Why McAllen Should Have Mattered in the Health Reform Debate

Jeff GoldsmithBack in June, Atul Gawande, a Harvard trained surgeon, published a riveting article in the New Yorker   about the physician community in McAllen Texas. If ever an article was strategically timed to influence the nation’s health policy debate, this was the one. His story was accompanied by a graphic showing a patient as an ATM machine.  President Obama read it and put it on his staff’s reading list.  Yet, it’s depressing how little impact Atul’s article has had on health reform.

Atul’s purpose was to explain a major policy conundrum: why some communities manage to spend as much as triple on Medicare services as other communities. McAllen’s physicians practice some of the most expensive medicine in the United States, second only to Miami, and spend seven thousand dollars per Medicare beneficiary more than the national average. Peter Orszag has said that eliminating this type of variation could cut Medicare expenses nationally by as much as 30% and actually improve the quality of care.

Mining the Patient for Profit

As Atul made his way through his interviews with local hospital executives and physicians, a pattern emerged. McAllen’s sickest Medicare patients saw 50% more specialists than comparable patients in El Paso (a Texas community not world famous for conservative medical practice).  McAllen’s Medicare population had far higher rates of elective surgery, and received two to three times as many cardiac bypass operations, carotid endarterectomies and coronary artery stents as patients in El Paso. The poorest community in Texas, McAllen is nonetheless the home both of a lavish physician-owned community hospital, that split its $64 million bottom line with its admitting physicians, and a heart hospital with physician partners.

McAllen physicians aggressively added high margin technologies to test for nerve conduction, bone density, ultrasound and high technology imaging equipment to their office practices. Health executives both in hospitals and the home care sector reported that many physicians expected to be paid for their referrals, some as much as $500 thousand a year. Home care agency managers reported that some physicians wanted to be paid for referrals with sex or college tuition for family members .

Atul’s conclusion:  “The primary cause of McAllen’s extreme cost was, very simply, the across-the-board overuse of medicine”. McAllen’s physicians were “mining” their credulous, poorly educated and impoverished patients for profit.  In my consulting experience, what Atul documented in McAllen is, in fact, happening across the sunbelt- Florida, Arizona, Nevada, Louisiana, Southern California, etc.- not just in south Texas.

It’s actually a national problem, not a one-community problem, moral failure on a grand scale.

Medicare’s Fraud and Abuse Statutes Are Riddled with Loopholes

As late as 1992, McAllen’s Medicare costs were about the same as the national average. The progression to doubling the national average had all taken place in the seventeen years since.  There is considerable irony here; 1992 was the year that Congressman Pete Stark succeeded in amending Medicare statutes to forbid physicians from profiting from Medicare referrals to facilities or services they owned.  These laws were aimed at staunching the growth of syndicated freestanding surgical and imaging centers.

What they did instead is spawn a vast and lucrative new legal subspecialty aimed at circumventing the intent of the Stark Laws.  Those seeking to continue to profit from self-referring Medicare patients have been assisted materially by two gaping loopholes in the Stark Laws- the in-office ancillary services exemption and the “whole hospital” exemption.

The “whole hospital” exemption protected physicians who were investors in an entire facility- typically in partnership with an investor owned company that built and operated the hospital.  This exemption led to a practice of investor owned companies syndicating hospitals that they would otherwise have closed, hoping to attract physicians away from stronger hospitals by giving them a share of the profits they generate.   The in-office ancillary exemption was intended to protect physicians who, for patient   convenience, did minor lab work and simple X-rays in their offices.  At that time, high technology imaging equipment like CT scanners and MRI scanners were so expensive that only hospitals or high volume freestanding imaging facilities could afford to purchase them.

By the late 1990’s, however, imaging equipment had been miniaturized and simplified so that small physician groups or even individual physicians could lease and operate them.   An exemption intended to protect $60 office x-rays is now protecting physician-owned MR, CT and PET scanners that generate thousand of dollars a day per physician in “ancillary” revenues. In fact, there is nothing remotely “ancillary” about an MR or PET scanner; orthopedic surgeons and oncologists now generate most of their incremental income from self-referring patients to their own imaging equipment.  There is a rich literature that establishes that physicians who own their own imaging equipment order from two to five times as many tests as those who do not.

