Obama’s Plan for a Health Care Summit and the Unenthusiastic Response

Last week, President Obama announced plans to hold a bipartisan health care summit to push forward on health care reform and to give both sides an opportunity to discuss ideas for health reform legislation that will be able to garner enough votes for passage.  While President Obama and Democratic Congressional leaders want to use the health care proposals that have already passed in the House and in the Senate, Republicans say that they are unlikely to vote for a bill unless the current proposals are scrapped and the process is started afresh.  It seems like Americans, once again, may be left watching the theatrics of the health care reform debate without actually being the focal point of it.

Some conservative Congress members have already responded to the President’s invitation publicly to make their steadfast positions known.  Representative Eric Cantor (R-Va.) said this past week that he was not willing to discuss a “health reform package that spends money we don’t have.”  He added that “House Republicans have offered the only plan that will lower health care costs.”  If that is true, it is likely attributable to the fact that the House Republican bill would cover only 3 million uninsured Americans, compared to the Democratic House bill which would  insure an additional 36 million Americans.

On Monday night, House Minority Leader John A. Boehner (R-Oh.) joined Cantor in submitting a letter to White House Chief of Staff, Rahm Emanuel, which said that the Republicans were not willing to come to the table unless certain prerequisite questions were answered.  You can see the whole letter here.  In the letter, Cantor and Boehner express their non-support for reform that the American people themselves are not supporting; the basis for such being the recent Republican Senate win in Massachusetts.

Exactly what are the citizens of American thinking about health care reform anyway?  CNN reported on Tuesday that nearly two-thirds of Americans want Congress to persist in passing health care reform legislation.  The poll, an ABC News/Washington Post survey, also indicates that Americans blame both Democrats and Republicans on their unwillingness to compromise.  HHS Secretary Kathleen Sebelius herself is quoted as saying, “When people look up close at the personal activities of Congress they are confused and disgusted with the whole process and too afraid that whatever is going on can’t possibly be good for them or their families.”

Many believe that the idea for the health care summit was to address the back-door processes that led to American distrust and to make it all more transparent.  Still, there appear to be more differences between the conservative version of reform and the liberal version than points of reconciliation.  Though the prolonged tug-of-war between both sides does not seem like one that might be resolved in a day of convening, the summit is, perhaps, at least a start.

And, while the political contenders decide what to do about the summit, the health reform stalemate has presently-occurring repercussions. Many hospitals, which were holding on to the hope of reform, are now at the point where downsizing their health systems is thought to be the only step left.  Hospitals all around the country have been seeing more and more uninsured patients, and with no one to cover the full cost of services, the hospitals providing unreimbursed care are said to be further sinking into debt– and must therefore cut staff as well as services.  On the individual level, Americans are also finding it difficult to  keep up with the costs of health care, and while many forgo insurance, those that cannot due to chronic illness or necessity of care are finding the cost further prohibitive.

It would make sense, then, that Americans do want reform.  Andrew Rubin, Vice President for Medical Center Clinical Affairs for NYU Langone Medical Center and radio show host for HealthCare Connect, says that one of the underlying reasons why Americans are reluctant to give support for legislation is their lack of understanding of what is happening, not because they do not want to see change.  Let’s hope that the proposed health care summit will be used to clarify issues for Americans who do need and want health care, instead of for just another political brouhaha.

Revisiting CONventional Wisdom on State Hospital Licensure

If there is one aspect of contemporary health care regulation that conservatives have decried, it’s “certificate of need laws.” These laws require licensure of new health facilities (and sometimes expansions of facilities) in thirty-seven states. Denounced as relics of socialist central planning, they were a prime target of the Bush-Era Dose of Competition report. But, as David Leonhardt notes, it appears that CON laws are reducing costs without impairing quality in some areas.

First, a bit of background. As health costs rose in the 1960s, many policymakers believed that a surplus of health services was to blame. Policymakers worried that health care costs were rising due to “induced demand:” the more doctors and hospitals there were, the more these actors would try to counteract the normal price-depressing effect of increased competition by finding more wrong with patients, thus “inducing” demand for their services. Although such a strategy could rarely work in a normal market, health care is a credence service—it is very hard for the average consumer to “second guess” his or her provider about the amount or nature of care needed.*

In 1974, Congress passed the National Health Planning and Resources Development Act. The Act required new health care facilities, and additions to existing facilities, to obtain a Certificate of Need (CON) from the appropriate state agency as a prerequisite to receiving federal funds via the Medicare and Medicaid programs. As a result of these laws, those opening new health care entities needed to demonstrate to state commissions that their services are actually needed by the community.

Over time, state boards started addressing concerns beyond “induced demand,” including social goals of equity and fair distribution of health resources. When I emailed a New Jersey policymaker who has worked in this area, he told me that the state would be unlikely to license specialty hospitals that concentrate on the most lucrative cases because they would threaten the ability of safety net hospitals to use revenue from such cases to cross-subsidize uncompensated care. He called such egalitarian concerns “explicit and leading factor[s] of discussion at all levels in CON proceedings.”

Leonhardt is more concerned about the classic CON goal of cost-control, and sees CON laws as a key reason for positive developments in Richmond, Virginia:

Since 1996, the Richmond area has lost more than 600 of its hospital beds, mostly because of state regulations on capacity. . . . Richmond has gotten rid of 15 percent of its hospital beds, and its health care still looks a lot like the rest of the country’s, only cheaper and a bit better. . . .

