Legislative public hearing on the CON

The legislature is holding public hearings on the issue of revoking the Certificate of Need requirement. The first one is:

Saturday, February 9, 9 am
at the Legislative Affairs Office in the Alaska USA building
at 1292 Sadler Way, Suite 308, Fairbanks.

Below is a list of observations on the value of the Certificate of Need requirement, forwarded to me and in direct counterpoint to many of the points raised in the insert in last Sunday's News-Miner (be forewarned, it's long):

1. The absence of market competition does not cause increasing healthcare costs. Rising costs are caused by a combination of many other factors. Three major drivers of rising health care costs are:

a. Medical advances and improved technologies account for one-half to two-thirds of the increase in health care spending in excess of general inflation.(1)

b. Neither the patient who uses healthcare nor the physician who orders it are the direct payer for most healthcare costs. Insurance lowers the effective price of healthcare, which increases demand and leads to overuse. Few people realize that the magnetic resonance image (MRI) for which they paid a $10 co-payment could actually cost $250 or more.

c. Aging and lifestyle choices, such as smoking and inactivity, contribute to a wide variety of health problems. The average age of Fairbanks is rising, one in four Alaskans smoke, and 63% are overweight.(2)

2. Adding providers often raises costs
Since “for much of U.S. health care, supply drives demand. In other words, higher-than-average utilization of a particular procedure may occur in an area where the technology or specialists performing the procedure are in abundance.”(3)

3. Other states that have abolished CON have had a variety of unintended consequences.
The Virginia General Assembly removed all medical equipment CON requirements in 1989. The result was rapid proliferation of for-profit providers. Average volumes fell and prices rose. So, in 1992, the Virginia legislature reinstated CON regulation of medical equipment. Alaska shouldn’t repeat Virginia’s mistake.

4. CON review doesn’t prevent any needed projects from going forward. It does help to ensure that they are based on a sound business plan and respond to a genuine community need.

5. Experience in the auto industry shows that medical costs are lower in states that have CON legislation.
Studies undertaken by General Motors, Ford and DaimlerChrysler demonstrate that health care expenditures per employee are significantly lower in states with CON legislation, such as Michigan and New York, than in states without it, such as Indiana, Ohio and Wisconsin.”(4) In fact, their MRI costs per covered person were up to 20% higher in states without CON.(5)

6. “Competition” doesn’t lower prices.
In Fairbanks, when AOIC opened, they charged more per scan than FMHDC. There is no evidence of lower costs or charges in states where physician-owned ambulatory surgery centers and freestanding diagnostic imaging centers are widespread.

7. Healthcare is an unusual business.
It’s possible to keep prices high even when there are alternatives because of a host of inherent structural quirks of the healthcare marketplace. Much of healthcare is supply-sensitive, where the use rate is driven primarily by the available supply of resources.(6) That is why Alaska requires a demonstration of community need before permitting additional services. Now some are seeking to repeal CON rather than play by the rules required of all service providers.

8. The state plays a necessary role in realms that markets cannot value properly.
Regulation is required to solve problems that the market cannot fix, such as education, health, public infrastructure, and clean air and water.

9. CON makes sure that good planning has been done that meets a real community need.
In Alaska, and in other states with CON programs, health care facilities are required to “play by the rules” and meet specified planning requirements. That’s it, that’s what it does.

10. Repeal of CON will NOT lead to competition, and competition will not lower costs.
As Yale professor Ted Marmor said recently, “choice and competition have no proven record of cost control in medical care either in the United States or elsewhere.”(7)

11. The notion of competition is a Trojan horse.
It may look great on the outside, but a complex set of conditions and devices lurk inside. Conditions that increase overall healthcare costs, decrease the ability of the local hospital to invest in new services and support those that can’t pay for themselves, and favor the wealthy and well-insured at the expense of the poor and the sick. Don’t be fooled by the skin-deep attraction of the competition argument.

12. Research shows “competition” has negative consequences in health care.
The Center for Studying Health System Change 2005 survey is the fifth conducted by the Center. Recent survey results reinforce and amplify earlier observations. Key findings include:

• Socially nonproductive competition between and among hospitals, freestanding service centers, and physicians appears to be having significant system distorting effects.

• It contributes to:
-- decreased average service volumes,
-- reduced system efficiency,
-- increased withdrawal of operating returns as profit,
-- promotes undesirable joint ventures, and
-- provides economic incentives for the provision of unnecessary services and of care of little benefit to patients.