Despite the Stark Laws, McKinsey estimated that physicians derived $8 billion in 2006 alone from partnership dividends from health facilities in which they had an ownership interest.  This does not count the cost of the extra,  economically motivated testing or hospital admissions.    Congressman Stark was so disconcerted by the failure of his legislation to stem the tide of  avaricious physician behavior that he told the American College of Radiology in 2007, after his party returned him to the Chairmanship of the Health Subcommittee of Energy and Commerce, that he was disinclined to press further to tighten the statutes.

Could the Part B “Crater” Help Kill Health Reform?

As health reform grinds to its conclusion, policymakers are scrambling to avoid a ruinous 21% reduction in Medicare physician fee payments mandated by the 1997 Balanced Budget Act. This methodology, the Sustainable Growth Rate (SGR), capped the growth in Part B spending, and mandated that physician fees be cut each year the growth exceeded the cap.  Congress has overridden this mandate every year except one (2002), with the resultant accumulation of hundreds of  billions in unrealized savings that nonetheless count in the CBO deficit calculations.   The unrealized Part B savings are like a huge bad mortgage on our federal balance sheet. The physician business practices Atul documented in his article have contributed in a major way to the depth of this crater.

This SGR “crater” has significantly complicated health reform. Physician groups want a permanent reprieve from the fee cuts.  Inclusion of this reprieve in HR3200 was single handedly responsible for the bill not being deficit neutral. The innovative Senate solution was to put the reprieve in a separate bill that substituted a ten year freeze on physicians fees for the mandated cuts, adding the cost equally to a$14 trillion federal deficit in 2019 because it was not offset by other cuts or additional revenues.   (The SGR “reset” bill failed in a floor vote in mid October, despite intense pressure from both the AMA and advocacy groups for Medicare beneficiaries.)

A CBO analysis last December put the price of substituting a ten-year fee freeze (which won’t be sustained either) for the BBA mandated fee reductions at $318 billion.  If you permit physician fees to rise at the rate of the medical inflation index (MEI),  the cost rises to $439 billion.  If you also hold Medicare beneficiaries harmless from the growth in their premiums because you declined to cut physician fees according to the SGR formula, the price tag rises to $558 billion, or almost 2/3 of President Obama’s $900 billion price cap for the entirety of health reform.

Why Can’t Ending Self-Referral Help Pay for Health Reform?

The failure of Atul’s analysis to connect to fraud and abuse evasion was disconcerting.  At the end of his article, Atul mused about how to get physician communities to practice a more conservative style of medicine like the salaried physicians at the Mayo Clinic.  He discussed the Elliot Fisher idea of capping Medicare cost increases at  the hospital service area level, converting physician and hospitals into a kind of virtual HMO.  Some of this magical thinking might actually survive in a final health reform bill (See our Aug 17 blog in Health Affairs: “The Accountable Care Organization: Not Ready for Prime Time” )

Applying the Kumbaya logic of  “accountable care” to McAllen’s physician community isn’t going to fly.  It is somewhat akin to social workers and agricultural specialists going to the Taliban and the opium growers in Helmand Province of Afghanistan and persuading them to grow arugula and take up yoga instead.

The “pay for play” solicitations Atul reported in McAllen are in direct contravention of the “anti kickback” provisions of Medicare law. Yet these solicitations often result in hospitals paying bogus “medical directorships” to physicians, which are rarely challenged.  Hospitals all over the US are facing extortionate demands from their surgeons to cover emergency room call, with the clear signal that they will move their surgery if they are not compensated. Hospital payments to physicians has become hospitals’ least controllable and fastest growing expense.

