The U.S. specialty hospital industry, which had been booming in the past few years, is reeling from a provision of the Medicare reform law that effectively halts development or significant expansions of those facilities for a year and a half.
Specialty hospital operators contend the new rule was included to curb their industry's growth and ability to compete with full-service community hospitals and will only serve to reduce patients' choices. Proponents of the provision, led by the American Hospital Association, argue it was needed to put a swift stop to increasing conflict-of-interest issues between physicians and providers. Heart and surgical hospitals stand to be most significantly affected.
"The rule is very disappointing and we feel it's unwarranted," says Michael Lipomi, founder and president of the American Surgical Hospital Association and chief executive officer of 23-bed Stanislaus Surgical Hospital, Modesto, Calif. "It's also very unfortunate that this provision was allowed to be part of a Medicare prescription drug bill. Had it not had that political clout, it wouldn't have had the support to pass."
The legislation grants a partial reprieve to existing specialty hospitals by grandfathering those "under development" as of Nov. 18. Specifically, the law places a moratorium on the whole-hospital exemption in the federal Stark II law, under which physicians have been able to refer patients to inpatient hospitals in which they have an ownership stake. Specialty hospitals currently in development must apply for an exemption to the moratorium. HHS will consider whether architectural plans have been completed, if funding was received and if zoning requirements and necessary approvals from appropriate state agencies have been met in granting exemptions.
To maintain the exemption, a specialty hospital may not increase its number of physician investors as of Nov. 18 or change or expand the field of specialization it treats. The hospital also may not expand beyond the main campus or increase the total number of beds in its facilities by more than the greater of five beds or 50% of the number of beds in the hospital as of Nov. 18. Specialty hospital developers contend the moratorium will have a chilling effect on financing for new projects.
An October report by the General Accounting Office identified roughly 100 specialty hospitals in the U.S. that focus on cardiac, orthopedic or women's medicine or on surgical procedures. Although 28 states have at least one specialty hospital, roughly two-thirds of the facilities are located in seven states: Arizona, California, Kansas, Louisiana, Oklahoma, South Dakota and Texas. At least 26 specialty hospitals also were in development in 2003. In 2001, specialty hospitals accounted for approximately $871 million, or 1%, of Medicare's spending on hospital inpatient services. Nearly two-thirds of this amount went to cardiac hospitals. The AHA and the newly created Coalition of Full-Service Community Hospitals, a group of 180-plus hospitals formed to combat specialty hospitals, have been campaigning ardently for the new rule, contending the nation's specialty hospitals are taking away the best paying patients and weakening general hospitals' bottom lines.
"We're very pleased with the moratorium as a solid step that Congress has taken to acknowledge that conflict of interest is wrong," says Mary Beth Savary Taylor, vice president of executive branch relations for the AHA. She says the association intends to continue its lobbying for an "all-out elimination" of physician-owners referring any patients to their own specialty hospitals.
While not-for-profit hospitals have themselves been building specialty hospitals or participating in deals, the number is still small. According to the GAO report, about 74% of specialty hospitals are for-profit, compared with about 20% of all general hospitals. Specialty hospital developers say that although there have been some joint ventures between not-for-profit hospitals and physicians, joint ventures will be increasingly problematic under the new law. It remains to be seen how the rule will affect future development by companies like AmSurg Corp., Ortho-Neuro Corp., Surgical Alliance Corp., United Surgical Partners International and many others that partner with physicians.
Surgical Alliance owns a 40% stake in New Albany (Ohio) Surgical Hospital, a joint venture with 28 doctors who invested $20,000 to $300,000 apiece in the $38 million facility. The hospital opened its doors earlier this month and was the impetus for a bill being considered in Ohio that would expand current state prohibitions against physicians referring patients to clinical laboratories or home health agencies in which they own stakes.
The AHA's Savary Taylor says anecdotal data show specialty hospitals are pulling away lower-acuity patients, making it far more difficult for community hospitals to survive.
But Lipomi bluntly refutes the claim that cherry-picking of patients has led to financial problems for local hospitals. "There has not been one hospital that has reduced services or closed because of a surgical or specialty hospital in their community," he says.
Dennis Kelly, spokesman for MedCath Corp., which operates 11 hospitals-primarily heart hospitals-and plans to open two more in early 2004, says the new law allows exemptions for MedCath hospitals under development-Texsan Heart Hospital, San Antonio, and the Heart Hospital of Lafayette (La.). "The bigger question for MedCath is whether this law even applies to our facilities when all the final definitions are said and done," Kelly says, citing the company's operating model. While the new rule limits existing facilities' ability to grow, specialty hospital operators say the larger, long-term problem is the provision's cap on the number of physician investors.
"The whole model for these hospitals is geared on the physician being part of the decisionmaking process for the business," Lipomi says.
Kelly says he believes two studies mandated by the bill-by the Medicare Payment Advisory Commission and by HHS-of financial and referral issues will point out that care is better in specialty facilities precisely because physicians are partners.