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United SU-os
Environmental ProtectaEi
Agency
Economic Impact Analysis of the Proposed
Hospital Sterilizers Area Source Standard
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EPA 452/D-06-001
November 2006
Economic Impact Analysis of the Proposed Hospital Sterilizers Area Source Standard
U.S. Environmental Protection Agency
Office of Air Quality Planning and Standards
Health and Environmental Impacts Division
Air Benefits and Costs Group
Research Triangle Park, NC
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Hospital Sterilizers Area Source Proposed Rule - Economic Impact Analysis
Background on Hospital Industry
The portions of the hospital industry that are affected by this proposal are NAICS
62211 (General Medical and Surgical Hospitals) and NAICS 62231 (Specialty (Except
Psychiatric and Substance Abuse) Hospitals).
This category potentially includes many types of hospitals such as academic
medical center/university-based/teaching hospitals, community hospitals, specialty
hospitals (i.e., orthopedic or pediatric), and tertiary care facilities that are qualified to
handle major trauma cases (i.e., burns and catastrophic accidents). There are also
distinctions between public and private hospitals, hospitals that are part of a healthcare
system (i.e., organizations such as Kaiser Permanente), Veterans Administration
hospitals, and other types of facilities.
The hospital industry impacts the lives of nearly every person in the United
States. According to the 2002 Economic Census of the Health Care and Social
Assistance Industry, which covers NAICS 62211 and 62231, there are 6,541 hospitals in
the United States. These hospitals employ approximately 5.2 million people with an
annual payroll of almost $196 billion. Of these hospitals, 5,404 are classified in NAICS
62211 and 532 are classified in NAICS 62231. '
The revenue obtained by hospitals in NAICS 62211 in 2002, the latest year for
which we have such data, is nearly $481 billion while the revenue obtained by hospitals
in NAICS 62231 in 2002 is about $15 billion. Therefore, the average revenue for a
hospital establishment (which is a facility, and not necessarily a parent firm or entity) in
NAICS 62211 is $89 million while the average revenue in NAICS 62231 is $29 million.
Revenue for each type of hospital is largely obtained from in-patient services (56.8
percent) and outpatient services (30.2 percent) in NAICS 62211 and breaks out very
similarly for NAICS 62231 (57.6 percent and 20.2 percent, respectively).
1 U.S. Census Bureau. 2002 Economic Census, Health Care and Safety Administration Series. Report No.
EC-02-621 -02. Found on the Internet at http://www.census.gov/econ/census02/guide/lNDRPT62.HTM.
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There is not a great degree of concentration amongst firms in the hospital
industry. According to the 2002 Economic Census, the 4 largest firms in NAICS 62211
own only 415 hospitals, or less than 8 percent of the establishments classified in this
NAICS code, and the 50 largest firms own 1,220 hospitals, or only 23 percent of the
establishments classified in this NAICS code. If one examines the amounts of revenue
received by firms as a measure of firm concentration, the 4 largest firms in NAICS 62211
receive only 9.5 percent of all revenues earned by firms classified in this code while the
50 largest firms receive only 29.7 percent of all revenues. In NAICS 62231, there is a
higher degree of firm concentration. The 4 largest firms own 28.2 percent of the
hospitals classified in this NAICS code, while the 50 largest firms own 71 percent of the
hospitals classified in this NAICS code.
This result may be somewhat surprising since there was a considerable degree of
hospital consolidation in the U.S. during the late 1990's. One source claims as many as
900 mergers occurred from 1994-2000.2 This surge in consolidation has led to concern
about the effects on competition in local markets for hospital services. Federal antitrust
enforcement agencies such as the Federal Trade Commission (FTC) along with the U.S.
Department of Justice (DOJ) brought challenges against a number of hospitals seeking to
merge. The courts, however, have ruled against the antitrust enforcement agencies on
every hospital merger case tried in the last decade.3
Markets for the services provided by hospitals are local in nature due to the nature
of the services involved.4 This reflects the fact that consumers strongly prefer hospitals
close to their homes. While the price elasticity of demand can be quite low for health
care services as a whole (below -0.2), the price elasticity of demand for hospital services
2 Abraham, Jean, Gaynor, Martin, and Vogt, William. Entry and Competition in Local Hospital Markets.
National Bureau of Economic Research. Working Paper 11649. Available on the Internet at
http:/Avww.nber.org/papers/w 1 ] 649
3 Reference 2.
4 Freeh, H.E. (1987). Comments on (hospital) antitrust issues. Advances in Health Economics and Health
Services Research, 7:853-872.
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can be quite large (nearly -6, or highly elastic).5 Hence, those who go to hospitals do
consider the price of services as a parameter for decision making.
