March 11, 2005

TO: Board of Directors

FR: Kevin J. Burke
Director, Division of Government Relations

CC: Doug Henley
Todd Dicus
Rosi Sweeney

RE: State and Federal Legislative Update (Week of March 7)

The Medicare Modernization Act (MMA) imposed an 18-month moratorium on the construction of new physician-owned specialty hospitals. That moratorium expires in June 2005. The Medicare Payment Advisory Commission (MedPAC) recently released a report to Congress containing recommendations concerning physician-owned specialty hospitals. Both the Senate Finance Committee and House Ways and Means Committee held hearings on physician-owned specialty hospitals on Tuesday, March 8. At both hearings, Glenn Hackbarth, Chairman of MedPAC and Thomas Gustafson, Deputy Director for the Centers for Medicare and Medicaid Services (CMS), testified.

Mr. Hackbarth said that 60 percent of specialty hospitals are located in four states: Kansas, Oklahoma, Texas and South Dakota. The MedPAC study examined 2002 claims data for 48 specialty hospitals which met MedPAC's test for specialization of services and Medicare claims volume.

Mr. Hackbarth pointed that cardiac hospitals tended to select slightly greater than average expected profit from the DRGs reimbursed, while orthopedic hospitals tended to recoup slightly less than expected profit. However all three types of hospitals examined (cardiac, orthopedic surgery and general surgergy) tended to treat less severely ill patients. Therefore, in 2002 specialty hospitals did not have lower costs than community hospitals but they did provide shorter lengths of stay.

While there was an early trend of specialty hospitals drawing patients away from local community hospitals, MedPAC reports that community hospitals tend to remain competitive by adding services or improving quality. Mr. Hackbarth did admit in response to a question from Sen. Thomas (R-WY) that this might be harder in a smaller rural community. As a result of their findings, the MedPAC commissioners have recommended to Congress that DRG payments to hospitals be adjusted to more carefully account for the severity of patients' medical condition. In addition, MedPAC recommends that Congress extend the moratorium on development of new specialty hospitals until Jan. 1, 2007. Finally, MedPAC suggests that Congress allow gainsharing arrangements between physicians and hospitals so that financial incentives are aligned for both parties to improve the quality and efficiency of community hospitals. According to MedPAC, "gainsharing could capture some of the incentives that are animating the move to physician-owned specialty hospitals while minimizing some of the concerns that direct physician ownership raises."

In response to questions from Sen. Charles Grassley (R-IA), chairman of the Finance Committee, and Sen. Max Baucus (D-MT), Mr. Hackbarth said that Congress could easily choose to close the "whole hospital" exception to the Stark II ban of self-referral. However, MedPAC's report did not find any need to ban specialty hospitals outright. The same line of questioning was pursued by Rep. Pete Stark (D-CA) in the afternoon hearing before the House Ways and Means Health Subcommittee.

Rep. Nancy Johnson (R-CT), who chairs the Subcommittee, expressed interest in whether community hospitals were forced to close costly but needed services such as pediatric or ob/gyn wards in response to specialty hospitals opening in their community. She also asked whether all physicians were allowed to invest in specialty hospitals or whether only potential referring physicians were allowed to invest. Reps. McCrery (R-LA) and Sam Johnson (R-TX) were more supportive of the competitive advantages of specialty hospitals, opposing closure of the "whole hospital" loophole in Stark II.

MMA also directed CMS to examine referral patterns, quality of care and patient satisfaction, as well as to study the amount of uncompensated care and amount of taxes paid between specialty hospitals and community hospitals. The final report is being prepared but Mr. Gustafson testified using preliminary data from their study which relies upon 2003 data as well as site visits.

As did MedPAC, CMS found that cardiac hospitals tend to be larger, have a higher daily census, are more likely to have an ER department open round the clock, have a higher number of Medicare patients and have a much smaller share of physician ownership—as low as 30 percent—compared to community hospitals. Orthopedic and general surgery hospitals tend to have a smaller daily census (sometimes the entire facility only has four beds), have much higher percentage of physician ownership (up to 80 percent) and a lower Medicare patient ratio (an average of 40 percent). CMS found no difference in referral patterns between owners and non-owners, although their sample size was so small for orthopedic and general surgery that it may not be reliable.

