June 1, 2003 Newsletter

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Recently there has been a lot of medical press devoted to the current trend of specialty hospitals.  This has gone so far as to have Representative Stark  introduce a bill in Congress to forbid physicians from referring patients to hospitals in which they own an interest unless the general public can also buy into the hospital on the same terms.  Also, on the Federal level, the Office of Inspector General has asked for comments by the AMA and the AHA on whether mandatory referrals to the general hospital constitute illegal kickbacks.  The real issue is what leverage the general hospitals have over their non-employed medical staff to keep them from investing in the specialty hospitals.  First, I’ll discuss the general problems from both sides and then the associated economic credentialing issues.  

For many years there have been specialty hospitals in the fields of rehabilitation and children.  Throughout the United States there has been a recent trend for physicians to partner with private firms to build specialty hospitals.  This is especially true with cardiac, oncology and orthopedic specialties.  The first issue is why this is happening and then what are the potential problems and fixes.  I will start with the premise that the real reason for the trend is money.  The physicians have been caught in managed care hell with its restricted payments while their expenses continue to rise.  The same is true for hospitals but they hold more clout with the managed care organizations than the individual physician or small medical group.  With this greater clout and at times, with the hospitals dictating the terms for how much both they and their medical group get from the managed care company, they can command a larger percentage of the pie.  Many times the physicians aren’t even allowed into the negotiations.   

Over the course of time the physicians have finally awoke and realized they and not the hospitals control the flow of patients.  This has led to the physicians forming their own groups and then negotiating directly with the managed care organizations.  This new physician clout has led to, at times, disharmony between the physicians and their hospitals.  The pie has now been cut differently even when the pie has enlarged in circumference.  However, the pie is never large enough.  Managed care has decimated the hospital’s nursing and equipment budget.  As managed care loosens its reins, the hospitals want to keep up with the Jones on equipment and need to hire more nurses which were increasingly scarce.  The hospitals and physicians have also both been caught in the EMTALA non-compensated care web with both sides losing money.   

For years the hospital execs have always thought of the “docs” as something that gets in the way of the orderly running of the hospital.  They hired consultants who coined the unflattering phrase “herding cats”.  This meant, of course, that physicians would not just be sheep and allow those who thought they knew what was best do what they believed necessary.  Some doctors even had the nerve to want a say in the running of the institutions where they admit their patients.  Hospitals attempted to overcome this by making physicians their employees.  This led to disastrous results in almost every circumstance.  The new trend is to get rid of these physician employee practices that lose the hospital money.  In fact, hospitals were not and are not capable of running medical practices due to a practice’s unique characteristics and the hospitals uniformity of thought and process.  

When the physicians also realized that under managed care they would need to become more efficient in their practices with less time per patient and no time for sitting around in between surgical or other procedural cases, they attempted to have the hospital increase the number of cases that could be done in a given time.  The hospitals resisted due to a combination of unionization and the need to pay significant overtime if cases ran long.  The unionization issues also led to keeping employees who should have been let go for various reasons.  At our hospital this led directly to the building of a physician owned surgical center across the street from the hospital.  Originally some of the physicians were afraid of the center and leaving the “safety” of the hospital.  However, the physicians that utilized the center had a much shorter down time between cases and a much more physician friendly scheduling system.  The costs per case for the facility went down with more efficiency and less operating room time.  The time factor for the physician became more efficient.  More physicians started to use the surgical center and finally the hospital offered to buy the center.  The offer was accepted with the proviso that no unionization would take place at the center.  The center continued to run efficiently until it closed due to flooding.    

With the continued squeeze on finances between the inability to raise prices and the now galloping expense increases, especially in the realm of malpractice insurance, the physicians began again to look for increases in income.  They looked at the Stark and state anti-referral laws.  They found that lithotripsy, ambulatory surgical centers were omitted and so was hospital ownership.  With the positive history of surgical centers behind them, the physicians usually went to the hospitals to partner in specialized institutions for cardiac, oncology and orthopedic procedures.  The hospitals were afraid to give up any of the pie and instead started to build their own specialty hospitals.  This did not sit well with physicians and any remaining loyalty to the hospitals went out the window.  

Then the private entrepreneurs saw a new business and they began to partner with physicians to build and potentially manage specialty hospitals.  This started with radiation therapy institutions and then spread to cardiac and orthopedic hospitals.  Plastic surgeons, due to financial constraints by patients, have been building and using their own centers for years.  Gastroenterologists also have put up their own centers where not only did they own the center but they also owned the equipment individually and leased it on a per use fee to the center. 

The crux of the issue for the general hospitals is money and the ability to fund all their programs.  The crux for the specialty hospitals is also money but also included are the managerial and efficiency issues as well as an increased quality of care.  The general hospitals state the specialty hospitals are draining the good pay patients as well as nurses.  The specialty hospitals state the increased efficiency allows better use of the physician time to care for more patients safely and the greater number of procedures that may be done also increase safety.  

