The Emergence of Physician-Owned Specialty Hospitals
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《新英格兰医药杂志》
In 1972, the federal government, no longer satisfied that America's social contract with its physicians could be shaped by self-regulation alone, began to weave a complex web of laws and regulations circumscribing the business practices of doctors. As a consequence, the government, with very few exceptions, prohibits physicians from referring their Medicare and Medicaid patients to freestanding entities in which a practitioner or a member of the practitioner's immediate family has an investment interest. One of these exceptions, known as the "whole-hospital exception," has become the subject of a serious dispute, because general hospitals strongly object to the use of this exception by physicians who refer their patients to specialty hospitals in which these practitioners hold an ownership interest.
Although most of the specialty hospitals that have opened since 1990 are located in only a few states, the number of such hospitals has tripled nationally, to some 100 facilities.1 This rapid growth has raised concerns among general hospitals, which consider the specialized facilities an unfair form of competition as they currently operate that should be outlawed. Recognizing these concerns, in December 2003 Congress declared a moratorium of 18 months on the development of new specialty hospitals that are partly owned by physicians who refer their patients to them and directed two federal agencies to study the effect of these facilities on the health care system.
In this report, I discuss the emergence of specialty hospitals and why the general hospitals are so exercised by this new form of competition. On the basis of evidence and, no doubt, politics, Congress will have to decide whether to extend the moratorium when it expires in June 2005 or to adopt some other policy. Because the moratorium was a compromise struck behind closed doors by a House and Senate conference committee, many members of Congress are barely aware of the dispute — a circumstance that has prompted the general hospitals to launch a major lobbying effort to "educate" legislators. Thus far, organizations of physicians — with the exception of the American Medical Association (AMA) — have not staked out public positions in this debate. On December 7, at the AMA's semiannual meeting in Atlanta, its House of Delegates voted to oppose efforts to extend the 18-month moratorium on the development of new specialty hospitals.
The Emergence of Specialty Hospitals
The distinguishing characteristic of the specialty hospitals that have come under the scrutiny of government is that these entities are partially owned by the physicians who refer patients to them. Other specialty hospitals that do not share this characteristic — such as long-term care facilities, rehabilitation hospitals, psychiatric hospitals, cancer hospitals, and children's hospitals — were excluded from the definition of the specialty hospital spelled out in the law. This definition is similar to the one adopted by the General Accounting Office (GAO), recently renamed the Government Accountability Office, in two recent studies of specialty hospitals. The GAO defined a specialty hospital as a facility in which the diagnoses of two thirds of its Medicare patients fell into no more than two major classifications according to the diagnosis-related–group (DRG) system (e.g., diseases of the circulatory system), or those in which at least two thirds of its Medicare patients were classified into surgical DRGs.1,2 The GAO classified hospitals that met these criteria into five types of specialty hospitals: cardiac, orthopedic, surgical, women's, and other. General hospitals acknowledge that cases requiring cardiac, orthopedic, or general surgical services are among their most profitable.
The specialty hospitals are part of a large movement that is roiling relations between general hospitals and physicians throughout the country — the shifting of patients to alternative settings. The number of ambulatory-surgery centers, diagnostic testing facilities, and specialty hospitals has steadily increased during the past 15 years as physicians, taking advantage of new forms of technology, available capital, and supportive health policies, pursue new ventures outside hospitals and their control3,4,5 (Figure 1). Also propelling this shift to alternative settings is the view held by many physicians that hospitals are not responsive to physicians' demands for a larger voice in the governance of the hospitals. Other factors that have energized physicians are the ongoing consolidation of private health care insurers into ever larger enterprises and the hospital mergers that are increasing the market muscle of general hospitals in a growing number of communities.6,7
Figure 1. Increases in the Numbers of Ambulatory-Surgery Centers, Diagnostic Testing Centers, and Specialty Hospitals from 1997 to 2003.
Data are from the Centers for Medicare and Medicaid Services.
In a 2003 report requested by Congress, the GAO counted 100 specialty hospitals in 28 states and an additional 26 entities under development.1 About two thirds of the specialty hospitals in operation or under development are located in just seven states: Arizona, California, Kansas, Louisiana, Oklahoma, South Dakota, and Texas. Most of these facilities (85 percent) are in rapidly growing urban areas, although only 43 percent of those that have opened since 1990 are in such areas. Virtually all specialty hospitals — 96 percent of those built since 1990 — are in states that do not require the developers to secure a "certificate of need," which is a permit that is issued by states before a health care facility may be constructed or expanded.
The GAO also reported that more than 90 percent of the specialty hospitals that have opened since 1990 are for-profit entities, as compared with 20 percent of all general hospitals. Specialty hospitals are much less likely than general hospitals to have emergency departments (45 percent vs. 92 percent) or to treat Medicaid or uninsured patients. In 2001, specialty hospitals accounted for an estimated $871 million, or 1 percent, of Medicare's spending on inpatient services, nearly two thirds of which went to facilities that treat patients with cardiac disorders.