CMS does report lower mortality and better quality of care outcomes in cardiac hospitals. Patient satisfaction was high for all three types of specialty hospitals probably because of the array of amenities provided at specialty hospitals. CMS also compared the real estate and property taxes, as well as income and sales taxes, paid by the specialty hospitals. This total tax load on specialty hospitals is significant since non-profit community hospitals are exempt from such taxes. CMS found that the total amount spent by specialty hospitals on taxes exceeded the amount spent by tax-exempt community hospitals on uncompensated care. Mr. Gustafson reported that CMS was currently examining MedPAC's recommendations concerning changing the DRGs reimbursement.

On Wednesday, March 9, Senate Majority Leader Bill Frist (R-TN) said that he will try again to have the Senate address medical malpractice legislation in the 109th Congress. He indicated that he wanted to look comprehensively at physicians' rising malpractice premiums, adding that he was willing to consider elements of insurance reform in addition to capping malpractice awards. Sen. Frist said that he may reconsider the $250,000 cap on non-economic damages as a way of breaking the Senate’s impasse.

On Wednesday, March 9, the Senate Health, Education, Labor and Pension Committee approved by voice vote the Patient Safety and Quality Improvement Act (S. 544). The bill is the same as the HELP Committee’s patient safety bill from the 108th Congress.

The legislation would create a system for voluntary reporting of medical errors to promote interventions and solutions that ensure patient safety.

The bill also establishes federal privilege and confidentiality protections to promote the reporting of medical errors. Finally, the bill promotes the development of national standards to integrate health care technology information systems. To do this, HHS must develop or adopt voluntary national standards that promote the electronic exchange of health care information.

Late on Wednesday, March 9, the House Budget Committee approved a budget for the federal government that, if passed, would require reductions of $18.7 billion in Medicare and possibly $20 billion in Medicaid over the next five years. On Thursday, March 10, by a party-line vote of 12-10, the Senate Budget Committee passed a budget resolution. But the Senate Committee’s version would require only $14 billion in savings, all from Medicaid. The Senate Committee’s reductions all come from restrictions in intergovernmental transfers, lower reimbursement to pharmacies and tightened procedural rules for seniors re-assigning assets to qualify for Medicaid. In contrast, the President’s budget called for reductions in Medicaid of $24.9 billion over five years, with no cuts proposed for Medicare.

The Senate Budget Committee also adopted by voice vote an amendment that would add a reserve fund to the budget to pay for possible legislation – if enacted this year – that would legalize the importation of prescription drugs. The amendment notes the re-importation fund could only be used to facilitate the sale of drugs from "specified countries with strong safety laws.”

Sen. Michael Crapo (R-ID) and Rep. Randy Cunningham (R-CA) have proposed legislation (S 228, HR 457) that would establish an Office of Men's Health in HHS. The office, which would resemble the existing Office on Women's Health within HHS, would provide men with medical treatment and ways to learn about early detection and disease prevention. The legislators said men often avoid going to the doctor and ignore symptoms, noting that the average life expectancy for men is six years younger than that of women

As of March 7, legislatures in 45 states and the District of Columbia are in session with two states yet to convene - Florida and Louisiana. State legislatures in Utah, Virginia and Wyoming are adjourned for the year.

Kansas, Missouri, West Virginia, and Georgia have been dealing with specific issues regarding challenges to the scope of practice. Kansas was able to hold off legislation that would have permitted advanced nurse practitioners to obtain a DEA number and prescribe higher class narcotics.

Missouri is fending off legislation that would allow lay midwives to practice without training or liability; is working to defeat legislation that would license naturopathic doctors as physicians and allow the same recognition as MD/DO under the law, and expansion of scope for physician assistants, nurse practitioners, and licensed counselors.

Georgia and West Virginia have been looking at legislation that would restrict pre-K eye screening to ophthalmologists/optometrists.

Hawaii successfully defeated a bill that would have given psychologists prescriptive authority.