• With the possibility of shifting their practices, or selected patients, to outpatient services in which they may have a financial interest, larger numbers of physicians are shunning hospital and related professional community service.
-- Many hospitals are being forced to hire physicians to provide on-call emergency, trauma and specialty care. Concern about access to specialty care – inpatient psychiatric services for example – for some patients is growing.

• With the shift of profitable services to physician owned facilities, and the increased focus on profitable services at some hospitals, “safety net” community hospitals are under increasing pressure to provide needed, but unprofitable, services. The revenue stream needed to support these services is drying up.

• This wouldn’t be good news, but if CON is repealed, we’ll be seeing it here.

13. Financial incentives can distort clinical decisions made by physician-owners.
Specialty facilities erode cross-subsidization by “cherry picking” relatively well-insured and healthy patients (where profit margins are higher) and by limiting or denying care outright to underinsured, indigent, and less healthy patients.(8)

Because physicians may refer patients to specialty facilities in which they have an ownership interest, financial self-interest may overwhelm clinical judgment and lead to unnecessary referrals, threatening both cost and quality.(9)

“Medical profiteering steers care away from what's best for the patient in favor of what's best for the doctor. That greed undermines the entire process: It compromises quality, increases cost, and erodes the patient-physician relationship.” (10)

Saying that physician self-referral arrangements are “creating incentives for overutilization and corrupting medical decision-making,” CMS’s proposed Physician Fee Schedule (PFS) rule for calendar year 2008 signals the agency’s intent to clamp down on the practice and has led some providers to temporarily put such deals on hold. (11)

According to a recent study by McKinsey, “physicians have been making profits estimated at $8 billion annually through the practice for self-referral.”(12)

“Like all of us, physicians are susceptible to the financial conflicts that are inevitable in an entrepreneurial society. Clearly, professional self-regulation isn't working. Nor is the system yet transparent enough to discourage these behaviors and protect patients. So additional safeguards are required.”(13)

Barring a legislative prohibition on physician investment in health care facilities, CON is the best safeguard Alaskans have against the problem of financially conflicted care.

14. State support for Certificate of Need (CON) is not ideological.
CON laws require that entities proposing to build new facilities demonstrate that they are meeting an unmet health care need.(14) The American Health Planning Association recently summarized the breadth of state regulation, and the pattern of distribution is not clearly related to the overall political leaning of the state. Thirty-six states today retain some sort of CON oversight.

15. Specialty providers avoid patients who are uninsured or underinsured.
Specialty facilities focus exclusively on profitable procedures. Since no financial incentive exists for the care of Medicaid patients, it is not surprising that specialty hospitals treat proportionately fewer Medicaid inpatients.(15)

16. Specialty providers are not more efficient.
The recently published MedPAC report found that physician-owned specialty hospitals do not have lower costs for Medicare patients than community hospitals, despite shorter lengths-of-stay. (16)

17. Specialty providers are not higher quality.
A recently published study by Peter Cram and colleagues found no difference in Medicare mortality rates between specialized hospitals and community hospitals, but did find that specialized facilities are more likely to treat healthier patients.(17)

There is an extensive literature demonstrating that institutions that perform a high volume of a given procedure provide higher-quality care.(18) Eliminating CON from Alaska’s largest communities, as HB287 sought to do, would only serve to dilute an already small number of procedures across a greater base of providers—with a strong potential for compromising the quality of care we can provide in-state.

18. Specialty providers treat less complex, more profitable cases.
The treatment of patients of lower acuity (“cherry picking”) by ASCs and specialty facilities appears to be taking place.(19) In strong support for this hypothesis, Ariel Winter found that Medicare patients treated in ASCs had lower risk scores (a reflection of a patient’s expected costliness based on age, sex, and diagnoses) than patients treated in hospital outpatient departments for all ten procedure categories that accounted for the highest share of Medicare payments to ASCs in 1999. (20)

Similarly, a recent GAO report found that specialty hospitals treated a lower proportion of severely ill patients in the same diagnostic categories treated at general hospitals.(21) The recent MedPAC and CMS reports also confirm these results.(22) Since no financial incentive exists for the care of Medicaid patients, it is not surprising that specialty hospitals treat proportionately fewer Medicaid inpatients.(23)

Cross-subsidies have always been a key part of the health care financing system, with hospitals using profitable services and patients covered by profitable payers to offset their losses from less profitable services and patients.(24) The strong financial incentives to select more-profitable cases and patients, combined with niche providers’ greater inclination and ability to act on those incentives, makes community hospitals financially vulnerable.