Financially, the inpatient margins that specialty hospitals generated from treating Medicare beneficiaries (an average of 9.4 percent) were slightly higher in 2001 than those reported by general hospitals (8.9 percent). But when revenues from all payers were taken into account, "specialty hospitals tended to outperform general hospitals," the GAO reported. Physicians who are part owners of specialty hospitals stand to gain the most financially from their stake in these facilities, because the physicians collect fees for their own professional services and share in the profits generated by the hospital fee, which traditionally went entirely to the hospital. Some physicians report that they also benefit financially through gains in their productivity. According to a recent report by the staff of the Medicare Payment Advisory Commission, based on findings derived from visits to specialty hospitals:
Physicians practicing at both types of facilities told us that they can perform about twice as many cases in a given time period at specialty hospitals as at community hospitals. Physicians mentioned operating room turnaround times at specialty hospitals of 10–20 minutes, compared with over an hour at the community hospitals where they also practice. . . . Surgeons at one specialty hospital told us about working between two operating rooms at once to increase their productivity. At one specialty hospital, we were told that physician incomes had increased by 30 percent as a result of increased productivity.8
A second recent GAO study showed that the proportion of severely ill patients who were treated was lower at 21 of 25 specialty hospitals than at general hospitals, for patients with the same diagnoses.2 In contrast, an analysis conducted by the Lewin Group for the MedCath Corporation showed that the scores for severity of illness among patients who were treated at MedCath's 13 cardiac specialty hospitals were higher than those among patients treated at comparable community hospitals.9 The main reason the two studies came to contradictory conclusions was that they defined "severity" differently.
Physicians as Investors
In most instances, it is physicians who take the initiative in developing a specialty hospital, through a joint venture with a for-profit chain of specialty hospitals, a general not-for-profit hospital, an independent entity that attracts outside — usually local — investors, or some combination of these organizations. According to a case study of MedCath by Regina E. Herzlinger, a faculty member at Harvard Business School, the company entered every new market in partnership with local cardiologists and cardiovascular surgeons. "Typically, the company was contacted by a physician group with a reputation for clinical excellence in the local area inquiring if MedCath would consider building a new heart hospital in its area. According to one physician, there were three main reasons for partnering with the company — better patient care, less hierarchy, and the opportunity to invest in the hospital."10 The GAO found that 70 percent of the existing specialty hospitals or those under development were owned to some degree by physicians. On average, the collective share of physician ownership at each specialty hospital was more than 50 percent, but the average share owned by individual practitioners was less than 2 percent.2
Even the possibility of the development of a specialty hospital in a particular market can have a strong influence on the reactions of general hospitals.11 A case in point is the city of Indianapolis, 1 of 12 cities or counties that have been studied closely over the past decade by the Center for Studying Health System Change, a nonprofit research organization supported by the Robert Wood Johnson Foundation.12,13,14 One of the center's analysts, Kelly J. Devers, described the scene in Indianapolis at a conference in Washington, D.C., on April 15, 2003:
The building boom began when specialists affiliated with one of the four major (nonprofit) hospital systems threatened to partner with MedCath. . . . These physicians had pressed the system to build a new hospital in which they could share ownership interest but were turned away. The new competitive threat posed by a heart hospital jointly owned by its cardiologists and MedCath convinced the system to build a freestanding heart hospital, and the physicians own up to a 30-percent share. Another hospital system also bent under pressure from specialists who threatened to partner with MedCath, agreeing to build a new freestanding facility in which they could own up to 50 percent. Given the increased competition from specialty heart hospitals and the MedCath threat, the two remaining large hospital systems in the market built their own heart hospitals, but without physician ownership.14
In the end, MedCath did not build a specialty hospital in Indianapolis, and most of the new inpatient beds replaced old ones — with a net addition of about 20 beds — but the financial arrangements between several of the local hospital systems and their cardiac specialists were renegotiated to the benefit of the physicians.
General hospitals have also responded in other ways to physicians who shift, or threaten to shift, their patients to a specialty hospital. The general hospitals have sought to deny admitting privileges to physicians who become part owners of a nearby specialty hospital (a practice known as economic credentialing) or have denied them promotions.15 Some courts have upheld these actions, but there are cases pending. Devers reported that general hospitals have also attempted to discourage health care plans from contracting with specialty hospitals "by threatening to terminate their contracts for all of the hospitals in the system and all of the services."14
The Role of Self-Referral
Generally, federal law prohibits physicians from referring Medicare patients for specific health care services to facilities in which they or members of their immediate family have a financial interest. This prohibition was imposed in response to studies showing that physicians with ownership interests in freestanding clinical laboratories, diagnostic-imaging centers, or physical-therapy facilities made more referrals to these entities and ordered substantially more services at higher costs than was the norm.16,17,18,19 Current law prohibits physicians from referring their patients to facilities they own in 10 different categories: clinical laboratories, physical therapy, occupational therapy, radiology or radiation therapy services and supplies, durable medical equipment, parenteral and enteral nutrients, prosthetics, home health care services, outpatient prescription drugs, and inpatient and outpatient hospital services.
