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Part IV
Implications for Providers
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8
New Technology Adoption
in the Hospital
Paul F. Griner
Medical technology adoption decisions in hospitals may occur through
planned acquisitions or through uncontrolled changes in medical practice.
They reflect a complex set of dynamics, with method of reimbursement
being only one, albeit an important one, of those forces. These dynamics
must be understood before there can be any hope of developing optimal
approaches to the adoption of new technology.
This paper first presents a working definition of new technology, fol-
lowed by a discussion of the various factors that influence decisions regard-
ing its adoption. The reader should bear in mind that these factors are
described from the perspective of a hospital physician administrator. This
perspective reflects a mixture of knowledge of the benefits and limits of
technology on the one hand and awareness of its drawing power on the
other. The discussion includes selected data related to the effect of these
factors on patterns of technology adoption. The paper closes with several
predictions for the future as a way of focusing and stimulating debate.
NEW TECHNOLOGY: WHAT ARE ITS COMPONENTS?
New technology may be arbitrarily classified into five groups:
1. new diagnostic or therapeutic equipment, such as linear accelerators;
2. expensive procedures for example, transplantation;
123
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124
PAUL F. GRINER
3. pharmaceuticals the fastest-growing segment of the hospital econ-
omy, comprising such subareas as biologics developed through genetic en-
gineering and expensive antibiotics;
4. "supportive" technology examples are hospital information sys-
tems and intensive care unit monitors; and
5. "hidden" new technology- changes in medical practice as a result of
new knowledge that causes a hospital's existing technology, both diagnostic
and therapeutic, to be applied in new ways.
The last category of new technology represents unplanned changes in
the day-to-day life of hospital practice that often have significant cost im-
plications but that generally do not come to light until after the change has
been in place for a period of time. Some examples are the use of magnetic
resonance imaging (MRI) to evaluate the internal structure of the knee and
the use of gamma globulin to treat immune disorders of the blood.
FACTORS INFLUENCING THE ADOPTION AND
USE OF TECHNOLOGY
Any strategy designed to promote discriminating approaches to the adoption
and use of new technology must recognize and take into account the influ-
ence of certain factors (Table 8-1~. These factors are discussed in the
sections below.
Method of Financing
New equipment and hospital renovation (e.g., to accommodate a new
program) require capital. The first factor to consider in new technology
adoption is thus the hospital's pool of reserves. Does the hospital have the
funds needed to renovate space and acquire new equipment? Its endow-
ment, its other sources of nonoperating revenue, and its cash reserves are
the primary components of its pool of reserves. The extent of that pool is
largely a function of the hospital's ability to generate surpluses from its
TABLE 8-1 Factors Influencing the Adoption of New Technology
1. Method of financing "up-front" costs
2. Method of recovering incremental operating costs, including depreciation
3. Regulation
4. Level of competition
5. Capacity
6. Evidence of effectiveness
7. Hospital/medical staff organizational relationships
8. Decision-making processes
OCR for page 125
NEW TECHNOLOGY ADOPTION IN THE HOSPITAL
125
day-to-day operations and to generate nonoperating revenue from gifts and
other sources. Operating surpluses, in turn, are largely a function of the
level of rate regulation to which a hospital is subject.) In the underregulat-
ed states of the Midwest, hospital cash reserves tend to be high; reserves of
up to $150 million in some of the large midwestern teaching hospitals are
not unusual. Conversely, in the heavily regulated hospitals of the North-
east, operating surpluses are uncommon, and for many hospitals (e.g., most
New York state hospitals), reserves are nonexistent. Cash for capital ex-
penditures must therefore come from borrowing, and the hospital's borrow-
ing capacity is determined by its overall financial position. It is not surpris-
ing, as the data presented later in this discussion show, that new technology
is introduced and disseminated more slowly in states that limit capacity
through rate regulation.
Recovery of Operating Costs
Financing the initial cost of new technology is one thing; obtaining
reimbursement for its operating costs can be quite another. Reimbursement
is more complex than financing because there are two important variables
involved: the level of regulation and the payers. Among states requiring
certificates of need,2 approval may apply equally to all payers, including
health maintenance organizations (HMOs), or just to Medicaid. New York
is a good example of a state that requires a certificate of need; as one might
imagine, adoption of new technology in this state is more conservative than
in any other. Where certification of need is not required, other factors may
then assume greater importance.