[Meanwhile, health facilities vastly expanded in South Dakota after it scrapped its CON law in 1988.] In other industries, all that new capacity might have led to a glut, in which workers and equipment sat idle. But health care is different. Doctors and patients tend to believe that more care is better, and patients often don’t pay much extra for any additional care. So new doctors, nurses and equipment generally stay busy.

Dr. John Wennberg of the Dartmouth Medical School refers to this phenomenon as supply-sensitive care. Dr. Marlon Priest, the chief medical officer of Bon Secours, puts it this way: “If you build 100 beds, they’ll get used.” . . . [But] [m]ore care is not always better care. Sometimes, in fact, it’s worse. Just consider the recent research showing that radiation from CT scans will eventually kill thousands of patients a year.

I’m not fully sold on the Dartmouth studies (here’s one critique of them), and I do worry that efforts to fight overtreatment will lead to some “meat ax” rationing that denies care to the poorest (rather than motivating those who don’t need the attention of the health care system to avoid it). But when cost saving initiatives are combined with a commitment to preserve access to necessary care for all, they may be as close to a “Pareto optimal” health policy as we can get.

*(Lawyers have their own version of this “induced demand” problem, encapsulated in the old saw: “When there was one lawyer in town, he had no business; when another moved in, he was swamped with cases.” I suppose laws against barratry offer a loose parallel to CON in the legal profession. Antitrust may stand in the way of legal and medical professionals’ own actions to avoid “induced demand.”)

X-Posted: Concurring Opinions.

Developments in the Law Governing Physician-Owned Ambulatory Surgery Centers in New Jersey

Over the past year, one or the other of my sons has had minor surgery in no less than three of New Jersey’s many ambulatory surgery centers (”ASCs”).  So, I noted with interest the Appellate Division’s recent decision in Garcia v. Health Net in which it affirmed a lower court holding that physicians who make referrals to ASCs in which they have an ownership interest violate the Codey Law, New Jersey’s version of the Stark Law.  The Appellate Division also affirmed the lower court’s decision that, despite the illegal referrals, the physician-owners in the case committed no fraud.  They (along with other physicians-owners across the state) acted in reliance on the New Jersey Board of Medical Examiners’ conclusion that the Codey Law’s exception to the self-referral ban for services provided at the referring physician’s medical office applied to ASCs.

In response to the lower court’s holding and heavy lobbying from physicians, the New Jersey State Legislature enacted revisions to the Codey Law which were signed into law in March 2009.  Physicians are now expressly permitted to refer patients to ASCs in which they have a financial interest if they meet a list of conditions, including that: (1) for patients they refer, they personally perform the surgery; (2) they be paid in proportion to their ownership interests, not the number of patients they refer; (3) they and their physician partners make all healthcare decisions, leaving non-physician partners without a say; and (4) they inform their patients in writing of their ownership interest at the time they make the referral.

On the other hand, the Legislature acted to all but put a stop to the establishment of new physician-owned ASCs, with the exception of those which are jointly owned by a general hospital.  Development of hospital– and medical school–owned centers may proceed apace.  Fox Rothschild’s Elizabeth Litten notes  that this “resonates more of long-forgotten certificate of need and health planning policy than it does of the original law’s concern with physician profit motives and overutilization.”  Clearly, the Legislature hopes that the new limits will be good for general hospitals’ financial health.  Professor Frank Pasquale has written here and elsewhere about the concern that ASCs and other niche facilities harm general hospitals by “cherry-picking” lucrative patients and “lemon dropping” those that are more costly.

What about patients?  Should we care whether ASCs are physician-owned or not?  Unsurprisingly, the American Medical Association believes that “physician ownership interests in health facilities, products or equipment can benefit patient care.” Peer-reviewed research suggests that physician-ownership makes no difference in health outcomes, however.  And, as Dean Kathleen Boozang states here, there is evidence that “physicians who hold an equity interest in an entity that provides ancillary health care services, such as a clinical laboratory or MRI, more frequently order those services for their patients, referring them, unsurprisingly, to the entity they own,” although there is no evidence that “this higher use equated to over-utilization.”  I would suggest, admittedly based on a small (and potentially unrepresentative) sample, that, if nothing else, physician-owned surgery centers have better amenities than those that are hospital-owned.  Some of these amenities could easily be done without (orchids in the lobby, souvenir teddy bear); others (popsicles and DVDs in the recovery room) are potentially more significant.

“15 Years or 7 to Pay Off Your Debt. . .”

I have been watching the Alex Gibney documentary film version of Maggie Mahar’s book Money-Driven Medicine. It’s fascinating, and I’ll definitely do a few more blog posts on it. For now, I’d like to reflect on a quote from early in the film, from a Dr. Berwick who’s been a keen observer of the US health system. He notes that physicians who are specialists do lots of compensable and specific procedures, and therefore usually earn much more than primary care doctors, leading to an artificial glut of specialists. I’d known this for some time, but Dr. Berwick makes the fact particularly compelling by comparing the concrete choices faced by med students: “15 years or 7 to pay off” their educational debts. It’s no wonder there are so many specialists.

The quote reminded me of Jesse Larner’s recent idealized “health care speech” for President Obama, which would promise a “publicly paid medical education for qualified medical students, researchers, and other health care workers so that the profession is open to all who are bright and dedicated, regardless of financial resources.” Just as our tax code pushes the average citizen toward unnaturally high levels of debt via the mortgage deduction, medical education financing currently is biasing physicians toward unsustainable debt loads that ultimately drain the public weal by fueling an entrepreneurial mindset in a profession founded in the public interest.

