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California Hospital Officials Not Impressed by Research on ‘Out-of-Control Costs’

California hospital officials are not impressed with recently published research suggesting a handful of hospitals are charging patients and the government too much for certain procedures.

According to research published in the Nov. 13 Harvard Business Review, a few hospitals nationwide are responsible for the bulk of about $5.3 billion in above-average costs to CMS and patients. The authors, using CMS Medicare data, showed that 32 hospitals — less than 1% of the hospitals studied — accounted for about 25% of the country’s above-average charges.

In “Fix the Handful of U.S. Hospitals Responsible for Out-of-Control Costs,” the authors wrote:

“A handful of hospitals in New York State accounted for nearly half of them (excess charges). Add some hospitals in Baltimore, Maryland, and some in the cities of San Francisco, Stanford (Palo Alto), and Los Angeles in California, and the figure goes to nearly 80%. If the excess is that highly concentrated, it is likely that significant efficiency gains can be achieved with relatively little effort.”

The California hospitals with high rates of “cost-defective procedures” include Stanford Hospital, UCSF Medical Center, UC-Davis Medical Center, Ronald Reagan UCLA Medical Center, San Francisco General Hospital, Santa Clara Valley Medical Center and Cedars-Sinai Medical Center in West Hollywood.

Anne McLeod, senior vice president of health policy for the California Hospital Association, said the higher prices are not surprising.

“The hospitals that are listed are either academic medical centers or county hospitals, which offer high-cost services, such as trauma, burn units, etc. These hospitals treat some of the state’s poorest, sickest and most resource-intensive patients. It is not a surprise that these hospitals are among the most expensive,” McLeod said.

CMS routinely pays teaching hospitals a higher rate for many procedures. Known as IME, or indirect medical education, adjustments, these rates may explain the higher charges at some California hospitals. Hospital officials did not know what percentage of above-average costs was attributable to IME payments in California hospitals.

A couple of California hospital officials said the research is based on faulty understanding of the Medicare payment system.

In an emailed response to questions from California Healthline, Thomas Priselac, president and CEO of Cedars-Sinai Health System wrote:

“Given the growing number of well-researched studies identifying the drivers of health care costs, as well as potential solutions to reduce those costs, it is surprising that the Harvard Business Review apparently did no fact-checking or editorial review before allowing the posting of the blog item ‘Fix the Handful of U.S. Hospitals Responsible for Out-of-Control Costs.'”

Priselac said the research “contained numerous fundamental errors and demonstrated a significant lack of understanding of the system the authors purported to analyze, the Medicare payment system to hospitals.”

Tim Maurice, CFO of the UC-Davis Health System, agreed.

“I think their number crunching approach is great if we were the price setter, but hospitals don’t set prices for Medicare,” Maurice said. “That’s a major flaw in their analysis and in their conclusions.”

Medicare reimbursements are based on a complex set of factors revolving around diagnosis-related group payments, known as DRGs.

For patients with more than one diagnosis — a common occurrence in teaching and public hospitals — “Medicare has a special outlier pool set aside,” Maurice said. “These patients with comorbidities — typically seen in academic medical centers — can cause Medicare spending to rise because in addition to the heart attack that may have brought the patient to the hospital, that patient also has chronic pulmonary disease or diabetes,” Maurice said.

Maurice suggested that many of the hospitals singled out in the Harvard Business Review article are actually losing money on those patients, not making a profit as the research suggests.

“I haven’t found one outlier patient in 38 years that meant a profit for the hospital,” Maurice said.

Dale Tate, executive director of communications and government relations for UCLA Health, said government data seems to contradict the research findings.

“If you look at, Ronald Reagan UCLA Medical Center is below the national average and below the California average in properly risk adjusted spending per Medicare beneficiary, which should refute the conclusions of the article,” Tate said.

Six Sigma at Heart of Research

The authors of the Harvard Business Review research used Six Sigma analysis to determine which costs were excessive. Six Sigma, developed three decades ago and now considered one of the most valuable process management tools available, is a set of research techniques and strategies used to identify and improve industrial problem areas.

The authors, ManMohan Sodhi and Navdeep Sodhi, examined CMS data on 3,200 hospitals, searching for pricing “outliers,” those that were three standard deviations above average. They categorized these charges as “defective.”

“The variations were extraordinary,” the authors wrote. “Some hospitals in the New York State were being paid 40 times as much as the world-famous Mayo clinic for some treatments.”

The authors wrote:

“The conclusion we draw from this is that before fretting about fixing the health care system in general, the U.S. government and the hospitals themselves should consider engaging in a Six-Sigma-type analysis every year for continuous improvement. They can identify the tiny minority of hospitals — or areas within a hospital — that are enormously expensive across many procedures they perform and need better understanding of what is behind their extraordinarily high accepted charges. It may well turn out that many of these excess charges levied by these few hospitals can be significantly reduced simply through better management.”

Their study comes on the heels of research published in October that found about 1% of patients account for 21% of health care spending in the U.S.

Research Compared to Dartmouth Atlas

UCLA’s Tate said the research published in Harvard Business Review “Sounds like the same slant as Dartmouth Atlas studies, which we have refuted repeatedly.”

Four years ago, when Congress was working on the Affordable Care Act and considering changes to Medicare reimbursement, policymakers based many decisions on data from the Dartmouth Atlas of Health Care, a research arm of Dartmouth Medical School’s Institute for Health Policy and Clinical Practice.

Dartmouth Atlas researchers examined Medicare expenses on chronically ill patients in their last two years of life when medical costs are generally highest. The national average for Medicare spending over the last two years of life was $46,412, according to Dartmouth researchers. In New York City, the average tab was close to $100,000, and, in Los Angeles, the average was almost $85,000.

Researchers said doctors in urban areas, with ready access to more hospital beds, laboratory tests and specialized physicians, tend to hospitalize patients more frequently and order more tests and specialized care than doctors in rural settings.

Critics of the Dartmouth research — many of them in California — said the research was co-opted and twisted for political motives. Opponents of proposed Medicare spending changes characterized parts of the legislation as a money-grab by Blue Dog Democrats.

“This may have started out as a legitimate examination of how hospitals treat Medicare patients, but it has morphed into a policy-driven argument,” Tom Rosenthal, chief medical officer at UCLA Medical Center, said in 2009.

Similarly, critics of the Harvard Business Review article contend the research is based on a skewed premise.

Priselac, from Cedar-Sinai, wrote:

“Had the authors taken the time to learn basic facts about Medicare payments, perhaps instead of concluding that these hospitals are ‘cost-defective,’ they would have instead seen that almost all of the 50 hospitals on their list are:

 a) Teaching hospitals (which treat a sicker patient population and receive Direct and Indirect Medical Education adjustments in their Medicare payments);

 b) In metropolitan areas that have a high number of Medicare patients, many of whom may also be indigent (so they receive Disproportionate Hospital adjustments in their Medicare payments); and

 c) In New York or California, (so they receive adjustments in their Medicare payments for a high cost-of-living).

“Unwittingly, what the authors instead have done is essentially label the mission-related costs for teaching hospitals involved in taking care of a high number of the most seriously ill elderly patients, many of whom are economically disadvantaged and training tomorrow’s physicians as “cost defects.” I doubt that the patients who receive this care today, as well as those in the future who will be cared for by today’s physicians-in-training, consider themselves as defective,” Priselac wrote.

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