Future uncertain for investments in specialty hospitals

When C. David Joffe, MD, and his group invested in The Dayton Heart Hospital, getting big financial returns wasn't a primary goal. Instead, the interventional cardiologist said they plunked down money so they could have input into how the Ohio heart hospital was run.

Now, nearly five years after it opened, Dr. Joffe said the investors have gotten their money back along with a "slight" return. But the financial return isn't the real reward.

"The reward is a place that I'm proud to walk into when I go to work and comfortable to go into. And everybody is on the same team," he said.

Overall, the investment has been good for him. And Dr. Joffe thinks it will stay that way, despite the recent federal moratorium on new specialty hospitals that has clouded the future of the niche market and left some questioning whether specialty hospital investments are in trouble.

Experts disagree about how such investments might be affected by the new law, which was part of the Medicare reform legislation passed by Congress in November 2003. Some say that a provision of the law restricting new investors could jeopardize the long-term value of specialty hospital investments. Others say the legislation has little impact on physician investors who have already put in their money.

Dr. Joffe, for one, is not worried.

"The moratorium does not affect us anyway. We're up and running," he said. "Once a facility is up and running, you don't need new investors."

The law included an 18-month 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 under development by Nov. 18, 2003, were not subject to the referral moratorium.

The Centers for Medicare & Medicaid Services on March 19 issued guidance saying specialty hospitals in development will have to petition the federal government to know for sure whether they are exempt from the moratorium.

Chicago health care attorney Scott Becker said the law also includes language that prohibits specialty hospitals from increasing their total number of physician investors.

"What's happened here is that the ability to bring in new investors has essentially stalled," said Becker, who is counsel for San Diego-based American Surgical Hospital Assn.

At the same time, Becker said, companies that buy and help develop specialty hospitals have been "soft" on purchasing those hospitals because they are not sure if it's going to continue being a growth market.

Together, Becker said those factors could spell trouble for physician investors when they are ready to pull out of the investment.

"People have sort of lost their potential exit strategy," he said. But he added that doesn't mean they don't have good investments. He said some specialty hospital investments have returns of 10% or 20% after the first few years.

The moratorium was created to give federal officials time to study specialty hospitals to see what impact they have on community hospitals. If at the end of the study period the government decides to ban specialty hospitals altogether, Becker said it could have grave consequences for physician investors, some of whom have put in hundreds of thousands of dollars. "A number of them would go broke. It would be a disaster," he said.

Jacque J. Sokolov, MD, said returns on the investments are widely varied. Though he no longer practices medicine, Dr. Sokolov has been involved with the industry as chair of Sokolov, Sokolov & Burgess, a health care management, project development and investment firm.

He said there are about 100 specialty hospitals in the United States. Of those, about 90% have a physician in an equity position. Some are set up as for-profit ventures with hospital development companies. Other facilities are partnerships with traditional hospitals.

Dr. Sokolov believes that, regardless of the financial value of the investment or the uncertainty of the market's future, physicians will continue to seek investments in specialty hospitals because they give physicians control in their work environment.

"The [financial] investment in the hospital which is more intermediate to longer term is usually offset by the physician's ability to be more productive, have more sophisticated technology and essentially benefit from greater efficiency of patient flow through the hospital," he said.

Mike Lipomi, president of the American Surgical Hospital Assn., agreed. "The reason physicians invest in these models in not necessarily for their financial return but more for their ability to control the environment they practice in."

Dr. Sokolov said it is difficult to judge whether the value of these investments has changed because they haven't been around long enough to determine whether the investment stakes can be sold for a profit.

If additional specialty hospitals are banned in the future, preventing further competition, he said "it could make those existing shares substantially more valuable if the hospital is a high-performing entity."

Jim Abel, a certified financial planner in St. George, Utah, said he would counsel clients against making new investments in specialty hospitals for now. "For new investors, I would say wait and see what happens," said Abel, owner of Physicians Financial and Investment Services.

"It was a great investment a couple years ago and probably still is a pretty good investment, but with the moratorium, it raises some doubts as to whether this type of investment will be able to go on in the future unchanged."