The US already has some limited loan forgiveness programs for physicians who work in underserved regions. It is time to expand these subsidies to cover more physicians working in primary care.

The Cost of Dying, 60 Minutes

In case you missed it.

Watch CBS News Videos Online

More Institutional Health Economics, Please!

Today’s Nobel Prize award for institutional economists Oliver Williamson and Elinor Ostrom is a welcome step toward methodological pluralism in the profession. Both have looked outside markets to understand the organization of economic life. Ostrom is not even an economist–she is a political scientist by profession. As Bob Shiller observes:

This award is part of the merging of the social sciences. Economics has been too isolated and too stuck on the view that markets are efficient and self-regulating. It has derailed our thinking.

According to the NYT, “The Nobel judges, in their description of Mr. Williamson’s and Ms. Ostrom’s achievement, said that ‘economic science’ should extend beyond market theory and into actual behavior, and the two award winners, in their empirical work, had done this.”

There is a great need for more of this type of work in health economics. Joe White’s Markets and Medical Care: The United States, 1993–2005 is one good exemplar of needed work here; he eschews “discussions of how economic theory can be applied to medical care production and delivery” and instead “focuses on ‘the market’ in its actual, not theoretical, form, as it existed in the United States.” White describes case after case where consolidation, not medical need, drove industry structure. He leaves the reader with a clear and convincing image of a space where varying levels of provider and insurer power, not productivity, is the key to understanding changes in the profitability of services. I’ve seen few better brief explanations of rising medical costs than the following: Read more

American Health Lawyers Association on the Stark Law and its Revision: a Good Step Towards Holistic & Ethical Reform

Health reform that focuses exclusively on health care finance — that is, how we pay for universal access to insurance coverage — will not produce successful reform.  Reform must be holistic, with a focus on the entire system, as well as its component parts, including whether the system is structured to deliver the right kind of health care services in the most appropriate setting, whether we have sufficient quantity and kind of health care professionals and technology geographically dispersed to provide the health care services that people will presumably have insurance to access, and whether the system properly incentivizes health care professionals to make decisions that are efficient, effective, and in patients’ best interests.  This is a massive undertaking, with a tremendous risk that important components will be overlooked precisely because of the size of the undertaking.  The Stark Law represents the kind of on-the-ground healthcare delivery problems that healthcare reform must tackle.

The American Health Lawyers Association’s Public Interest Committee today released a Whitepaper entitled: “A Public Policy Discussion: Taking Measure of the Stark Law” analyzing the ” Ethics in Patient Referrals Act” (and its progeny), more commonly known collectively as the “Stark Law“, after its primary sponsor, Congressman Pete Stark, who now counts himself among the many who believe that while the problem the law aimed to address is real, the statute and its multitudinous exceptions have become a nightmare.

Stark was enacted in response to empirical studies showing that physicians who hold an equity interest in an entity that provides ancillary health care services, such as a clinical laboratory or MRI, more frequently order those services for their patients, referring them, unsurprisingly, to the entity they own (the Whitepaper notes that no studies indicated that this higher use equated to over-utilization).  The implication, then, is that the opportunity for additional profit causes excessive referrals, whether consciously or unconsciously.  Thus, Stark sought to establish a bright line test regarding the propriety of physician referrals.  Stark prohibits a physician from referring patients to entities in which the physician (or a family member) holds an equity interest.  Congress seeks to ensure that patients are referred only for tests and other health care services that are medically necessary and appropriate.  The law also prohibits the entity actually providing the services to the patient (the recipient of the referral) from billing Medicare if the patient care resulted from an impermissible referral (even if the patient needed the service).

But a basic prohibition proved too broad to be practicable.  For example, how should the law treat rural areas where the only potential investors in an MRI for the community are all of the local physicians?   While many of situations crying for exceptions have been legitimate, virtually every single business relationship that seems justified requires the adoption of a new exception — which, the Whitepaper points out, stymies innovation in a dynamic health care market.  I would add that simultaneous with the continuous recognition of new exceptions, Congress and CMS keep adopting new prohibitions in response to physicians (with the aid of their lawyers) who take advantage of loopholes by engaging in business practices that violate the philosophical goals of the law, but are not specifically banned.

And so now we simply have a mess on our hands.  According to the Whitepaper, on the positive side, Stark has encouraged health care institutions to adopt corporate compliance programs and contract management systems; hospitals are more careful about their relationships with physicians.  Repeating a recurring theme of this blog about physicians’ conflicts of interest, the AHLA Whitepaper suggests that Stark has had less effect on physicians’ awareness and avoidance of conflicts of interest — my observation is that they continue to engage in business arrangements and practices that increase healthcare expenditures and cause patients to receive unnecessary medical services.  This is likely because physicians don’t understand Stark, which is rarely enforced against them.  The Whitepaper conveys the observations of some of its participants that Stark has caused a restructuring of healthcare delivery (some would argue that physicians have simply re-packaged their business relationships, rather than eliminated their “pernicious” conduct).  Even more problematic is that Stark precludes the experimental implementation of some creative ideas to reduce health care costs and improve quality, such as pay-for-performance, shared savings, and bundled payments.  Essential to a reform of how we deliver health care is an alignment of physician and institutional financial incentives - Stark (as well as some other laws) makes difficult that effort.

