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Cutting costs, not care; Rochester hospitals try cooperation instead of competition.


The ugly side of health care cost-control surfaced last year during a U.S. Senate committee hearing on Medicare's two-year-old system for providing the elderly with hospital care. The committee, chaired by Pennsylvania Republican John Heinz, uncovered the case of a 68-year-old man who had been hospitalized for vomiting caused by a hiatal hernia that had also worsened his chronic emphysema. The patient was discharged eight days later, before he fully recovered. The early discharge, the committee reported, was prompted by the doctor's fear that the patient would be responsible for paying the balance of his bill not covered by the Diagnostic Related Grouping (DRG)--the Medicare program that pays hospitals a flat fee based on a patient's diagnosis. When the patient said he had no money, he was sent home.

He died in his driveway.

Despite this and other horror stories, DRGs and other programs aimed at curbing health care costs through competition are increasingly popular. Corporations are signing up their employees in Preferred Provider Organizations-- doctor groups and hospitals that promise to hold down their bills in return for the right to care for a block of patients. Health Maintenance Organizations (HMO) are competing with traditional insurance plans by cutting costs through reduced hospital stays and by covering more out-patient treatment, including regular doctor's office visits not covered by traditional insurance. Where the financial incentives once led doctors and hospitals to give as much treatment as possible--whether it was needed or not--they're now rewarding the health care providers who do less. Perhaps the greatest spurs to competition have been the DRGs.

The rise of competition has begun to rein in health care costs. Hospital occupancy rates have dropped for the last two years and will probably continue to do so this year. Former Health, Education and Welfare Secretary Joseph Califano championed the accomplishments of the market-place in shaving the health care dollar in a recent New York Times article: "[T]he spirited air of competition is for the first time swirling through the health industry.' Business, government, and unions, he continued, are "changing the way doctors, hospitals, and other providers are used and paid, and reshaping financial incentives that have encouraged patients to seek unnecessary care. And a host of new health care providers is scrambling to get their business.'

There's no question that many of the changes in health care are long overdue. As Califano points out, for instance, simply requiring second opinions for virtually all major elective surgery helped Chrysler save $100 million over the last three years--and probably improved the health of patients spared unnecessary operations. A RAND Corporation study published two years ago in the New England Journal of Medicine showed that HMOs in Seattle successfully cut hospital use without hurting patients.

But as the Heinz committee found out, competition has created winners and losers. The winners have been the private hospitals, often operated by for-profit chains, that know how to weed out the difficult, expensive cases and the inconvenient, poor patients who aren't covered by insurance. The losers include teaching hospitals, whose medical students and residents increase costs both directly and indirectly--for instance, by ordering tests that, while not medically needed, could add to the trainees' knowledge of a certain illness. More important, the losers often include municipal hospitals supported by tax dollars that end up shouldering the burden of charity care. In Florida, patient dumping has become so bad that the state now taxes private hospitals to help offset the costs of treating the poor.

The Heinz committee concluded that in the scramble to make DRGs work for them financially, hospitals began pushing Medicare patients out as soon as they calculated a patient's treatment had reached the limit of Medicare's new fixed fees. Before switching to the flat-fee approach, Medicare had paid hospitals on the basis of how long a patient stayed. Some hospitals are now turning down patients whose illnesses they conclude would cost more to treat than the government intends to pay under the DRG system. The committee found a 40 percent increase in the number of patients who were sent to nursing homes from hospitals in the year and a half after the new system began, and a 37 percent increase in the number who were sent home needing still more care. One 73-year-old man discharged after a heart attack was sent home to be cared for by his severely retarded son, despite the fact that the man needed several medications that the illiterate son shouldn't have been expected to administer. An 88-year-old diabetic woman who suffered a stroke so severe she could neither speak, feed herself, nor ring for a nurse, was discharged to a nursing home after hospital personnel told her daughter--wrongly--that DRGs limited how long the elderly woman could stay and that her time was up.

