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How Trends Will Interact:
The Perspective of the Hospital
JOHN H. MOXLEY III ANI) PENELOPE C. ROEDER
When the 62-year old patient entered [the medical center] last spring, he
never expected to walk out of the . . . hospital the next day. After two
unsuccessful attempts at surgical removal of the fat deposits clogging an artery
in his left leg, some doctors concluded that an amputation was the only way
to stop the severe pain. But a team of surgeons . . . decided to make one last
try with a risky and highly experimental technique that had never been used
on a human. The team snaked an optical fiber into the clogged blood vessel
and then shot laser light through it, vaporizing the blockage. Less than 24
hours later, the patient went home. His only medication: aspirin.
This story is not science fiction or creative speculation; it is an item
reported in the October 17, 1983, issue of Business Week.
The fact is, most of us have become somewhat jaded because the
things that we think of as advanced technology are already so pervasive
in the medicine of the late 1980s. As a result, we often do not know
whether to count our blessings or bemoan our fate as we consider the
obstacles to the further progress of technologies.
Neither the complexities of, nor the questions surrounding, devel-
opment of medical technologies are new areas of concern. In 1968
members of the President's Science Advisory Committee (PSAC)
considered many of these issues in regard to funding of the National
Institutes of Health (NIH). In The Youngest Science, Lewis Thomas
describes PSAC's findings:
We recognized three levels of medical technology: (1) genuine high tech-
nology, exemplified by Salk and Sabin poliomyelitis vaccines, which simply
eliminated a major disease at very low cost by providing protection against
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HOW TRENDS WILL INTERACT
the three strains of virus known to exist; (2) "halfway" technology, applied
to the management of disease when the underlying mechanism is not understood
and when medicine is obliged to do whatever it can to shore up and postpone
incapacitation and death, at whatever cost, usually very high cost indeed,
illustrated by open-heart surgery, coronary artery by-pass, and the replacement
of damaged organs by transplanting new ones (at extremely high cost); and
(3) nontechnology, the kind of things doctors do when there is nothing at all
to be done, as in the care of patients with advanced cancer and senile dementia.
We suggested that the rising cost of health care was resulting from efforts to
treat diseases of the hallway or nontechnology class, and recommended that
more basic research on these ailments be sponsored by NIH (emphasis added)
(Thomas, 1983, pp. 264 265~.
There is, however, a significant question that was not addressed by
the PSAC not the question of whether new technologies can or should
be used, but whether they will be used. This question was of little
interest in 1968, when it was assumed that all technology would be
used. Nearly 20 years later, in an environment of constrained resources,
the question of what will actually happen at the level of the provider/
patient interface has become a critical issue.
We examine this critical issue primarily from the perspective of
hospitals where administrators make decisions daily that may affect
the availability and use of new technologies. We also examine briefly
the participation of payers through appropriateness review, as well as
some of the societal issues that affect providers, payers, and patients.
Before discussing the specific issues, it is important to set the stage
by looking briefly at the practice of medicine and its relation to hospitals
and technology development.
Since World War II there have been at least four significant changes
in the health care environment. These include increased funding for
biomedical research, dramatic growth in the availability of health
insurance, rapid rises in the numbers and types of medical specialists
and subspecialists, and expanding use of medical technologies.
The relationship between the financing changes and the changes in
medical practice patterns can be briefly summarized in a single
sentence: With few limits on the availability of funds, medical practices
were often based on the belief that more care was better care.
The relationship between the rise of specialty medicine and the
spread of technology is no less important. As new technologies have
become available, new groups of physicians have become specialized
in their use. For example, cardiology now encompasses invasive and
noninvasive cardiologists. Lithotripsy has given birth to a whole new
group of urologists, as in vitro fertilization has to obstetricians/
gynecologists. With recent developments in magnetic resonance im-
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THE PERSPECTIVE OF THE HOSPITAL
129
aging (MRI), it would not be surprising to see the growth of MRI
subspecialists in a host of current specialists. From a hospital's
perspective, each of these technological developments has given rise
to a special interest group that can dramatically affect not only the
institution's governance but also its capital and operating decisions.
