New specialty hospitals on hold for now

Steps taken by CMS could stave off proposed congressional action to extend the soon-to-end moratorium on self-referrals.

By Joel B. Finkelstein — Posted June 6, 2005

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Washington -- Just as specialty hospitals were set to clear one hurdle -- a soon-to-expire 18-month moratorium on "self-referrals" -- new obstacles popped up in the form of legislative and administrative actions.

Federal officials recently announced their plan to alter the way Medicare pays for care at specialty hospitals in an effort to correct perceived inequities benefiting these facilities over general hospitals.

In addition, the Centers for Medicare & Medicaid Services will take until January 2006 to assess whether the hospitals meet the Medicare requirement that they provide primarily inpatient care, the agency's director, Mark McClellan, MD, PhD, announced at a recent hearing before the House Energy and Commerce health subcommittee. Between now and then, CMS will not approve applications from any new specialty hospitals for participation in the program.

There are currently about 100 specialty hospitals, most of which provide either cardiac, surgical or orthopedic services.

The moratorium on physician referrals to specialty hospitals in which they have an ownership interest has slowed down the creation of new facilities, said Eric Zimmerman, a partner with the international law firm McDermott, Will and Emery, who specializes in Medicare law.

That prohibition, passed as part of the 2003 Medicare reform law, ends June 8. That deadline has prompted opponents of the hospitals to call for extending the moratorium.

The day before the May 12 House hearing, Sens. Chuck Grassley (R, Iowa) and Max Baucus (D, Mont.), respectively the chair and ranking member of the Senate Finance Committee, introduced a bill that would make the moratorium permanent. The measure also would limit the total number of shares that physicians could own in specialty hospitals that existed before December 2003. These facilities were exempt from the original referral ban.

Calls to refine payment

CMS' plans and the moratorium legislation are driven by the perception that specialty hospitals benefit from a healthier patient base than general hospitals. A CMS study released at the House hearing and a recent report by the Medicare Payment Advisory Commission support that contention. Both found that diagnosis-related payments favored specialty hospitals and likely need to be refined to account for the sicker patients being treated at general hospitals.

Dr. McClellan said CMS would readjust Medicare's hospital payment structure to better reflect severity of illness and the estimated cost of providing care. The agency also plans to develop a system that will weigh payments to hospitals by taking into account particularly high-cost patients.

Findings similar to those by CMS and MedPAC from previous studies have prompted general hospitals to oppose specialty hospitals as unfair competition. They argue that physician-owners "cherry-pick" the best patients for referral to their own hospitals.

"The existence of specialty hospitals is not the problem. Instead, it is the physician ownership and self-referral to these facilities that creates an uneven playing field and directly harms full-service community hospitals," John Hornbeck, president of the Methodist Healthcare System, in San Antonio, testified at the hearing.

"These facilities limit their care to just one type of high-margin service ... while avoiding essential but unprofitable community-based services, such as emergency departments and burn units," he added.

The CMS study found that doctors who owned a stake in specialty hospitals were more likely to refer Medicare patients to the facilities. While they also were likely to refer more severely ill patients to the community hospital, in that way their referral pattern was no different from other physicians, who also sent sicker patients to the general hospitals.

Good for competition, some say

The agency's findings and the move to review the hospital payment structure could knock some of the steam out of legislative efforts to extend the moratorium on the specialty facilities, experts said.

Rep. Joe Barton (R, Texas), chair of the House Energy and Commerce Committee, indicated that he did not see the need for new legislation extending the ban.

"CMS did not recommend that the moratorium on building or expanding specialty hospitals be extended," he said in a statement before the subcommittee. Any measure to extend the prohibition typically would need to pass through his committee before being brought to the floor for a House vote.

Proponents of allowing the moratorium to sunset argue that more specialty hospitals could result in improved patient care.

"The rise of specialty hospitals will press traditional community hospitals to become leaner, faster and better," Barton said. "This means more patients get well quicker."

The American Medical Association called for an end to the moratorium on physician referrals, arguing that specialty hospitals are good drivers of competition.

"The AMA strongly supports and encourages competition between and among health facilities as a means of promoting the delivery of high-quality, cost-effective health care. Consistent with medical ethics, we support physician ownership of health facilities, and referrals by physician owners, if they directly provide care or services at the facility," according to written testimony submitted for the House subcommittee hearing.

The CMS and MedPAC reports found that specialty hospitals do provide high-quality care. For example, cardiac hospitals had complication and mortality rates that were lower than community hospitals when adjusted for disease severity, according to the CMS report, based on data from 11 specialty facilities.

Patient satisfaction also was high at specialty hospitals, due in part to their focus on one condition and a better ability to predictably schedule patients for procedures.

Physicians also like the predictability and control specialty hospitals afford them. Those benefits are likely to mitigate any impact that CMS' actions have on physician interest in the hospitals, said lawyer Zimmerman of McDermott, Will and Emery.

"I'm not sure to what extent tinkering with the reimbursement will curtail the growth of these hospitals. There are plenty of reasons besides making a profit for physicians to want to establish them," he said.

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Reimbursement changes

Based on recommendations made by the Medicare Payment Advisory Commission in March, the Centers for Medicare & Medicaid Services has decided to use its administrative authority to make several changes in the way it reimburses physician-owned specialty hospitals. CMS plans to:

  • Refine payment rates to hospitals by taking into account differences in severity of illness and other influences on the cost of providing care.
  • Reform payment rates for ambulatory surgery centers to reduce differences that favor inpatient facilities, including specialty hospitals, over the centers.
  • Apply greater scrutiny to specialty hospitals to check whether they meet all the criteria of an inpatient hospital.
  • Review internal procedures designed to ensure that approved specialty hospitals meet all requirements for Medicare participation.

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