Moratorium for doctor-owned specialty hospitals now over

Washington -- The development of new doctor-owned specialty hospitals, an opportunity that has been largely closed off to physician investors for nearly three years, has once again received the go-ahead from the federal government.

The latest major administrative barrier preventing new cardiac, orthopedic and surgical hospitals from opening their doors to Medicare patients expired at the beginning of this month, when the Centers for Medicare & Medicaid Services released a congressionally mandated strategic plan for the future of the facilities. In doing so, CMS ended a phase during which Congress had prohibited the agency from issuing Medicare provider numbers to new specialty hospitals whose owners also would refer beneficiaries to the facilities.

New specialty hospital development has been significantly limited since December 2003, when President Bush enacted a Medicare reform law that temporarily prohibited physician investors from referring Medicare patients to facilities in which they had a financial interest. When that original 18-month moratorium expired, CMS and Congress kept specialty hospitals' Medicare applications on ice for more than a year while the Bush administration continued to craft its strategic plan and study whether these facilities were acting appropriately within the program.

The American Medical Association and the American Surgical Hospital Assn., a group that represents specialty hospitals, praised the decision to allow this latest obstacle to the facilities to disappear.

"This is good news for patients, because it affords them choices in where they can get treatment," said AMA President William G. Plested III, MD, a thoracic and cardiovascular surgeon. "It's good news for physicians, because it has now been recognized that physician-owned specialty hospitals are a legitimate part of the health care delivery system."

Specialty hospital proponents said the green light for physicians to form and invest in such facilities was the fruit of a number of investigations that demonstrated the important role they play in delivering high-quality patient care. Doctors who had put their own investment dollars into the hospitals before the first moratorium said both they and their patients had benefited greatly from the quality and innovation that comes from creating facilities that become "focused factories" of care.

Although community hospitals have maintained that allowing referring doctors to own a piece of the specialty hospital pie puts profits before patient care, physician investors see the situation differently.

"When these facilities started years ago, it was never about trying to make a whole bunch of money off of them; it was about physician dissatisfaction with the status quo," said R. Blake Curd, MD, an orthopedic surgeon in Sioux Falls, S.D., and a member of ASHA's board. "It was about trying to get more patients taken care of in a manner directed by the physician in a shorter period of time."

More federal scrutiny

The release of the CMS report means that Medicare has opened the door for new specialty hospitals. But the government will be paying closer attention than ever before to how they behave once they get in.

"Specialty hospitals often achieve high levels of service, but especially under current payment methods, there have been questions about whether they focus on profitable patients rather than quality care," said CMS Administrator Mark McClellan, MD, PhD.

To address these concerns, CMS will require specialty hospitals -- and eventually all types of hospitals -- to publicize any investment and compensation arrangements they have with physicians or risk fines of up to $10,000 per day.

Based on such disclosures, CMS and the Office of Inspector General might decide that some referring doctors are reaping disproportionately high returns from their investments and are therefore not eligible for exceptions to federal laws against physician self-referral, Dr. McClellan said.

In an effort to demonstrate that CMS is serious about pursuing offenders, he announced that the agency has identified six hospitals that billed Medicare in violation of the congressional moratorium and is working to recoup more than $10 million in federal payments.

The agency also is taking steps to level the financial playing field between specialty hospitals and community facilities. By adjusting Medicare reimbursements to reflect hospitals' costs and severity of patients' illnesses more accurately, CMS hopes to reduce the financial incentives that some specialty facilities might have to focus on healthier, more profitable patients.

In addition, by transitioning to a system in which ambulatory surgery centers receive higher rates than they do now for certain procedures, Medicare might discourage more ASCs from converting to specialty hospitals in a bid to receive better pay.

The fight's not over

Despite the new disclosure requirements and payment adjustments, some experts have detected a significant amount of pent-up interest in developing new specialty hospitals.

"Clearly you still have some disincentives in the form of the steps CMS has taken, but it's questionable whether those are actually going to be ample discouragement against setting up specialty hospitals," said Eric Zimmerman, an attorney with McDermott Will & Emery in Washington, D.C.

Groups representing community facilities, including the American Hospital Assn. and the Federation of American Hospitals, show no signs of letting up pressure on lawmakers to legislate a more permanent barrier to what they consider inappropriate investment relationships.

Senate Finance Committee Chair Charles Grassley (R, Iowa) and lead Democrat Max Baucus (Mont.) said after the CMS report's release that a repeal of the federal exceptions that allow specialty hospitals to avoid physician self-referral sanctions is needed to bolster the disclosure and payment changes that the agency has proposed.

"These steps alone won't unravel the web of conflicts that have been created by these limited-service hospitals, which cherry-pick patients based on dollars rather than diagnosis and put the well-being of both individual patients and the health care delivery system at risk," Grassley said.

But Drs. Plested and Curd said specialty hospitals and the doctors who own them have consistently proven their worth amid such criticism and would continue to prevail in the public debate.

"This has certainly been studied and studied and studied, and all of the complaints of the people who are opposed to specialty hospitals have been investigated and have been found to be wanting," Dr. Plested said.