With all this lucrative care leaving the hospital along with potential hospital employees who now only worked 7-5 with no weekends or nights, the hospitals began to panic.  The individual hospitals complained to their state associations who complained to the American Hospital Association.  The state and federal hospital associations began their lobbying, sending money to their friendly representatives.  These legislators have now begun to introduce legislation in the state and federal arenas to make these referrals illegal.  According to the recent introduction in the House, Rep. Stark wants this inability to refer retroactive to 2001.  The physicians then decided they should get busy and utilized the AMA to state that any law that restricts where a patient may be sent is anti-kickback.  The OIG has asked for comments on this and their report is due soon.  In May, 2003, the Louisiana legislature voted down a bill that would have required all specialty hospitals to have 24 hour emergency departments.  There are about a dozen specialty hospitals in the state, some of which have emergency departments.  In other communities specialty hospitals have been denied based on lack of need, after pressure by the community hospitals.  

The GAO in May, 2003, released a report on specialty hospitals.  The report was based on a questionnaire with a 25% return rate.  The hospitals were in California, North Carolina, Arizona, Texas, New York and New Jersey.  They found that the specialty hospitals comprise about 2% of all the hospitals.  There were physician owners in 70% of these hospitals.  The report stated that the specialty hospitals are taking in patients who are less sick than their general hospital cohorts.  The actual percentages were 17% sick in the specialty hospitals versus 22% in the general hospitals.  There is no mention of the statistical implication of these raw data.  The data was based on Medicare All Payer Refined-Diagnosis Related Groups.  This also changed with the type of specialty hospital.  For example, orthopedic hospitals showed only a 3% differential.  

The specialty hospitals had physician ownership in most cases.  About half had individual physician ownership of about 2% of the hospital and single specialty group ownership of 25%.  In about 10% of the specialty hospitals, physicians owned at least 80% of the hospital.  In many hospitals the physicians owned over 50% of the hospital.  There was no analysis of how many of the physician owners referred all or some percentage of their patients to their specialty hospitals.  

The GAO report also states that since the specialty hospitals are taking less sick patients, they should be paid less under the DRG system.  This at first glance is good for the general hospital but would set a dangerous precedent for all community hospitals.  Some, under this type of arrangement, would see their reimbursement decrease compared to the tertiary centers or even their neighbors with a higher percentage of sicker patients.  

Now, what’s this economic credentialing?  I define economic credentialing as not allowing someone on the hospital staff based not on their quality but on whether or not they have any investment in an economic competitor or removing one from the staff based on the same thing or other economic data such as ordering too many tests or having a high length of stay.  To be fair, there are many times when the latter factors are also signs of decreased medical judgment and/or quality.  If that is the case then the person should have his/her quality individually appraised.  I personally am also conflicted as to whether those physicians with split loyalties should be allowed high positions on the general hospital staff.  If they are, they should sign non-disclosure agreements.  

Some of this is not new.  There are states that specifically do not allow economic credentialing and others that do by statute.  The former include California, Colorado, D.C., Idaho, Illinois, Louisiana, Massachusetts, Rhode Island, Texas, Tennessee and Virginia.  The latter include Georgia, Florida, Indiana, Iowa, Kansas, Maryland, New York and North Carolina.  Other states are silent on the issue.   

Some hospital attorneys have held up the 2 to 1 South Dakota Supreme Court Mehan v Avera St. Luke’s decision as a rationale for not allowing physicians with competing interests on the staff.  However, this is not true.  In this case the new spinal orthopedic physician was never given an application not because he was a member of the competing ambulatory care center, but because the hospital had made a business decision to close the spinal orthopedic staff in order to entice a neurosurgeon who does spinal work to the area. The new Orthopod happened to be with the competing group that formed the ambulatory surgical center.  They did not take away privileges from the remaining competing physicians.  Since that decision, the group has continued to grow and the new physicians refer any patients needing hospitalization to their partners who remain on the staff of the hospital.  The hospital continues to lose the outpatient business and I don’t know if they ever got their neurosurgeon.  

In Ohio, some of the hospitals in Columbus are threatening to remove physicians from the staff if they join the consortium building competing surgical centers.  The physicians are countering by enlarging the centers to form true competitive hospitals in order to have a place to practice, a lose-lose situation dictated by the hospitals.  This area seems to be ground zero for the AHA and the AMA battleground.  It also is the area where the not for profit hospitals have put up their own specialty hospitals, but not allowed their physicians to participate, a double standard.  

In Indianapolis, Indiana a general hospital was faced with the cardiac physicians building their own hospital.  First one and then another hospital built their own cardiac hospitals with the physicians partnering in 30% and 50% of the operation respectively.  The other two area hospitals are building or enlarging their own cardiac institutions without physician partners.  Which hospitals will get the most cooperation from its medical staff?  