Patients sent home were often too ill to appeal, the committee wrote in its final report. It also found fault with the Peer Review Organizations (PRO) set up by the federal Health Care Financing Administration (HCFA) which runs Medicare. The PROs are panels of doctors in each state who are supposed to keep an eye out for abuses of the system. The committee concluded the panels inadequately examined the quality of care. It noted that the PROs had no authority to penalize hospitals that kicked patients out too soon. The committee stated: "There are . . . significant indications that these problems are more severe and widespread than current HCFA estimates, based upon the very limited information available from PROs, would indicate.'

But beyond the damage DRGs have caused individual patients, there's reason to believe the whole system could eventually backfire. That's because DRGs still pay hospitals only if they admit patients. The result is that except for the PROs, which look at unnecessary admissions only after the fact, hospitals have no incentive to find the most economical way to treat many patients. So, ironically, while they often kick out patients who should remain, hospitals often have to take in patients who shouldn't be admitted.

Hospitals get HEP

There is a better way--one that already works. For the past six years, 16 hospitals in upstate New York have quietly pursued their own program to cut costs with the approval of state and federal officials. They started their program nearly four years before the Medicare DRG program took effect. Hospital costs rose 87 percent across the country from 1980 through 1984 but only 55 percent in the nine hospitals belonging to the Rochester Area Hospitals Corporation (RAHC), one of two consortiums of hospitals taking part in the cost-cutting plan. In a study published in Health Affairs in 1984, health care researcher Walter McClure found that Rochester's Medicare expenditures had been consistently below the national average for the previous five years. In 1982 alone, McClure found, the community's Medicare bill was 27 percent lower than the national average, and the lowest of 30 metropolitan areas.

In the past six years, Rochester's hospitals have willingly, even eagerly, trimmed their occupancy rates to below 80 percent. They did so not through cutthroat competition. Instead, they sat down and worked together in an unusual cooperative venture that--despite all the potential for pitfalls--has worked better than the efforts of either the federal government or private enterprise to turn health care into one more arena for economic competition. And they did it without turning out hordes of desperately ill patients, and without dumping charity care on municipal hospitals, as has happened in Florida, Texas, and other states. Yet this system has proven itself as economical as any system now operating in the U.S.

Rochester's example does not provide an easy alternative. It requires hospitals to adhere to tough planning procedures and to be willing to give up a measure of individual power in the medical marketplace. It also demands that business and industry get involved in the community's health care at the most fundamental levels instead of carping from the sidelines about the high cost of health care.

Part of the secret of Rochester's success is the community's long history of health-care planning--a practice that was virtually invented there. "You never let your hospitals net out of control there,' McClure says. "The physicians were used to working with a tight hospital system and practiced medicine accordingly.' Consider the controversy of four or five years ago, when delays of several months or more were common among patients seeking coronary bypass surgery. Doctors pressured the regulators to certify a third bypass program, but the planners held fast, insisting the need had not been established. The planners won. By mid-1984, the backlog in bypass operations had disappeared and there was no need for an expensive new unit.

That kind of planning set the tone. Six years ago, Rochester hospitals gave up the old "cost-plus' system, under which they had been paid for each patient, and took up one that put the whole hospital system on one budget: the Hospital Experimental Payment (HEP) plan. Instead of paying hospitals for individual patients, Blue Cross, Medicare, and Medicaid paid a fixed sum of money to the RAHC, which doled out revenues to participating facilities each month. Using 1978 hospital costs as the base, the payments were increased for inflation and other varying costs from year to year. For the hospitals, the bottom line is simple: act efficiently, and you'll get to keep the surplus from your payment. Waste money, and you'll eat the loss.

The system would appear to work in principle the same way DRGs do--by putting hospitals on a budget. But there are some essential differences that go to the heart of why the HEP program has succeeded where DRGs have not.

First of all, the system is predictable and flexible. Under HEP, hospital administrators know what they'll be getting each year. By guaranteeing the hospitals revenues, the system has helped them become more efficient--allowing them to empty out hospital beds without losing a lot of money. "Deliberately following a course of action that will allow you to empty beds is an act of bravery,' says David Stewart, retired head of the local Blue Cross-Blue Shield plan and one of those in on HEP's early planning.

