Generous Medicare Payments Spur
Specialty Hospital Boom
October 26, 2003
By REED ABELSON
INDIANAPOLIS - The hospitals here -
hospitals across the
United States, for that matter - covet patients like
E. Wilson. Mr. Wilson, 79, has had two open-heart
operations, five angioplasties, three cardiac
catheterizations and an implanted defibrillator. Just
month, he checked into the Heart Center of Indiana to
his first stent, a tiny bit of wire scaffolding that
keep arteries open.
Mr. Wilson's primary health insurance
is Medicare, and
Medicare pays generously for cardiac care - so
that hospitals and doctors scramble after the
The Heart Center, a 60-bed hospital
that cost $60 million
and boasts not just the most sophisticated new
technology but an executive chef and what it calls
service," opened last December. Indeed, all four
hospital groups in Indianapolis are investing in new
hospitals, collectively spending $215 million on
buildings with catheterization labs and bedside
Cranes have been raised over
construction sites in places
like Milwaukee, Phoenix and Houston, too, with money
flowing into new hospitals specializing not just in
care, but in other well-reimbursed specialties like
orthopedics and surgery. In a report this month, the
General Accounting Office, the investigative arm of
Congress, counted at least 26 specialty hospitals
construction across the country.
Medicare - which pays for some $100
billion of inpatient
hospital care annually, and sets the pattern for many
private insurers, as well - is not the sole driver of
investment. But health executives say that Medicare's
payment system for hospitals, with its emphasis on
procedures and its weak ties to the actual costs of
providing care, exerts a strong influence on which
needs in a community are met.
Amid the building boom here in
Indianapolis, some hospitals
are laying off employees or scaling back programs,
psychiatric care, that are less generously
Preventive care and case management, health experts
get short shrift.
"The incentives are terribly
misaligned," said Samuel R.
Nussbaum, a doctor and former hospital executive who
the chief medical officer of Anthem, a large health
Creating Excess Demand A study of
Indianapolis health care
last year concluded that the construction of so many
heart hospitals could create excess demand for
rather than produce better cardiac care.
"Improving clinical quality did not
appear to be a driving
force for new facilities or services," said the
the Center for Studying Health System Change, a
research group. "Given these market conditions,
competition could, alternatively, result in higher
rates and costs."
In Washington, lawmakers rushing to
complete a compromise
bill that would establish a Medicare prescription
benefit are now turning their attention to the growth
specialty hospitals. The Senate version of the
bill would make it harder for doctors to invest in
refer patients to such hospitals, and full-service
hospitals are lobbying hard for the provision.
Hospitals will typically not disclose
how much they profit
from a particular procedure, like a coronary bypass
angioplasty. And Medicare - with little information
the cost of treatment - cannot say, either. But one
full-service medical center that is leading the
campaign against specialty hospitals, Sioux Valley
in South Dakota, estimates that it makes nearly
a typical coronary bypass under Medicare, while it
almost $1,800 treating a case of simple pneumonia and
$2,500 on a patient with kidney failure.
Cardiac procedures "are absolutely
our highest margin
business," said Becky Nelson, the president of Sioux
Valley, who estimates that they account for 13
the hospital's patient volume but 28 percent of its
profits. Costs and payment levels vary so widely
country that Dr. John Birkmeyer, a surgeon who
health care at Dartmouth Medical School, estimates
some hospitals may make nearly $20,000 on a coronary
In Indianapolis, there is recognition
levels have influenced hospitals' behavior.
"We're working on a payment system
that has been
jerry-rigged so many times, we've been looking for
loopholes," said Jack C. Frank, an executive at
Health Network, which opened the Indiana Heart
this year in partnership with local doctors.
Hospital Building Boom Just 20
minutes southeast of the
Heart Center of Indiana, Mr. Frank's $60 million
says it is the nation's first all-digital heart
using electronic patient records to track care.
minutes to the south, construction is well under way
latest - and most expensive - competitor here, the
Francis Cardiac and Vascular Care Center, expected to
about $65 million when it opens next year.
Even some of the people building the
hospitals worry that
Indianapolis may not be able to support them all,
heart disease is the leading cause of death among
"It can't work," said Daniel F. Evans
Jr., the chief
executive of Clarian Health Partners, whose Clarian
Cardiovascular Center is the most modest of the
undertakings, at $30 million, and the only one built
a full-service hospital.
Executives, of course, vigorously
defend the decisions to
build their own facilities. Heart hospitals, they
pay for money-losing cases, like accident victims or
patients with congestive heart failure.
"Cardiac care has been a source of
some margin, which has
been very important in subsidizing some services,"
Robert J. Brody, the chief executive of St. Francis
Hospital and Health Centers.
Nothing in the Medicare legislation
before Congress would
directly alter the hospital payment system. But
mainly Republicans, for provisions aimed at
more beneficiaries to enroll in private health plans
that bigger plans would have more leverage to
"The prices are being fixed" by the
government, said Thomas
A. Scully, who runs Medicare as administrator of the
government's Centers for Medicare and Medicaid
Local insurance companies would be much better at
how to pay doctors and hospitals to deliver quality
Payment System Is Dated The current
system was adopted in
1983, in an effort by the federal government to
costs. Until then, Medicare basically reimbursed
for their costs of delivering care, an arrangement
offered them no incentive to keep hospital stays
new plan established fixed prices for treating a
disease or performing a given procedure. Some cases
cost more and some less, but the price Medicare paid
supposed to represent the average.
