Lawmakers weigh future of specialty hospital referral ban

MedPAC says the prohibition against physician self-referrals to these facilities should be extended. The AMA argues that it should expire.

By David Glendinning — Posted March 28, 2005

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Washington -- Congress has begun debating whether to extend an 18-month ban on physician referrals to specialty hospitals in which they have an ownership interest -- an issue that has spurred some conflict within the medical community.

The moratorium, which lawmakers approved as part of the 2003 Medicare reform law, is set to expire on June 8. It bars physician investors from referring Medicare and Medicaid patients to specialty facilities that entered the development stage after Nov. 18, 2003, but exempts hospitals that already existed as of that date.

At least two lawmakers are contemplating offering legislation that would extend the prohibition before it sunsets. Sens. Charles Grassley (R, Iowa) and Max Baucus (D, Mont.), who head the Senate Finance Committee, harbor concerns that these so-called self-referrals create incentives for doctors to shepherd more profitable patients away from full-service community hospitals and toward the specialty facilities in which they hold a stake.

"Physicians may choose where to send a patient based on whether or not they think that patient will profit their hospital," Grassley said. "That's troubling."

Grassley convened one of a pair of recent hearings at which the independent panel that advises Congress on Medicare topics issued a similar warning. Unresolved concerns that this type of physician self-referral could lead to patient access problems and unfair competitive advantages should prompt Congress to extend the ban through the end of 2006, the Medicare Payment Advisory Commission said at the hearings, which were held by the Finance Committee and the House Ways and Means health subcommittee.

In the meantime, lawmakers should pursue Medicare reforms that would pay more for patients with more complicated diagnoses in an effort to reduce the number of cases that hospitals find unprofitable, MedPAC recommended. The change could remove any incentive specialty hospitals might have to avoid taking these patients.

The commission said more data are needed to determine if physician ownership of specialty hospitals is detrimental enough to warrant a complete outlawing of the practice.

More competition or unfair advantage?

Not all doctors see eye to eye on the specialty hospital issue. Some physicians view them as a threat to the community hospital safety net, while others consider the surgical, orthopedic and cardiac centers to be a valuable addition to the health care system.

Congress' ban effectively halted the construction of such hospitals. The move also put on hold the ability of many physicians to become more involved in a proven high-quality alternative to community hospital care, said American Medical Association Trustee William G. Plested III, MD, a thoracic and cardiovascular surgeon in Santa Monica, Calif.

"Physicians need more control over the care their patients receive," Dr. Plested said before the Ways and Means health subcommittee. "Investing in specialty hospitals enables physicians to increase productivity, improve scheduling of procedures for patients, maintain desired staffing levels, increase nurse-to-patient ratios and purchase state-of-the-art equipment -- all of which improve the quality of patient care."

Alan Pierrot, MD, an orthopedic surgeon and founder of a physician-owned surgery hospital in Fresno, Calif., said most doctors referring patients to specialty settings don't own a stake in the facilities.

"Clearly, these physicians find something very attractive about the specialty hospital model even without an investment interest," Dr. Pierrot said. "They have no motivation to engage in unfair competition."

Pursuant to policy that AMA delegates adopted during the 2004 Interim Meeting, the Association is calling for Congress to let the moratorium expire in June. Such a move would help foster healthy competition among different centers of care, the group said.

But even the small possibility of financial reward tied to patient referral patterns has allowed specialty hospitals to enjoy an uneven playing field that would not be tolerated elsewhere in the system, say some community hospital physicians.

"If a community hospital were to pay physicians to refer patients to [certain] units, they would be committing a felony," said J. Andy Sullivan, MD, an orthopedic surgeon and chief medical officer of the Oklahoma University Medical Center in Oklahoma City. "Some individuals have been in prison for just such acts."

Allowing the operation of orthopedic centers and other physician-owned specialty facilities that do not maintain emergency departments threatens patient access to necessary care in Oklahoma, Dr. Sullivan said. He reported that the OU Medical Center is struggling to keep running as the only Level I trauma center in the state after losing several neurosurgeons to specialty hospitals.

A vicious cycle ensues when specialty facilities lure away doctors with the promise of making more money under more predictable working conditions, he said. At least two critical members of the medical center's faculty are being recruited and potentially would drop from the on-call list if they decide to accept the offers. This would put more strain on the remaining physicians, he said.

Dr. Sullivan acknowledged that the prospects offered by specialty hospitals are understandably attractive to doctors.

"Regular hours with no responsibility for call are great incentives for taking a different job," he said.

Ensuring more adequate federal funding to all hospitals would eliminate the need for facilities to rely on more profitable patients to offset the costly ones and would allow community hospitals to thrive despite these competitive pressures, Dr. Plested said.

"This does not need to be an either-or scenario. Support for physician-owned specialty hospitals in no way diminishes the important role of the general hospital in the community," he said.

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Staking a claim

Of the roughly 100 specialty hospitals in the nation, 48 meet the Medicare Payment Advisory Commission's criteria for having some level of physician ownership. Here's how the size of doctors' shares breaks down:

Physician ownership
Hospitals Average Range
All specialty hospitals 48 60% 18100%
Surgical hospitals 11 73% 25100%
Orthopedic hospitals 25 67% 18100%
Heart hospitals 12 35% 2149%

Source: Medicare Payment Advisory Commission

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