Single Specialty Hospitals and Economic Efficiency: Evidence from the Supply Side
Slide Presentation from the AHRQ 2011 Annual Conference
On September 21, 2011, Kathleen Carey made this presentation at the 2011 Annual Conference. Select to access the PowerPoint® presentation (2.6 MB). Plugin Software Help.
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
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.
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.
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.
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.
What Does the Literature Show?
- Mitchell, Medical Care (2008):
- In referrals by orthopedic doc-owners compared to non-owners, OK SSHs.
- Nallamothu, JAMA (2007):
- In coronary revascularization procedures, Medicare population.
- Mitchell, Medical Care Research & Review (2007):
- In complex spinal fusion procedures, OK SSHs.
- GAO Report, 2003.
- Cram et al., NEJM 2005.
- Mitchell, Health Affairs 2005.
- Guterman, Health Affairs 2006.
- 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.
- 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?
- 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.
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).
- Medicare Cost Reports 1998-2008.
- American Hospital Association Annual Survey Database.
- ~ 90% of SSHs are located in 10 states (n=405):
- South Dakota.
- Competitors in same market (n=5,273)
(Dartmouth Hospital Referral Regions).
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 ].
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.
- Short-run cost function.
- Cubic functional form.
- GEE estimator.
(1 - BED elasticity) / (DIS elasticity + OPV elasticity) =
(1 - δ*BED) / [(α11DIS + 2*α21DIS2 + 3*α31DIS)3 +
β11OPV +2* β21OPV2 + 3*β31OPV)3]
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.
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.
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.
[ESC = (Cost A + Cost B - Cost C) / Cost C]
Costs measured in million $.
Quartile values taken across distributions of discharges and outpatient visits.
Results: ESC, continued
Implicit Cost Savings (million dollars):
(Cost A + Cost B—Cost C).
- 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.
Current as of December 2011
Single Specialty Hospitals and Economic Efficiency: Evidence from the Supply Side. Slide Presentation from the AHRQ 2011 Annual Conference (Text Version). December 2011. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/about/annualconf11/carey/carey.htm