The Scandal is What’s Legal

To paraphrase Michael Kinsley’s comment about campaign financing, the real scandal about Medicare fraud and abuse is what’s legal.   Closing the twin loopholes in the Stark Laws mentioned above could save tens of billion of dollars over the next decade. It would also make it easier for hospitals to resist demands by physicians to joint venture services that physicians would otherwise place in their offices or in freestanding facilities.

Indeed, the President’s FY10 budget requested a 50% increase in funds for Medicare fraud and abuse enforcement, but these funds were to be targeted at the twin Democratic bête noirs- Medicare Advantage contractors and the pharmaceutical companies.  Other than freezing the development of new physician-owned hospitals and requiring public disclosure of physician ownership and payments, most of the health reform legislation reported out by Senate or House committees have left the Stark Laws essentially intact, loopholes and all.  The physician owners of McAllen’s “gleaming” Doctors Hospital of Renaissance raised $500 thousand in Congressional campaign contributions, according to the New York Times, to protect their lucrative franchise.

Shutting down Medicare profiteering seems like a no-brainer  strategy to help finance health reform.  Uncovering revenues to support health reform has been so sketchy that one Congressperson referred to the process as “looking under the sofa cushions for loose change”.  Closing the in-office exemption seems like a particularly tempting target, given that it will markedly slow the growth of imaging spending.

Salaried group practices with compensation schemes that do not reward “ancillary” revenue growth or with a significant fraction of their incomes “at risk” through capitated contracts could keep their “ancillary” income, as could research facilities or those with a large percentage of uncompensated patients.  Public disclosure of ownership or physician “payola” from pharmaceutical firms and device manufacturers, as the Senate Finance Committee bill provides, is a laughable substitute for actually protecting the Medicare patient and taxpayer from economic abuse; disclosure won’t change a damned thing.

Physician self-referral is an expensive, taxpayer financed abuse of professional power.  Do oncologists really have a right to own their own PET scanners, or orthopedists their own MR machines?  Should surgeons profit from the hospital’s legal requirements under EMTALA?  Taking these expensive perks away would reduce some physician incomes, to be certain  Heaven forfend!  Yet for a Congress that has great difficulty taking money away from anyone, even if they are stealing, that might prove challenging.

Jeff Goldsmith is president of Health Futures Inc. He is also the author of a book released this year titled “The Long Baby
Boom: An Optimistic Vision for a Graying Generation.” Health Futures specializes in corporate strategic planning and forecasting future health care trends.

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MittiePedroHal Andrews108DAYSTempe Recent comment authors
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Hi there to every one, the contents existing at this website are in fact amazing for people knowledge, well, keep up the good work


Would you mind if I quote a small number of your blog posts as long as I
provide credit and sources returning to your weblog: http://thehealthcareblog.
I most certainly will aslo be sure to give you the appropriate anchor-text hyperlink using your website title:
Why McAllen Should Have Mattered in the Health Reform Debate | The Health Care Blog.
Please let me know if this is acceptable with you.

Hal Andrews

As we demonstrated with the actual all-payer data, Dr. Gawande’s use of the Dartmouth Atlas makes for a gripping read but is badly flawed. The “excess” spending in McAllen does not actually occur in McAllen, but in Houston and Galveston and Dallas and San Antonio. I continue to assume that the self-referring physicians who drive all of this excess are not driving 60-300 miles to deliver that care.


“Rather than standing back, criticizing and nit-picking, everyone needs to help.” I agree with Maggie.


“I have encountered two instances of what could be unnecessary tests ordered,”
“What on earth is a patient/parent supposed to do in this case?”
It is common for smart consumers when unsure about something to seek a second opinion. You asked what a patient/parent was to do, I suggested calling a free 24 nurse line that is specifically designed to assist members with such situtions and you went off sorta pompous like.
Nurse lines don’t rely on the knowledge of an NP. NPs work off medical protocals written by panels of physicians.