DRGs, on the other hand, still require hospitals to admit patients in order to get paid. In cities with an oversupply of hospital beds, "DRGs have performed a rather crude brand of surgery,' says Stewart. Suppose two patients show up at the emergency room with symptoms of pneumonia. One case is mild, needing just a prescription; the other is severe, demanding a few days in the hospital. Under DRGs, both patients will bring the hospital the same amount of money--but only if admitted. Indeed, the hospital could well make a profit by admitting the mildly ill patient and sustain a loss by admitting the severely ill one. While state PROs can penalize hospitals that admit patients needlessly, the Heinz committee found this was not a disincentive. The PROs review patient cases months after hospitalization. This "Monday morning quarterbacking,' the committee concluded, "has cost the . . . PROs credibility.'

HEP doesn't force hospitals to factor financial decisions into patient admissions. Payment has nothing to do with whether a given patient is admitted or not, so the hospital has the freedom to treat patients in the best and most efficient way possible. All of the Rochester-area hospitals have programs allowing simple operations to be performed without requiring the patient to spend a night in the hospital, and their volume of such surgery has been steadily increasing. As a result, payments for outpatient visits increased 57 percent from 1980 to 1984, more than twice the rate of increase for inpatient costs.

The system also is more sensitive to the severity of a patient's illness. It's well known that hospital patient make-up can vary tremendously; some hospitals routinely get very mild cases, while others get most of the sicker ones. Not coincidentally, the sicker group usually goes to the more sophisticated teaching hospitals, which are often regional referral centers. It's easy to see how the DRG system could quicly penalize the hospital that sees mostly the severe pneumonia cases, while the private hospitals that get the mild cases quickly profit.

The amount paid each HEP hospital is based on past experience. The lump sum reflects the severity of illnesses that historically have been treated in each facility; the formula used to determine a hospital's payment includes adjustments for the "case-mix' seen. Adjustments are also made for the amount of medical education each hospital provides and how much charity care and bad debt it carries. The HEP system is invisible to Rochester patients, who still get conventional hospital bills that they turn over to Blue Cross. Those bills, however, are simply a bookkeeping tool for the system.

The HEP system would seem to have some of the same incentives as the DRG system to dismiss patients too early. Worried that a hospital might be going over budget, why wouldn't an administrator turn up the pressure to clear out patients as fast as possible? In practice, though, the group planning alleviates that problem. If, for example, a hospital were to have an unexpectedly high number of AIDS patients that threatened to bust its budget, administrators could sit down with officials from other hospitals and work out special dispensation. Under the DRG system, on the other hand, the budgeting is fixed in law.

The HEP system is almost self-policing. In interviews, consumer advocates and groups who work on behalf of the elderly say they have no record in Rochester of the kind of abuses that the Heinz committee has turned up. Hospital officials don't pretend that they or local doctors are any more moral than those in other parts of the country; instead, they say, local hospitals simply scrutinize each other more. Executives from each hospital participating in the plan meet weekly or biweekly through RAHC, which allows them to exchange information but also to keep an eye on each other.

That points to the most fundamental difference between the Rochester system and DRGs. HEP's underlying premise is that hospitals are a collective resource. "There has to be the community will to deal with health care as a community-wide issue in order to have that kind of program work,' says Lovinski, the health planning group director. That attitude contrasts sharply with the central assumptions of the DRG system, which pits individual hospitals against each other. "The best part of it is it's being accomplished through what I would call deregulation and putting the system in the hands of the community,' says Robert Barnett, director of health economics and systems development at the New York State Health Department. "They recognize that providing the teaching functions and providing bad debt and charity care is a community problem.'


That's not to say that there's been no competition in Rochester. In the past five years, the area has seen a phenomenal growth in HMOs that advertise on television. They are signing up patients so quickly that Rochester now has more HMOs per person than most cities. Rochester hospitals have begun advertising for the first time, and each is looking for ways to sell its services that set it apart from the rest. But the hospitals in Rochester compete on the level playing field that HEP creates.