An exception to this law, the whole-hospital exception, allows physicians who have an ownership interest in an entire hospital and are authorized to perform services there to refer patients to that hospital. Another exception allows physicians who hold an ownership interest in an ambulatory-surgery center to refer patients to the center, the rationale being, in part, that such facilities deliver care at lower cost than hospitals do. The GAO report explained the rationale for the whole-hospital exception and the reasons for which specialty hospitals may be in violation of it:
The premise is that any referral or decision made by a physician who has a stake in an entire hospital would produce little personal economic gain because hospitals tend to provide a diverse and large group of services. However, the Stark (named after its chief House sponsor, Representative Pete Stark, D-Calif.) law does prohibit physicians who have an ownership interest in only a hospital subdivision from referring patients to that subdivision. With respect to specialty hospitals, the concern exists that, as these hospitals are usually much smaller in size and scope than general hospitals and closer in size to hospital departments, the exception to Stark could allow physician owners to influence their hospitals' — and therefore their own — financial gain through practice patterns and referrals.1
Because most of the physicians who invest in a specialty hospital retain their admitting privileges at a general hospital, they can select which of their patients to admit to the specialty hospital and which to the general hospital. One example of how a new specialty hospital can alter referral patterns is the effect on the Oklahoma University Medical Center after the Oklahoma Heart Hospital, a 78-bed facility owned by a not-for-profit hospital system, opened nearby in 2002. As Table 1 documents, the number of inpatients admitted for cardiac care plummeted at the university hospital after 16 surgeons and cardiologists on the clinical faculty began to refer all their patients to the specialty hospital as soon as it opened. Forty nurses also moved to the specialty hospital. The medical center, which operates under a joint agreement between the state and the for-profit hospital company, Hospital Corporation of America (HCA), said that it lost $11.6 million in "cardiology operating income" between 2002 and 2004 as a consequence of the shifting of patients to the specialty hospital (Watson J, chief financial officer, Oklahoma University Medical Center: personal communication).
Table 1. Effect of a Specialty Hospital on Oklahoma University Medical Center (OUMC).
Studies Mandated by Congress
Uncertain of what policies it should chart in relation to specialty hospitals, Congress directed the Centers for Medicare and Medicaid Services (CMS) and the Medicare Payment Advisory Commission (MedPAC) to study the effect of such entities on general hospitals, the services general hospitals deliver that lose money (e.g., emergency and trauma services), and the cost and quality of the health care they provide. Although the results of these studies are not due to Congress until March 2005, MedPAC staff members gave the commission the flavor of their early findings at several recent meetings. At the first of these gatherings, on September 10, 2004, several analysts recounted their impressions, based on site visits to Austin, Texas; Manhattan and Wichita, Kansas; and Sioux Falls, South Dakota.20 One analyst, Carol Carter, reported, "The physicians we spoke with told us they set up specialty hospitals for two reasons: governance and opportunities to increase their income. . . . We repeatedly heard about the frustrations physicians had with community hospitals. Many community hospital administrators acknowledged they had been slow to react to the issues raised by their physicians. . . . The community hospitals we visited responded to the pressure of specialty hospitals by improving their own performance." At a later point, Carter said, "The first order of business in developing a specialty hospital is to secure a core set of admitters. Usually, at the hospitals we visited, the key admitters were owners."
At a MedPAC meeting on October 29, two other commission analysts, Julian Pettengill and Jeff Stensland, reported their preliminary findings on whether Medicare's prospective-payment system may be creating financial incentives that encourage the development of specialty hospitals by setting payment rates that are more profitable for some DRGs than for others. They also reported on whether profitability differs according to the severity of the illness, thus creating financial incentives for specialty hospitals to select less severely ill patients. Pettengill and Stensland also examined whether physician-owned specialty hospitals actually treat patients who are less severely ill and are thus expected to be relatively more profitable than the average patient. In brief, Pettengill told the commission:
Among the DRGs we looked at — those important to physician-owned heart, orthopedic and surgical hospitals — the evidence suggests that current payment policies create differences in relative profitability both across and within DRGs. Surgical DRGs are generally relatively more profitable while medical DRGs tend to be relatively less profitable than the overall average. Within DRGs, patients in low severity groups tend to be relatively more profitable. Conversely, those in high severity groups tend to be relatively less profitable. Consequently, hospitals appear to have financial incentives to specialize and to treat low severity rather than high severity patients. On selection, the preliminary evidence suggests that physician-owned heart, orthopedic and surgical hospitals treat a significantly more favorable selection of patients than the average community hospital or than peer hospitals that have a high concentration of patients in the same specialty but are not physician-owned.21
At a subsequent MedPAC meeting (November 17), Pettengill told the commissioners, "Compared with other hospitals, physician-owned specialty hospitals had higher costs per discharge, on average, but the differences are not statistically significant."22 At the most recent MedPAC meeting (on December 9 and 10), staff members proposed (in a "meeting brief" distributed only to commission members) policy options designed to reduce, if not eliminate, "substantial differences in national average relative profitability across and within DRGs. These differences in relative profitability give hospitals undesirable financial incentives to specialize in treating patients in relatively profitable DRGs and to select low-cost patients within DRGs." The commission will forward its policy recommendations to Congress in its March 2005 report.