The ability of the payment system to adapt to changes in the cost of a
service may also influence the rate of adoption of new technology. For
example, the diagnosis-related group (DRG) system associated with Medi-
care appears to be a disincentive to the introduction of new technology
because the rate of recalibration of DRGs for the incremental cost of the
new technology occurs quite slowly (Kane and Manoukian, 1989~. In an-
other example, one might anticipate that the problem of fixed-price reim-
bursement for inpatient care will slow the introduction of some pharmaceu-
ticals, particularly those developed through genetic engineering for highly
specific uses at considerable cost.
iRate regulation is the payment for care of an individual patient that a regulatory entity
allows a hospital to collect. It may be based on a per-diem figure or it may be a fixed payment
per admission according to the diagnosis-related group.
2In some states, certificate of need regulation requires that hospitals justify the need for a
capital project (e.g., device, facility, or program) on the basis of community or regional need.
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126
PA UL F. GRINER
An additional aspect of recovering the cost of new technology is recov-
ery of the cost of the initial investment, that is, capital cost recovery through
depreciation, which should be distinguished from recovery of operating costs.
By and large, regardless of the method of reimbursement, capital costs
traditionally have been passed on to payers and reimbursed fully. This is
likely to change, however, given the proposal by the U.S. Health Care
Financing Administration (HCFA) to incorporate capital expenditures into
the DRG-based reimbursement per diagnostic category. Although this ap-
proach may help control costs overall, it has no mechanism to account for
the legitimate capital costs of individual hospitals and is causing much
concern among hospital administrators.
Data are available to support these observations bearing on the relation-
ship of capital reserves, operating surpluses, and regulation on the one hand
and adoption of new technology on the other. There are 30 teaching hospi-
tals in the states of New York, Massachusetts, Connecticut, and New Jer-
sey, where hospital reimbursement is heavily regulated. The average oper-
ating margin of these hospitals in 1989 was -$2.4 million, compared with
an operating surplus averaging $6 million for the country's remaining teaching
hospitals (Fishman et al., 1990~. In addition, annual capital expenditures
for building improvements and equipment replacement, reasonable surro-
gates for overall capital outlays, were 25 percent less for the 30 Northeast
hospitals than such expenditures for similar hospitals throughout the rest of
the country.
Comparing upstate versus downstate New York hospitals reveals anoth-
er factor that may influence the adoption of new technology, namely, the
hospital's share of service to the poor. New York metropolitan hospitals
had operating deficits in 1989 (-3.2 percent) that were 60 percent higher
than their upstate counterparts (-2.0 percent). This difference in part re-
flected more charity services by downstate hospitals and bad debt levels
that were twice as high as levels for upstate hospitals (6 percent versus 3
percent, respectively). It is little wonder that New York City hospitals
frequently complain of their inability to compete for new technology (Fish-
man et al., 1990~.
Regulatory Equity
Fueled by technological advances and stimulated by reimbursement in-
centives, much health care that previously involved hospitalization is now
provided in ambulatory settings. What one might refer to as unbalanced
regulation less regulatory oversight than is required for hospitals-has
provided a further stimulus for the rapid growth of out-of-hospital technolo-
gy (e.g., ambulatory surgical centers, imaging centers, ambulatory rehabili-
tation centers). In many areas of the country, hospitals that wish to expand
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NEW TECHNOLOGY ADOPTION IN THE HOSPITAL
127
their ambulatory services are at a disadvantage because of unbalanced cer-
tificate of need requirements compared with outpatient facilities. Such
facilities contribute significantly to the rate of inflation in Part B Medicare,
a rate that is rising more than twice as fast as that of hospitals. This is an
area that demands more regulatory attention.
Level of Competition
The level of competition among hospitals in a region is an important
dete~inant in the adoption of new technology, particularly in areas with
excess hospital capacity. This phenomenon occurs most often in regions
with little regulatory control of capacity but with substantial growth in the
use of managed care. Examples of such areas include Minneapolis, Chica-
go, and California.
Where competition is great, the principal focus of the hospital adminis-
trator becomes the hospital's market share. High-technology services tend
to attract patients, and the more services a hospital can offer, the more
competitive it will be for exclusive contracts with employers and other
third-party payers. Such circumstances support a tendency to develop du-
plicate services considerably in excess of regional needs. As a result, man-
aged care models do not appear to be as effective as regulation in control-
ling the adoption of new technology. (The closed-panel Kaiser system may
be an exception to this generalization because, in this form of managed
care, both the hospital and its medical staff have incentives to acquire and
use technology sparingly.) Few data are available to prove or disprove this
hypothesis, although some information bearing on the number of hospital
FTEs (full-time-equivalent employees) according to the reimbursement en-
vironment may be acceptable as a surrogate, given that even new technolo-
gy tends to be labor intensive. Fishman and colleagues (1990) present
figures for the number of FTEs per occupied hospital bed, after adjusting
for case mix, in four heavily regulated northeastern states, four underregu-
lated midwestern states, and two states with a sizable proportion of man-
aged care. The number of FTEs per bed in these regions are 5.2, 6.1, and
6.9, respectively. ~ ~
health care, regulation is more effective than competition in controlling
These data support the hypothesis that in the field of
costs.
