How peculiar Medicare rules contributed to the Memorial Medical Center tragedy during Hurricane Katrina.

How peculiar Medicare rules contributed to the Memorial Medical Center tragedy during Hurricane Katrina.

How peculiar Medicare rules contributed to the Memorial Medical Center tragedy during Hurricane Katrina.

How to fix health policy.
Sept. 4 2009 7:03 AM

The Other Katrina Hospital Mystery

What that New York Times Magazine story missed about the Memorial Medical Center tragedy.

Memorial Medical Center in New Orleans, Louisiana. Click image to expand.
Memorial Medical Center in New Orleans

Forty-five people died at New Orleans' Memorial Medical Center during and after Hurricane Katrina. Sheri Fink's amazing, 13,000-word piece in last Sunday's New York Times Magazine set out to explain why a group of doctors decided that at least 17 patients needed to be dosed with lethal amounts of morphine and other drugs.

Most of those 17 people had something in common: They were housed at a "hospital within a hospital," an 82-bed long-term-care facility called LifeCare that leased space from Memorial Medical Center. As Fink explained, LifeCare "credentialed its own doctors … had its own administrators, nurses, pharmacists and supply chain." This separation of authority and personnel caused chaos in the days after Katrina and probably contributed to the death toll at the hospital. Fink reports that LifeCare's patients allegedly weren't part of the original evacuation plan put together by Memorial's owner, Tenet Healthcare Corp. And the doctors who ultimately administered lethal drug cocktails to LifeCare patients were Memorial staffers who, in Fink's telling, seemed unfamiliar with the needs of the patients in the "hospital within a hospital." One Memorial doctor told Fink that some of his colleagues didn't believe in LifeCare's mission: They thought "excessive resources [were] being poured into hopeless cases."

Fink's story is a remarkable feat of investigative journalism, but there's one piece she left out. Why did LifeCare exist in the first place, and why would a "hospital within a hospital" have a separate staff? It turns out that there is a very interesting answer to this question, one that reveals the peculiar and complex financial relationships that make the American health care system so difficult to reform.

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Long-term-care hospitals like LifeCare were created to take advantage of the way Medicare payouts work. The requirement that LifeCare and its ilk have separate administrative control is an attempt by the federal government to ensure that they aren't taking too much of an advantage—that they aren't scamming Medicare.

Josh Levin Josh Levin

Josh Levin is Slate’s editorial director.

LifeCare was what's known as a long-term-care hospital. (The facility inside Memorial Medical Center never reopened after Hurricane Katrina.) A "long-term-care hospital" is not to be confused with a "long-term-care facility"—common parlance for a nursing home. An LTCH specializes in patients with major health problems: people who need ventilators to breathe, people with neuromuscular damage, and people with organ failure. Under Medicare regulations, an LTCH is defined as a hospital where the average Medicare inpatient stays more than 25 days. According to testimony at a 2006 congressional hearing (PDF), Medicare patients make up 83 percent of the LTCH caseload.

America's oldest long-term-care hospitals developed out of former tuberculosis hospitals. The LTCH boom, however, came in the 1980s, after the Centers for Medicare & Medicaid Services (CMS) devised a new payment system in the hopes of controlling health care expenditures. Rather than paying a hospital's actual costs, Medicare's inpatient prospective payment system, or IPPS, implemented in 1983, paid a consistent rate for patients in given "diagnosis-related groups." Long-term-care hospitals—where the costs per patient were much higher and the average length of stay much longer than in their acute-care brethren—were excluded from the new IPPS system, along with psych, cancer, rehab, and children's hospitals.

Medicare's new rules created an economic incentive to build more LTCHs. Acute-care hospitals, now getting a fixed amount per patient, were eager to discharge the people they treated as soon as possible—the longer the stay, the more money the hospital would lose. LTCHs, which were reimbursed at higher levels, sprang up to take in that supply, becoming a repository for patients who were clogging up beds at acute-care facilities. CMS reported in 2005 that the standard payment rate for LTCHs was eight times greater than the rate for acute-care hospitals. In 2006, the director of the Center for Medicare Management said that LTCHs were "the highest paid hospitals in the Medicare program, with average Medicare margins of almost 12 percent."

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For-profit hospital corporations, enticed by those huge margins, predictably swooped in. In the mid-1980s, Vencor (since renamed Kindred Healthcare) began putting together a chain of 60 facilities for patients on respirators. But LTCHs really took off with the advent of hospitals within hospitals. An HWH matches up an acute-care hospital with spare beds and a long-term-care hospital in need of patients. Put the two together, and you've got a perfect symbiosis: The big hospital gets a rent-paying tenant for its formerly unused space, and the LTCH saves the cost of building a free-standing facility and gets a steady provider of sick people.

The amount of LTCHs in the United States more than tripled from 1993 to 2005, with hospitals within hospitals growing at three times the rate of LTCHs overall. In 1995, there were 32 HWHs across America; seven years later, there were 132. According to CMS, there are nearly 400 LTCHs today, with 60 percent of those hospitals within hospitals. Those LTCHs are highly concentrated in a few states; as of 2004, one-third of all LTCH beds were in Massachusetts, Texas, and Louisiana. LifeCare Hospitals moved into the New Orleans market in 1994.

This expansion was all well and good for the hospitals, but it wasn't necessarily good for Medicare. A 2004 report by the Health and Human Services Office of Inspector General (PDF) revealed that HWHs were marketing themselves to potential hosts as a way to get around Medicare reimbursement restrictions for acute-care hospitals. What the hospitals saw as an efficiency could be viewed as Medicare fraud. Host hospitals had a financial motivation to dispense with non-revenue-generating patients as soon as possible, perhaps before they received the treatment mandated by Medicare's IPPS payments. Sending those patients along to the in-house LTCH would generate another Medicare check for a single episode of care. Bruce C. Vladeck, the administrator of the Medicare and Medicaid programs in the mid-1990s and now a health care consultant, says he was always aware of the two-payments-for-one-patient dilemma. He says the problem for the government was "to figure out whether Medicare is getting billed twice for two separate services. The HWH has been particularly problematic in that regard—you just take the patient up the elevator and you're generating another $8,000 Medicare bill."

A 2004 Medpac report revealed that HWHs got 61 percent of their patients from a single acute hospital—almost certainly the host facility. Medicare has created a bunch of regulations to try to ensure that patient-shifting between the host and the LTCH happen for medical rather than economic reasons. HWHs have long been required to have separate medical boards and administrative boards from their host hospitals. And in fiscal year 2005, before Katrina, CMS installed the "25 percent rule," a requirement that LTCHs take in a maximum of 25 percent of their patients from any one acute-care hospital in order to get paid their normal Medicare rate. (The Medicare, Medicaid, and SCHIP Extension Act of 2007 has delayed and rolled back parts of this rule for three years.)

The host and the HWH are not required to have separate ownership, although in the case of Memorial Medical Center, the main facility (owned by Tenet) and the HWH (owned by LifeCare Hospitals) did indeed belong to separate corporate entities. But having separate owners doesn't get rid of the incentive for the host and the HWH to scratch each other's backs, or to make decisions for financial reasons rather than medical ones. Ellen B. Griffith, a spokesperson for CMS, says Fink's New York Times Magazine article fed into some of the agency's concerns about HWHs. While there were LifeCare nurses and an administrator on call during Katrina, it is not clear whether a dedicated LifeCare physician was present in the LTCH. If not, Griffith says, it raises questions about whether the LifeCare facility really was a separately certified hospital from Memorial Medical Center or was actually functioning as a unit of Memorial.