How can physicians and hospitals work together?  The first is to have the CEO personally go to the physician leaders in the specialties to make overtures of cooperation.  This means to allow the physicians meaningful input into the running of the hospital.  This can be done by the use of the hospital revolving around their service areas and not the traditional areas of nursing, professional and support systems.  This change would allow physicians to become managers within their service area and increase efficiency of the area.  The managers should also be paid by the hospital like any other manager on a fair market value basis.  This type of arrangement may keep the physicians from looking outside the institution for the efficiency they crave.  

Another method is the use of a joint venture between the physicians and the hospitals.  A new hospital is built or carved out in the existing structure that could be run efficiently by physicians.  This also keeps the two parties interests aligned.  It is imperative for the hospital to work cooperatively with the physicians even if they lose some money and there is not a perfect fit with the hospital culture.  These joint ventures may be structured in the service line co-management area, equity joint ventures, under arrangement where the physicians supply the equipment, staff, supplies and management and participating bond transactions.  The latter was recently done at Lafayette General Hospital in Louisiana.  They are building a new cardiac hospital and selling $2 million of tax exempt participating bonds to the physicians to help with the financing.  This will cost the hospital some extra money in interest payments but will help retain the physicians.  However, this does nothing to help with the efficiency physicians crave.  

In some states the use of a MSO type arrangement to get tax deferred money to physicians may be useful.  This is the IRS 457 (b) for employees of 501 (c) (3) organizations.  The hospital and physicians must be leery of the joint venture that allows nonusers of surgical centers to participate in the venture.  This may, under OIG Advisory Opinion 03-5, lead to sanctions.   

The one thing hospitals should not do is to follow the advice of the hospital biased Eastern law firm and discipline its medical staff due to conflicts.  The biased Eastern law firm in a White Paper extolling their position, sets up the hospital for conflict and the need for the firm’s legal services.  This firm makes its money from these fights.  It is interesting that at the end of its White Paper, the Eastern law firm states that it is reasonable to condition hospital privileges on the amount of procedures done.  This is a well established quality concept but no one states that these procedures have to be done at only one hospital.  This also is the reason why specialty hospitals are so sought out.  They get to perform the procedures more often and can become much more efficient and economical by trying innovative approaches to improve safety and lower costs.  The legal firm has gone so far as also stating the physicians should not perform office procedures that may be in conflict with the hospital, a quick way to a law suit, loss of physician loyalty and more business for the law firm.  

If the hospital truly wants to work with the physicians, they will allow true physician self-governance with no loyalty oaths.  The local hospital should be able to develop its own physician cooperation, not limited to the corporate office dictates which does not understand the local politics.  The hospital should begin to look at paying all its physicians for call and for service to the hospitals in their committee work.  The hospital can not stand behind their corporate bylaws and state it is the duty of the physician to do these things.  These past concepts lead to friction and the seeking of autonomy.   

The Board does have a right to close part of the hospital for business reasons and/or to use exclusive contracts.  These also are well established principles.  The problems come when the Board believes that the physicians are there to serve them.  Indeed, there is no automatic right to hospital privileges but nothing can damage a hospital and make a CEO lose his/her job faster than an all out fight with the medical staff.  The resultant publicity over the law suit is deadly to the perceived quality of the hospital.  The old adage is true; one can catch more flies with honey than with vinegar. There is currently a fight in a Southern California hospital over signing of loyalty oaths and no one will win. The hospital will lose their physicians and patients and the physicians and patients will lose their hospital. Hopefully the Board and Administration will come to their senses soon.  

I will now get off my soapbox and ask that you consider how the two entities, physicians and hospitals, in your community can work together.  I hope that this gives you some areas for discussion and consensus building.  

Please remember that the AMA recommends that ALL hospital medical staffs have their own attorney for any item in which their may be a conflict of interest with the hospital.  This article shows one such area.  Others are the medical staff bylaws and peer review in hospitals especially where the medical staff is controlled by the administration.  External peer review is the best option.  Recently HIPAA has caused potential strife between hospital commandments and Medical Staff autonomy.  This needs to be reviewed at your hospital before a physician loses privileges over something he/she didn’t understand.  

I believe the whole physician-hospital conflict may be summed up by a statement by Monte Clark, the former Detroit Lions’ coach.  He said “the key to this whole business is sincerity.  Once you can fake that, you’ve got it made”.  Please remember this if you are a medical staff leader and get picked to go to a seminar put on by a Massachusetts consulting firm and their hospital biased attorneys.  No hospital will ever pay to send someone to a meeting to learn how to think independent of the hospital.

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DISCLAIMER: Although this article is updated periodically, it reflects the author's point of view at the time of publication. Nothing in this article constitutes legal advice. Readers should consult with their own legal counsel before acting on any of the information presented.