Margalit Gur-Arie
Margalit Gur-Arie

Please explain to me clearly, Nate, why I should call a nurse that I don’t know, who does not know me, after I spoke to my physician and he recommended a course of treatment? Do you usually check with an anonymous nurse every time you see your doctor, just to make sure he is right? Is it common practice for people to go to doctors and then call some nursing service afterward? What arrogance are you talking about? I don’t have a problem with seeing an NP for routine stuff, but the logic of calling one for a second opinion… Read more »


In the absence of rampant M&A amoung the PCP community, something I think would actually go a long way to reduce cost, empty buildings 16 hours a day, maximize equipement, and allow for greater investment in technology, nurse lines are a proven and cost effective second opinion. Not all nurse lines are equal you need to have one with a cost containment mentality. The concept is no different then precert for hospital and any other test. Medicare has radiology management providers in test pilot, this is the same thing. That arogance is why you over pay Margalit. In fact didn’t… Read more »

Margalit Gur-Arie
Margalit Gur-Arie

Get serious Nate. I’m not going to call a nurse to validate what a physician recommended any more than I’m going to post a question on some internet forum.
MD as HELL, are you hinting at a need to maybe restructure the way primary care is delivered?


Don’t call the nurse advise line. They will never tell you not to get seen if you want to.
The doctor ordered the test just to be sure because of the perceived standard of care if something happened to be wrong, no matter how unlikely.
The big clinics order less tests because they have more internal colleageal support for clinical opinion without testing. They also have a culture of acedemia, which is usually anti-test. They control their risks with internal redundancy of opinion, expert opinion. That is not so in primary care.


“What should most people, who have no idea what an MRI is for, do?”
Take their cell phone out of their pocket and call the 24 hour nurse line most people have access to.
“And while we’re at it, please show me another “industry” where the goods sold include life and death, and where basic economic principles like supply and demand still apply.”
off the top of my head;
1. Car saftey like brakes and tires
2. Air Travel
3. Saftey equipement for work sites
4. Guns
5. Alarm Systems/Home Monoriting
6. boat saftey/life vests
Can you name one where supply and demand don’t apply?


Margalit, Even though you did not address the question to me, I can tell you that I am looking to work on it; no, barely any work at all done about this question (I think there is a peds cardiology study, mainly about sthg else, revealing some soft supportive evidence). Let me just tell you that the anecdotal evidence from people working in the US and having worked elsewhere is very strong. That should give you pause. I can tell you multiple examples of patients expecting inappropriate tests, at times explicit requests, at times unspoken expectations that generate at times… Read more »


I just wanted to jump in here concerning Stark loopholes. You guys that are into fighting fraud and self-referral should look into what the gastroenterologists and urologists are up to. They are gutting the pathologists by opening their own in-office histology labs and then hiring a pathologist to read the slides at fees well below Medicare. By doing this they get all the technical fee and at least half the professional fee. It is all about the money.

Margalit Gur-Arie
Margalit Gur-Arie

Do we have any studies measuring the assertion that over utilization of expensive tests, like MRI for migraine, is mostly due to patients insistence to have those tests done? Personally, I have encountered two instances of what could be unnecessary tests ordered, and both instances started with the following statements from my pediatrician: “it’s probably nothing serious, but just to make sure, I’ll order XYZ…” What on earth is a patient/parent supposed to do in this case? The doctor is not sure. Should I bring my health policy knowledge to bear here and override the physician, who in this case… Read more »


not sure what praise CC is getting, they offer great care but far from affordable. It is a great example of not everyone gets to drive a bentley in life nor should everyone grow up thinking it is a birth right to.
People need to start paying for their own care again, only then will they get back n touch with the cost aspect of it. When living unhealthy cost them money and when an unneeded test comes out of their pocket then they will start contributing the effort required.


I can only second hell MD. We have a culture of overutilization – deeply engrained in many patients and physicians alike. Since a reason driven campaign from the health care sector propagating cultural change (“more tests does not provide better outcomes”) appears very unlikely – since many physicians are part of the problem, the system (i.e. medicare, “affordable” private insurance) likely will financially implode. The only other option I see is a group of docs really and conscientously going with the effective guidelines (no MRI for migraines and no surgery for axial backpain etc.) and offering care at a “discount”… Read more »