A Temporary Compromise
The issues relating to specialty hospitals provoked a limited debate behind closed doors during the House and Senate conference committee that produced the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which President Bush signed into law on December 8, 2004.23 At the meeting on specialty hospitals held on September 10, 2004, Linda Fishman, who was then the health staff director of the Senate Finance Committee, said, "Many of us who participated in the conference were extremely surprised to find that the issue of specialty hospitals was one of the most contentious issues. . . . And mostly it was due to the tenacity of Billy Tauzin . . . who went mano a mano with another Louisianan, Senator John Breaux on this issue. . . . Interestingly, chairman Thomas throughout the process remained neutral and never came to a vote."24 Thomas, chairman of the powerful House Ways and Means Committee, which shares jurisdiction over Medicare with the House Energy and Commerce Committee, was one of two legislators who had requested the GAO studies of specialty hospitals.25
Breaux, who retired at the end of the 108th Congress, was the chief sponsor of a measure passed by the Senate that would have prohibited physicians from referring patients to a specialty hospital in which they had an ownership interest. He had expressed his position succinctly in a newspaper interview: "If it's unethical for doctors to refer to their own labs, why should they be able to refer to their own hospitals?"26 Tauzin, who has stepped down as chairman of the House Committee on Energy and Commerce and was to become president of the Pharmaceutical Research and Manufacturers of America on January 3, favored the approach passed by the House, which called for the CMS to study specialty hospitals.
The compromise they struck imposed the 18-month moratorium on the development of new specialty hospitals and the expansion of existing ones, which ends on June 8, 2005. The law included a grandfather clause that exempted specialty hospitals that were already in operation or under development. To be granted an exemption, a specialty hospital must seek an advisory opinion from the CMS, which was charged with determining whether a facility had completed architectural plans, secured funding, and gained the necessary approvals from the state government. As of December 14, 2004, the CMS had issued advisory opinions on 6 requests for exemption, approving 5 exemptions and denying 1; 1 request had been withdrawn, and 35 others were pending.
Future Directions for Policy
The American Hospital Association (AHA) and the Federation of American Hospitals (FAH) have begun an aggressive effort to thwart the development of more specialty hospitals.27 They combined forces for many reasons, not the least of which was that the largest member of both organizations, the HCA, attributed one third of its lower-than-expected earnings per share in its first-quarter financial report for 2003 to the increase in competition from physician-owned specialty hospitals and ambulatory-surgery centers.3 Together, the AHA and the FAH wield considerable political muscle, representing, as they do, some 5000 hospitals, many of which are among the largest employers in their communities. Their recommendation is straightforward, as William Petasnick, who chairs an AHA task force on the fragmentation of the delivery system, said in a telephone interview: "Our key message to Congress is to make the moratorium permanent."
By contrast, specialty hospitals argue that they are an innovation that provides new choices for patients and a better quality of care. Moreover, their advocates assert, specialty hospitals stimulate healthy "competition," the watchword of the Republican-controlled Congress and the Bush administration. As John Rex-Waller, the chief executive officer of National Surgical Hospitals, which operates 18 for-profit facilities in joint ventures with physicians, put it at the conference on September 10, 2004, on specialty hospitals: "I think the policy question is, should we be encouraging competition or protecting the status quo? Competition is the issue. Physician ownership I don't think has any relevance to the issue whatsoever but it's a very easy way to attack it. So legislating away the competition is a whole lot easier than competing on service and cost."28
The question is what kind of competition should be encouraged that enhances the choices available to patients and that has the potential for making care more affordable and of higher quality. Congress may address this question when the time comes to chart a new policy on specialty hospitals, but legislators certainly will not settle the issue permanently. In a society in which most goods and services are purchased in a market economy, a lasting definition of the right kind of competition in health care has proved to be elusive. Markets never go away, but finding the right prescription for health care has become more complicated, because no major stakeholder is prepared to give ground in the continuing search for consensus.29,30,31
References
Specialty hospitals: geographic location, services provided, and financial performance. Washington, D.C.: General Accounting Office, October 2003:1-41. (GAO-04-167.)
Specialty hospitals: information on national market share, physician ownership, and patients served. Washington, D.C.: General Accounting Office, April 18, 2003. (GAO-03-683R.)
Casalino LP, Devers KJ, Brewster LR. Focused factories? Physician-owned specialty facilities. Health Aff (Millwood) 2003;22:56-67.
Goldsmith J. Technology and the boundaries of the hospital: three emerging technologies. Health Aff (Millwood) 2004;23:149-156.
Winslow R. Fed-up cardiologists invest in own hospital: they'll regain autonomy but critics see a grab for more profitable care. Wall Street Journal. June 22, 1999:A1.
Robinson JC. Consolidation and the transformation of competition in health insurance. Health Aff (Millwood) 2004;23:11-24.
Cueller AE, Gertler PJ. How the expansion of hospital systems has affected consumers. Health Aff (Millwood) 2005;24:215-221.
Specialty hospital study meeting brief: prepared for September 9-10, 2004, meeting of commission. Washington, D.C.: Medicare Payment Advisory Commission, 2004.