The AHLA Whitepaper seeks statutory reforms and increased CMS discretion as part of overall healthcare reform.  It suggests reimbursement modifications as a mechanism that would more directly accomplish the government’s goals of reducing costs and controlling utilization, including: decreasing reimbursement for ancillary services provided through a physician group practice; decreasing payments for high margin services; implementing more stringent credentialing requirements for the provision of certain services; bundling the payment for a physician office visit and ancillary services;  and payments for episodes of care, rather than delivery of specific services.

While AHLA addressed an important problem that begs for resolution, the ultimate challenges for health care reform that the Stark problem points up are significant:

• First is the question of whether reform will restructure health care delivery so that patients receive quality care that they actually need, in a timely cost-effective and convenient way.
• Second is how to identify the most effective means of adjusting physicians’ norms of behavior so that they recognize and avoid or ameliorate conflicts of interest that adversely affect their care of patients.
• Third, since the HHS OIG began issuing its Guidances, the relationship between government and provider has been like one of cat and mouse — the government articulates a philosophy about its interpretation of fraud, waste and abuse and the attendant practices that violate the law, and providers adjust their behavior to discontinue the specifically enumerated offensive practices, and then adopt new behaviors that government then addresses and it goes on and on and on.
• All of the above points result from the fact that politicians have created a huge perception divide — physicians believe that they are professionals operating in a market who should be guided by their ethical code and the business practices that make America great - government regulators and prosecutors believe that taxpayers foot 40-60% of the healthcare bill, and should expect very stringent oversight of the behavior of health care providers to make sure taxpayer money isn’t being wasted. Whatever our health care system looks like this time next year, everyone — provider, supplier, and patient needs to acknowledge that irrespective of what descriptors we use, it is a system significantly underwritten by the government, which means that it necessarily operates by different rules….

In the meantime, the AHLA Whitepaper is a terrific description of all that is right and wrong with the Stark Law. Let’s hope Congress takes notice.  More important, it exemplifies the important contributions professional organizations can make to productively convey to policy-makers the on-the-ground effects of their laws.  The AHLA process also models an exemplary collaboration between the private sector and government to their mutual education and, hopefully, benefit.

While the author is an AHLA board member, this post solely represents the author’s interpretation of and opinions about the AHLA Whitepaper, and has not been reviewed by any director, officer or member of AHLA.  The author had no involvement in the production of the Whitepaper.

Will Conflicts of Interest Sabotage Health Reform?

With health care reform in full gear, one crucial question is that of prioritization. Where should we focus our efforts? Who needs greater treatment, and what type of care is missing from the everyday lives of everyday Americans? Unfortunately, the politicians crafting the legislation may be swayed–not surprisingly–by stakeholders and lobbyists who are concerned with how reform will affect their bottom line. Interestingly, it is not just private insurance companies and pharmaceutical companies that are influencing the legislation.

A recent New York Times piece underscores how the emerging landscape of physician-owned hospitals is helping to shape congressional legislation.

The Times article states that one of the largest sources of campaign contributions for the Senate Democrats Campaign Committee is from the Doctors Hospital at Renaissance for a not-so-paltry sum of $500,000. Ironically, the event that raised the sum was at the home of Alonzo Cantu, a real estate developer in–you guessed it–McAllen Texas. Another event at Cantu’s house “brought in at least $800,000 for the committee’s House counterpart, the Democratic Congressional Campaign Committee.”

McAllen became (in)famous as the town depicted by Atul Gawande in his now oft-cited piece exposing the framework of incentives available to providers and hospitals to perform a greater number of tests and procedures in order to increase their bottom line, even when the greater volume of tests and procedures does not necessarily correspond to an increase in quality of care. Health Reform Watch has discussed the “cost conundrum” before.  Nevertheless, the incessant media and blog coverage of our inefficient system does not seem to have dissuaded those with a stake in that inefficient system from advocating for the status quo. As the Times points out that:

…like others here, he [Mr. Cantu] is not pleased about the president’s depiction of health care in McAllen.

“What’s so upsetting,” he said, “is that to make his case he threw McAllen under the bus.”

One might ask–given Gawande’s seemingly accurate portrayal of the overly-entrepreneurial nature of McAllen’s health care system–why we shouldn’t throw McAllen under the bus, especially when we can put a face on a problem undermining our system? Mr. Cantu and other Doctors Hospital officials are said to have offered the following argument for why Doctors Hospital and other physician-owned hospitals were beneficial and shouldn’t be singled out:

They have argued they are being unfairly grouped with boutique specialty hospitals that do not have emergency departments and that cater to privately insured patients. Eighty-eight percent of Doctors Hospital patients are either on public insurance or uninsured, 750 babies are delivered there a month, and no one is turned away because of inability to pay, they said.

Physician ownership, they added, has meant major investments in the latest equipment and good staffing ratios for nurses. Appealing to local pride, the hospital markets itself as the first in the area to offer services like PET scans, robotic surgery and breast imaging, which once required trips to Houston or San Antonio.

It is perhaps important to remember, as the McAllen boys attempt to mitigate the damages of the Gawande article, just what Gawande found. As we wrote prior:

Gawande writes that McAllen “is one of the most expensive health-care markets in the country. Only Miami-which has much higher labor and living costs-spends more per person on health care. In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average. The income per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars more per person here than the average person earns.”

El Paso, Texas, similarly situated, spends significantly less– half as much.

Might I suggest that there is little consolation in the fact that the largesse found in McAllen is largely funded through “public insurance,” or that there are “boutique hospitals” which charge even more?