Worth sharing in regard to this issue are the experiences of the author
and his colleagues (Block et al., 1987) during the 1980s in Rochester, New
York, under an experimental hospital payment system. This payment pro-
gram encompassed two extremes. One featured a community cap on capital
expenditures; that is, all major capital projects required review and approval
by the hospital coalition before subsequent review by the local health sys-
tems agency and the state. During the period 1980 through 1987, the oper
OCR for page 128
128
PA UL F. GRINER
TABLE 8-2 Rochester Hospital's Experimental Program Under Two
Systems
Effect Global Budget All-Payer Diagnosis-Related
(1985-1987) Group (1988-1990)
Revenue Predictable (pro); variably Variable; determined by volume
adequate (con) and case mix
Community Controlled Unpredictable; inflationary
health care costs
Incentive
Introduction of
new technology
Incentive for
ambulatory
alternatives to
inpatient care
Physician +
satisfaction
Manage services
Controlled (pro);
rationed (con)
Yes
Obtain market share
Available to all (pro);
inflationary (con)
No
Access to + ++
hospital services
Quality of care Good
Cooperative spirit Good
Good
Constrained
ating expenses of the participating hospitals were guaranteed but capped
under a global budget, providing a ceiling on both operating and capital
costs. In the other extreme of the payment system (1988-1990) the hospi-
tals functioned under an all-payer DRG system and capital costs were not
limited.
Table 8-2 displays the advantages and disadvantages of these two sys-
tems. Under the system of capped operating and capital budgets (i.e., the
Global Budget column), revenue was predictable and hospital costs were
controlled. From 1980 through 1987, hospital costs increased by 168 per-
cent nationwide; in Rochester, the increase was 108 percent. The average
Blue Cross premium in the United States in 1989 was $3,500; in Rochester,
it was $1,600. Managers spent most of their time managing, new technolo-
gy was introduced in a controlled fashion, incentives for ambulatory alter-
natives to hospitalization were great, and adequate markers existed to con-
firm that quality of care was good. Some physicians felt that access to
hospital or high-technology services was being constrained, and hospital
boards were concerned about the loss of sovereignty. These observations,
in combination with a year when demands (and costs) of hospital services
outstripped the dollars available, led to an interest in exploring the opposite
alternative. Consequently, from 1988 through 1990, the hospitals were
reimbursed under an all-payer DRG system with a capital pass-through.
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NEW TECHNOLOGY ADOPTION IN THE HOSPITAL
129
Physicians were more satisfied, access was probably better, hospital boards
were happier, and revenues increased at a higher rate; but community health
care costs were higher, managers spent most of their time trying to gain
market share (despite the observation that the rate of bed occupancy was
high for all hospitals), considerable duplication of new technology occurred,
and incentives for ambulatory alternatives to inpatient care virtually disap
peared.
The experience in Rochester is a classic example of the conflict be-
tween the need to address the collective interests of society on the one hand
and the interests of the individual on the other (the individual in this case
being the patient, the physician, and the hospital all together). One system
favored the greater social good; the other favored the individual. The goal
must be a balanced approach that recognizes both needs. Ultimately, some
combination of local, state, and federal regulation, together with price-driv-
en competition, should promote that balance.
Table 8-3 presents some data that reflect major differences in the intro-
duction of new technology throughout the country, according to whether
regulation or competition prevails (Fishman et al., 1990~. The four heavily
regulated states mentioned earlier (New York, New Jersey, Connecticut,
and Massachusetts) are compared with the country at large in terms of the
proportion of institutions that perform various transplant procedures and
another procedure (cochlear implants) whose efficacy remains to be deter-
mined. Striking differences are apparent. Two-thirds of the less regulated
teaching hospitals perform bone marrow transplants, but only one-quarter of
similar hospitals in the heavily regulated states undertake the procedure.