Profit margins for hospitals range from 3 to 5% based on historical averages
(historical median of 4.6% based on American Hospital Association data from 1990-
2000). Hospitals reported an average profit margin of 5.2 percent in 2004, according to
the American Hospital Association (USA Today, "Hospitals' Profit Margin Hits 6-year
High in 2004, downloaded from the Internet on August 18, 2006). For-profit, publicly
traded hospitals have profit margins in the high end of this range while the not-for-profit
hospitals have profit margins closer to the low end. Typically, for-profit hospitals are
larger than not-for-profit hospitals, and not-for-profit hospitals typically generate less
revenue per bed than for-profit hospitals due to lack of economies of scale and larger
overhead costs. For-profit publicly traded hospitals are 15% of facilities and about 13%
of the beds available to incoming patients, and the remaining 85% of facilities (87% of
beds) are not-for-profit.6 Not-for-profit hospitals are exempt from federal tax; for-profit
hospitals are not. In addition, smaller hospitals such as those in inner-city areas are likely
to have lower profit margins than other urban hospitals.7
Economic growth in the hospital industry is expected to climb as the number of
patients grow due to the aging of the U.S. population and the expansion of hospitals into
outpatient care. One estimate projects hospital spending growth to average 6.2 percent
annually between 2004 and 2014.8 A major reason for this is an expected increase in
Medicare hospital spending.
Affected Population of Hospitals
Of 6,500 hospitals nationwide, roughly 1,800 sterilize with EO. It is estimated
that 1,200 hospitals control EO emissions from sterilizers. Most hospitals that sterilize
5 Reference 2.
6 Health Care Industry Market Update, Centers for Medicare and Medicaid Services. July 14,2003.
7 Issue Brief, National Health Policy Forum. March 1999.
8 Heffler, Stephen. Smith, Sheila. Keehan, Sean. Borger, Christine. Clemens, M. Kent, and Truffer,
Christopher. U.S. Health Spending Projections for 2004-2014. Health Tracking, February 23, 2005.
Found on the Internet at http://content.healthaffairs.org/cgiycontent/full/hlthaff.w5.74/DCl.
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with EO are located in urban areas (about 95%).9 Based on a nationwide and State
search for permits and inventory data, we specifically compared the number of hospitals
identified and the number confirmed to conduct EO sterilization, and extrapolated to
nationwide estimates. The percentage of hospitals with EO sterilization ranges from 28
to 33 percent. Based on this range, there are approximately 1,600 to 1,900 hospitals
nationwide that conduct EO sterilization.
Control Devices to Reduce EO Emissions from Hospital Sterilizers
The predominant type of air pollution control devices are the EtO-Abator™ and
the Safe-Cell technology. Both technologies reduce emissions by approximately 99
percent. The EtO-Abator™ oxidizes the EO with a catalyst to form COa and water vapor.
The latest version of the EtO-Abator™ (sold by 3M) is sold only for use with pure EO
systems; however, earlier versions were used with gas blends. The Safe-Cell technology,
which can be used with either pure EO or EO gas blends, is a two-stage process. In the
first stage, an acid hydrolysis scrubber removes EO from the gas stream and converts it to
ethylene glycol (EG); in the second stage, the remaining EO is captured and destroyed on
a dry bed filter impregnated with a chemical reactant.
Ethylene oxide emissions for hospital sterilizers have decreased over 90 percent
(from 1,000 to 70 tons per year) from 1990 to 2005. We estimated that 1990 emissions
levels of EO were 1,060 Megagrams (Mg)/yr (1,170 tons/year) from sterilization
processes nationwide. In this study, all of the EO emissions were associated with area
source facilities, i.e., there were no major source hospital facilities. Recently, industry
representatives have cited declining trends in EO usage for sterilization processes.
Nationwide EO usage in 2000 was estimated to be 192 Mg/yr (212 tpy). The nationwide
EO usage in 2005 was estimated to be 122 Mg/yr (135 tpy). The decline in EO usage for
hospital sterilization is due mainly to: (1) new regulations and excise taxes on
chlorofluorocarbons (CFCs), (2) development of new sterilization processes, such as
liquid peracetic acid and hydrogen peroxide plasma processes, for certain medical items,
(3) increased concern over the toxicity of ethylene oxide residuals, and (4) new
' Ec/R. EO Sterlizers Report. Prepared for the U.S. Environmental Protection Agency. December 2003.
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restrictions on reprocessing single use devices (SUDs). As a corollary to the decline in
EO usage and emissions, the number of hospitals that conduct EO sterilization has been
declining. With the trends mentioned, hospitals in urban areas have begun to consolidate
EO sterilization processes, and one hospital with a large sterilizer may conduct
sterilization processes for its neighbor or affiliated hospitals or those in close proximity.