In addition, “Local pride” aside, the real question is whether McAllen needs a PET scan facility or robotic surgery. Importantly, Texas is not a Certificate of Need (C.O.N.) law state. Therefore “local pride” (i.e. desire of a local, often private, facility) may often trump the actual “need” of the community. This idea is reinforced when taking into account that a PET scanner may have an annual operational cost of over $1 million, in addition to the upfront construction costs that can also venture into the millions. Altruism aside for the moment (or perhaps, it seems, longer), the investors in those machines will seek to recoup their cost plus profit. To do so, they simply must use that machine.

Thus, as it stands, the allocation of expensive high-tech machinery in physician-owned hospitals is based upon the government subsidized decision of private investors regarding the liklihood of turning a profit (for the subsidies, think “depreciation” and “expensing” for business equipment; think “public insurance” for billables). Perhaps we should not be quite so surprised when they then comport themselves in a way which ensures such a profit. But, it certainly may be argued that with our health care system in its precarious state, without a showing of actual need, the trip to Houston or San Antonio for very advanced high-tech procedures is a price we must be willing to pay and that the allocation of medical resources (and government subsidies for such) should be based on public need and not private profit.

In addition, given the overlap between physician-owned hospitals and single specialty hospitals, as Professor Frank Pasquale points out, these single specialty hospitals may siphon scarce health resources and undercut the care that community hospitals provide.

In a previous post, I discussed comparing a health care system to a pyramid, the foundation of the pyramid requiring a solid base of primary, preventive, and wellness care, that tapers to the top of the pyramid where we find the specialists utilizing, for example, advanced equipment and procedures like robotic surgery. However, a stable foundation for the pyramid is necessary, and the favoritism described above may stymie actual reform–reform that will provide Americans with the basics that they need at an affordable price.

Democrats are surely not the only ones to blame, and money has flowed to Republicans as well. As we discussed in an earlier post, a Common Cause report finds that $1.4 million dollars per day is being spent by healthcare interests lobbying Congress this year. From the perspective of the physician-owned hospitals and private health insurance companies, donating to both sides of the aisle makes sense; it ensures that both political parties have a financial stake in preventing legislation that would limit physician-owned hospitals from being subject to greater restrictions (like CON laws), or tightly regulating insurer practices. Though there are some restrictions governing physician-owned facilities in the House bill, these have been watered down, and will now allow facilities like Doctors Hospital to maintain their current structure, and even expand in certain future circumstances. As the Times reports:

The Senate Finance Committee has yet to release its final draft, but bills passed by two House committees would prevent the opening of new physician-owned hospitals by disqualifying them from receiving Medicare reimbursements. Existing facilities like Doctors Hospital would be grandfathered in.

One key provision would limit a hospital’s ownership by doctors to the level in place at the time of enactment. That is a change from previous language in House bills to restrict physician ownership to 40 percent. It would have forced Doctors Hospital, where physicians have an 82-percent stake, to be sold or required some of its owners to divest.

The future disallowance by Congress of Medicare funding for procedures performed at physician-owned hospitals is a tacit acknowledgment that the structure is one in which conflicts of interest abound; that he who owns a machine and will profit from its use is apt to refer patients for its use–regardless of actual need. It is the acknowledgment that the foxes are essentially guarding the henhouse–and that hens cost money. The exception made for Doctors Hospital and others of its ilk, however, considering the large campaign contributions, gives rise to other questions about conflicts of interest.

The problem is not simply the amount of money that is being funneled to Congress by the health care industry. The more pertinent issue at this point is: Read more

Medical Repatriation: Montejo v. Martin Memorial Medical Center

[Ed. note: Today's post comes from Dean Kathleen M. Boozang and Erika M. Lopes.  Erika is a Seton Hall Law student and a graduate of Trinity College, Connecticut, where she majored in Political Science. Ms. Lopes is a research assistant to Kathleen M. Boozang, and formerly worked as a litigation paralegal specializing in both Class Action and Foreign Corrupt Practices Act matters for Skadden, Arps, Slate, Meagher & Flom, LLP.]

A Florida jury won’t resolve the issue of how to provide health care to severely injured undocumented aliens, but it may signal to hospitals that engage in “medical repatriation” whether there are any legal risks attendant to the practice.  The case, Montejo v. Martin Memorial Medical Center, involves a claim of false imprisonment brought by the legal guardian of a patient transported by private plane in 2003 to Guatemala for rehabilitative care following severe brain injuries sustained in a car accident involving a drunken driver and two deaths.

Mr. Jimenez remained a patient in Martin Memorial Hospital for almost three years following the accident, incurring $1.5 million in medical bills, of which only $80,000 was reimbursed by Medicaid. As reported by local newspapers (here and here) the hospital CEO testified last week that the transfer to Guatemala was motivated by the fact that Mr. Jimenez missed his family and country — the medical staff came up with the idea to return the patient to “his own culture” where he would “be around his language . . . and [] be in a situation that was more relaxed than an acute care hospital.”  According to the hospital executive, the transport to Guatemala had nothing to do with the financial burden to the hospital of Mr. Jimenez’s care.  While the Guatemalan health ministry agreed to assume Mr. Jimenez’s care, a Guatemalan physician who testified for the plaintiff claimed that Guatemala does not have the kind of rehabilitation facility required by Mr. Jimenez’s condition.  In addition, the jury was presented with a 2003 affidavit from the vice consul for the Consulate General of Guatemala, in Miami stating that she had no authority to place Jimenez in a facility, no doctor to care for him and no way to pay for medical care he needed.  Mr. Jimenez, 37, currently lives in a remote village where he is largely cared for by his elderly mother.