Dobson A, Haught R. Studies on MedCath heart hospitals' case severity, cost structure, effect on community utilization rate, quality of care and community impact. Falls Church, Va.: Lewin Group, 2002.
Herzlinger RE. Medcath Corporation. Harvard Business School case 9-303-041. Cambridge, Mass.: Harvard University, 2003.
Abelson R. Generous Medicare payments spur specialty hospital boom. New York Times. October 26, 2003:A1.
Health Services Research. Longitudinal change in communities' health care systems, 1996-2001: analyses from the community tracking study site visits. Malden, Mass.: Blackwell Publishing, 2003.
Devers KJ, Brewster LR, Ginsburg PB. Specialty hospitals: focused factories or cream skimmers. Issue brief no. 62. Washington, D.C.: Center for Studying Health System Change, April 2003.
Devers KJ. Speaking at conference on "specialty hospitals: focused factories or cream skimmers?" Washington, D.C.: Center for Studying Health System Change, April 15, 2003 (transcript).
Manning J. Aurora board refuses to promote physician who has invested in heart hospital. Milwaukee Journal Sentinel. January 26, 2004. (Accessed December 16, 2004, at http://www.jsonline.com/bym/news/jan04/202607.asp.)
Mitchell JM, Scott E. Physician ownership of physical therapy services: effects on charges, utilization, profits, and service characteristics. JAMA 1992;268:2055-2059.
Hillman BJ, Olson GT, Griffith PE, et al. Physicians' utilization and charges for outpatient diagnostic imaging in a Medicare population. JAMA 1992;268:2050-2054.
Medicare: referrals to physician-owned imaging facilities warrant HCFA's scrutiny. Washington, D.C.: General Accounting Office, October 20, 1994. (GAO/HEHS-95-2.)
Sullivan J. Health care: physician self-referrals "Stark I and II." Congressional Research Service no. 97-5 EPW. Washington, D.C.: Congressional Research Service, 1996.
Public meeting. Washington, D.C.: Medicare Payment Advisory Commission, September 10, 2004 (transcript).
Public meeting. Washington, D.C.: Medicare Payment Advisory Commission, October 29, 2004 (transcript).
Public meeting. Washington, D.C.: Medicare Payment Advisory Commission, November 17, 2004 (transcript).
Iglehart JK. The new Medicare prescription-drug benefit -- a pure power play. N Engl J Med 2004;350:826-833.
Fishman LE. Conference on "specialty hospitals, ambulatory surgery centers, and general hospitals: charting a wise public policy" held September 10, 2004, Washington, D.C. Waltham, Mass.: Council on Health Care Economics and Policy, 2004 (transcript).
Thomas B, Kleczka J. Letter to William Scanlon, director, health care issues, Government Accountability Office, requesting a comprehensive review of specialty hospitals. Washington, D.C.: Government Accountability Office, July 19, 2001.
Walsh B. Breaux targets doctors' specialty hospitals: advocates contend care there is superior. New Orleans Time-Picayune. October 20, 2003:1.
AHA keeping limited service provider issue on congressional radar screen. AHA News. September 20, 2004. (Chicago: American Hospital Association.)
Rex-Waller J. Conference on "specialty hospitals, ambulatory surgery centers, and general hospitals: charting a wise public policy" held September 10, 2004, Washington, D.C. Waltham, Mass.: Council on Health Care Economics and Policy, 2004 (transcript).
Nichols LM, Ginsburg PB, Berenson RA, Christianson J, Hurley RE. Are market forces strong enough to deliver efficient health care systems? Confidence is waning. Health Aff (Millwood) 2004;23:8-21.
Butler SM. A new policy framework for health care markets. Health Aff (Millwood) 2004;23:22-24.
Enthoven AC. Market forces and efficient health care systems. Health Aff (Millwood) 2004;23:25-27.(John K. Iglehart)
Although most of the specialty hospitals that have opened since 1990 are located in only a few states, the number of such hospitals has tripled nationally, to some 100 facilities.1 This rapid growth has raised concerns among general hospitals, which consider the specialized facilities an unfair form of competition as they currently operate that should be outlawed. Recognizing these concerns, in December 2003 Congress declared a moratorium of 18 months on the development of new specialty hospitals that are partly owned by physicians who refer their patients to them and directed two federal agencies to study the effect of these facilities on the health care system.
In this report, I discuss the emergence of specialty hospitals and why the general hospitals are so exercised by this new form of competition. On the basis of evidence and, no doubt, politics, Congress will have to decide whether to extend the moratorium when it expires in June 2005 or to adopt some other policy. Because the moratorium was a compromise struck behind closed doors by a House and Senate conference committee, many members of Congress are barely aware of the dispute — a circumstance that has prompted the general hospitals to launch a major lobbying effort to "educate" legislators. Thus far, organizations of physicians — with the exception of the American Medical Association (AMA) — have not staked out public positions in this debate. On December 7, at the AMA's semiannual meeting in Atlanta, its House of Delegates voted to oppose efforts to extend the 18-month moratorium on the development of new specialty hospitals.