As a cost-control mechanism, the
system has been largely
successful. The problem, say hospital executives and
industry analysts, is that after 20 years, the
out of whack: Medicare frequently pays too much for
kinds of care and too little for others.
To take account of the rapid changes
in medicine, like new
technologies and treatments, Medicare collects data
hospital charges - essentially list prices for
from a cardiac catheterization to bypass surgery to
treatment for pneumonia. The agency then tweaks
relative to one another, updating its payment
But charges often bear little
relation to a hospital's
actual costs, any more than a car's sticker price
indicates what it costs to build the car. And
rarely, if ever, lower their charges, say industry
analysts, even when their costs fall significantly.
"Administered price systems tend to
break down over time,"
said Joseph P. Newhouse, a Harvard University
health policy who is a member of the Medicare Payment
Advisory Commission. "If you're overpaid, everybody
on the way to the bank, and you may induce more
Just how overpaid is unclear. Many
hospitals lack the
accounting systems to determine their exact expenses
specific procedures. Hospitals also have tremendous
discretion in allocating expenses across departments,
In the case of a coronary bypass, for
charges increased nearly 30 percent from 1993 to
as the average hospitalization decreased to 9 days
nearly 12 days, according to data from the Healthcare
and Utilization Project of the Agency for Healthcare
Research and Quality, a government group in
Profitability Varies Widely What
seems certain is that
there are wide variations in the profitability of
hospital services under Medicare. Mark Wietecha, who
directs health care consulting for Kurt Salmon
estimates that the profit margin for surgery,
cardiovascular cases, is about 15 percent for some
hospitals, compared to just 2 percent for
"People build their business plans
and facilities on these
profitabilities," he said.
In Indianapolis, the rush to build
heart hospitals is
leading to what appears to be significant duplication
Heart transplants are offered only by
St. Vincent and
Clarian, which is affiliated with Indiana University,
many services are available at all four heart
fact, St. Vincent's new heart hospital, the Heart
Indiana, competes directly with its parent hospital
patients. And some doctors at Clarian who have
the Heart Center are sending profitable cases there,
according to Mr. Evans, Clarian's chief executive,
on only the most difficult - and expensive - cases at
The construction boom here was
influenced by the threat of
a new competitor, the MedCath Corporation, a
chain with 11 heart hospitals in nine states that
discussions with some local doctors. To avert
entry into the market, Community Health and St.
made deals of their own with doctors to build
Hospital executives here are quick to
agree that more needs
to be done to help people stop smoking or lose weight
steps that could help prevent the diseases they make
treating. "Our reimbursement is all around acute
said Sister Sharon Richardt, a St. Vincent executive.
think where the flaw is we need to keep people well.
need to start reimbursing for prevention."
But Medicare was created nearly four
decades ago to prevent
the financial catastrophe that often occurred when an
person suffered a heart attack or when a disease like
cancer was diagnosed. Payments are therefore
rather than intended to encourage hospitals and
prevent disease or coordinate care, said Dr. Gerard
Anderson, a former federal health official who helped
develop the system and now teaches at the Johns
Bloomberg School of Public Health.
Patients Can Lose Patients like
Corinne Walker, an
83-year-old Indianapolis woman who suffers from
heart failure, are not always well served. In late
she developed cellulitis, a serious bacterial
her legs, and spent months in three hospitals. No one
bothered talking to her personal doctor, Ms. Walker
To her, it seemed as if the people treating her
ignored her heart condition, although it contributed
"They were working on my legs,
period," Ms. Walker said.
Only after she was sent home, with a nurse
her care, was she finally able to get better, Ms.
In Indianapolis, the treatment of
chronic conditions "has
fallen through the cracks," acknowledged Mr. Frank,
Community Health Network executive. With long
stays and few options for aggressive intervention,
congestive heart failure is a particularly
diagnosis, executives say; the Sioux Falls hospital
loses $1,200 on the average case.
Even so, there is little constituency
- outside a circle of
policy analysts - for overhauling a payment system
produces such results.
Many hospitals have figured out how
to make the most of the
status quo. Tenet Healthcare has been formally
abusing the system by which Medicare pays for the
expensive cases. But hospitals generally try to fit
care into the most lucrative billing codes.
"In fact, you see a great deal of
gaming going on," said
David Butz, a health economist at the University of
Lawmakers, meanwhile, focus on small
fixes to the system.
With cuts in spending on cancer or heart disease
politically unpalatable, they tend, under lobbying
pressure, to expand coverage or increase payments.
Impetus to refine the existing system
has also been blunted
by the unwillingness of Congress to better analyze
of care, policy analysts say. Some experts say that
Medicare's administrative expenses - 2 to 3 percent
overall budget - have been kept too low.
Armed with more information, they
say, Congress could
realign the incentives to cut costs and improve care.
"We have a limited budget," Dr.
Christopher M. Callahan,
the director of the Indiana University Center for
Research, said. "From a public health perspective,"
added, the question is: "Where would those dollars