The guardianship plan prepared for Jimenez, filed short of two years after his accident, recommended twenty-four hour skilled care.  The hospital intervened in the guardianship proceeding claiming that it was not the appropriate facility for the long-term rehabilitative care required.  Responding to the guardian’s objection to the hospital’s planned repatriation, a trial court directed the guardian to stop frustrating the hospital’s plan for relocation, and directed the hospital to provide a suitable escort and medical support.  On the day that the hospital was due to respond to a motion to stay, Jimenez was transported to Guatemala via private plane.  An appellate court later reversed the trial court order, citing the insufficient evidence that the patient would receive adequate care in Guatemala, a requirement of federal law directing hospitals to prepare appropriate discharge plans for patients.  42 C.F.R. § 482.43.

The guardian’s false imprisonment suit against the hospital was initially dismissed after the hospital argued that Montejo could not demonstrate that the detention was unreasonable and unwarranted — a necessary element of a false imprisonment claim.  The hospital contended that its actions were executed pursuant to a then-valid court order, and were therefore entitled to qualified or quasi-immunity. The appellate court disagreed on the grounds that the actions were not taken during the course of a judicial proceeding nor in an effort to prosecute or defend a lawsuit, but were carried out in the vindication or enforcement of a purely private right.  The court concluded that affording absolute immunity from tort liability would be an unwarranted and improper extension of the litigation privilege.  Accordingly, the appellate court reversed the trial court’s dismissal of the false imprisonment claim, and remanded to the lower court for a determination of whether the hospital’s actions were unwarranted and unreasonable under the circumstances.

The guardian is seeking the cost of Mr. Jimenez’s care and punitive damages from the hospital.

Price-Gouging by Doctors and Hospitals

Mark A. Hall, Professor of Law and Public Health, Wake Forest University

Carl E. Schneider, Professor of Law and Internal Medicine, University of Michigan

[Ed. note: As noted above, we are very pleased to welcome Professors Mark Hall and Carl Schneider to the blog today.]

We cannot reform health care intelligently unless we understand the medical marketplace well. Debates about reform have scrutinized the health-insurance market, but they have neglected a crucially defective feature of the medical marketplace — the way doctors and hospitals charge patients when prices are not set by regulation or by negotiation with insurers.

The Problem

When patients are not protected by large private or public insurers, doctors and hospitals charge them astonishingly more than patients with Medicare or managed-care insurance.  Some price difference would make sense, because insurers offer providers large volume and economies of scale.  But we are not talking about discounts of 10, or 20, or even 30 percent.  Providers routinely double, triple, or even quadruple prices for unprotected patients.  Such huge mark-ups can only be regarded as price-gouging — exploiting market power to charge prices virtually unrelated to actual cost or market value.

A comprehensive analysis of data hospitals report to Medicare shows that, on average, hospitals charge uninsured patients two-and-a-half times more than they charge insured patients and three times more than their actual costs.  In some states mark-ups average four-fold.

Data for physicians’ prices are less comprehensive, but information from office management systems is disturbing.  Across a range of diagnostic and invasive specialty services (echocardiography, coronary catheterization, liver biopsy, upper GI endoscopy, circumcision, flexible sigmoidoscopies, hysterectomy, appendectomy, gall bladder removal, and arthroscopic knee surgery), many physicians in 2003 charged uninsured patients roughly two to two-and-a-half times what insurers paid.  Only primary care physicians appear to be staying within plausible bounds.  They typically charge uninsured patients only one-third to one-half more for basic office or hospital visits than they received from insurers.

Some Excuses

Providers defend themselves in several ways.  First, they call these price differences steep discounts rather than huge mark-ups.  This is almost laughable.  Most providers charge “list prices” to only a small minority of patients (10-20%), so these are hardly a genuine baseline.  Second, providers argue that because they often cannot collect list prices, they are on balance receiving little more than they would receive from insurers.  However, when patients cannot pay inflated bills, doctors and hospitals regularly send them to collection agencies, ruining patients’ credit and bankrupting millions of them.

Third, providers blame the government by claiming that program and accounting rules require them to bill this way.  But governmental agencies have declared that this is not true, and while some rules may still be irksome, rules about billing certainly do not require providers to set their prices as high as they do.  Many tax-exempt (non-profit) hospitals recently wilted under scrutiny and adopted sliding-scale policies for low-income uninsured patients, but these policies do little to help insured patients who are receiving care out-of-network or uninsured patients from the broad middle class.

The Solution

Insurers’ attempts to stop price gouging have failed.  Some large insurers have refused to reimburse out-of-network providers for the full amounts they charge on the grounds that those amounts are not “usual, customary, and reasonable.”  But New York’s Attorney General called this “consumer fraud” because patients were left owing the full bill.  Courts have been little help.  Consumer class-action lawsuits have attacked price gouging by non-profit hospitals, but courts have dismissed most of these cases on various technical grounds.

Government regulation has inhibited price gouging, but only for people covered by government programs.  Medicare, for instance, prohibits doctors from charging Medicare patients more than about 10% over Medicare-approved rates.  But inflated pricing still afflicts the uninsured and privately insured people buying care out of network.  Some reformers simply advocate greater price transparency so that patients know better what to expect when seeking care without the protection of insurers.  But transparency will not fix the structural dynamics of market power that allow providers to charge almost whatever they want.

