Background: Compared with heart hospitals (HHs), does Medicare provide better reimbursement to traditional hospitals (THs)? Methods: Diagnosis Related Group (DRG)-specific data from Hospital Compare (www.hospitalcompare.hhs.gov) were used to compare Medicare reimbursement to hospitals in nine HH markets, representing 10% of the national HH market. Results: On average, markets contained 1.2 HHs and 8.1 THs. Average market size for invasive cardiac services was $13±8.4 million, with HHs having 36.1% of the market share. Compared with HHs, THs received significantly better reimbursement for coronary artery bypass graft (CABG: $20,281±3,047 HH versus $23,958±4,562 TH; p=0.004), percutaneous coronary intervention (PCI: $11,230±742 HH versus $13,347±2,662 TH; p<0.001), heart valve replacement ($33,710±4,056 HH versus $39,819±6,356 TH; p=0.001), pacemaker implantation ($11,245±706 HH versus $13,212±2,043 TH; p<0.001), heart failure ($5,622±489 HH versus $6,482±1,010 TH; p<0.001), chronic obstructive pulmonary disease (COPD: $4,893±802 HH versus $5,641±841 TH; p=0.013), pneumonia ($5,708±763 HH versus $6,456±1,136 TH; p=0.012), and diabetes ($4,115±355 HH versus $4,963±812 TH; p<0.001). Conclusions: The excessive reimbursement granted to THs for non-cardiac services is likely to reflect a policy decision to assist these hospitals with their cross-subsidization of other services. If Medicare is to cut reimbursement to TH for CABG, PCI, or other services, Medicare should be asked to pay more for the services (e.g. emergency room care) that it currently reimburses only indirectly through the process of cross-subsidization.
The policy debates concerning heart hospitals boil down to two issues: the extent to which these hospitals compete unfairly with traditional hospitals, which must cross-subsidize non-cardiac care, and the extent to which physician ownership affects the patient mix.1 Largely ignored in these debates is the extent to which traditional hospitals receive better reimbursement from both the government and private health insurers to cross-subsidize the losses incurred by providing certain non-cardiac services.2
While cross-subsidization is an unfamiliar concept to many, it is not a hard concept to grasp.3 By law, hospitals are required to provide a multitude of money-losing services (e.g. emergency care). To cover such losses, hospitals tend to maximize their income from profitable services (e.g. invasive cardiac services). Indeed, the need to provide profitable cardiac services in order to offset the losses arising from providing emergency room services helps to explain why urban regions have a surplus of hospitals that provide invasive cardiac services (ICS) such as coronary artery bypass grafting (CABG) and percutaneous coronary intervention (PCI).4 Conversely, to the degree that government and private insurers provide premium reimbursement for ICS, these payers tacitly place their seal of approval on such fiscal sleight of hand. To a degree, the discussion on cross-subsidization has been muted by a lack of objective data. However, now that the Department of Health and Human Services publishes hospital Diagnosis Related Group (DRG)-specific reimbursement on its Hospital Compare website,5 it is possible to gain some insight into a hospital’s revenue stream.6 Accordingly, by using this publicly available data, we examined Medicare reimbursement for ICS to heart and traditional hospitals. From these data we concluded that Medicare intentionally overpays traditional hospitals for ICS in order to facilitate cross-subsidization.
Nine hospital markets for ICS were selected for review. Markets were defined as all hospitals providing ICS within a 25-mile radius of a heart hospital. A hospital was considered to provide ICS if it offered either CABG or PCI services to the public.
- Schneider JE, Miller TR, Ohsfeldt RL, et al., The Economics of Specialty Hospitals, Medical Care, 2008;65(5):531–53.
- McLean TR, The Rise of the Heart Hospital and the Fall of the House of Usher, Am Heart Hosp J, 2003;1(3):223–30.
- Betbeze P, The truth about cross-subsidization, HealthLeaders Media, June 2, 2008. Available at: www.healthleadersmedia.com/ content/212643/topic/WS_HLM2_FIN/The-Truth-About-Cross Subsidization.html (accessed November 2, 2009).
- McLean TR, Reputational incentives – how improved transparency can drive hospital competition, Am Heart Hosp J, 2009;7(1):27–32.
- Yasaitis L, Fisher ES, Skinner JS, et al., Hospital quality and intensity of spending: is there an association?, Health Affairs, 2009;28(4): w566–w572.
- Office of Inspector General, Medicare Hospital Prospective Payment System, How DRG Rates Are Calculated and Updated, 2001, No. OEI-09-00-00200. Availale at: oig.hhs.gov/oei/reports/ oei-09-00-00200.pdf (accessed June 18, 2009).
- Consolidated Omnibus Budget Reconciliation Act of 1985 (Pub.L. 99-272, 100 Stat. 82).
- Stiglitz J, Globalization and its Discontents, New York, NY: WW Norton Company, 2002
- Umbdenstock R, President and CEO of the American Hospital Association, AHA president talks to NPR about proposed hospital payment cuts, June 19, 2009. Available at: www.aha.org (accessed June 19, 2009).