The Business of Hospice Care

Hospice care occupies a specialized and growing niche in the healthcare economy as a comfort to the dying and their families, and a potential cost-saver for Medicare. With baby boomers now hitting their seventh decade, hospice is expected to become an even more important part of the healthcare landscape, according to Wharton faculty and industry analysts.



While it began as a charitable endeavor run by volunteers offering relief from pain for the terminally ill, hospice organizations, including for-profit companies, served 1.2 million patients in 2005, and a third of the nation’s 2.4 million deaths occurred in hospice programs. A handful of publicly held companies provide hospice care along with hundreds of smaller private, for-profit companies and well-established non-profit ventures. Medicare picks up more than three-quarters of the bill.



According to Wharton management professor John Kimberly, hospice is a business that has evolved from a purely non-profit mission into a growing healthcare business. From the late 1980s to the mid-1990s, hospital managers believed the industry’s future would be in offering integrated services to patients. They began buying physician practices and other health service organizations, including hospices, thereby spurring interest in the hospice business. At the same time, the Medicare reimbursement also helped generate new hospice organizations. “At least some people thought there was an underlying business model in providing hospice care that would be profitable — that it was not simply a do-good model,” says Kimberly.



For-profit programs now care for 35% of hospice patients. Non-profit groups care for 56%, while government and other types of organizations help the other 9%, according to a report on the industry released last fall by CIBC World Markets.



Reluctant Physicians


The hospice movement started in England and came to the United States in the early 1970s. Medicare added a hospice benefit in 1982 to its program for older Americans. To enter hospice, a patient’s doctor must certify that he or she believes the person could die within six months.



Today there are 2,900 Medicare-certified hospice programs. Medicare reimbursement for hospice care has grown from $68.3 million in 1986 to $8.3 billion last year and is expected to reach $9.5 billion in 2006. By 2030, as the baby boomers enter their 80s and beyond, Medicare projects hospice spending will climb to $45.6 billion, according to data supplied by the Centers for Medicare & Medicaid Services, which administers hospice benefits within the Medicare program.



While hospice care is gaining acceptance, Kimberly says its growth remains hampered by physicians who are reluctant to recommend the service. “Physicians are trained to do all they can to prolong life. There’s a fundamental, almost philosophical, conflict in the way physicians are trained and the goals of hospice. A physician has to say, ‘This person’s illness is terminal and this person will not recover.’ Most physicians find that difficult to do.”



While advocates for hospice argue it is primarily a compassionate way to make it easier for people to die quietly at home, some research indicates the service can reduce costs for Medicare. The routine Medicare hospice benefit in 2001 was $125 a day, compared to daily inpatient payments of more than $3,000, the CIBC report notes.



“If you view it from the perspective of the federal government, what we know about healthcare is that far and away the largest portion of hospital expenses are incurred in the last few weeks of a person’s life,” says Kimberly. “So one could argue that if it were possible to make relatively accurate judgments about when an illness is terminal, and if legitimate hospice services can be provided to the patient, cost savings would result…. If the patient is terminal, why spend all this money to prolong life for one week or two weeks or three weeks? Through one set of lenses, it’s not money well spent.” On the other hand, he continues, some patients and their families are adamant about doing everything possible to prolong life. “So there’s a conflict on the surface of it between cost-containment and potential [disputes with the family].”



CIBC World Markets projects spending on hospice care to increase 9.1% over the next five years. In addition to the aging of the population, CIBC notes that there is room for hospice programs to continue to grow into medical conditions beyond cancer (the illness that traditionally has been most often associated with hospice care). Growth is also likely by geographic region. In 10 states, including Arizona, Texas and Florida, more than 40% of the deaths occurring in the population over age 65 were under hospice care. By contrast, in 13 states, including Massachusetts and New York, and Washington D.C., hospice deaths occur in only 20% of the same population.



The market remains fragmented, with the top five publicly held hospice companies controlling 14% of the market, according to CIBC. The largest hospice company is Vitas, a division of Chemed, which had more than 12,000 admissions to its programs in the fourth quarter of 2005. Two other hospice companies are publicly traded, Odyssey HealthCare of Dallas, Tex., and VistaCare of Scottsdale, Ariz. Two healthcare corporations, Beverly Enterprises and ManorCare, operate hospice divisions as part of their larger operations.



Eric T. Gommel, vice president of equity research at Stifel Nicolaus, a St. Louis investment firm, says even though the industry is heavily reliant on Medicare funding, Congress seems intent on keeping hospice well-funded. While Medicare mandates much of what hospice companies must provide — and what they will be paid for it — there are ways for companies to run profitably, he notes. “It’s really about your ability to get a toehold in local markets. The public companies will point to well-run non-profits as their major competitors in many markets because they have been there longer and have better name recognition.” For-profit corporations with better access to funding and economies of scale will be able to compete effectively against local non-profits, says Gommel, whose firm has a client relationship with Odyssey. He noted that profit margins for the three major companies range from 6% to nearly 15%.