The proportion of teaching hospitals that perform heart transplants in less
regulated states is 4.5 times the proportion of hospitals perfoll.ling them in
the more regulated states (78 percent versus 17 percent, respectively). If
one focuses only on those less regulated states in which managed care has a
TABLE 8-3 Proportion of Hospitals Performing Selected
Procedures According to Level of Regulation
Procedure
More Regulated Less Regulated
(% of hospitals) (% of hospitals)
Transplant
Adrenal 0 8
Bone marrow 27 66
Heart 17 78
Liver 17 45
Cochlear implant 7
40
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130
PAUL F. GRINER
significant effect on patterns of practice (i.e., California and Minnesota),
these differences appear to hold up. These data support the conclusion that
strategies designed to limit overall capacity are more effective than compet-
itive strategies, including managed care, in controlling the introduction of
new technology.
Other Factors That Influence the Adoption of New Technology
The four factors discussed above method of financing a technology's
initial cost, method of recovering operating costs, level of regulation, and
degree of competition are the principal factors influencing the decisions
of hospital administrators regarding the adoption of new technology. There
are a number of others as well, the hospital's capacity for technology as-
sessment being one. Some hospitals (e.g., Johns Hopkins) have an office of
technology assessment, which requires medical staff to support initiatives
for new technology with evidence of scientific efficacy before other consid-
erations are explored. At Strong Memorial Hospital in Rochester, New
York, more than $1 million was saved over 4 years through the application
of a protocol that restricted the use of tissue plasminogen activator (t-PA) to
patients for whom streptokinase was not appropriate. The protocol was
developed by a process of consensus among interested faculty after review-
ing the relevant literature on the subject. Such decisions, which are not
without political risk, require the medical staff to accept responsibility for
prudent use of the hospital's resources.
Hospital-medical staff organizational relationships are yet another fac-
tor bearing on the adoption of new technology. Until recently, the hospital
has been expected to provide all of the resources needed for its medical
staff to deliver patient care. But as the availability of hospital capital
decreases, interesting financial relationships are developing in some instances
between hospitals and medical staff. Some examples are joint ventures for
the acquisition of and operation of new technology, or arrangements where-
by staff members purchase equipment and are responsible for its operating
costs, while the hospital advances money for working capital, applying standard
banking practices for its repayment.
The locus of decision making in the hospital is becoming an important
aspect of new technology adoption decisions. The ultimate responsibility
for policy rests with the hospital board. In cases in which hospital boards
exercise that authority, the adoption of new technology is determined large-
ly by affordability. In instances in which hospital boards still serve in a pro
forma mode, medical staff pressures may override financial reality testing
and local or regional needs. Finally, in many teaching hospitals, the re-
search activities of faculty lead to the development and introduction of new
diagnostic and therapeutic technology.
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NEW TECHNOLOGY ADOPTION IN THE HOSPITAL
Hidden New Technology
131
So-called hidden new technology refers to changes in the application of
technology in hospital practice, which occur almost daily and which often
have significant cost implications.
Such changes occur in an unplanned
way and result from the generation and dissemination of new knowledge
bearing on clinical diagnosis and management (e.g., new applications of
MRI, new uses of existing expensive pharmaceuticals such as gammaglobu-
lin for the treatment of immunologic disorders). The pharmacy budget of
Strong Memorial Hospital in Rochester, New York, has increased by 75
percent in fewer than 5 years. Across the country, hospital pharmacy bud-
gets are the fastest growing segment of the hospital economy. Because of
these trends, hospitals are beginning to put in place more comprehensive
drug surveillance systems to monitor changes in medical practice and to
ensure that these new practices adhere to reasonable standards of cost-
effectiveness.
Hidden technology encompasses many other aspects of the day-to-day
care of hospitalized patients. Changes in automatic infusion pumps, hospi-
tal beds, cancer chemotherapy protocols, monitors/defibrillators, and pulse
oximeters are but a few of the many enhancements to care that are intro-
duced daily throughout the hospital, usually without a management master
plan.
SUMMARY
The following sums up a combination of facts and the author's personal
experience regarding the adoption of new technology.
1. New technology is introduced more slowly in areas of the country in
which health facilities are heavily regulated than areas in which competitive
strategies are promoted.
2. A regional capital expenditures cap tied to a global operating budget
appears to be the most effective method of controlling capital costs. The
Rochester experience bears this out, although this paper does not include all
the supporting data.
3. The single most important determinant of a hospital's adoption of
new technology is the hospital's operating margin. This statement holds
true both when payment programs are designed to control capacity and
when they are designed to stimulate competition.
4. Hospitals are beginning to recognize the many other factors that
influence the adoption of new technology for example, changes in organi-
zational and financial relationships with medical staff, development of in-
house technology assessment capabilities, and the increasing role of the
hospital's governing body in decisions about major hospital expenditures.
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BRUCE J. HILLMAN
losses, acquirers were instituting new payment requirements that they con-
ceded they had never considered in the past, including payment by the
patient prior to scanning and reduced "charity" care.
