Specialty hospital advances despite stalled Medicare OKs

A national moratorium put its construction on hold, but a California facility is among a few banking on CMS approval by the time it's built.

By Katherine Vogt — Posted Oct. 3, 2005

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Construction could begin by the end of this month on a new surgical hospital in Southern California, marking one example of how physicians are moving forward with plans to build specialty hospitals despite lingering uncertainty about how regulators view such facilities.

The California Heart and Surgical Hospital in Loma Linda passed a major hurdle on Sept. 6 when the city council there approved its plans to build a $60 million, 28-bed multispecialty surgical hospital despite vocal criticism from community hospitals in the area.

AMA president-elect William G. Plested III, MD, spoke at an earlier city council meeting in favor of the facility; the AMA's House of Delegates put into policy support for physician-owned specialty hospitals.

The approval cleared the way for construction to begin this fall.

But another major regulatory test could be yet to come when the hospital, led by 36 physician investors, eventually applies for licensing from federal regulators. Though a congressionally imposed 18-month moratorium on physician referrals to new specialty hospitals expired in June, the Centers for Medicare & Medicaid Services has left uncertain its position about such facilities.

CMS has said it will take until January 2006 to assess whether the hospitals meet Medicare requirements. In the meantime, the agency will not approve applications from any new specialty hospitals for participation in the program.

For Allen Gustafson, MD, an orthopedic surgeon spearheading the California Heart and Surgical Hospital, the regulatory ambiguity hasn't been worrisome enough to prevent him from trying to advance a project that has been on his mind for several years.

"We had raised money, we had plans and we were well along the road by the time the moratorium hit," said Dr. Gustafson. "We're moving ahead. We don't want to stop progress not knowing what the future holds."

Dr. Gustafson is hopeful that by the time the hospital needs a license -- it could open to patients by late 2006 or early 2007 -- CMS will have decided that such facilities are compliant with laws and rules and will grant it approval. If not, he said the facility may qualify for being "grandfathered in" because it was under development before the moratorium was enacted as part of the 2003 Medicare reform law.

"We've gone this far; we're not going to stop," he said.

There are about 100 specialty hospitals operating in the United States. But it's unclear whether other specialty hospital projects under development are making strides toward opening, or if they have been shelved until the regulatory questions are settled.

James Grant, president of the San Diego-based American Surgical Hospital Assn., said such statistics aren't available. However, anecdotal evidence suggests that at least a handful of projects are moving forward.

"We are seeing facilities like the Loma Linda facility going forward because I think the concept is too powerful and advantageous to patient care not to go forward," he said.

Grant said there has been a slight uptick in activity since the moratorium expired in June. However, he said proposed legislation to make the moratorium permanent has been seen "as another potential negative [and] we're not seeing any rapid growth."

He expects CMS to make a decision "in a timely manner," helping to resolve lingering questions.

Much of the opposition to specialty hospitals has come from community hospitals and their lobbying associations. They claim that specialty hospitals siphon away the most lucrative services and the highest-paying patients, leaving less profitable care to the already squeezed local community hospitals.

Loma Linda University Medical Center said the council's decision to approve the project could "harm the regionwide health care safety net."

The medical center said in a written statement after the decision that it was still considering other strategies for opposing the new facility.

But supporters say specialty hospitals can improve health care because they focus on a few lines of service, which can lead to better efficiencies and quality. Also, they say, specialty hospitals help keep the health care market competitive.

Dr. Plested, a thoracic and cardiovascular surgeon from Santa Monica, Calif., appeared before the Loma Linda city council in his role as AMA president-elect to express the organization's support for specialty hospitals. He is not an investor in the Loma Linda facility.

The American Medical Association "supports competition in health care, and for that reason we support physician-owned specialty hospitals," Dr. Plested said.

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