1. 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.  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.  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 Act Section 6001 ◦ Whole hospital exception dismantled ◦ Stricter limitations on grandfathered SSHs

4.  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.  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.  Self-referral ◦ Mitchell, Medical Care, (2008):   in referrals 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.  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.  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. 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.  Medicare Cost Reports 1998-2008  American Hospital Association Annual Survey Database  ~ 90% of SSHs are located in 10 states (n=405): ArizonaLouisiana CaliforniaOhio IdahoOklahoma IndianaSouth Dakota KansasTexas  Competitors in same market (n=5,273) (Dartmouth Hospital Referral Regions)

11.  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. Marginal Cost Average Cost Medical Services Cost Range of EOS

13. Short-run cost function Cubic functional form GEE estimator EOS = _____(1 – BED elasticity)_____ (DIS elasticity + OPV elasticity) = __________(1 – δ*BED)__________ [ (α 11 DIS + 2*α 21 DIS 2 + 3*α 31 DIS) 3 + β 11 OPV +2* β 21 OPV 2 + 3*β 31 OPV) 3 ]

14. General HospitalsSpecialty Hospitals Discharges Visits Beds EOS Discharges Visits BedsEOS Q1 1,60028,555522.702623,88292.13 Median 4,64561,4781191.114985,224141.44 Q3 10,925121,6332330.6589879,499241.05

15.  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.  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. Specialty Hospitals General Hospitals 1 st QuartileMedian3 rd Quartile 1 st Quartile (22.71+8.62- 23.95)/23.95 = 0.30 (41.12+8.62- 43.02)/43.02 = 0.16 (105.44+8.62- 108.69)/108.69 = 0.05 Median (22.71+11.76- 25.07)/25.07 = 0.38 (41.12+11.76- 44.74)/44.74 = 0.18 (105.44+11.76- 111.65)/111.65 = 0.05 3 rd Quartile (22.71+21.09- 27.62)/27.62 = 0.59 (41.12+21.09- 48.60)/48.60 = 0.28 (105.44+21.09- 118.19)/118.19 = 0.07 Costs measured in million $ Quartile values taken across distributions of discharges and outpatient visits [ESC = (Cost A + Cost B – Cost C) / Cost C]

19. Specialty Hospitals General Hospitals 1 st QuartileMedian3 rd Quartile 1 st Quartile 7.386.725.37 Median 9.408.145.55 3 rd Quartile 16.1813.618.34 Implicit Cost Savings (million dollars): (Cost A + Cost B – Cost C)

20.  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.