Certain elements of the reimbursement milieu-the uncertainty over
how capital reimbursement would be handled under the diagnosis-related
group (DRG) system and a reduced ability of hospitals to shift costs-
probably promoted early acquisition decisions. (Providers hoped by early
acquisition to be "grandfathered" under the old rules.) Concerns over reim-
bursement probably affected some siting decisions, as well as who would
own and operate the devices. As with CON regulation, reimbursement
considerations produced a disadvantage with regard to acquisition of tech-
nology by hospitals. In concert with the tax advantages favoring for-profit
ownership, these issues promoted outpatient siting of MRI.
Competition Over Magnetic Resonance Imaging
The RAND investigators evaluated competition among providers in the
same five states in which they had assessed the effects of regulation. In
states other than Massachusetts (where, as noted earlier, regulation effec-
tively constrained access to the technology), there was ardent competition
over MRI. Three forms of competition can be identified: competition to
provide MRI services, competition over patients, and competition among
specialties for control of the technology.
The health care policy initiatives of the 1980s were designed, in part, to
introduce price competition into medicine. Yet the RAND study team found
no instance in which providers considered reducing prices as a means of
attracting patients to MRI services. Rather, providers expressed the inten-
tion of competing on the basis of the service and developing their marketing
efforts more fully than they had ever done before.
The goal of such marketing was to use MRI as a competitive instrument
to enhance utilization of a provider's other services. Experiences with CT
scanning had given most providers a healthy respect for the power of a new
technology to imbue them with a desirable image. Consequently, they viewed
MRI as a tool in their battles with local competitors to attract referring
physicians, and hence patients, a strategy that would eventually lead to their
controlling a larger share of the local market. Their belief was that if they
could use MRI to get patients "in the door," they might "capture" them for
their other, more remunerative services. A number of early MRI purchas-
ers, who had acquired the technology on this basis, were disappointed when
they found that local physicians, concerned over the possible loss of their
patients, were reluctant to refer them for scans.
Competition among MRI facilities over referring physicians consequently
took a peculiar turn. Given the very high financial risks associated with
OCR for page 141
PHYSICIANS' ACQUISITION AND USE OF TECHNOLOGY
141
such an expensive technology, coupled with expected coming financial con-
straints, facilities vied for the patronage of the physicians most likely to
have a high number of potential referrals for MRI scans: neurologists,
neurosurgeons, and orthopedists. Frequently, providers offered these physi-
cians special inducements to refer patients to their facilities. Most com-
monly, the physicians became limited partners in facilities being operated
as entrepreneurial ventures or even in joint ventures with hospitals. Despite
concerns that such financial involvement might inappropriately influence
referrals, lead to abuse of the technology, and infringe on traditional medi-
cal ethics (Relman, 1985; Hyman and Williamson, 1989; Morreim, 1989),
this practice appeared to be growing rapidly in popularity. (See also the
series of letters to the editor and editor's response in the January 23, 1986,
issue of The New England Journal of Medicine EVol. 314, No. 4, pp. 250-
2531.) The competition for physicians and their patients, which was intend-
ed to secure a sufficient patient stream to enable financially stable MRI
operation, in fact strained traditional relationships among providers and
promoted early MRI acquisition.
In addition to competition in providing services and for patients, the
RAND researchers observed enhanced competition among specialties over
the control of MRI. Turf battles over technology are not new in medicine;
this one, however, appeared to be more contentious than previous struggles,
possibly because of the high financial and scientific stakes associated with
MRI, in concert with physicians' concerns that their ability to sustain their
incomes by providing traditional services might be compromised by the
more draconian coming milieu. Radiologists, the specialists traditionally
responsible for medical imaging, were the earliest and most frequent pur-
chasers of scanners. They were also the physicians who most often advised
hospital administrators and were most instrumental in helping to foul ate
administrators' views. However, radiologists do not primarily care for pa-
tients; they depend for referrals on other physicians, which puts them at a
disadvantage in the more entrepreneurial context of MRI.
Many of the providers interviewed in the RAND study indicated that
they were uncomfortable in proceeding with MRI acquisition but that the
competitive environment dictated such an action. Their view was that they
gained a competitive advantage by being the first MRI facility in their
locale. (Being second meant that fewer of the most desirable referring
physicians would be available.) Yet in no instance did the presence of an
existing facility dissuade a provider from pursuing MRI acquisition; in these
cases, providers cited the existence of other facilities as evidence that if
they did not hurry their acquisition, they might be left out entirely. Overall,
the RAND investigators concluded that competition among providers was a
potent force encouraging the early diffusion of MRI technology.