To help medical markets work better, the government should cap what doctors, hospitals, and other providers may charge patients who are not protected by regulated or negotiated discounts.  The details can be debated and refined, but one approach is to cap charges at, say, 150% of a normal reference rate.  The reference rate could be what Medicare pays, or a weighted average of what larger private insurers normally pay across a region.  Doctors with boutique practices could still charge what they wished for extra concierge services, or perhaps doctors who don’t accept any insurance should be exempted.  Design features are important and tricky, but they should not keep us from setting reasonable bounds within which markets can function.

The Unconventional Economics of Health Care

In a response to one of my posts on the public plan, Tyler Cowen noted that it was “hard to translate” my points into “econspeak.” I agree, and I think that’s one reason why we need to pay attention to “alternative economics of health care,” to use the title of Geoffrey M. Hodgson’s excellent article. In a series of posts over the next few days, I will focus on the many ways in which classical economic reasoning fails in the health care context, and what that means for law.

For an accessible opening example, consider Charles Morris’s description of the “bargaining” between doctors and insurers in his book “The Surgeons.” From a chapter entitled Money, here is a fascinating and counterintuitive insight on the interplay between incentives and medical care:

There is a strongly held opinion, particularly among conservative think tanks, that with multiple competitive private payers, the normal interactions between vendors and payers will gradually create a more efficient health care system. I saw no evidence to support that belief.

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Kaiser Health News, New Jersey Gets a New Hospital?, & Kicking Medicaid Grandma to the Curb

In the wake of declining newspaper presence, the Kaiser Family Foundation, a nonprofit private operating foundation known for its health care concerns, has started Kaiser Health News. In the present issue, there are two articles of special note for New Jerseyans. The one regards the plans of Hackensack University Medical Center, a 775-bed teaching and research hospital that is one of New Jersey’s most prestigious, [which] requested state permission to open a new hospital in Pascack Valley’s empty [hospital] buildings. Although Hackensack is a nonprofit, it announced that Westwood would be getting a for-profit facility financed by a private equity firm from Texas.

Not everyone approves.

The other regards measures that New Jersey legislators are considering in response to a recent investigation of assisted living facilities. KFN reports

Associated Press/Philadelphia Inquirer reports that “lawmakers this week will consider measures to enhance protections for assisted living residents in New Jersey to ensure they aren’t discharged simply because they pay with Medicaid.” The legislation comes in response to an investigation that found a Wisconsin-based assisted living firm called Assisted Living Concepts, which has eight facilities in New Jersey and more than 200 nationwide, “wrongly showed New Jersey residents the door once they exhausted their savings and were about to go on Medicaid, despite promises to allow them to stay.”

Both stories are worth reading.

Nonprofit Hospital Tax Exemptions Worth $638 Million, Exceed “Community Benefit” by $373 Million for 10 Nonprofit Hospitals in Massachusetts

In recent posts we’ve pointed out some of the questionable characterizations of “community benefit” by nonprofit hospitals under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities, such as nonprofit hospitals, which it harbors. In particular, we’ve focused on how matters such as “bad debt,” Medicare “shortfalls,” and even Private Insurer “shortfalls” have often been construed by nonprofit hospitals to constitute the conveyance of a community benefit. A “shortfall” may be deemed to have occurred when although the hospital receives the amount it had agreed to with a Private Insurer, or which was designated by the government through Medicare, that amount is less than the hospital’s “list price” for such a services.

Despite this rather lax standard, Kaiser.org reports that an in-depth review by the Boston Globe determined that “the value of abundant tax exemptions extended to Massachusetts General Hospital, and other private non-profit hospitals, ‘far exceeds the amount the state’s leading hospitals spend on free care for the poor and other community benefits.’”

Kaiser reports that in Massachusetts

The ten biggest hospitals in the state benefited from $638 million in tax breaks in 2007, but reported only $265 million in “community benefits” provided that year, the Globe found.

Even if one accepts the questionable characterizations of community benefits, that still leaves an excess of $373 million in tax exemptions–for merely 10 hospitals–in only one state.

Grassley and Baucus Seek to Further Define the Difference Between Charity Care and Bad Debt for Nonprofit Hospitals. As a Matter of Collections Timing?

According to Inside ARM, an accounts receivable management online magazine, the Senate Finance Committee is presently contemplating imposing strictures upon nonprofit hospitals regarding when those hospitals may outsource the collection of unpaid bills and, presumably, the definition of “bad debt” as it relates to “community benefit.” Inside ARM states that “The proposal is meant to provide more free care and make not-for-profit hospitals more accountable for their tax-exempt status.”

Details of the initiative are said to be scant at this point, but according to Inside ARM, “Committee Chairman Max Baucus of Montana and Chuck Grassley of Iowa, the committee’s top ranking Republican, propose requiring not-for-profit hospitals to follow certain procedures before initiating collection actions against patients.” Sen. Grassley has sought to require nonprofit hospitals to justify their tax exemptions since 2005, the year in which he sent what pretty much amounts to interrogatories to the nation’s leading nonprofit hospitals regarding billing practices and questionable characterizations of “community benefit.”