After more than a generation of medical practice dominated by
nearly open-ended financing and growth in medical specialties and
widely disseminated, complex technologies, we still find ourselves in
a world in which most of our medical resources are devoted to the
kind of acute-care medicine Dr. Thomas (1983) and his colleagues
labeled "halfway technologies."
Although we may be closer to discovering the "high technologies,"
there has not yet been quite enough time. We still need more research
to transform our recent progress in genetic engineering into actual
cures of Alzheimer's disease or multiple sclerosis; we still need more
research to develop the neural prostheses that can change the lives of
trauma victims and that can enable the blind to see and the deaf to
hear.
THE PERSPECTIVE OF HEALTH CARE PAYERS
Today we have entered a new world a world in which the costs of
health care are increasingly monitored by payers from both the public
and private sectors. Although we can argue that high technologies
would reduce society's total health care bill over the long term, today's
payers have found that they can save far more by looking first at the
simple issues of how care is delivered for some very common occur-
rences such as back pain, normal obstetrical deliveries, and children's
sore throats. While these payers clearly hope to reduce the costs of
treating all illness including the more complex cases of cancer and
heart disease they hope to do so by effecting fundamental changes
in the current medical care system.
Let us look at the changes sought by payers and think about the
impact they will have on the adoption of new medical technologies.
The most obvious fact about the new health care environment is the
alphabet soup of new delivery networks. Whether these groups are
called health maintenance organizations (HMOs), preferred provider
organizations (PPOs), or anything else, they tend to have a number of
features which can have an impact on the technology adoption process.
Perhaps most important, most have a single agent an insurance
company, the employer group itself, or some other intermediary that
administers payment for all services delivered to plan members. This
is not a simple check-writing function; it is a true oversight function.
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While reviewers may check invoices submitted by providers for billing
errors and price levels, their primary function is to review the appro-
priateness of the care delivered. However, many of these reviewers
base their assessments of appropriateness more on financial averages
than on clinical considerations. There is, therefore, an increasing
tendency to review claims on the basis of costs per case rather than
on the needs of a particular patient.
THE PERSPECTIVE OF THE HOSPITAL
Whether it is based on clinical expertise or not, this kind of
appropriateness review has become part of the clinical decision-making
process. It has also put the hospital in the middle of the clinical
decision-making process by forcing it to act as the payer's local
policeman. If the hospital does not accept this role, it is often forced
to forgo payment for services and to withstand some financial loss.
Appropriateness review has also forced some dramatic shifts in the
ways in which hospitals adopt new technologies. A brief review of
those shifts will help illuminate their possible long-term impact on the
development and use of new medical technologies.
All providers be they not-for-profit or investor-owned institutions,
solo physicians, or members of group practices are able to continue
delivering medical care only if they can meet the costs of doing
business. That is, all of them must generate an economic profit,
whatever name they choose to apply to it.
In the cost-based payment environment that existed until a few
years ago, virtually all services delivered were profitable. That is no
longer the case. In 1983 the federal government introduced prospective
pricing by diagnostic-related groups (DRGs). Increasingly, private
payers are also adopting the prospective pricing principle. When prices
are set prospectively, profit is earned only when the costs of producing
a product are less than the prices paid for the product.
If this point seems trivial, that is only because it reflects the basic
economics under which most American industries have operated for
decades. For the health care world steeped in cost-based reimburse-
ment, it is, however, an unfamiliar perspective. Prospective pricing
has forced providers to revise the way they think about such things
as capital investments, operating expenses, and market share.
Despite the fact that hospitals' expenses have not been included
under DRGs, there was a decrease in those expenses in 1984 and 1985.
In 1986 capital expenditures rose in what many believe was the
anticipation that they would soon be integrated into the DRG system.
There are now clear indications that many hospitals are considering
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131
or have implemented reductions in capital expenditures. In December
1986, for example, Thomas Frist, the chief executive officer of Hospital
Corporation of America, announced that capital spending had been
cut from $1.4 billion in 1985 to about $700 million in 1986 (McGraw-
Hill's Health Business, 19871. Certainly, some of the industry-wide
reduction in capital expenditures has been in response to a generally
tighter economic environment. However, in some hospitals it also
reflects a completely new approach to capital budgeting.
