Addressing Roadblocks to Hospital-Physician Alignment

By Lefton, Ray

The Hippocratic Oath is a guiding force behind every decision that a physician makes. But it would be idealistic not to acknowledge that physicians have economic as well as humanitarian interests at stake whenever they take on a new patient or order a diagnostic test. The same, of course, is true of hospitals. Hospitals and physicians should work hand in hand to ensure patients receive high-quality care at the lowest possible cost. But this utopian vision ignores two major monetary roadblocks: malpractice and the practice of defensive medicine, and economic competition between physicians and hospitals. Below, I present possible approaches for resolving these issues.

Move Malpractice cases Out of Civil Court

Between 2000 and 2003, malpractice premiums rose 60 percent, an increase that is attributed to the number and size of plaintiff awards (Baicker, K., et al., “Malpractice Liability Costs and the Practice of Medicine in the Medicare Program,” Health Affairs, May/ June 2007). The supply of physician specialists declined, clinical programs (such as obstetrics) closed, and hospitals saw their operating margins decline. In response, many states implemented some reform measures. Although this crisis has abated to a degree, no national reform has occurred.

Medical malpractice insurance premiums account for approximately 1 percent of the nation’s healthcare spending, and actual malpractice judgments amount to 0.5 percent (Kendal, D., “Health Care Costs and Malpractice Report,” The American Interest, January 2008). However, a far bigger impact on overall costs is the resulting fear among physicians of being named in a malpractice suit- and how that affects the way medicine is practiced.

What physicians are comfortable doing in the current legal environment is practicing defensive medicine-the extra tests and procedures they feel compelled to order serve as liability shields. A 2005 study found that almost all physicians order additional tests and perform additional diagnostic procedures in response to growing malpractice costs (Studdert, D., et al., “Defensive Medicine Among High-Risk Specialist Physicians in a Volatile Malpractice Environment,” JAMA, June 2005). The cost of defensive medicine accounts for 4 percent to 9 percent of healthcare spending, according to various estimates. Furthermore, despite mandates in transparency, the fear of malpractice still prevents physicians and nurses from reporting quality problems and medical errors, which may prevent providers from making necessary changes.

Without legal reform of our medical justice system, little hope exists for preventing defensive medicine. One idea that makes good sense is to institute a network of specialized healthcare tribunals and take malpractice cases out of the civil courts. Instead, malpractice cases would be handled in an administrative system overseen by the states, with cases reviewed by medical experts. The system would be similar to the state-run workers’ compensation system (Udell, N., Kendall, D., “Health Courts: Fair and Reliable Justice for Injured Patients,” Progressive Policy Institute, Feb. 17, 2005).

In addition to legal reform, providers should be “immunized” if they strictly follow evidence-based medicine guidelines, as appropriate. Medicine is not an exact science, and some negative outcomes and results are inevitable. Under such circumstances, the patient would be compensated from a list of scheduled benefits. The practice of defensive medicine would be greatly reduced; physicians would be less afraid to intervene with high-risk, necessary procedures and more apt to care for potentially litigious patients.

The bottom line: The fear of litigation pays a tremendous negative toll on provider behaviors, driving up costs and shaping the patient/provider relationship.

Implications: Providers should work with and galvanize their legislators to change the current system. However, most providers believe the system is the problem, rather than accepting their fair share of the responsibility. To win over legislators and the public, physicians must be willing to compromise and adopt best practices.

Eliminate Physician Conflicts of Interests

Despite antikickback, fraud and abuse, and Stark laws, many arrangements still exist where physicians are able to refer patients and gain economically. Often hospitals’ biggest competitors are physicians on their own medical staffs who perform diagnostic and therapy services. Radiologists owning imaging centers and surgeons owning ambulatory surgery centers are commonplace. Also, there has been a proliferation of companies that will bring turnkey diagnostic operations (staff, equipment, etc.) to a physician’s office, allowing the physician to bill for both the technical and professional components without having to come up with any capital investment.

A recent study reports that referrals to physician-owned hospitals, surgery centers, and imaging facilities have increased considerably in the past decade, resulting in higher utilization of services. The largest leap in referrals was for advanced imaging tests, such as positron emission tomography scans, computed tomography scans, and magnetic resonance imaging scans. The study concluded that self-referral indeed increases utilization of healthcare services, but existing payment policies encourage referrals to physician-owned facilities (Gasalino, L.P., Physician Self-Referred and PhysicianOwned Specialty Facilities, Robert Wood Johnson Foundation, The Synthesis Project, June 3008).

The regulations generally allow for these arrangements provided the physician’s financial interest is not related to the volume of patients referred to the facility and the patient is given prior written notice of the physician’s financial interest. Also, no limitations exist if services are performed within the physician- owned facilities (or part of larger group).

Countervailing arguments are that physician-owned services are more consumer-oriented and can be performed more efficiently being separated from hospital bureaucracies. Due to their lower cost structure and/or negotiating leverage, they are often paid less than hospital-based services. In many markets, competing centers create underutilized capacity at the hospital, increasing hospitals’ costs.

The bottom line: There is no doubt that conflicts exist when physicians are able to gain financially from referring to services in which they have an ownership interest-a practice that can also lead to over-utilization. If true savings are to be achieved by prohibiting physician-owned services, hospitals must be willing to compromise and accept lower payment levels, which should not hurt margins if excess capacity exists.

Implications Hospitals should lobby to expand the list of designated services as well as what services are exempt (especially if provided within a large group setting) within the Stark and anti- kickback statutes. Without some relief, hospitals will continue to lose high-margin business to their medical staffs.

In Lefton’s June column, he outlined the need for meaningful healthcare reform and presented 14 reform strategies. This month, he examines two of these 14 strategies-both of which relate to hospital- physician alignment.

Ray Letton, DDS, FHFMA, CPA, a vice president, finance. Princeton HealthCare System, Princeton, N.J., and a member of HFMA’s Metropolitan Philadelphia Chapter (rlefton@princetonhcs.org).

Copyright Healthcare Financial Management Association Aug 2008

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