Do more beds drive up costs?

Aurora is a case in point in old debate

Milwaukee Journal Sentinel, August 13, 2007

By GUY BOULTON

The phenomenon was noted more than 40 years ago: Hospital beds, once built, will be used.

The Milwaukee area is about to find out whether that phenomenon, known as Roemer's Law, still holds true.

Last month, Aurora Health Care announced plans to build a hospital in Grafton in southern Ozaukee County. The announcement came about one year after it won approval to build a hospital in western Waukesha County.

Both hospitals will be within five miles of existing hospitals. Both will be in affluent suburbs that don't lack for health care services.

No one knows for certain what Aurora's moves will mean for health care costs in the Milwaukee area. But critics and competitors contend that the new hospitals and the inevitable duplication of services that attends them will increase costs.

They can point to research that shows that markets with more hospitals, specialists and other health care services generally have higher health care costs, with no significant improvement in the population's health.

"Somebody is going to have to pay for this," said Dorothy Hagemeier, an assistant professor at Columbia College of Nursing. "And it's going to be businesses that pay for health care for their employees. And it's going to be employees who have to pay for health care."

Aurora's expansion comes at a time when soaring health care costs have roughly doubled the cost of health insurance in the past eight years.

It also is taking place in a market that had the fifth-highest hospital costs and ranked 22nd in total health care spending out of 232 metro areas, according to a 2004 study by the Government Accountability Office.

The non-profit health care system's decision to build another hospital in the Milwaukee market was announced last month as part of its deal to buy Advanced Healthcare, the area's largest physician practice.

Building two new hospitals and buying Advanced Healthcare are expected to cost Aurora at least $450 million, and possibly much more.

Aurora has not disclosed the purchase price for Advanced Healthcare or the estimated cost of the Grafton hospital.

But consultants and others estimate the total cost of buying Advanced Healthcare at more than $100 million. And health care executives estimate that the 80- to 90-bed hospital will cost $150 million to $200 million.

The 110-bed hospital in Summit is projected to cost $189 million, not including its projected losses in its first few years of operation.

Aurora isn't the only health care system in the region that has expanded in recent years.

Wheaton Franciscan Healthcare now owns a heart hospital near Froedtert Hospital and is building an $80 million hospital in Franklin.

Columbia St. Mary's is completing a $72 million expansion of its hospital in Mequon. It also is building a $417 million hospital on Milwaukee's east side.

Columbia St. Mary's has said the cost savings from combining its two Milwaukee hospitals, about a mile apart, will offset the cost of the new hospital.

No other health care system, though, plans to build hospitals as close to existing hospitals as Aurora.

Jeff Squire, an Aurora spokesman, noted that the non-profit organization is overseen by a board that includes people from the community.

"We understand that health care resources are precious and limited," Squire said.

The projected costs of the new hospitals and of buying Advanced Healthcare, though, raise the question of whether the money would be put to better use paying down Aurora's $1.2 billion in debt.

That would lower its interest expense and in turn lower its costs.

"We believe we are making the best use of our resources as we can," Squire said.

He also noted that Aurora has worked to improve health care quality and increase the efficiency of the care it provides.

But research done by Dartmouth College strongly suggests that in areas with more hospital beds, specialists and other services, people are more likely to be hospitalized, see specialists more frequently and have more tests and procedures done. And that means higher costs.

"We have a decade of Medicare data that shows exactly that," said Kristen Bronner, managing editor of the Dartmouth Atlas of Health Care, which has tracked the connection between health care costs and available services.

The research has shown a relationship between the supply of staffed hospital beds and the rate of hospitalization for conditions that don't require surgery.

"The correlations are strong and they are persistent," Bronner said.

The availability of beds and services often influences how medicine is practiced and health care resources are used.

"They interact to create a medical culture in an area," she said.

For patients with chronic illnesses, for example, few guidelines exist on scheduling patient visits, when to order a diagnostic imaging test or when to refer the patient to a medical specialist.

Scheduling a patient visit every six weeks instead of every eight weeks works out to roughly two additional visits a year. And that in turn means higher costs.

Partly for this reason, some states require approval to build new hospitals. Minnesota, known for its low health care costs, has restricted new hospital construction since 1984.

Bronner said that increasing hospital capacity in an area that is adequately served doesn't benefit communities.

"The key point is: 'Why do you need more?'" she said.

That's the contention of Aurora's competitors.

Aurora is aware of the Dartmouth research, Squire said, noting that the correlation is not absolute.

Some health care economists support that.

The widespread variation in how medicine is practiced is well documented. But the reasons for the variation are less clear.

The availability of services is just one of many factors that influence how medicine is practiced, said Jose Escarce, a physician and health care economist who is a senior scientist at Rand Corp.

"I don't think it's a major driving force," said Escarce, also a professor at UCLA.

But Escarce said the duplication of services can increase costs.

Aurora's planned expansion will give it a presence in northern Milwaukee and southern Ozaukee counties. And that could increase competition in an area now dominated by Columbia St. Mary's and Froedtert Community Health.

It also could benefit the community by giving more options, said David Vanness, a health care economist at the University of Wisconsin-Madison. But competition in health care doesn't necessarily lead to lower costs.

"That's been established for quite some time," Vanness said. "And there's a lot of duplication of services."

Dianne Kiehl of the Business Health Care Group, a coalition of employers created to bring health care costs in southeastern Wisconsin more into line with those in other Midwestern metro areas, said that excess health care capacity increases costs.

"That's the same position we've said all along," Kiehl said.

The unknown is how the health care market will evolve. For example, public information on health care prices could become available in coming years, spurring competition on price and quality. And employers could begin to give employees incentives to get care from doctors and hospitals that provide the best care at the lowest price.

How Aurora's plans will affect costs won't be known for years. But, for now, some economists contend the relationship between supply and costs is clear.