The Washington Post picked up a report that focused on a study conducted by four law professors on medical malpractice claims from 1988 to 2002 in the state of Texas concluding in the study that, "… attempts to avoid crises in malpractice insurance prices should focus on insurance, not litigation." The study was conducted by two professors at the University of Texas Law School and William Sage, a physician and a law professor at Columbia University.

From 1999 to 2002, malpractice insurance premiums in Texas rose an average of 135 percent from 1999 to 2002, prompting the state legislature to cap non-economic damages in 2003.

States continue to work on the issue of medical malpractice with the main focus on non-economic damage caps.

The Arizona Senate passed S.B. 1036. This bill sets restrictions on the use of expert witnesses in lawsuits. The bill states that an expert witness must be a specialist in the same medical field as the defendant and must have recent academic or clinical experience. However, the bill grants defense attorneys access to the plaintiff's medical records and allows defense to interview any other physician who has treated the plaintiff for the same condition. Lastly, in what is a growing trend, the bill allows health care providers to express sympathy without fear of reprisal by stipulating that such statements are inadmissible as evidence of liability.

Two bills that would reduce the cap on non-economic damages to $250,000 remain in committee.

FL SJR 684 proposes an amendment to the state constitution that would repeal a section which revokes the medical licenses of physicians who have been found guilty of three malpractice judgments. FL SJR 684 was referred to committee on 01/28/2005.

The Senate revised HB 393, the House refused to concur and the bill now goes to a joint reference committee. It is anticipated that some agreement will be reached but there will be attempts to amend the bill on the House floor when it returns for a vote. The Missouri Academy continues to work on insurance reform including language that would address the issue of tail coverage.

In contrast to the governor's positive statements, the Missouri Association of Trial Attorneys said that the bill is not a singular solution to increasing medical malpractice insurance premiums. House Bill 393 fails to address adequately the central facet of increasing premiums--the practice of medical malpractice insurance companies. The Association of Trial Attorneys said that legislation should require insurers to set insurance rates based on how physicians perform as individuals. The current system of requiring all physicians to bear the financial burden created by a minority of unsafe physicians in inequitable. Moreover, legislation should require insurers to hold public hearings prior to increasing premiums by 15 percent or more. It is worth noting that a bill has been introduced on the House side with several of these proposed reforms and is now held up in committee.

HB 24 would enact “sympathy” legislation or the ability for a physician to express or extend a statement of sympathy that would not be admissible in court as evidence of guilt or liability.

Legislation has been introduced creating a commission that would study the issue of medical malpractice in other states and Canada with recommendations required no later than November 2005.

SB 83 includes a cap of $350,000 on non-economic damages against a single provider and a $1,050,000 cap with multiple providers; a provision for pre-trial settlement offers; new qualifications for expert witnesses; and mandatory mediation. The bill has passed both the Senate and House and is ready for a third read.

HB 1148 was signed into law on February 22. This law makes statements of sympathy by health care providers inadmissible as evidence of liability in malpractice cases.

Proponents of caps on non-economic damage frequently claim that limiting jury awards will lead to a decrease in medical malpractice premiums. The absence of rate decreases, the amount of rate decreases and rate increases by select malpractice insurers often become subjects of legislative debate following the enactment of caps on non-economic damages. This characterizes aspects of the medical malpractice debate in the Texas legislature since lawmakers enacted a measure in 2003 to cap damages at $250,000 for physicians, hospitals, nursing homes and other health care facilities. The legislation limits total non-economic damages at $750,000 per plaintiff.

The state's third-largest malpractice insurer intends to reduce the premiums for approximately 2,200 physicians by an average of 5 percent. A physician-owned insurer that provides policies to 1,500 physicians will reduce premiums by an average of 9 percent. Both insurers attribute the reductions to the 2003 law as well as a 70-percent decline in the number of lawsuits.

This is contrasted with the largest insurer in the state increasing premiums by 10 percent after the law was enacted raising the ire of legislators. Policymakers from both parties said that they may consider mandatory rate rollbacks if there is not a significant reduction in physicians' malpractice premiums.