In addition, regulation of EO sterilization at hospitals has contributed to the decline in the
number of hospitals that conduct sterilization processes. In California, there were
approximately 600 hospitals that operated EO sterilizers in 1991. Since implementation
of the CARB regulation for hospital sterilizers in 1991, at least 60 percent of these
hospitals are no longer conducting sterilization operations. In 2000, the Food and Drug
Administration (FDA) regulated the reprocessing of SUDs, and these regulations have
made it more difficult for hospitals to continue the reprocessing. Many hospitals have
reacted to the 2000 FDA regulations by discontinuing the reuse of SUDs or by
outsourcing the sterilization processing of SUDs. As a result of the many SUD reuse
issues, when hospitals are outsourcing and using reprocessed devices, EO usage by
contract sterilizers is increasing, and when hospitals are not reprocessing SUDs, EO
usage by medical device manufacturers has increased as they manufacture more SUDs.
Sterilization processes by commercial sterilizers, which include commercial contract
sterilizers and medical device manufacturers, are subject to MACT controls under 40
CFR part 63, subpart O.
Emissions from controlled hospital sterilizers are negligible and we are not aware
of any practical emission reduction strategies after control. Emissions from uncontrolled
hospitals range from less than 10 to 17,800 Ibs of ethylene oxide per year. The capital
x • '
costs of add-on-controls for these facilities range from $23,000 to $130,000 per hospital.
These costs do not include recordkeeping and reporting, monitoring, or testing costs;
annualized costs of add-on-controls range from $10,000 to $46,000 per year in 2002
dollars. Any recordkeeping and reporting, monitoring, or testing costs are expected to be
minimal.
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Description of Proposed Rule
Given the minimal EO emissions from this source category, the proposed rule
does not include additional emission controls. The proposal rule includes a management
practice to reduce EO emissions from hospital sterilizers that do not use control devices
for such emissions. This practice consists of sterilizing full loads of items having a
common aeration time. Facilities complying with this proposed rule by applying the
management practice will be required to maintain records on-site of the date and time of
sterilization and whether a full load was sterilized, and the reason for not running a full
load. Finally, the proposal requires hospitals with controlled sterilizers to certify that the
control devices are operating and will continue to operate in accordance with applicable
State and/or local laws or, if controls are voluntary, in accordance with manufacturer's
specifications.
The management practice will increase the awareness of pollution prevention and
has the potential to reduce emissions from uncontrolled hospital sterilizers. The cost of
this practice applied to uncontrolled hospital sterilizers nationwide is $1.3 million (2005
dollars), and this cost may be off-set by the reduced purchasing costs of ethylene oxide
and other operating costs resulting from fewer loads. These costs are calculated based on
the 2005 estimate of 135 tpy EO nationwide. 10
Results of Economic Impact Analysis
The economic impacts of the proposed option are minimal. Of the 26 entities
identified as owning 32 hospitals affected by tins-proposed option according to our
databases, there are no affected entities with annualized compliance costs of greater than
0.1 percent of sales except for 1 small firm. We extrapolate the impacts to the universe
of hospitals affected by this proposal, which is 630 hospitals owned by 512 entities, and
10 Research Triangle Institute. "Documentation of Emissions Control Cost Estimates and Nationwide Costs
for Ethylene Oxide Sterilizers and Hospitals," March 13, 2006. Prepared for the U.S. Environmental
Protection Agency.
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the economic impacts are therefore no affected entities with annualized compliance costs
greater than 0.1 percent of sales except for 1 small entity. Consequently, the impacts of
this proposed option on the profits of these hospitals and output of their services are
minimal. Impacts to the consumers of these services (primarily hospital patients) should
be minimal as well using costs as a percent of sales as a proxy for the price increase that
may result. While we have hospital industry-level data for 2002 only, we have revenue
data for individually affected entities for 2005 in many instances. These data are taken
from D&B, financial reports on hospital made available by various States, and other
sources. Our dataset of 23 entities that own 32 affected hospitals are those entities for
which we are fairly certain that the proposed rule will have an impact on them. We
believe this data is representative of the impacts of this proposal on the 630 hospitals
expected to be impacted by this proposal. The impacts are summarized in Table 1 below.
Impacts for each affected firm and hospital facility can be found in the Appendix.
Economic impact data for each affected hospital can be found in the file
"EconomicImpactsHospitalSterlizersproposaldata.xls" which can be found in the public
docket, and revenue data used in this analysis can be found in
"Hospital_Entity_Revenue_Data.xls" which is also in the public docket.