The Emergence of Specialty Hospitals
The distinguishing characteristic of the specialty hospitals that have come under the scrutiny of government is that these entities are partially owned by the physicians who refer patients to them. Other specialty hospitals that do not share this characteristic — such as long-term care facilities, rehabilitation hospitals, psychiatric hospitals, cancer hospitals, and children's hospitals — were excluded from the definition of the specialty hospital spelled out in the law. This definition is similar to the one adopted by the General Accounting Office (GAO), recently renamed the Government Accountability Office, in two recent studies of specialty hospitals. The GAO defined a specialty hospital as a facility in which the diagnoses of two thirds of its Medicare patients fell into no more than two major classifications according to the diagnosis-related–group (DRG) system (e.g., diseases of the circulatory system), or those in which at least two thirds of its Medicare patients were classified into surgical DRGs.1,2 The GAO classified hospitals that met these criteria into five types of specialty hospitals: cardiac, orthopedic, surgical, women's, and other. General hospitals acknowledge that cases requiring cardiac, orthopedic, or general surgical services are among their most profitable.
The specialty hospitals are part of a large movement that is roiling relations between general hospitals and physicians throughout the country — the shifting of patients to alternative settings. The number of ambulatory-surgery centers, diagnostic testing facilities, and specialty hospitals has steadily increased during the past 15 years as physicians, taking advantage of new forms of technology, available capital, and supportive health policies, pursue new ventures outside hospitals and their control3,4,5 (Figure 1). Also propelling this shift to alternative settings is the view held by many physicians that hospitals are not responsive to physicians' demands for a larger voice in the governance of the hospitals. Other factors that have energized physicians are the ongoing consolidation of private health care insurers into ever larger enterprises and the hospital mergers that are increasing the market muscle of general hospitals in a growing number of communities.6,7
Figure 1. Increases in the Numbers of Ambulatory-Surgery Centers, Diagnostic Testing Centers, and Specialty Hospitals from 1997 to 2003.
Data are from the Centers for Medicare and Medicaid Services.
In a 2003 report requested by Congress, the GAO counted 100 specialty hospitals in 28 states and an additional 26 entities under development.1 About two thirds of the specialty hospitals in operation or under development are located in just seven states: Arizona, California, Kansas, Louisiana, Oklahoma, South Dakota, and Texas. Most of these facilities (85 percent) are in rapidly growing urban areas, although only 43 percent of those that have opened since 1990 are in such areas. Virtually all specialty hospitals — 96 percent of those built since 1990 — are in states that do not require the developers to secure a "certificate of need," which is a permit that is issued by states before a health care facility may be constructed or expanded.
The GAO also reported that more than 90 percent of the specialty hospitals that have opened since 1990 are for-profit entities, as compared with 20 percent of all general hospitals. Specialty hospitals are much less likely than general hospitals to have emergency departments (45 percent vs. 92 percent) or to treat Medicaid or uninsured patients. In 2001, specialty hospitals accounted for an estimated $871 million, or 1 percent, of Medicare's spending on inpatient services, nearly two thirds of which went to facilities that treat patients with cardiac disorders.
Financially, the inpatient margins that specialty hospitals generated from treating Medicare beneficiaries (an average of 9.4 percent) were slightly higher in 2001 than those reported by general hospitals (8.9 percent). But when revenues from all payers were taken into account, "specialty hospitals tended to outperform general hospitals," the GAO reported. Physicians who are part owners of specialty hospitals stand to gain the most financially from their stake in these facilities, because the physicians collect fees for their own professional services and share in the profits generated by the hospital fee, which traditionally went entirely to the hospital. Some physicians report that they also benefit financially through gains in their productivity. According to a recent report by the staff of the Medicare Payment Advisory Commission, based on findings derived from visits to specialty hospitals:
Physicians practicing at both types of facilities told us that they can perform about twice as many cases in a given time period at specialty hospitals as at community hospitals. Physicians mentioned operating room turnaround times at specialty hospitals of 10–20 minutes, compared with over an hour at the community hospitals where they also practice. . . . Surgeons at one specialty hospital told us about working between two operating rooms at once to increase their productivity. At one specialty hospital, we were told that physician incomes had increased by 30 percent as a result of increased productivity.8
A second recent GAO study showed that the proportion of severely ill patients who were treated was lower at 21 of 25 specialty hospitals than at general hospitals, for patients with the same diagnoses.2 In contrast, an analysis conducted by the Lewin Group for the MedCath Corporation showed that the scores for severity of illness among patients who were treated at MedCath's 13 cardiac specialty hospitals were higher than those among patients treated at comparable community hospitals.9 The main reason the two studies came to contradictory conclusions was that they defined "severity" differently.
