Abelson, Reed. "Generous Medicare Payments Spur Specialty Hospital Boom," New York


Abelson, Reed. "Generous Medicare Payments Spur Specialty Hospital Boom," New York
Times, 26 October 2003, pp. !, 20.

INDIANAPOLIS - The hospitals here - hospitals across the United States, for that matter - covet
patients like Robert E. Wilson. Mr. Wilson, 79, has had two open-heart operations, five
angioplasties, three cardiac catheterizations and an implanted defibrillator. Just last month, he
checked into the Heart Center of Indiana to get his first stent, a tiny bit of wire scaffolding that
helps keep arteries open.

Mr. Wilson's primary health insurance is Medicare, and Medicare pays generously for cardiac
care - so generously that hospitals and doctors scramble after the business.

The Heart Center, a 60-bed hospital that cost $60 million and boasts not just the most
sophisticated new imaging technology but an executive chef and what it calls "room service,"
opened last December. Indeed, all four major hospital groups in Indianapolis are investing in new
heart hospitals, collectively spending $215 million on multistory buildings with catheterization
labs and bedside computers.

Cranes have been raised over construction sites in places like Milwaukee, Phoenix and Houston,
too, with money flowing into new hospitals specializing not just in cardiac care, but in other
well-reimbursed specialties like orthopedics and surgery. In a report this month, the
General Accounting Office, the investigative arm of Congress, counted at least 26 specialty
hospitals under construction across the country.

Medicare - which pays for some $100 billion of inpatient hospital care annually, and sets the
pattern for many private insurers, as well - is not the sole driver of this investment. But health
executives say that Medicare's payment system for hospitals, with its emphasis on procedures
and its weak ties to the actual costs of providing care, exerts a strong influence on which medical
needs in a community are met.

Amid the building boom here in Indianapolis, some hospitals are laying off employees or scaling
back programs, like psychiatric care, that are less generously reimbursed. Preventive care and
case management, health experts add, get short shrift.

"The incentives are terribly misaligned," said Samuel R. Nussbaum, a doctor and former hospital
executive who is now the chief medical officer of Anthem, a large health insurer here.

Creating Excess Demand A study of Indianapolis health care last year concluded that the
construction of so many new heart hospitals could create excess demand for treatment rather than
produce better cardiac care.

"Improving clinical quality did not appear to be a driving force for new facilities or services,"
said the report, by the Center for Studying Health System Change, a nonprofit research group.
"Given these market conditions, provider competition could, alternatively, result in higher use
rates and costs."

In Washington, lawmakers rushing to complete a compromise bill that would establish a
Medicare prescription drug benefit are now turning their attention to the growth of specialty
hospitals. The Senate version of the Medicare bill would make it harder for doctors to invest in
and refer patients to such hospitals, and full-service hospitals are lobbying hard for the provision.

Hospitals will typically not disclose how much they profit from a particular procedure, like a
coronary bypass or angioplasty. And Medicare - with little information about the cost of
treatment - cannot say, either. But one full-service medical center that is leading the lobbying
campaign against specialty hospitals, Sioux Valley Hospital in South Dakota, estimates that it
makes nearly $1,500 for a typical coronary bypass under Medicare, while it loses almost $1,800
treating a case of simple pneumonia and $2,500 on a patient with kidney failure.

Cardiac procedures "are absolutely our highest margin business," said Becky Nelson, the
president of Sioux Valley, who estimates that they account for 13 percent of the hospital's patient
volume but 28 percent of its profits. Costs and payment levels vary so widely around the country
that Dr. John Birkmeyer, a surgeon who studies health care at Dartmouth Medical School,
estimates that some hospitals may make nearly $20,000 on a coronary bypass.

In Indianapolis, there is recognition that reimbursement levels have influenced hospitals'

"We're working on a payment system that has been jerry-rigged so many times, we've been
looking for the loopholes," said Jack C. Frank, an executive at Community Health Network,
which opened the Indiana Heart Hospital this year in partnership with local doctors.

Hospital Building Boom Just 20 minutes southeast of the Heart Center of Indiana, Mr. Frank's
$60 million center says it is the nation's first all-digital heart hospital, using electronic patient
records to track care. Roughly 45 minutes to the south, construction is well under way on the
latest - and most expensive - competitor here, the St. Francis Cardiac and Vascular Care Center,
expected to cost about $65 million when it opens next year.

Even some of the people building the hospitals worry that Indianapolis may not be able to
support them all, though heart disease is the leading cause of death among Indiana residents.

"It can't work," said Daniel F. Evans Jr., the chief executive of Clarian Health Partners, whose
Clarian Cardiovascular Center is the most modest of the undertakings, at $30 million, and the
only one built within a full-service hospital.

Executives, of course, vigorously defend the decisions to build their own facilities. Heart
hospitals, they say, help pay for money-losing cases, like accident victims or patients with
congestive heart failure.

"Cardiac care has been a source of some margin, which has been very important in subsidizing
some services," said Robert J. Brody, the chief executive of St. Francis Hospital and Health

Nothing in the Medicare legislation before Congress would directly alter the hospital payment
system. But advocates, mainly Republicans, for provisions aimed at encouraging more
beneficiaries to enroll in private health plans say that bigger plans would have more leverage to
negotiate better prices.

"The prices are being fixed" by the government, said Thomas A. Scully, who runs Medicare as
administrator of the government's Centers for Medicare and Medicaid Services. Local insurance
companies would be much better at deciding how to pay doctors and hospitals to deliver quality
care, he said.

Payment System Is Dated The current system was adopted in 1983, in an effort by the federal
government to control costs. Until then, Medicare basically reimbursed hospitals for their costs
of delivering care, an arrangement that offered them no incentive to keep hospital stays short.
The new plan established fixed prices for treating a specific disease or performing a given
procedure. Some cases might cost more and some less, but the price Medicare paid was
supposed to represent the average.