Results of Small Entity Analysis
The Regulatory Flexibility Act (RFA) generally requires an agency to prepare a
regulatory flexibility analysis of any rule subject to notice and comment rulemaking
requirements under the Administrative Procedure Act or any other statute unless the
agency certifies that the rule will not have a significant economic impact on a substantial
number of small entities. Small entities include small businesses, small organizations,
and small governmental jurisdictions. This analysis identified the businesses that will be
affected by this proposed rule and provides an analysis to assist in determining whether
this rule is likely to impose a significant economic impact on a substantial number of
small businesses. The screening analysis employed here is a "sales test" that computes
the annualized compliance costs as a share of sales for each company or affected entity.
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For purposes of assessing the impacts of today's rule on small entities, small
entity is defined as: (1) a small business as defined by the Small Business
Administration's (SBA) regulations at 13 CFR 121.201; which for today's rule is a small
parent company is less than $31.5 million in gross revenue (NAICS 62211 and NAICS
62311); " (2) a small governmental jurisdiction that is a government of a city, county,
town, school district or special district with a population of less than 50,000; and (3) a
small organization that is any not-for-profit enterprise which is independently owned and
operated and is not dominant in its field.
After considering the economic impact of today's proposed action on small
entities, I certify that this action will not have a significant economic impact on a
substantial number of small entities (SISNOSE). This action proposes work practices to
minimize the operation of the ethylene oxide sterilization unit and will therefore have
minimal nationwide costs, i.e., less than $2 million per year. We have determined that
less than 3 percent of the hospitals are small entities as defined by the SBA. While we do
not have any small entities identified in the dataset used for this rule's analyses, we do
have some small entities identified as potentially affected but for which we do not have
revenue data and thus cannot generate a specific impact estimate for them. We have also
determined that none of these small businesses are significantly impacted by this proposal
for none of them will incur annualized compliance costs of 0.1 percent of sales or greater.
Based on this information on small business impacts, we make this certification.
We continue to be interested in the potential impacts of the proposed rule on small
entities and welcome comments on issues related to such impacts.
While we do not believe these options will lead to significant economic impacts
on a substantial number of small entities, we have undertaken efforts to mitigate small
entity impacts as part of this rulemaking. We continue to be interested in the potential
impact of the proposed action on small entities and welcome comments on issues related
to such impact.
1' The SBA small business size standards can be found at www.sba.gov/size.
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Appendix - Detailed Results by Firm (or Entity) Affected by the Proposed Hospital
Sterilizers Rule
Entity Name
Resurrection Health
Care Corporation
Victory Memorial
Health Association
Bethesda Memorial
Hospital, Inc.
Protestant Memorial
Medical Center
Provena Hospitals
Bloomington Hospital,
Inc.
Sparks Health System
North Shore Long
Island Jewish Health
System
Alexian Brothers
Medical Center, Inc.
Memorial Health
System
JPS Health Network
Advocate Health
Methodist Medical
Center of Illinois
Rockford Health
System
St. John's Hospital of
the Hospital Sisters of
the Third Order of St.
Francis
Elkhart General
Hospital
St. Vincent's Catholic
Medical Centers of
New York
Charleston Area
Medical Center
(CAMC) System
New York Health and
Hospitals Corporation
Is Affected Entity
Small According
toSBA
Definition?
No
No
No
No
No
No
No
No
No
No
•No
No
No
No
No
No
No
No
No
Annualized Costs of
Proposal for
Affected Entity
(2005 dollars)
$87,003
23,032
20,657
13,014
7,836
9,535
8,939
10,131
7,869
11,156
5,438
54,329
2,980
3,754
3,003
2,682
3,650
2,047
10,166
Annualized Costs As a
Percentage of
Revenues for Affected
Entity
0.07
0.05
0.01
0.007
0.004
0.003
0.004
0.003
0.003
0.002
0.002
0.0018
0.001
0.001
0.0008
0.0007
0.0005
0.0003
0.0002
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Entity Name
Adventist Health
System Sunbelt
Healthcare Corp.
St. Francis Hospital
and Health Centers
Northwestern
University Medical
Center
St. Mary's Good
Samaritan Hospital
US Federal
Government
Is Affected Entity
Small According
toSBA
Definition?
No
No
No
No
No
Annualized Costs of
Proposal for
Affected Entity
(2005 dollars)
4,338
816
2,684
2,591
30
Annualized Costs As a
Percentage of
Revenues for Affected
Entity
0.0001
0.0001
0.0001
No impact estimate
available due to lack of
revenue data
N/A
* N/A - Not Applicable
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United States
Environmental
Protection
Agency
Office of Air Quality Planning and
Standards
Health and Environmental Impacts
Division
Research Triangle Park, NC
Publication No. EPA
452/D-06-001
November 2006
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