SINGLE SPECIALTY HOSPITALS AND ECONOMIC EFFICIENCY: EVIDENCE FROM THE SUPPLY SIDE

1. SINGLE SPECIALTY HOSPITALS AND ECONOMIC EFFICIENCY: EVIDENCE FROM THE SUPPLY SIDE Kathleen Carey* James F. Burgess Jr.* and Gary J. Young** AHRQ Annual Meeting – September 21, 2011 Research funded in part by the Robert Wood Johnson Foundation and by AHRQ *Boston University School of Public Health and Department of Veterans Affairs ** Northeastern University

2. Legislative History of Single Specialty Hospitals (SSHs): I • Ethics in Patient Referrals Act (Stark I & II): 1989, 1993 • “Whole Hospital Exception”: a fertile environment for development of new SSHs • Reasons for proliferation? • Distortions in the payment system • Technological advances • Dissatisfaction on the part of physicians with responses of hospital administrators • Moratorium on new physician-owned cardiac, orthopedic, and surgical SSHs: 2003 to 2006

3. Legislative History of Single Specialty Hospitals (SSHs): II • What were the issues? • Patient selection: cherry-picking • Financial impact on community hospitals • Conflict of interest: self-referral, induced demand • Medicare inpatient reimbursement structure reform: FY2007 • Patient Protection and Affordable Care ActSection 6001 • Whole hospital exception dismantled • Stricter limitations on grandfathered SSHs

4. What Lies Ahead? I • Efforts to remove restrictions in Section 6001 underway • Lobbying efforts to persuade legislators • Legal challenges around the constitutionality to persuade the courts • Restrictions only relate to SSHs with respect to reimbursement under federal insurance programs (viz., Medicare) • SSHs can continue to operate by relying on reimbursements from private plans and on out-of-pocket payments by patients

5. What Lies Ahead? II • All SSHs are not the same • Two types: Orthopedic/Surgical and Cardiac • Key differentiating factors in addition to specialization: • Size: Cardiac average 60 beds – OrthSurg average 20 • Scope of Services: Most OrthSurg SSHs do not have Emergency Departments but most Cardiac SSHs do • Payer mix: MedPAC found that ~ 2/3 of Cardiac SSH patients were reimbursed by Medicare and 1/3 by private payers; for OrthSurg SSHs just the reverse

6. What Does the Literature Show? • Self-referral • Mitchell, Medical Care, (2008): •  inreferrals by orthopedic doc-owners compared to non-owners, OK SSHs • Utilization • Nallamothu, JAMA, (2007) : •  in coronary revascularization procedures, Medicare population • Mitchell, Medical Care Research & Review (2007): •  in complex spinal fusion procedures, OK SSHs • Selection • GAO Report, 2003 • Cram et al., NEJM, 2005 • Mitchell, Health Affairs, 2005 • Guterman, Health Affairs, 2006 • Cost • Barro et al. Journal of Health Economics (2006) • ↓ spending for cardiac care in markets w/ cardiac SSHs w/o worse outcomes • Schneider et al., Inquiry, 2007: ↓ in hospital level costs, national SSH study • Carey et al. Health Services Research (2008): • Orthopedic/Surgical SSHs  cost inefficiency

7. Research Questions • The question of SSH cost efficiency is deep • One economic issue is whether there is “enough scale at all of these separate institutions to allow them to operate efficiently” (Newhouse, 2004) • Also, more services allow for joint costs of services Do SSHs realize economies of scale? Do SSHs realize economies of scope?

8. Focus • Too few observations on cardiac SSHs • We focused on orthopedic and surgical SSHs • These hospitals are primarily engaged in outpatient surgical services • They also treat inpatients, although on a smaller scale • Multiple output cost function with 2 outputs: • Inpatient Discharges • Outpatient Visits

9. Hospital Cost Function Approach Operating Costs = f (discharges, outpatient visits, average length of stay, wage index, bed size, case-mix index, outpatient case-mix index, teaching hospital indicator, ownership, SSH indicator, SSH*discharges, SSH*outpatient visits)

10. Data Sources • Medicare Cost Reports 1998-2008 • American Hospital Association Annual Survey Database • ~ 90% of SSHs are located in 10 states (n=405): Arizona Louisiana California Ohio Idaho Oklahoma Indiana South Dakota Kansas Texas • Competitorsin same market (n=5,273) (Dartmouth Hospital Referral Regions)

11. Production Cost Efficiency Construct I: EOS • Economies of Scale (EOS) • Does the average cost decline as output increases? Or, is cost ↑ < output ↑(in proportional terms) • EOS = [ 1/ (MC/AC) ] = [1 / cost elasticity] • For multiple outputs, Ray Scale EOS assumes that all outputs increase proportionately • Ray EOS = [ 1 / Σ cost elasticities ]

12. Graphic Conceptualization of EOS Range of EOS Cost Marginal Cost Average Cost Medical Services

13. Short-run cost function • Cubic functional form • GEE estimator EOS = _____(1 – BED elasticity)_____ (DIS elasticity + OPV elasticity) = __________(1 – δ*BED)__________ [(α11DIS + 2*α21DIS2 + 3*α31DIS)3 + β11OPV +2* β21OPV2 + 3*β31OPV)3]

14. Results: EOS

15. Production Cost Efficiency Construct II: ESC • Economies of scope (ESC): present if the cost of jointly producing a set of outputs is lower than the costs of producing those outputs separately • For the 2 output case: ESC = [C(DIS, 0) + C(0,OPV) – C (DIS,OPV)] / C(DIS,OPV) • ESC are present if the expression is positive • Will occur if the numerator is positive • Indicates it is cheaper to produce outputs DIS and OPV jointly than in separate facilities • The expression rarely applied in the case of hospitals • Why not? Because it is unusual that hospitals would be producing at levels of zero output

16. ESC: What if orthopedic and surgical SSHs closed their doors? • Alternative conception of economies of Scope (ESC) • ESC exist if it is possible to produce outputs jointly in the same hospital cheaper than it is to produce them separately • How will we measure ESC? • ESC = [C(System A) + C(System B) – C(System C)] C(System C) • where System A is general hospital production, System B is SSH production, and System C is a simulation of general hospital technology cost of producing (general hospital + SSH) outputs

17. Cost A refers to production of general hospital output using general hospital technology. • Cost B refers to production of specialty hospital output using specialty hospital technology. • Cost C refers to joint production of general hospital and specialty hospital output using general hospital technology.

18. Results: ESC [ESC = (Cost A + Cost B – Cost C) / Cost C] Costs measured in million $ Quartile values taken across distributions of discharges and outpatient visits

19. Results: ESC, continued Implicit Cost Savings (million dollars): (Cost A + Cost B – Cost C)

20. Conclusions • SSHs may lack sufficient scale to compete effectively with general hospitals on the basis of cost efficiency • Yet this supply side analysis does not account for demand side price competition pressures • Simulation analyses also suggest potential improvement in cost efficiency through exploitation of economies of scope by shifting SSH production to general hospitals • But only one piece of evidence in understanding a very complex issue: SSHs might be able to control costs through leaner staffing, tighter inventory control and/or effective discharge planning, e.g.