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42
BRUCE J. HILLMAN
Summary: The Acquisition of Magnetic Resonance Imaging
From the foregoing, it is evident that physicians- whether representing
themselves or an organization-were largely unaffected by the intended
thrust of regulatory, reimbursement, and competitive influences in what
they themselves believed to be a harsh environment for technology acquisi-
tion. Perhaps they simply did not understand the full implications of the
policy initiatives opposing MRI purchase. It is likely, however, that physi-
cians' decisions were guided by two considerations: first, although hostile,
the forces opposing technology acquisition were still disorganized and were
likely, in the end, to be ineffectual; and second, physicians in the past had
always found a way to access new technology- MRI would be no different.
The physicians were correct in these surmises. The technology was se-
ductive, and the policies that had been intended to retard its acquisition were
ineffective in the face of significant professional and lay demand for MRI.
TECHNOLOGY ACQUISITION IN THE
"NEW HEALTH CARE" ERA
There is a general perception among physicians that the times have
grown tougher, especially over the past few years. Despite the recent expe-
rience with MRI, many observers believe that physicians might be more
responsive now to environmental influences opposing technology acquisi-
tion than they were in the 1980s. Certainly, imposing barriers have been
erected that might well dissuade physicians from purchasing an expensive
new technology similar to MRI. But there are also aspects of the milieu
that might reasonably encourage acquisition. Table 9-1 lists various aspects
of the health care environment that might promote or retard technology
acquisition. As the table indicates, several might be expected to have both
positive and negative effects. This section considers how particular influ-
ences might be expected to affect technology acquisition by physicians in
the coming years.
TABLE 9-1 Influences in the Environment That
Promote or Retard New Technology Acquisition
. _
Promoting
Retarding
Nature of technology
Hospitals and regulation
Competition for patients
Providers' turf
Nature of technology
Hospitals and regulation
Competition for patients
Providers' turf
Reimbursement
Managed care
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PHYSICIANS' ACQUISITION AND USE OF TECHNOLOGY
Nature of Technology
143
One important aspect of recent technological innovation has been an
emphasis on developing technologies that are safer and less invasive. MRI
is a good example, as are the development of digital subtraction angiogra-
phy for outpatient arteriography, ambulatory dialysis, and technological
modifications that permit more surgery to be performed on an outpatient
basis. In part, the emergence of this trend is related to the realization that
medical technologies have an important role in improving the comfort of
care and the quality of life, as well as in extending its length. The develop-
ment of less invasive technology is also a response to the policy environ-
ment, which has favored more flexible siting, particularly siting outside of
hospitals. That newer technologies are amenable to outpatient siting is
likely to continue to encourage their acquisition. Outpatient use of technol-
ogy is still relatively free of regulatory constraints and enjoys more favor-
able reimbursement than inpatient use. The high cost of many new technol-
ogies is a potential deterrent to their acquisition but, as with MRI, physicians
and other entities still find significant incentives for financial investments
in outpatient medical services. The sole disincentive in this regard is the
recent congressional prohibition against physicians having ownership inter-
ests in outpatient laboratory facilities to which they refer patients and the
threat that in the future this ban might be extended to other types of medical
facilities.
Hospitals and Regulation
Although some states still maintain CON policies, the overall sense is
that health planning generally is weakening. Although this trend might
have portended the reemergence of hospitals as aggressive early acquirers
of new technology, there are few signs of such activities. Indeed, hospitals
now appear more financially debilitated than they were even in the previous
decade. They remain disadvantaged under current reimbursement policies
and are less able to shift costs among payers, given the increasing volumes
of contracted and managed care. As a result, there is a persistent, advanta-
geous niche for entrepreneurial technology acquisition in outpatient settings
by physicians and other entities, either jointly with or exclusive of hospi-
tals. These potential providers of technologically advanced services still
have access to capital, tax incentives, and mechanisms to ensure a sufficient
volume of patients-most notably through self-referral and to encourage
new technology acquisition (ECRI Technology Management Assessment,
1985~.
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144
BRUCE J. HILLMAN
Competition for Patients
Physicians' incomes have kept pace with or exceeded inflation over the
past decade, despite declining patient rolls (Starr, 1982~. This pattern has
been largely attributed to increasing intensity of care, fueled in part by the
assimilation of technologies into office practice (Holohan and Zuckerman,
1990~. Demand by patients for the use of innovative technologies and their
appreciation of the convenience of receiving all of their care in their physi-
cian's office have further encouraged these trends. New reimbursement
policies now seek to reduce payment for technological care but do little to
reduce utilization by individual physicians, who often have a financial in-
centive to continue or even increase the use of technology. A significant
counterbalancing influence, however, is that even independent physicians
increasingly participate in managed care, either as members of preferred
provider organizations or as contractors to HMOs. In this situation, physi-
cians must compete for patients on the basis of price as well as on the
services they offer. Presumably, they will have to consider whether the
overhead they will assume in purchasing a technology will diminish their
price competitiveness.