Rigorous economic analysis has not always been part of most
hospitals' decision-making process. Indeed, most hospital analysts
have concentrated on developing their reimbursement savvy, and few
have had the traditional capital budgeting skills found in other indus-
tries.
It used to be that hospitals made purchasing decisions based entirely
on physician demand, and that physicians demanded whatever tools
or procedures they were comfortable with—often without regard to
the cost. Hospital boards or managements might have decided against
a project, but that was more often for reasons of timing or overall
desirability than it was for economic reasons.
The results of decision making based on physician demand are now
apparent throughout the country. For example, it is not uncommon to
see cardiac catheterization laboratories in small rural or semirural
hospitals with a single cardiologist and one trained technician. It is
difficult to believe that the incremental patient load brought to most
rural hospitals by such a service is likely to justify the cost of a trained
technician and the capital investment required to run the lab. In fact,
administrators of some of these hospitals use their small patient loads
as justification for cardiac catheterization prices that are higher than
those at the large medical center 2 hours away.
Certainly, such an investment would be made on the basis of clinical
factors: There is ample evidence that the risk factors for patients in
this kind of situation are high (Shortell and LoGerfo, 1981; Showstack
et al., 19871. Instead, such investment decisions have been based on
the assumption that any additional services and any additional pa-
tients would be profitable under the payment systems that were in
place.
In the current environment, however, even rigorous economic
analyses are only marginally useful for hospital managers attempting
to malice rational capital investment decisions. This point is easily
illustrated by a number of examples.
The first involves the coverage of a new technology under the DRG
system. DRG no. 108 prescribes the reimbursement rate for cardi-
othoracic procedures, except valve and coronary bypass, with pump;
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HOW TRENDS WILL INTERACT
it has a weight of 4.7810. When DRGs were originally introduced, this
DRG included angioplasty. With that basis of payment, any hospital
that handled a reasonable number of patients with obstructed coronary
arteries (procedure code 36.0) was likely to invest in angioplasty: It
was much less costly to deliver than the alternative procedures covered
by the DRG.
Within a short period of time, however, a new procedure code was
introduced for angioplasty and the procedure was moved to another
DRG (no. 112; vascular procedures except major reconstruction,
without pump) with a weighting of 2.2239. At an average blended DRG
rate of $3,000, this change reduced payment for each angioplasty by
more than $7,600. At the very least, the projected return from the
investment in angioplasty was considerably diminished.
A second example involves another new technology this time a
very expensive piece of equipment: the lithotriptor, which provides
noninvasive treatment of the common kidney stone. From a clinical
perspective, a lithotriptor appears to be a desirable investment. Prom
an economic perspective, it would also appear to be reasonable at first
glance, since noninvasive procedures generally reduce hospitalization
time—and costs—for patients. However, that rationale does not take
into account the realities of reimbursement: When the Health Care
Financing Administration decided to reimburse lithotripsy, they de-
cided to cover it as a medical, not a surgical, procedure. DRG no.
323, medical treatment of a kidney stone, pays only half as much as
DRG no. 308, which applies to the surgical treatment of kidney stones.
In effect, this means that many hospitals that could serve a sizable
patient base with a lithotriptor simply cannot justify the investment
. .
On an economic casts.
We emphasize that we are not commenting on the logic or the
justness of these reimbursement decisions. Rather, we would argue
that such decisions particularly if made abruptly make reasonable
analysis of capital investments very difficult for the hospital. Faced
with such uncertainty, hospitals are apt to adopt progressively more
conservative capital investment postures which may well slow the rate
of introduction of new and "higher" technology into the health care
system.