Roseanne Berry, chief compliance officer and a founder of VistaCare, predicts consolidation in the hospice industry. “There are a number of hospice start-ups that have occurred in the last few years and I think that, like other industries, there will be a natural consolidation,” she says, adding that running a for-profit hospice offers some unique challenges. For example, it is a highly regulated industry in which federal oversight over the quality of care and payment rates is a major part of the business model. She also notes that finding good workers is a constant challenge. Indeed, as the CIBC report notes, “any significant labor shortage on a state or national level would erode operating margins of national hospice operators. While the nursing labor situation has improved over the past several years, we believe future shortages are a possibility.” In addition, Medicare states that hospice operators must include volunteer workers in their operations — an unusual requirement for any industry. Today, more than 400,000 people are volunteers in hospice programs, although most contribute only a few hours a week.



Despite the challenges, Berry, a nurse who founded the company with a group of other nurses in 1995, says she finds hospice to be a highly rewarding way to provide healthcare. “It is wonderful to keep someone at home, work with the caregiver and make that journey” with the person who is dying “as good as it can be. But it’s not an easy business. A lot of hospices are getting started and they are going to find it can be hard.”



As in so many other industries, Berry says the hospice business is likely to be transformed as the baby boom generation ages and confronts death. “As a baby boomer myself, I know that I, and my friends, don’t want to be in an institution,” says Berry. “I want to be at home and I want to make my own choices.”



Different Savings for Different Illnesses


In the early days of the Medicare benefit, in-home hospice care appeared to be a major cost savings, but more recent reports have shown mixed results. According to a study published in 2004 in the Journal of Pain and Symptom Management, hospice care does reduce the costs of caring for patients with many forms of cancer, but the savings are not as clear-cut for other diagnoses, including dementia, chronic obstructive pulmonary disease and congestive heart failure, which increasingly are part of the hospice treatment mix.



Another study, which was conducted by the RAND Corp., found expenses were 4% higher for the last year of life among patients who used hospice services compared to similar patients who received traditional medical care.



On average, cancer patients who chose hospice care were about 1% less expensive for Medicare to treat, according to the study, which evaluated the cases of 250,000 people who died between 1996 and 1999. Savings were as large as 17% for patients with aggressive tumors such as lung cancer. For hospice patients who died from illnesses other than cancer, average costs were 11% higher than similar patients who received standard medical care.



Stephen Connor, vice president of research at the National Hospice and Palliative Care Organization, suggests that the higher costs for hospice patients is a result of delays in patients entering the program. The median length of stay is 22 days, but 35% of those who die under hospice care are only in the program seven days or less. “The biggest problem is people are with us for too short a time. Hospice adds value by providing quality care and preventive medicine,” says Connor. “If the patient is in hospice seven days or less, it’s too late to prevent that final hospitalization and we become an add-on cost at that point.”



Medicare initiated the benefit in response to families who wanted a way to cover the expenses of caring for a patient who chose to die at home. Medicare has not done a cost-benefit study of hospice but recognizes that this would require taking into account many variables, including the cost of treating conditions not related to the underlying terminal illness, according to a spokeswoman for the Centers for Medicare & Medicaid Services. However, she said that it can be assumed that if costly hospitalizations are relinquished in return for palliative care at home, there will be cost savings.



While hospitals do earn substantial revenue providing services to patients in their dying days, treating those patients also results in high costs that can exceed what Medicare and other insurers cover, according to Wharton professor of health care systems Mark Pauly. In addition, Medicare regulations prevent reimbursement for providers who attempt to push unnecessary services to generate profits. “Medicare tries hard to set payment rates so there are not unusually high profits,” he says.



Hospice might be most valuable for families who want extra assurance that doctors will not use heroic measures to prolong a patient’s life for only a short period of time, Pauly suggests. “Given the hospital culture of trying to save them no matter what, hospice is a way to signal to the healthcare system — more strongly than a living will — that a person is ready to let go” rather than continue treatments that “have a small probability of success, are costly” and can seem “inhumane.” The advent of new life-saving medical technology has made it more difficult for physicians to pull back from a terminally ill patient, Pauly adds. Because the technology for heroic measures now exists, “the technology tends to be used, not from a financial point of view, but from a cultural point of view.”



He agrees with Kimberly that patients and family often change their minds about accepting death when the time actually arrives. “When we are feeling good, we think we would like death with dignity, but a lot of the research suggests that, for whatever reason, when they are finally faced with death, people and their families change their minds and they try everything.”


J. Donald Schumacher, president and chief executive officer of the National Hospice and Palliative Care Organization, says hospitals are increasingly adding pain management and other non-curative treatments to their business models. “Some hospitals are developing innovative programs for palliative care which is pre-hospice for patients who are in need of pain and symptom management, but are not quite ready for hospice care. There is a nice synergy developing between hospice and hospitals.”

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