SPECIALTY HOSPITALS: FOCUSED FACTORIES OR CREAM SKIMMERS?

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SPECIALTY HOSPITALS FOCUSED FACTORIES OR CREAM
SKIMMERS?

• Presented to the HSC Specialty Hospitals
  Conference
• April 15, 2003
• Kelly J. Devers, Ph.D.

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Objectives

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

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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

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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

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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

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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

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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

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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

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Concerns about Cream-Skimming

• Specialty facilities might succeed primarily by
  selecting
• Better paying services
• Better paying patients
• Relatively healthy patients

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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

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Vital Signs to Monitor

• Quality
• Cost and price
• Access

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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

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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)

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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

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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

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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

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Policy Challenge

• Allow competition and innovation, while
  guarding against potential problems

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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

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  JOHNSON FOUNDATION, IS AFFILIATED WITH
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