It is arguable that the current reimbursement policy will force a
centralization of lithotriptors in regional referral centers, and that may
be a good thing. Nevertheless, it is certainly a different pattern than
the one followed by the diffusion of computerized axial tomography
(CT scanning). The example of CT scanning is, of course, a telling
one: At its introduction in the mid-1970s, the CT scanner was one of
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133
the leading drivers of health planning. Many argued that its dissemi-
nation would contribute significantly to the rapid escalation of health
care costs. In retrospect, we now know that the capabilities of CT
scanning and the improved ability to do noninvasive diagnostic work
have in fact reduced the net cost of treating some diseases most
notably, neurological disease (Altman and Blendon, 19791.
This example illustrates an important point: To the extent that
dissemination of technology becomes dependent on prospective finan-
cial analyses, we may miss opportunities to reduce the net costs of
health care. Among other things, we will remove the opportunity for
many creative physicians to develop new and effective applications of
these technologies and therapies. On the other hand, if we allow new
technologies to be disseminated as before, without careful attention
to their cost-effective uses, increases in health care costs may indeed
outweigh the benefits of these technologies.
If society is to continue to benefit from the development of new
technologies that require significant capital investments, we must have
more information than has traditionally been provided by clinical trials.
In addition to data about clinical effectiveness, we must know the
specific advantages of the new technology—how it will improve the
delivery of care and what its rational relationships with other tech-
nologies may be. Only if the cost-effective use of new equipment can
be demonstrated to both providers and payers will providers be able
to count on reimbursement and make the necessary investments to
adopt the new technology in this economically driven environment.
While these expanded clinical trials will be more expensive, the logical
source of payment is the payers that will benefit significantly from the
expanded data base and reduced costs of care.
Tests of cost-effectiveness also will be applied to routine clinical
activities in hospitals. Consider, for example, intravenous therapy.
The protocols for starting intravenous therapy are highly variable
throughout the United States. Even within a single system of hospitals,
differences in the amount of tape, the kinds and amount of packing,
and the types of needles and catheters used can result in variations of
250 percent per insertion in the cost of materials for this simple
procedure. Add to this the variability of hospital rules about the
frequency of reinserting the intravenous line, and there exists an
opportunity for significant unnecessary expenditures (R. M. Schlosser,
personal communication).
This example, like those that preceded it, is not raised for the value
of its particulars. Instead, all of them are provided as illustrations of
a new approach to acquiring and using biotechnical materials. Increas-
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HOW TRENDS WILL INTERACT
ingly, providers will undertake careful analyses of all purchases to
ensure that they provide cost-effective care and, hence, are likely to
be reimbursed.
However, these examples leave out the important issue of market
share and its effect on the adoption of new technologies. Historically,
one of the major reasons for hospitals to invest in new technologies
was to expand services. In theory, such expansion would attract more
patients, thereby increasing the hospital's market share.
In the economically driven environment, growth in market share
will continue to provide a strong motivation to adopt new technologies
and devices. However, the hospitals' pursuit of market share will
focus on technologies that will increase profits. Under cost-plus
reimbursement, virtually any technology that physicians used increased
profits, even if only a few patients were served. In the current
environment of price constraints, however, new technologies must
serve enough patients to more than cover the costs of equipment and
specially trained personnel.
Even with better understanding of the clinical advantages of new
technologies, economic forces are likely to encourage centralization
of expensive equipment. This centralization is likely to reduce patients'
access to some kinds of health care. Payers' increased participation
in individual beneficiaries' care, as well as increases in patients'
copayments and deductibles, will accentuate that trend. To the degree
that we believe that society is suffering from the overuse of health
services, these changes may be beneficial.
Some observers of the health care scene are quite explicit in their
beliefs that curbing the development and diffusion of clinically useful
technologies may be the only way to achieve long-term control of
health care costs. They argue that even low-risk new technologies
with low unit costs add to net health care costs because they are used
on many more patients. Thus, they argue, we ought to limit the
development and use of new technology (Schwartz, 19871.
However, in its extreme, this approach seems to be little different
than the traditional rationing approach—except, perhaps, in the sense
that we allow ourselves to claim that we have not made prior decisions
about which class of patients will be ineligible for which set of benefits.
We would argue that there are more productive ways to make policy
than by using what might be called "simple default by economics."