19. Specialty providers raise overall healthcare costs.
On the state level, experience in the auto industry shows that medical costs are lower in states that have Certificate of Need programs because these programs reduce redundant capacity and limit the proliferation of specialty providers and unnecessary capital expansion projects. Studies undertaken by General Motors, Ford and DaimlerChrysler demonstrate that health care expenditures per employee are significantly lower in states with CON legislation, such as Michigan and New York, than in states without it, such as Indiana, Ohio and Wisconsin.(25)

The peer-reviewed literature on self-referral suggests that physician ownership of facilities leads to higher use rates. Self-referring physicians were 4 to 4.5 times more likely than radiologist-referring physicians to obtain radiological investigations, and they charged much more for tests of the same complexity.(26) Similar results have been observed for physician ownership of physical therapy and rehabilitation facilities and radiation therapy clinics.(27)

One standard hypothesis in favor of ASCs is that their main effect on hospitals is a competitive reduction in price, but on balance not a large loss of hospital outpatient surgery volume.(28) Contrary to that hypothesis, research shows a substantial loss of hospital volume.(29)

Another recent study indicates that prices do not necessarily come down, either.(30) In fact, as the economics in an imperfect market would predict, overall costs increase instead. “While purchasers are predisposed to favoring increased competition to help keep prices low, what we heard generally from health plans and employers is that specialty hospitals are contributing to higher costs without any clear quality benefits," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

“Some purchasers believe that referring physicians, especially those with a financial interest in the specialty hospital, increase volume by inducing patient demand for elective procedures. The higher volume raises costs more than the savings achieved from lower prices from competition, leading to increased aggregate costs.”(31)

Lynk and Longley found evidence that this belief is well-founded: adding an ASC to the markets they studied caused the total volume of outpatient surgeries to rise 9% over the trend.(32) Furthermore, this volume increase is largely confined to those physician investors with a financial interest in the ASC.

There is strong evidence that ASCs—which, in Alaska, currently exist only in Anchorage—increase both overall demand and per unit costs as well, consistent with research we have cited above. The surgical use rate in Anchorage is over 50% higher than that in Fairbanks. Obviously, this leads to much higher total healthcare costs to the community as a whole—while simultaneously undercutting a community hospital’s ability to care for the most vulnerable members of the community.

20. Alaska’s CON Program
Consistent with the state’s unique geography and demography, the program has taken on a distinctive Alaskan character.
Most states that set expenditure review thresholds usually distinguish between new services, medical equipment, and health facility renovation, expansion and development. Alaska does not. Some states review all projects that establish a category service (e.g., a service for which review standards exist) regardless of their capital or annual operating costs. Others limit this to certain categories (e.g., CT scanners, MRI scanners, PET scanners, cardiac catheterization laboratories, ambulatory surgery centers, linear accelerators).

21. Eliminating or weakening CON is not a good solution to Alaska’s healthcare marketplace.
Weakening CON would make it likely that the communities in Alaska will see spiraling healthcare costs, and higher utilization—without increasing access, cost, price or quality.

Weakening CON will not result in better healthcare for rural communities or larger communities. It will only raise the overall cost of healthcare by enriching a few investors at public expense.

Alaska should consider establishing different cost thresholds for different types of projects, an approach followed by most other states. This approach recognizes that it is primarily the on-going cost of potentially excess utilization that has the greatest risk of increasing health care costs. It is also because these are the services where damaging “cherry-picking” behavior is most likely.