As a cost-control mechanism, the system has been largely successful. The problem, say hospital
executives and industry analysts, is that after 20 years, the payments are out of whack: Medicare
frequently pays too much for some kinds of care and too little for others.

To take account of the rapid changes in medicine, like new technologies and treatments,
Medicare collects data on hospital charges - essentially list prices for everything from a cardiac
catheterization to bypass surgery to treatment for pneumonia. The agency then tweaks prices
relative to one another, updating its payment schedule once a year.

But charges often bear little relation to a hospital's actual costs, any more than a car's sticker
price directly indicates what it costs to build the car. And hospitals rarely, if ever, lower their
charges, say industry analysts, even when their costs fall significantly.

"Administered price systems tend to break down over time," said Joseph P. Newhouse, a Harvard
University professor of health policy who is a member of the Medicare Payment Advisory
Commission. "If you're overpaid, everybody smiles on the way to the bank, and you may induce
more services."

Just how overpaid is unclear. Many hospitals lack the accounting systems to determine their
exact expenses for specific procedures. Hospitals also have tremendous discretion in allocating
expenses across departments, let alone procedures.

In the case of a coronary bypass, for example, hospital charges increased nearly 30 percent from
1993 to 2001, even as the average hospitalization decreased to 9 days from nearly 12 days,
according to data from the Healthcare Cost and Utilization Project of the Agency for Healthcare
Research and Quality, a government group in Rockville, Md.

Profitability Varies Widely What seems certain is that there are wide variations in the
profitability of different hospital services under Medicare. Mark Wietecha, who directs health
care consulting for Kurt Salmon Associates, estimates that the profit margin for surgery,
including cardiovascular cases, is about 15 percent for some hospitals, compared to just 2 percent
for gastrointestinal care.

"People build their business plans and facilities on these profitabilities," he said.

In Indianapolis, the rush to build heart hospitals is leading to what appears to be significant
duplication of services.

Heart transplants are offered only by St. Vincent and Clarian, which is affiliated with Indiana
University, but many services are available at all four heart hospitals. In fact, St. Vincent's new
heart hospital, the Heart Center of Indiana, competes directly with its parent hospital for patients.
And some doctors at Clarian who have invested in the Heart Center are sending profitable cases
there, according to Mr. Evans, Clarian's chief executive, working on only the most difficult - and
expensive - cases at his hospital.

The construction boom here was influenced by the threat of a new competitor, the MedCath
Corporation, a for-profit chain with 11 heart hospitals in nine states that opened discussions with
some local doctors. To avert MedCath's entry into the market, Community Health and St.
Vincent made deals of their own with doctors to build facilities.

Hospital executives here are quick to agree that more needs to be done to help people stop
smoking or lose weight - steps that could help prevent the diseases they make money treating.
"Our reimbursement is all around acute care," said Sister Sharon Richardt, a St. Vincent
executive. "I think where the flaw is we need to keep people well. We need to start reimbursing
for prevention."

But Medicare was created nearly four decades ago to prevent the financial catastrophe that often
occurred when an older person suffered a heart attack or when a disease like cancer was
diagnosed. Payments are therefore "episodic" rather than intended to encourage hospitals and
doctors to prevent disease or coordinate care, said Dr. Gerard F. Anderson, a former federal
health official who helped develop the system and now teaches at the Johns Hopkins Bloomberg
School of Public Health.

`Patients Can Lose Patients like Corinne Walker, an 83-year-old Indianapolis woman who suffers
from congestive heart failure, are not always well served. In late 2000, she developed cellulitis, a
serious bacterial infection, in her legs, and spent months in three hospitals. No one bothered
talking to her personal doctor, Ms. Walker said. To her, it seemed as if the people treating her
virtually ignored her heart condition, although it contributed to her cellulitis.

"They were working on my legs, period," Ms. Walker said. Only after she was sent home, with a
nurse orchestrating her care, was she finally able to get better, Ms. Walker said.

In Indianapolis, the treatment of chronic conditions "has fallen through the cracks,"
acknowledged Mr. Frank, the Community Health Network executive. With long hospital
stays and few options for aggressive intervention, congestive heart failure is a particularly
money-losing diagnosis, executives say; the Sioux Falls hospital says it loses $1,200 on the
average case.

Even so, there is little constituency - outside a circle of policy analysts - for overhauling a
payment system that produces such results.

Many hospitals have figured out how to make the most of the status quo. Tenet Healthcare has
been formally accused of abusing the system by which Medicare pays for the most expensive
cases. But hospitals generally try to fit their care into the most lucrative billing codes.

"In fact, you see a great deal of gaming going on," said David Butz, a health economist at the
University of Michigan.

Lawmakers, meanwhile, focus on small fixes to the system. With cuts in spending on cancer or
heart disease politically unpalatable, they tend, under lobbying pressure, to expand coverage or
increase payments.

Impetus to refine the existing system has also been blunted by the unwillingness of Congress to
better analyze the cost of care, policy analysts say. Some experts say that Medicare's
administrative expenses - 2 to 3 percent of its overall budget - have been kept too low.

Armed with more information, they say, Congress could realign the incentives to cut costs and
improve care.

"We have a limited budget," Dr. Christopher M. Callahan, the director of the Indiana University
Center for Aging Research, said. "From a public health perspective," he added, the question is:
"Where would those dollars best be spent?"

Since its inception in 1965, Medicare has improved the health of the elderly while playing on
outsize role in shaping the delivery of health care for all Americans.

This article is the fifth in a series examining efforts to overhaul Medicare and ways that rules of
the program influence the economics and practice of medicine.

The articles will remain on-line at nytimems.com/business