Although without detail, the new timing distinction for collections seems to be based upon the amount owed being designated as “bad debt,” or that which is essentially deemed “uncollectable.” The prospective prohibition would seem to  require the amount owed to be deemed “uncollectable” or “bad debt” before it can be placed with a collection agency. A prospect the nation’s collectors, who generally work on commission, do not relish. But one hopes this provision is but one small piece of further defining “community benefit” in terms of actual charitable care.

Many nonprofit hospitals have characterized their uncollected receivables as a fulfillment of the ill-defined requirement that they offer a “community benefit” in exchange for the tax exemption they receive under 501(c)(3). Senator Grassley has said that “Neither the IRS nor Congress has done a very good job when it comes to establishing the criteria for enjoying this tax status since the IRS scrapped charity care for its community benefit standard in 1969″ (New York Times, 2/13/09).”

He has a point. But unless the prospective timing provision for outsourcing only “bad debt” is coupled with a prohibition upon characterizing mere “uncollected receivables” and  payor “shortfalls” as “community benefit,” it is hard to see what effect this bad debt collections distinction will have–besides the expansion of in house hospital collection  departments. One hopes that the pointed questions Senator Grassley asked of the nation’s leading nonprofit hospitals in ‘05 will play a substantial role in the Senate effort to reform and redefine the obligations of tax exempt nonprofit hospitals now. I believe Mr. Grassley would well agree that a mere shift in the locus of collection activities will not constitute reform worth the name.

Perhaps some background is in order. As we posted here a little while back in “The IRS, Nonprofit Hospitals, and the Meaning of “Community Benefit,” the IRS recently published the results of a two year study of nonprofit hospitals functioning under 501(c)(3), a portion of the Internal Revenue Code which garners tax exemptions for those entities it harbors. For those of you who have not yet read our post on the topic, I’ve excerpted it here below (if you have already read the piece, you can scroll down to the paragraph before Grassley’s numbered questions for the concusion to this post). The excerpted post describes how uncompensated care, bad debt and “shortfalls” in payments from Medicare and even Private Insurers can, and often are, characterized as somehow providing a “community benefit” which justifies a tax exemption for nonprofit hospitals:

Under the strictures of 501(c)(3) nonprofits are confined to paying executives “reasonable compensation” and supplying “community benefit.” Unfortunately, neither of these terms are particularly well defined. In the study’s executive summary, the IRS puts it so:

“The community benefit standard is the legal standard for determining whether a nonprofit hospital is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.”

“Observations. Both the community benefit and reasonable compensation standards have proved difficult for the IRS to administer. Both involve application of imprecise legal standards to complex, varied and evolving fact patterns.”

These limitations may be seen in the characterizations of “community benefit” available to the hospitals in the study. Bad debt and Medicare payment shortfalls may be construed as  “community benefit.” As the debt, the credit injury, and the collection calls all inure to the community member who received treatment but could not pay, one might question if the “community benefit” involved in a failure of collection practices might be distinguishable from the “community benefit” involved in intentional charitable care. In addition, there simply is no set criteria to determine the appropriate amounts to be charged as “community benefit.” The IRS study poses the following under the heading of

“Limitations: …although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the respondents’ discretion.

Which is to say that those being monitored (nonprofit hospitals) to gauge the amount of money spent– to justify their tax exempt  status– were free to characterize their contributions in the manner they thought best.

Medicare shortfalls: So… if a non-profit hospital has a fee schedule rate of $100 for a procedure, and Medicare has a reimburse rate of $80 for that procedure, if a “charge” rate of measurement is used then there has been a $20 “community benefit” if the federally designated tax exempt nonprofit hospital accepts as payment the federally designated and predetermined Medicare reimbursement amount. Significantly, 19% of the hospitals also claimed “shortfalls” in payment from private insurers as uncompensated care/community benefit (See Chart: “Figure 82,” p. 105, full report).

Cost vs. Charge: So… if a procedure has a cost to the hospital of $80 and a fee schedule [or "chargemaster"] rate of $100, and the recipient of the procedure does not pay and the hospital categorizes the non-payment as “bad debt,” it has the ability to count as “community benefit” not only the cost of its unintended largesse, but also the amount it had expected as profit.

Perhaps even more telling than this latitude in characterization are the amounts actually submitted to the IRS as community benefit. Here are a few of the findings:

• The average and median percentages of total revenues reported as spent on community benefit expenditures were 9% and 6%, respectively.
• Uncompensated care accounted for 56% of aggregate community benefit expenditures reported by the hospitals in the study.

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Hospitals Face Losses, Some Close

The Associated Press reports that hospitals are beginning to buckle under the weight of “tight credit, higher borrowing costs, investment losses and a jump in patients - many recently unemployed or otherwise underinsured - not paying their bills.” In response, there have been “more hospital closings…as well as layoffs, other cost-cutting and scrapping or delaying building projects.”

Tha A.P notes that “In November, Moody’s Investors Service changed its 12- to 18-month outlook from ’stable’ to ‘negative’ for nonprofit and for-profit hospitals, citing ‘prospects of a protracted recession,’ bad debt and the credit crunch.”

The article also notes that “many cash-strapped states already have begun cutting payments for poor people covered by Medicaid.” Tim Goldfarb, CEO of Gainesville-based Shands Healthcare–which just announced that it would be closing a hospital–said that “Florida started cutting Medicaid reimbursements two years ago, when its economy started to slow,” and that “he fears another huge cut next year.” Mr. Golfarb also reported that “his system, Florida’s second-largest provider of charity care, this year has seen bad debt jump 20 percent from patients with no insurance.” Read full story here.