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Specialty hospital growth put on hold

A Medicare bill sets an 18-month moratorium on referrals to new physician-owned hospitals.

By Markian Hawryluk, amednews staff. Dec. 15, 2003.

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Washington -- The New Albany Plan Commission meets every third Tuesday of the month in the southern Indiana city just across the river from Louisville, Ky. For most physicians, that means nothing. But for a dozen Louisville cardiologists, that schedule may have saved a lot of heartache.

At its Nov. 18 meeting, the commission approved plans for a 40-bed heart hospital to be built by Cardiovascular Hospitals of America and the doctors. That was the last day before an 18-month moratorium on new specialty hospitals.

As part of the Medicare reform legislation passed in November, Congress ordered a temporary ban on physician billing of Medicare or Medicaid for patients treated at any new specialty hospital in which the doctor has a financial interest. Specialty hospitals already in existence or those in development by Nov. 18 would not be subject to the referral moratorium.

The exact terms of the suspension are vague because it gives the Dept. of Health and Human Services some discretion in defining specialty hospitals and what is meant by "under development."

"The difficult part is determining, for the projects that are under way, what tests are going to be used beyond the statute to determine whether or not they fall into the grandfathering provision," said Randy Fenniger, a lobbyist representing the American Surgical Hospital Assn. "We may not have rules to clarify all of this for some time."

Government officials have indicated plans to issue rules implementing the terms of the moratorium. But given the usual pace of rulemaking, that may not happen until well into the 18 months.

The New Albany heart hospital, it seems, just slipped in under the deadline. Developers of other projects were not so lucky. The Ohio Heart Health Center had begun development of a regional cardiac hospital in Cincinnati and was forced to change its ownership model because of the moratorium.

"When we built the original model, the equity participation by our group and other [physician] groups was a factor that we felt was important for properly incentivizing doctors," said Jim Tomaszewski, Ohio Heart's executive director. "Now that we're not owners, we're looking at other models that still would allow specialty hospitals to be developed with community partners."

The project is still on track for breaking ground in April and to open in October 2005, after the moratorium is due to expire. But the heart hospital was perhaps not the intended target of the moratorium.

Unlike other specialty hospitals that compete with community hospitals, the Cincinnati heart hospital was meant to consolidate cardiac care in the city. Tomaszewski has been trying to convince the community hospitals to take equity shares in the specialty hospital project, rather than develop their own cardiac surgery programs. Some hospitals have expressed interest, he said. Cincinnati already has eight heart programs, with three more in development.

"That's almost as many cardiac surgeons as we have in the city," he said. "They're running cardiac surgeons all over the city. It's getting to be a terrible lifestyle challenge."

The moratorium was aimed at giving federal officials time to study whether specialty hospitals are having a negative impact on community hospitals. The legislation directed the Medicare Payment Advisory Commission, the General Accounting Office and HHS to study the issue and report to Congress before the ban expires.

The suspension is particularly disappointing because there is no evidence that any action is needed, said Michael Lipomi, ASHA president and the CEO of Stanislaus Surgical Hospital in Modesto, Calif.

"There's not one study, not one report, not one closure or reduction of services in a community hospital they can point to," he said. "All that's happened is competition has been introduced into the marketplace, which is good for the consumer."

The GAO completed two studies of specialty hospitals for Congress this year. The first, released in May, found that specialty hospitals generally treat less-acute patients. The second, released in October, found that growth in specialty hospitals tends to be in areas with large group practices and no certificate-of-need requirements for new construction. About two-thirds of the 100 specialty hospitals GAO identified were located in only seven states.

"There certainly are markets around the country where the community hospitals have been significantly weakened as a result of specialty providers," said George Lynn, president and CEO of AtlantiCare, a health care network in southeastern New Jersey. Lynn chaired an American Hospital Assn. task force looking at the impact of specialty hospitals.

Specialty hospitals go where money is

The GAO report found that specialty hospitals generally focus on cardiology, orthopedics and surgery. It's no coincidence that those are three of the critical services that produce a surplus in most hospital settings, Lynn said.

"There's an intricate system of cross-subsidization that takes place in a hospital," he added. "When you upset that balance and remove the profitable services, the responsibility for the community hospitals to provide all of the other services remains constant."

Lynn said specialty hospitals also pull specialists away from community hospitals, thereby reducing their availability in emergency departments when patients need them.

Although federal law generally precludes physicians from referring patients to entities in which they have a financial interest, the rules include a "whole hospital exemption" for specialty hospitals. Regulations allow physicians to invest in the entire hospital because their ability to profit financially by referring their own patients is diluted.

But hospital groups argue that specialty hospitals don't meet the definition of a whole hospital and have called for an end to the exemption.

"In most cases they don't provide emergency services, and if they did, those service would be treat-and-transfer," Lynn said. "They are taking only the most lucrative service lines to develop these specialty hospitals."

After 18 months, Congress will have to decide whether further action is warranted. Without additional legislation, the moratorium will expire in May 2005.

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