Single Specialty Hospitals and Economic Efficiency: Evidence from the Supply Side

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Single Specialty Hospitals And Economic Efficiency: Evidence From The Supply Side

Kathleen Carey* James F. Burgess Jr.* and Gary J. Young**

AHRQ Annual Meeting—September 21, 2011

Research funded in part by the Robert Wood Johnson Foundation and by AHRQ.

*Boston University School of Public Health and Department of Veterans Affairs
** Northeastern University

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Legislative History of Single Specialty Hospitals (SSHs): I

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

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Legislative History of Single Specialty Hospitals (SSHs): II

• What were the issues?
  • Patient selection: cherry-picking.
  • Financial impact on community hospitals.
  • Conflict of interest: self-referral, induced demand.
• Medicare inpatient reimbursement structure reform: FY2007.
• Patient Protection and Affordable Care Act Section 6001:
  • Whole hospital exception dismantled.
  • Stricter limitations on grandfathered SSHs.

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What Lies Ahead? I

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

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What Lies Ahead? II

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

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What Does the Literature Show?

• 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.

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Research Questions

• The question of SSH cost efficiency is deep.
• One economic issue is whether there is "enough scale at all of these separate institutions to allow them to operate efficiently" (Newhouse, 2004).
• Also, more services allow for joint costs of services.

Do SSHs realize economies of scale?

Do SSHs realize economies of scope?

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Focus

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

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Hospital Cost Function Approach

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

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Data Sources

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

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Production Cost Efficiency Construct I: EOS

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

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Graphic Conceptualization of EOS

Image: Line graph with "Cost" and "Medical Services" on the x and y axes compares Range of EOS, Marginal Cost, and Average Cost.

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• Short-run cost function.
• Cubic functional form.
• GEE estimator.

EOS =

(1 - BED elasticity) / (DIS elasticity + OPV elasticity) =

(1 - δ*BED) / [(α₁₁DIS + 2*α₂₁DIS² + 3*α₃₁DIS)³ +
β₁₁OPV +2* β₂₁OPV² + 3*β₃₁OPV)³] 

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Results: EOS

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Production Cost Efficiency Construct II: ESC

• Economies of scope (ESC): present if the cost of jointly producing a set of outputs is lower than the costs of producing those outputs separately.

• For the 2 output case:

  ESC = [C(DIS,0) + C(0,OPV) - C(DIS,OPV)] / C(DIS,OPV)

• ESC are present if the expression is positive:
  • Will occur if the numerator is positive.
  • Indicates it is cheaper to produce outputs DIS and OPV jointly than in separate facilities.
• The expression rarely applied in the case of hospitals.
• Why not? Because it is unusual that hospitals would be producing at levels of zero output.

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ESC: What if orthopedic and surgical SSHs closed their doors?

• Alternative conception of economies of Scope (ESC).
• ESC exist if it is possible to produce outputs jointly in the same hospital cheaper than it is to produce them separately.
• How will we measure ESC?
  • ESC = [C(System A) + C(System B) - C(System C)] / C(System C).
  • Where System A is general hospital production, System B is SSH production, and System C is a simulation of general hospital technology cost of producing (general hospital + SSH) outputs.

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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.

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[ESC = (Cost A + Cost B - Cost C) / Cost C]

Costs measured in million $.
Quartile values taken across distributions of discharges and outpatient visits.

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Results: ESC, continued

Implicit Cost Savings (million dollars):
(Cost A + Cost B—Cost C).

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Conclusions

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