Physicians as Investors
In most instances, it is physicians who take the initiative in developing a specialty hospital, through a joint venture with a for-profit chain of specialty hospitals, a general not-for-profit hospital, an independent entity that attracts outside — usually local — investors, or some combination of these organizations. According to a case study of MedCath by Regina E. Herzlinger, a faculty member at Harvard Business School, the company entered every new market in partnership with local cardiologists and cardiovascular surgeons. "Typically, the company was contacted by a physician group with a reputation for clinical excellence in the local area inquiring if MedCath would consider building a new heart hospital in its area. According to one physician, there were three main reasons for partnering with the company — better patient care, less hierarchy, and the opportunity to invest in the hospital."10 The GAO found that 70 percent of the existing specialty hospitals or those under development were owned to some degree by physicians. On average, the collective share of physician ownership at each specialty hospital was more than 50 percent, but the average share owned by individual practitioners was less than 2 percent.2
Even the possibility of the development of a specialty hospital in a particular market can have a strong influence on the reactions of general hospitals.11 A case in point is the city of Indianapolis, 1 of 12 cities or counties that have been studied closely over the past decade by the Center for Studying Health System Change, a nonprofit research organization supported by the Robert Wood Johnson Foundation.12,13,14 One of the center's analysts, Kelly J. Devers, described the scene in Indianapolis at a conference in Washington, D.C., on April 15, 2003:
The building boom began when specialists affiliated with one of the four major (nonprofit) hospital systems threatened to partner with MedCath. . . . These physicians had pressed the system to build a new hospital in which they could share ownership interest but were turned away. The new competitive threat posed by a heart hospital jointly owned by its cardiologists and MedCath convinced the system to build a freestanding heart hospital, and the physicians own up to a 30-percent share. Another hospital system also bent under pressure from specialists who threatened to partner with MedCath, agreeing to build a new freestanding facility in which they could own up to 50 percent. Given the increased competition from specialty heart hospitals and the MedCath threat, the two remaining large hospital systems in the market built their own heart hospitals, but without physician ownership.14
In the end, MedCath did not build a specialty hospital in Indianapolis, and most of the new inpatient beds replaced old ones — with a net addition of about 20 beds — but the financial arrangements between several of the local hospital systems and their cardiac specialists were renegotiated to the benefit of the physicians.
General hospitals have also responded in other ways to physicians who shift, or threaten to shift, their patients to a specialty hospital. The general hospitals have sought to deny admitting privileges to physicians who become part owners of a nearby specialty hospital (a practice known as economic credentialing) or have denied them promotions.15 Some courts have upheld these actions, but there are cases pending. Devers reported that general hospitals have also attempted to discourage health care plans from contracting with specialty hospitals "by threatening to terminate their contracts for all of the hospitals in the system and all of the services."14
The Role of Self-Referral
Generally, federal law prohibits physicians from referring Medicare patients for specific health care services to facilities in which they or members of their immediate family have a financial interest. This prohibition was imposed in response to studies showing that physicians with ownership interests in freestanding clinical laboratories, diagnostic-imaging centers, or physical-therapy facilities made more referrals to these entities and ordered substantially more services at higher costs than was the norm.16,17,18,19 Current law prohibits physicians from referring their patients to facilities they own in 10 different categories: clinical laboratories, physical therapy, occupational therapy, radiology or radiation therapy services and supplies, durable medical equipment, parenteral and enteral nutrients, prosthetics, home health care services, outpatient prescription drugs, and inpatient and outpatient hospital services.
An exception to this law, the whole-hospital exception, allows physicians who have an ownership interest in an entire hospital and are authorized to perform services there to refer patients to that hospital. Another exception allows physicians who hold an ownership interest in an ambulatory-surgery center to refer patients to the center, the rationale being, in part, that such facilities deliver care at lower cost than hospitals do. The GAO report explained the rationale for the whole-hospital exception and the reasons for which specialty hospitals may be in violation of it:
The premise is that any referral or decision made by a physician who has a stake in an entire hospital would produce little personal economic gain because hospitals tend to provide a diverse and large group of services. However, the Stark (named after its chief House sponsor, Representative Pete Stark, D-Calif.) law does prohibit physicians who have an ownership interest in only a hospital subdivision from referring patients to that subdivision. With respect to specialty hospitals, the concern exists that, as these hospitals are usually much smaller in size and scope than general hospitals and closer in size to hospital departments, the exception to Stark could allow physician owners to influence their hospitals' — and therefore their own — financial gain through practice patterns and referrals.1
Because most of the physicians who invest in a specialty hospital retain their admitting privileges at a general hospital, they can select which of their patients to admit to the specialty hospital and which to the general hospital. One example of how a new specialty hospital can alter referral patterns is the effect on the Oklahoma University Medical Center after the Oklahoma Heart Hospital, a 78-bed facility owned by a not-for-profit hospital system, opened nearby in 2002. As Table 1 documents, the number of inpatients admitted for cardiac care plummeted at the university hospital after 16 surgeons and cardiologists on the clinical faculty began to refer all their patients to the specialty hospital as soon as it opened. Forty nurses also moved to the specialty hospital. The medical center, which operates under a joint agreement between the state and the for-profit hospital company, Hospital Corporation of America (HCA), said that it lost $11.6 million in "cardiology operating income" between 2002 and 2004 as a consequence of the shifting of patients to the specialty hospital (Watson J, chief financial officer, Oklahoma University Medical Center: personal communication).
Table 1. Effect of a Specialty Hospital on Oklahoma University Medical Center (OUMC).
