Specialty hospitals can expect federal scrutiny

August 1, 2005

Washington — Physicians seeking to open specialty hospitals that focus on specific practices or procedures can expect to face careful scrutiny from federal regulators who believe those facilities may be generating windfall profits for doctors while creating unfair competition for traditional hospitals and ambulatory surgery centers (ASCs).

A moratorium on Medicare referrals to such hospitals, imposed by the Medicare Modernization Act of 2003, expired June 8, but the Centers for Medicare and Medicaid Services (CMS) has taken steps to delay further approvals until new rules are implemented. Specialty hospitals typically treat only cardiac, orthopedic or surgical cases, and physicians who refer patients there often have a limited ownership interest.

When the Medicare reform law was passed, Congress instructed the Medicare Payment Advisory Commission (MedPAC) and the Department of Health and Human Services (HHS) to conduct studies dealing with payment issues and referral patterns and quality of care issues, respectively.

Many motivations

"We found that physicians may establish physician-owned specialty hospitals to gain greater control over how the hospital is run, to increase their productivity and to obtain greater satisfaction for them and their patients," Miller said during the Senate subcommittee hearing. "They may also be motivated by the financial rewards, some of which derive from inaccuracies in the Medicare payment system."

MedPAC's study found that:

Mr. Miller says the study was based on a small number of physician-owned hospitals that have been operating long enough to generate Medicare data.

"The industry is in its early stage, but growing rapidly," he says. When the study was done, there were 12 heart, 25 orthopedic and 11 surgical specialty hospitals, concentrated in states where certificates of need are not required, such as South Dakota, Kansas, Oklahoma and Texas.

The study found that the average surgical specialty hospital had only 14 beds and appeared to focus more on outpatient care. CMS says that under Medicare, a hospital must primarily furnish care to inpatients. It issued a proposed rule May 4 indicating that if specialty hospitals do not meet this test, new applications for provider agreements will be denied and existing provider agreements may be terminated.

CMS says its study indicated "physician-owners may seek the specialty hospital designation because payment rates for hospital outpatient services under the outpatient prospective payment system are often higher than those for the same procedures when performed in ASCs." The agency says it plans to reform the ASC payment system by January 2008 to diminish these differences.

CMS to take steps

CMS says it also would take the following steps to prevent inequities in the system:

During the review process, CMS is instructing regional offices not to issue new specialty hospital provider agreements or authorize an initial survey by the state survey agency for new specialty hospitals. Medicare fiscal intermediaries have been instructed not to process new provider enrollment applications for specialty hospitals until further notice. Specialty hospitals that submitted an enrollment application or requested an advisory opinion from CMS before June 9 are exempt from the suspension. CMS said it would complete its review process by January 2006.

Bob Gatty, Former congressional aide, Bob Gatty, covers Washington for business and professional publications, specializing in healthcare and related issues. He has written Dermatology Times' Washington Report for nearly 20 years and welcomes comments and suggestions. Mr. Gatty is available at: bob@gattyedits.com