There’s a report in the weekend Washington Post that among his other "achievements" (like the muzzling of the actuarial projections about the cost of Medicare drug coverage) Tom Scully made some remarks that sunk the stock of specialty heart hospital MedCath a couple of years ago. The story is that he essentially hinted at an investment bank’s dinner that the government was going to overturn the exemption that specialty hospitals enjoy from Medicare’s ban on physicians’ self-referring.

What this is about is that, at the moment some facilities can be indirectly owned by doctors and they can bill both for the physician fee, and collect some share of the facility fee–not directly, but in terms of being a part-owner of the facility. Without getting into a lot of arcane law around these "Stark Amendments" about which I don’t remember everything, it’s worth understanding two things. One is that a lot of doctors got rich and Medicare’s finances suffered in the late 1980s when physicians started buying into home-infusion companies and then started referring their patients to them. A lot of the behavior going on then went well over the ethical line, with doctors basically referring to companies they owned or had a part of. Alternately they were also being directly bribed to refer to others– Caremark was heavily involved in this back before it was a PBM and even before it was PPM. After that Democrat Pete Stark introduced a series of legislation that basically made it very difficult for doctors to refer to a facility in which they had an ownership interest.

More recently hospitals have been struggling with the desire of physicians to move their practices into small hospitals that are "focused factories" and tend to specialize on one or two "service lines". This is a real threat to community hospitals. They tend to make money in a few areas (cardiology, neurology, general surgery, orthopedics, etc) and lose it everywhere else. If those profitable service lines walk out the door, then things get very grim very quickly for the community hospitals–and they are all struggling with this issue at the moment. In fact one of the bribes that they were paid concessions the AHA was granted to get its support for the recent Medicare PDIMA bill was to put a moratorium on the building of these new specialty hospitals. Obviously if CMS decided that specialty hospitals owned by doctors fell under the self-referral part of the Stark amendments, that scuppers their expansion plans dramatically. At the least it would force them into significant ownership re-organizations, and give the community hospitals some leverage in gaining back the high-admitting specialists who wield big financial clout in local markets.

To be fair to Scully, although MedCatch’s stock fell the day in question (April 22, 2002), it’s a small cap and very volatile stock, as you can tell from its 5 year chart. I hardly think Scully was short and trying to make money off it, so he probably let slip a fairly rational view from both his standpoint as guardian of the CMS purse and from his time representing the for-profit hospital industry. That view is that by leaving the less profitable "service lines" behind in the hospital, companies like MedCath are raising the overall average hospital cost per case, which in the end will get translated back as cost increases to big payers (like CMS). That’s not likely to be acceptable in the long run to payers and, while there are some efficiency advantages from creating these "focused factories," there’s not much benefit to society if the margins gained from capitalizing on these efficiencies go to subsidize the spending habits of surgeons and specialty hospital shareholders, rather than towards (say) the care of the uninsured in community hospitals. Pete Stark has said exactly as much in legislation he’s introduced that targets Medcath directly.

So Scully may have made a minor faux pas, and he maybe a convenient scapegoat for the Republicans as he just left the Administration, but I don’t think that he was really doing anything worse than giving the official line. After all, Alan Greenspan has far more impact any time he opens his mouth. Was he short the Dow the day of this speech?