Reimbursement
A number of recent reimbursement initiatives might be expected, indi-
vidually and cumulatively, to affect the ability of physicians to acquire and
use new technologies profitably. Perhaps the most significant is HCFA's
implementation of a resource-based fee schedule for physician payment
under Medicare, which replaces the traditional "reasonable, customary, and
usual" method. The major avowed intent of this change is to reduce com-
pensation for what HCFA considers overcompensated, technology-based services
in favor of more time-intensive activities, such as taking patient histories
and performing physical examinations. Other payers also are currently, or
are considering, implementing fee schedules with similar goals. In addi-
tion, reliance on Recertification, fee ceilings, and limits on balance billing
is growing and would be expected to influence technology acquisition and
use adversely. Capitated payments for bundled caret are increasingly pop-
ular with HMOs and clearly make the use of technology financially disad
2The provider assumes financial risk for the care of patients by accepting a lump sum
payment to provide a "unit" of service. This "unit" is often a period of time, such as a year. If
the provider spends less on care than the lump sum amount, he or she profits; if more, the
provider experiences a financial loss. Thus, under capitation, there is a fiscal disincentive to
employ medical technology, particularly if it is deemed to be of marginal benefit.
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PHYSICIANS ' ACE UISITION AND USE OF TECHNOLOGY
145
vantageous. Many physicians fear that if capitation becomes the dominant
payment mechanism, as many believe it might in the future, it would inap-
propriately curtail modern technological medicine.
Since the late 1970s, payers have voiced concerns about whether their
outlays for services that require new high-technology devices return conso-
nant benefits in improved health. A central concern is that little assessment
of such technology occurs before its general diffusion. Certainly, this was
the case with MRI: aside from the studies required for FDA certification,
no scientific assessment occurred for at least 5 years after its introduction
into the United States, and little has occurred as of today (Cooper et al.,
1988; Kent and Larson, 1988~. The resultant uncertainties regarding appro-
priate application generate unnecessary costs in excess capacity, duplicative
studies, financially motivated abuse, and early obsolescence. Payers have
threatened to tie reimbursement more closely to scientific evidence that
using a new technology improves patient health. Efforts in this regard,
however, have been uncoordinated, underfunded, and, as in the case of
MRI, unsuccessful. In 1989, the federal government established yet another
in a line of agencies intended to foster and coordinate technology assess-
ment-the Agency for Health Care Policy and Research (AHCPR). Unlike
its predecessors, however, a major focus of AHCPR's activities is the inves-
tigation of the outcomes of medical practice; it is expected to advise HCFA
on decisions concerning Medicare coverage. Although AHCPR has not
received the level of funding that was originally expected or that would be
sufficient to address this charge in a serious fashion, there remains an ex-
pectation that, to reduce their costs, both private and public payers must
soon consider patient outcomes to a greater extent in their coverage deliber-
ations. Should this occur, the period necessary to assess the effectiveness
of a new technology and physicians' concerns over eventual reimbursement
might be sufficiently great that diffusion would be slowed.
Managed Care
In the article by Wennberg in this volume, a distinction is made be-
tween "micromanaged" and "global limits" types of managed care. Cur-
rently, in the United States, a continuum of forms of managed care reflect
various combinations of aspects of the philosophies of micromanaged care
and managed care with global limits. Managed care in some form, includ-
ing HMOs, preferred provider organizations, and utilization controls, now
accounts for nearly 40 percent of the health care market. It is expected to
continue to grow perhaps to encompass as much as 70 percent of the U.S.
population. One intent of managed care is to reduce the use of marginal
and inappropriate technology. In staff-model HMOs, an example of a glo-
bal limits approach, this reduction is accomplished in part by queuing and
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46
BRUCE J. HILLMAN
by providing financial and other incentives to member physicians to use the
community's technology resources less frequently. The growing success of
this type of managed care entity has allowed it to assimilate more technolo-
gies into its own operations, which offers tighter internal control of utiliza-
tion. Virtually all managed care agencies seek to reduce their technology-
related outlays by encouraging potential contract providers to competitively
discount their fees and by paying for bundled services, such as in capitation
arrangements. Indemnity insurers, as well as HMOs, have increasingly
relied on micromanagement, including precertification and the development
of standardized approaches to clinical presentation, to control what they
view as marginal technology utilization. The emphasis of managed care on
cost containment presages a more cautious approach to new technology
acquisition and utilization in the future.