If the whole thing sounds a bit like all the players sit down to carve up the pie, that's true. "But you have to ask, what pie are you carving up?' says Paul Hanson, president of the Genesee Hospital, the community's third largest. "You're carving up an agreed-up, contracted amount. You're not carving up whatever you can go out and get.'

To some extent, participants agree, the system may slightly favor one hospital: the University of Rochester's Strong Memorial, the system's largest. Administrators at other hospitals say Strong's political clout probably makes this inevitable. Strong is a primary research hospital, the region's designated high-risk care center, and the home base for the University's School of Medicine and Dentistry. That makes Strong an important community resource that needs to be preserved, says Hanson. Yet, he continues, the smallest RAHC hospital, the 75-bed Lakeside Memorial in Brockport, 20 miles west of Rochester, has as many votes on the RAHC board as Strong. "Strong has had to fight as hard as Brockport and Genesee,' Hanson insists. "They have had to justify every dime like everybody else.'

Last year, all RAHC hospitals agreed to a community-wide cap limiting operating costs and depreciation for new capital expenses to about $4 million--1 percent of the total community hospital costs. It was a logical step given the longstanding practice of Rochester hospitals that predated HEP: sitting down and negotiating with each other about who would build what and who would acquire new technology before presenting those requests to local and state planning agencies, which must approve all such capital expenses.

Plenty of challenges lie ahead. The system has evolved so that hospitals, as they lose patients, have to pay back some of their funds--a move that is certainly fair and reasonable. But planners expect to see the local hospital system shrink within the next five years, cutting as many as 150 to 200 beds from the nine Rochester hospitals alone.

Yet that challenge shows some of the benefits such a cooperative system presents: if the marketplace alone were to decide which hospitals stay open and which close, chances are that the first to go might be those that serve the inner city communities, while facilities serving the middle class might stay open. By keeping hospital administrators at the table--horsetrading, perhaps, but in a quasi-public process--Rochester has a better shot at making sure the right hospitals close and the right ones stay open.

Can other community health care systems, which face an almost anarchic degree of competition, follow Rochester's example?

In some ways, Rochester is unusual. The city has for decades been dominated by a single university medical school and heavily influenced by the policies of a single corporation, Eastman Kodak, by far the city's leading employer. Corporate leaders took a cost-conscious approach and joined hospital boards to wield influence over how health care was delivered.

Many credit one man from Kodak with helping to set the tone for Rochester health care: Marion B. Folsom, secretary of Health, Education and Welfare under President Eisenhower. In 1958, Folsom joined Kodak's board and helped start one of the country's first volunteer planning agencies, one that later evolved into a part of the state's regulatory system.

Walter McClure argues that the planning and cooperative spirit behind HEP only worked because Rochester was under the "baronial' control of Eastman Kodak. He says he's skeptical about whether it can be copied elsewhere, especially if there isn't a home-based employer with Kodak's paternalistic brand of progressive community involvement.

One hospital director, who says he's tried to sell the notion around the country, confides he's practically given up. "They just can't get that first step--cooperation,' he says. Dr. Ernest Saward, a nationally recognized expert on health care policy trends and professor emeritus at the University of Rochester, agrees. "Everybody wants to be first, which is an impossibility,' he says.

In fact, when Staten Island's five hospitals began taking steps to design a reimbursement experiment like HEP, they foundered, according to Edward Messier, senior associate director of Staten Island Hospital. Messier said that it failed because officials feared that Washington wouldn't approve any more waivers for this kind of innovation, and because of concern over impending changes in New York State's own hospital payment system, which brought in DRGs this past January.

Yet last year, Dr. James Block left his post as RAHC president to become president-elect of Case Western Reserve University Hospitals in Cleveland. The competition he's seen there is more intense than what he's accustomed to, Block says, but he's already talked to business leaders in other Ohio cities who are beginning to pursue a cooperative approach. "In a few years, Rochester will be looked to as a very workable alternative,' he predicts.

Messier agrees. "It's much better for everyone to get together to complement each other instead of competing with each other,' he says. "We're not talking about manufacturing widgets. We're talking about providing health care for the community.'
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Copyright 1986, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Gunn, Erik
Publication:Washington Monthly
Date:Jun 1, 1986
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