Indeed, there may be better ways to develop even more cost-effective
strategies.
Interestingly, even the most adamant proponents of rationing are
beginning to recognize that there may be more productive ways to
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135
allocate medical resources than by price manipulations and other
simple marketplace strategies. They are beginning to advocate that we
learn where sound clinical management can contribute to economic
savings.
The need to improve clinical management is being advocated not
only by clinicians but also by both public and private sector payers.
As reductions in resources available to pay for health care have raised
fears of inadequate medical care among health care consumers, some
payers have begun to develop more sophisticated ways to monitor the
delivery of care (Roeder and Moxley, 19861.
The availability of large computers that can house massive data
bases, coupled with the need to balance costs and quality of medical
care, has encouraged increasing analysis of clinical records. Many
payers, who have records for and are responsible for meeting com-
mitments to patients in a variety of treatment settings, are beginning
longitudinal studies. The data in these tracking systems are being
analyzed to determine where strong correlations between treatments
and outcomes exist. Where negative correlations are found, even low-
cost treatments will be proscnbed; where there are positive outcomes,
higher-cost treatments are likely to become the treatment of choice.
Few payers have yet developed this level of sophistication in their
analysis; most are still trying to determine when outpatient treatment
is more cost-effective than hospitalization. However, interest in the
area has given impetus to the work of C. N. Wennberg at Dartmouth
and R. H. Brook and his colleagues at the Rand Corporation. On the
basis of his work, Brook advocates careful study of the risks and
benefits of technologies in a variety of settings ranging from academic
medical centers with specially trained staff to community hospitals
with their medical staffs as well as the use of formal decision analysis
by physicians. Such informed choice, Brook argues, can reduce the
growth of health care expenditures sufficiently to permit the continued
development and appropriate diffusion of new technologies (Brook
and Lohr, 19861.
Until the level of sophistication aimed at by Brook and his colleagues
is more widely available, we are likely to see the delivery of some
shortsighted, low-cost, but ultimately ineffective, medical care. In
such situations, convicts between cost-conscious payers and clinically
oriented providers are inevitable.
One of the primary responsibilities of the scientific community in
this transitional period will be to help providers develop the data
necessary to measure the effectiveness of care and to make the case
for continuing use of appropriate new technologies. Only if we are
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HOW TRENDS WILL INTERACT
able to work together in this effort will we be able to avoid the error
of applying simple solutions to complex problems by relying solely on
market forces to curb the development of technology.
CONCLUSION
In this paper we have examined some of the recent changes in health
care financing and the ways that they are affecting the adoption of
new technologies. The relevant changes include increasingly restricted
financial resources for health care, payers' attempts to effect funda-
mental changes in medical care, payers' increasing involvement in
clinical decision making through the claims review process and con-
sequent pressure on health care institutions to administer financial
controls or incur costs themselves, and health care institutions' early
efforts to respond to changed conditions by adopting new rules for
economic investment decisions. We have also discussed briefly how
those new rules could lead to a form of economic rationing of health
care services.
We do not believe that this outcome is inevitable. The work of
Brook, Wennberg, and the many others who are beginning to respond
to Earnest Codman's 1913 call for research on medical outcomes
should provide much encouragement to all of us. However, the
biomedical community must remain vigilant and expend the time and
energy required to be constructive participants in the policymaking
process if we as a society are to avoid the adoption of the deceptively
simple solution of economic rationing.
This is a significant responsibility for the scientific community to
accept. However, its participation is essential to the successful reso-
lution of these important issues. To quote again from Lewis Thomas:
"It is a gamble to bet on science for moving ahead, but it is, in my
view, the only game in town" (Thomas, 19841.
If we are to continue to benefit from the single most important
characteristic of twentieth century U.S. medicine—its capacity for
scientific improvement and technological adaptation—we must ensure
that the public and private sectors understand the importance of, and
work together to support, advances in science and technology.
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Brook, R. H., and K. N. Lohr. 1986. Will we need to ration effective health care?
Issues in Science and Technology 3(1):68-77.
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Representative terms from entire chapter:
market share
