SPECIALTY HOSPITALS: FOCUSED FACTORIES OR CREAM SKIMMERS?Presented to the

HSC Specialty Hospitals Conference

April 15, 2003

Kelly J. Devers, Ph.D.

Objectives

Prevalence and Characteristics

Drivers of Development

Vital Signs to Monitor

Policy Implications

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

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

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

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

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”

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

Concerns about Cream-Skimming

Specialty facilities might succeed primarily by selecting:

» Better paying services

» Better paying patients

» Relatively healthy patients

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

Vital Signs to Monitor

Quality

Cost and price

Access

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

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)

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

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

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

Policy Challenge

Allow competition and innovation, while guarding against potential problems

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

HSC, FUNDED EXCLUSIVELY BY THE ROBERT WOOD JOHNSON FOUNDATION, IS AFFILIATED WITH MATHEMATICA POLICY RESEARCH, INC.