation, he said.

The hospital claimed a total of $29 million on its “Community Benefit Report” for fiscal 2007.

That included $825,000 in free and discounted charity care, $9.5 million in government programs for low-income and under- or uninsured, including Medicaid and the State Children’s Health Insurance Program, and $634,000 in community education, support groups, self-help programs, screenings and free clinic.

Former Altoona Hospital board member and retired local cardiologist Marvin Meisner isn’t sympathetic to Barner’s complaints.

“Welcome to the real world,” he said. “It’s all about free enterprise.”

The merged hospital has a monopoly on inpatients, and it’s ironic it should complain about centers frustrating its wish for a monopoly on outpatients, Meisner said.

The hospital needs to make its services better and more convenient, he said. Then maybe it can earn back patients who have gone to the freestanding centers for care, he said.

Efficiency advantage?

Ambulatory surgery center advocates say they have an advantage over hospitals because they’re more efficient.

They can be more efficient for several reasons, said Stephen Sheppard, managing principal of Medical Consulting Group of Springfield, Mo., which helped develop Laurel Eye.

Surgery teams there tend to do their specialty exclusively, while hospital teams generalize more, Sheppard said. Hospitals that refuse to accept the trend toward ambulatory surgery are taking the “Luddite” position.”

Barner bristled at for-profits’ claim of greater efficiency.

“In my opinion, it’s absolutely false and absurd,” he said.

His hospital’s ambulatory surgery center is as efficient and high-quality as any for-profit center, he said. It’s also convenient for patients and surgeons, he said.

CON requirement

Barner and other hospital administrators want lawmakers to reinstate a “certificate of need” requirement to prevent health care duplication.

In 1979, Pennsylvania passed such a law, but it expired in 1996, and freestanding sites subsequently rose in number from 47 to 232.

CON advocates say competition in health care doesn’t work because patients don’t generally choose their healthcare providers — they simply take orders from doctors.

They say the law would control costs by allowing health care development only where needed.

In its absence, too much new technology, equipment and facilities have come on line, increasing overall health care costs, they say.

The “explosion” of medical technology is the biggest factor in the rapidly rising cost of health care, Highmark spokesman Michael Weinstein said.

A business group that advised the state implored officials to “stop the medical arms race,” Torregrossa said.

Rx for Pennsylvania, Gov. Ed Rendell’s health plan, supports the return of something like CON. It recommended a bipartisan commission to determine how to meet health care needs regionally within set budgets. That method would include license and payment restrictions.

Rendell is considering the recommendation.

Stephen Foreman, associate professor of health care administration and economics at Robert Morris University, doubts whether the Rx proposal will work better than the old CON, as he expects politically motivated commission appointments.

CON was “a mess” when Pennsylvania had it, Foreman said.

He was a lawyer for developers of medical centers and never lost, which is an indicator that clients with the resources to make a case virtually always succeed, he said.

Nevertheless, state Rep. Phyllis Mundy thinks it’s time to try again. She introduced a bill to reinstate CON, but it remained in the Insurance Committee. She has 39 co-sponsors, mostly Democrats.

The increase in the number of MRI units in the state helps illustrate the problem, she said.

That number increased by 47 percent between 1999 and 2001, she said.

The average MRI costs $2 million to buy and $800,000 a year to run, she said.

Mundy said the centers reduce quality because providers do fewer procedures at each individual location where service is available and thus tend to be less competent collectively.

Licensing, reimbursement

Hospital and Health Systems Association of Pennsylvania Vice President Paula Bussard believes the answer isn’t CON, but a combination of license and reimbursement adjustments by lead insurer Medicare to remove the profitmaking incentive for setting up freestanding centers that compete with hospitals.

HAP proposes licensing requirements that would hold freestanding centers to standards of charity care and medical quality commensurate with hospitals.

It also proposes financial disclosure requirements to counter the allegation that physician-owners of freestanding centers tend to refer well-insured patients to their facilities and uninsured and Medicaid patients to hospitals.

The Cost Containment Council reported in 2006 that an average of 2.15 percent of the care given by general acute care hospitals was charity, compared with 0.69 percent for ambulatory surgery centers.

The council reported also that an average of 10.93 percent of revenue for general acute care hospitals was from Medicaid (a notoriously poor payer), compared with 2.95 percent for surgery centers.

Reimbursement should be higher for hospitals in recognition of their overhead costs for necessary backup services, Bussard said.

If done right, the proper adjustment of reimbursements and licensing can help right-size system elements without inhibiting the innovation represented by freestanding entrepreneurship, Bussard said.

She doesn’t buy that letting CON expire in Pennsylvania caused the “explosive” growth of the freestanding centers, anyway.

That growth instead resulted from a “confluence of factors,” including pressure on doctors to maintain income levels as malpractice premiums rose, Medicare’s reimbursement changes to encourage the use of outpatient settings, individuals who made good on Wall Street looking for investment opportunities and a relaxation of managed-care reviews and other controls because of public backlash, she said.

Recent Medicare changes may help solve Barner’s problem.

The federal agency recently overhauled its system for paying ambulatory surgery center facility fees to “logically align payment rates across payment systems to eliminate payment incentives favoring one care setting over another,” according to the Medicare fact sheet “A revised payment system for services provided in ambulatory surgical centers.”

Under the old ambulatory surgery center system, Medicare was paying as little as 10 percent of hospital outpatient department amounts for some services, but more than 100 percent for others, officials said.

Most services that have migrated from hospitals to ambulatory centers in recent years were among those that paid more or nearly as much as the hospital payments, the officials said.