(1) New England Journal of Medicine, Controlling Heath Care Costs, Oct. 14, 2004.
(2) The Kaiser Family Foundation, statehealthfacts.org, at www.statehealthfacts.org
(3) General Accounting Office. Health Care: Unsustainable Trends Necessitate Comprehensive and Fundamental Reforms to Control Spending and Improve Value. Highlights of the May 2004 Health Care Forum GAO-04-793SP. Page19
(4) United Auto Workers. Health Care. 
(5) State of Missouri Department of Health and Senior Services. (PDF)
(6) http://www.gao.gov/new.items/d04793sp.pdf
(7) Marmor TR and Marshaw JL. “Understanding Social Insurance: Fairness, Affordability, and the “Modernization” of Social Security and Medicare.” Health Affairs 25 (2006): w114-w134 (published online 21 March 2006; 10.1377/hlthaff.25.w114). Page w132.
(8) Sujit Choudhry, Niteesh K. Choudhry, and Troyen A. Brennan. Specialty Versus Community Hospitals: What Role For The Law? Health Affairs: Health Tracking: Marketwatch 9 August 2005.
(9) Choudhry, Choudhry, and Brennan.
(10) Brian Klepper, PhD. “When Medical Care Is Financially Conflicted.” Webcast Video Editorials. Medscape General Medicine. 2007;9(2):39. ©2007 Medscape. Posted 05/18/2007.
(11) For the proposed rule, see: http://www.cms.hhs.gov/physicianfeesched/downloads/CMS-1385-P.pdf
(12) Kaiser Daily Health Policy Report. “CMS Officials Taking Steps To Reduce Physician Self-Referrals Under Medicare, Wall Street Journal Reports” Posted Sep 12, 2007.
(13) Brian Klepper, PhD. “When Medical Care Is Financially Conflicted.” Webcast Video Editorials. Medscape General Medicine. 2007;9(2):39. ©2007 Medscape. Posted 05/18/2007.
(14) Institute of Medicine, Health Planning in the United States (Washington: National Academies Press, 1981).
(15) GAO, Specialty Hospitals: Geographic Location.
(16) Medicare Payment Advisory Commission, Report to the Congress: Physician-Owned Specialty Hospitals, March 2005, (PDF)
(17) P. Cram, G.E. Rosenthal, and M.S. Vaughan-Sarrazin, “Cardiac Revascularization in Specialty and General Hospitals,” New England Journal of Medicine 352, no. 14 (2005): 1454–1462.
(18) See, for example, R. A. Dudley et al., “Selective Referral to High-Volume Hospitals: Estimating Potentially Avoidable Deaths,” Journal of the American Medical Association 283, no. 9 (2000): 1159–1166.
(19) Cram et al., “Cardiac Revascularization.”
(20) A. Winter, “Comparing the Mix of Patients in Various Outpatient Surgery Settings,” Health Affairs 22, no. 6 (2003): 68–75.
(21) U.S. Government Accountability Office, Specialty Hospitals: Information on National Market Share, Physician Ownership, and Patients Served, Pub. no. GAO-03-683R (Washington: GAO, 2003).
(22) MedPAC, Report to the Congress: Physician-Owned Specialty Hospitals; and CMS, “CMS Outlines Next Steps.”
(23) GAO, Specialty Hospitals: Geographic Location.
(24) See, for example, S. Guterman, Putting Medicare into Context: How Does the Balanced Budget Act Affect Hospitals? 1 July 2000 (PDF accessed 10 April 2006).
(25) United Auto Workers.
(26) B.J.Hillman et al., “Frequency and Costs of Diagnostic Imaging in Office Practice—a Comparison of Self-Referring and Radiologist-Referring Physicians,” New England Journal of Medicine 323, no. 23 (1990): 1604–1608.
(27) Mitchell and Scott, “Physician Ownership”; and J.M. Mitchell and J.H. Sunshine, “Consequences of Physicians’ Ownership of Health Care Facilities—Joint Ventures in Radiation Therapy,” New England Journal of Medicine 327, no. 21 (1992): 1497–1501.
(28) The argument is that overall volume in the outpatient surgery market rises when price in the market falls and that that increase in total market volume offsets the incremental volume that the ASC takes from the hospital.
(29) Lynk and Longley. What can happen when a hospital’s staff physicians become its business rivals. Health Affairs. 2002 Jul-Aug;21(4):215-21. Specifically, that analysis yields a coefficient estimate for the ASC effect of 0.0932 (with a statistical significance level of p=0_.0238) and an adjusted R-square of 0.8449.
(30) Robert A. Berenson, Gloria J. Bazzoli, Melanie Au. Do Specialty Hospitals Promote Price Competition? Center for Studying Health System Change. Issue Brief No. 103. Jan. 25, 2006. (10 April 2006).
(31) Berenson, Bazzoli, and Au.
(32) Lynk and Longley.