Providers' Turf
The personal motivations of physicians for acquiring a new technology
usually include intellectual enjoyment, the pride associated with being on
the "cutting edge," the respect of one's peers, being able to apply the tech-
nology to benefit patients, and the possibility of greater financial remunera-
tion (Hillman et al., 19849. The confluence of a number of the factors
described in the preceding sections impinges on the issue of which groups
of physicians can most benefit from technology acquisition in the current
organizational climate and in the expected climate of the future. Financial
concerns are particularly acute and increasingly may be the motivation for a
physician's acquisition of a particular technology. In 1990, an article in the
Wall Street Journal entitled "Warm Bodies" described how physicians who
previously had referred patients to radiologists for diagnostic imaging stud-
ies were now attempting to coerce these same radiologists into "kicking
back" a portion of the payments from these referrals. The threat that consti-
tuted the coercion, which had materialized in some cases, was that failure to
do so would result in the referring physicians' establishing their own facili-
ties (Waldholz and Bogdanich, 1989~.
There is ample evidence that ownership of technologies by physicians-
particularly when the technologies are located in their offices engenders a
capacity for technology utilization that is almost always exploited. Recent
research indicates that office ownership of imaging technologies by nonra-
diologist physicians results in four times the frequency of imaging utiliza-
tion compared with physicians who refer their patients to radiologists for
similar services (Hillman et al., 1990~. The Inspector General's office
recently has published "safe harbor guidelines" that define how freestand-
ing facilities may be organized and operated so as not to be legally culpable
for conflict of interest. Congress is considering statutes that would further
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PHYSICIANS ' A CQ UISITION AND USE OF TECHNOLOGY
147
restrict physicians' ownership of freestanding facilities to which they refer
patients, but little consideration has been given to the same circumstance in
physicians' offices.
HOW MIGHT PHYSICIANS RESPOND TO THE
"NEW HEALTH CARE" ENVIRONMENT?
It should be evident from the foregoing that the current and expected
future health care environments present physicians with a complex, often
interrelated set of considerations that might affect their decisions concern-
ing the acquisition of expensive medical devices. The focus of this paper
has been on such devices because they have been highly visible technolo-
gies with respect to the attention paid them in the scientific and lay media;
they have also served as focuses for policy research and for issues related to
reimbursement. It is important to note that the adoption of these technolo-
gies probably differs in ways from the adoption of drugs, procedures, and
even less expensive devices. Among these differences are the means by
which physicians first learn of the new technology, what influences affect
the acquisition decision, and characteristics of the key decision makers.
How responsive physicians are to the considerations described in this
paper depends, at least in part, on how well these factors coincide with the
criteria physicians actually use in making technology acquisition decisions.
In this regard, something can be learned from experiences with previous
technologies (Greer, 1981; Hillman et al., 1986~.
Physicians, in this author's opinion, first consider how the purchase of
a new technology might benefit their patients and fulfill their patients'
preferences. A related consideration is the specific attributes of the tech-
nology and, to a lesser extent, what remains uncertain about it. The charac-
teristics of a physician's practice (e.g., solo, small group, multispecialty
group), the costs of the technology (to own and operate), and the kinds of
difficulties the technology presents are also important. Note that all of
these "primary considerations" are, for the most part, remote from concerns
about the status of the general health care environment. Most physicians
consider only secondarily (at least consciously) the financial rewards they
might generate or how the regulatory, reimbursement, and competitive mi-
lieu might affect their ability to operate the technology successfully.
This lack of convergence between the intents of policymakers, payers,
and regulatory agencies and physicians' considerations suggests that, at
least in the near term, very little may change in how physicians approach
acquisition of a new technology. Despite their anxiety over the harshness
of the environment at the advent of MRI, physicians behaved as they have
always behaved with respect to their acquisition decisions. This "business
as usual" attitude is likely to continue until physicians are faced with a
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BRUCE J. HILLMAN
failure of this approach. Clearly, the stringency with which regulatory
agencies and health care payers approach their cost-containment initiatives
will be a major influence on physician responsiveness with regard to tech-
nology acquisition and utilization. -- ~ ~ ,
providers in circumventing restrictions in the past, and the considerable
ambiguity proffered by the current environment, suggest that physicians'
technology-related practices may change to a lesser extent than many au-
thorities expect.
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Representative terms from entire chapter:
resonance imaging