The most common ambulatory surgeries are eye operations such as cataract removals and lens replacements and colonoscopies, states the Payment Basics publication.

The new payment system will shift ambulatory payments to 65 percent of hospital outpatient amounts during four years, taking “into account the lower costs of furnishing services in the ASC [ambulatory surgery center] setting,” the fact sheet states.

Advocates for hospitals say it’s only right hospitals should get more because their overhead is so much higher, reflecting the need for them to be so much more to their communities. The 65 percent ratio also reflects a mandate from Congress to make the overhaul budget-neutral.

The changes should help ensure that doctors decide where to operate only on the basis of what’s best for the patient, the officials said.

Negotiating with Highmark

Giant as it is in the local health care market, Altoona Regional tried to negotiate a contract with dominant private payer Highmark by which Highmark wouldn’t pay for care at competitive freestanding centers, Barner said.

But Highmark refused.

“They indicated they would be nailed for anti-trust violations,” he said.

“Our subscribers in the region have historically preferred broad choice and broad access to health care providers,” Weinstein wrote in an e-mail about that issue.

Because of consumer satisfaction with freestanding centers, Highmark contracts with a broad network of facilities, he wrote.

Altoona Regional persuaded smaller insurance companies to shut out competitors.

But their market penetration is not enough to make much difference, Barner said.

Highmark’s reimbursements to hospitals take into account their “full-service setting,” including emergency service around the clock and community education, Weinstein said.

Joint venturing

Another approach to dealing with the problem of medical centers competing with hospitals is joint venturing.

“Some hospitals have figured it out,” said Chuck Moran, spokesman for the Pennsylvania Medical Society.

They figure “half a loaf is better than none,” stated a December 2006 article in Health Affairs titled “Hospital-Physician Relations: Cooperation, Competition or Separation?”

Sheppard’s group is working on four joint ventures, three of them initiated by hospitals.

When hospitals partner with doctors, they can retain those doctors on staff and continue to count on them to take calls and support the hospital in other critical ways, he said.

“Get out in front of the parade,” he said. “Rather than obstruct and restrict.” It’s better than “railing against the gods,” he added.

Altoona Regional considered partnering with doctors on its own ambulatory surgery center, but there wasn’t enough interest. The hospital built the center within its nonprofit corporation structure. The hospital there receives outpatient-level facility payments from Medicare, projected to be 35 percent higher than for freestanding ambulatory surgery centers.

The hospital also discussed partnering with Blair Gastroenterology Associates when they built their surgery center, but it didn’t work out. And Laurel Eye Clinic offered a partnership to the hospital when it built its Duncansville center, but the hospital rejected it, owner Dr. Stewart Van Horn said.

Against the tide

Hospital advocates look to the payment differential as an acknowledgement of hospitals’ additional community responsibilities, but Sheppard sees a chance for community cost-cutting.

Medicare pays $1,500 for a cataract operation at the hospital outpatient department and $1,000 for the same operation by the same doctor with the same equipment at an ambulatory surgery center, he said.

The patient’s copay for the hospital operation is $500, while it’s just $180 for the surgery center’s, he said.

Why should cataract operations be done at the hospital to subsidize hospital money-losers, he asked. He’s not anti-hospital, he said. “It’s obvious to everybody the critical role hospitals play,” he said.

But there are numerous hidden subsidies of hospital operations such as the emergency room, trauma, oncology, obstetrics and dialysis, he said.

More than 70 percent of cataract surgeries in the U.S. were done in ambulatory surgery centers last year, he said. Fifteen years ago, it was 25 percent. Surgery centers are the right place for cataract surgery — less costly, more efficient and more pleasant, he said.

“They’re swimming against the tide,” he said of the hospitals who object.

More and more, given the national emphasis on controlling costs, providers that can’t do procedures at the lowest cost will be at “significant disadvantage,” he said.

Let hospitals offer critical services that only they can offer: Emergencies, inpatient care, open-heart surgeries — things you can’t do at an ambulatory center, he said. Let the others migrate away.

Foreman questions the wisdom of allowing this to happen. If you spin all the profitable things out from hospitals, you still have nonprofitable services such as obstetrics, the emergency room and the hospital library — and no way to support them, he said.

“Those things go away if you lose the hospital,” he said. “There’s the potential for the hospital to unwind.”

Allowing competition to have its way could lead to bankruptcy, Foreman said.

“You don’t want to learn the hard way in Altoona,” he said.

The health care market lacks the classic elements of competition, he said.

“Would you go to a discount heart surgeon?” he asked, rhetorically.

Hospitals not only have value as markets for bringing together people and equipment to provide complex medical services and as markets for services that remain when you spin away the profitable ones, they also have value as markets for ideas, bringing medical people together to talk and refer patients, Foreman said.

There’s no single answer, said David Nash, chairman of the Department of Health Policy at Thomas Jefferson Medical College. But among potential solutions are better reimbursement for necessary services provided by community hospitals, preservation of hospitals’ tax-exempt status and holding every provider to the same evidence-based standards of practice and outcome, Nash said.

He doesn’t advocate laws to put medical centers out of business.

“I’m a free-market realist,” Nash said. “Let the chips fall.”

Freestanding centers are highly attractive to patients, who tend to go, “Wow, this is really nice,” said Richard Shurgalla, instructor in health policy and administration at Penn State.

“At the end of the day, people have an option,” he said. “They don’t have to go to 611.”

Ultimately, it comes down to the communities themselves, whether or not they support or abandon the hospitals, he said.

Mirror Staff Writer William Kibler

is at 949-7038.