Studies Mandated by Congress
Uncertain of what policies it should chart in relation to specialty hospitals, Congress directed the Centers for Medicare and Medicaid Services (CMS) and the Medicare Payment Advisory Commission (MedPAC) to study the effect of such entities on general hospitals, the services general hospitals deliver that lose money (e.g., emergency and trauma services), and the cost and quality of the health care they provide. Although the results of these studies are not due to Congress until March 2005, MedPAC staff members gave the commission the flavor of their early findings at several recent meetings. At the first of these gatherings, on September 10, 2004, several analysts recounted their impressions, based on site visits to Austin, Texas; Manhattan and Wichita, Kansas; and Sioux Falls, South Dakota.20 One analyst, Carol Carter, reported, "The physicians we spoke with told us they set up specialty hospitals for two reasons: governance and opportunities to increase their income. . . . We repeatedly heard about the frustrations physicians had with community hospitals. Many community hospital administrators acknowledged they had been slow to react to the issues raised by their physicians. . . . The community hospitals we visited responded to the pressure of specialty hospitals by improving their own performance." At a later point, Carter said, "The first order of business in developing a specialty hospital is to secure a core set of admitters. Usually, at the hospitals we visited, the key admitters were owners."
At a MedPAC meeting on October 29, two other commission analysts, Julian Pettengill and Jeff Stensland, reported their preliminary findings on whether Medicare's prospective-payment system may be creating financial incentives that encourage the development of specialty hospitals by setting payment rates that are more profitable for some DRGs than for others. They also reported on whether profitability differs according to the severity of the illness, thus creating financial incentives for specialty hospitals to select less severely ill patients. Pettengill and Stensland also examined whether physician-owned specialty hospitals actually treat patients who are less severely ill and are thus expected to be relatively more profitable than the average patient. In brief, Pettengill told the commission:
Among the DRGs we looked at — those important to physician-owned heart, orthopedic and surgical hospitals — the evidence suggests that current payment policies create differences in relative profitability both across and within DRGs. Surgical DRGs are generally relatively more profitable while medical DRGs tend to be relatively less profitable than the overall average. Within DRGs, patients in low severity groups tend to be relatively more profitable. Conversely, those in high severity groups tend to be relatively less profitable. Consequently, hospitals appear to have financial incentives to specialize and to treat low severity rather than high severity patients. On selection, the preliminary evidence suggests that physician-owned heart, orthopedic and surgical hospitals treat a significantly more favorable selection of patients than the average community hospital or than peer hospitals that have a high concentration of patients in the same specialty but are not physician-owned.21
At a subsequent MedPAC meeting (November 17), Pettengill told the commissioners, "Compared with other hospitals, physician-owned specialty hospitals had higher costs per discharge, on average, but the differences are not statistically significant."22 At the most recent MedPAC meeting (on December 9 and 10), staff members proposed (in a "meeting brief" distributed only to commission members) policy options designed to reduce, if not eliminate, "substantial differences in national average relative profitability across and within DRGs. These differences in relative profitability give hospitals undesirable financial incentives to specialize in treating patients in relatively profitable DRGs and to select low-cost patients within DRGs." The commission will forward its policy recommendations to Congress in its March 2005 report.
A Temporary Compromise
The issues relating to specialty hospitals provoked a limited debate behind closed doors during the House and Senate conference committee that produced the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which President Bush signed into law on December 8, 2004.23 At the meeting on specialty hospitals held on September 10, 2004, Linda Fishman, who was then the health staff director of the Senate Finance Committee, said, "Many of us who participated in the conference were extremely surprised to find that the issue of specialty hospitals was one of the most contentious issues. . . . And mostly it was due to the tenacity of Billy Tauzin . . . who went mano a mano with another Louisianan, Senator John Breaux on this issue. . . . Interestingly, chairman Thomas throughout the process remained neutral and never came to a vote."24 Thomas, chairman of the powerful House Ways and Means Committee, which shares jurisdiction over Medicare with the House Energy and Commerce Committee, was one of two legislators who had requested the GAO studies of specialty hospitals.25
Breaux, who retired at the end of the 108th Congress, was the chief sponsor of a measure passed by the Senate that would have prohibited physicians from referring patients to a specialty hospital in which they had an ownership interest. He had expressed his position succinctly in a newspaper interview: "If it's unethical for doctors to refer to their own labs, why should they be able to refer to their own hospitals?"26 Tauzin, who has stepped down as chairman of the House Committee on Energy and Commerce and was to become president of the Pharmaceutical Research and Manufacturers of America on January 3, favored the approach passed by the House, which called for the CMS to study specialty hospitals.
The compromise they struck imposed the 18-month moratorium on the development of new specialty hospitals and the expansion of existing ones, which ends on June 8, 2005. The law included a grandfather clause that exempted specialty hospitals that were already in operation or under development. To be granted an exemption, a specialty hospital must seek an advisory opinion from the CMS, which was charged with determining whether a facility had completed architectural plans, secured funding, and gained the necessary approvals from the state government. As of December 14, 2004, the CMS had issued advisory opinions on 6 requests for exemption, approving 5 exemptions and denying 1; 1 request had been withdrawn, and 35 others were pending.
Future Directions for Policy
The American Hospital Association (AHA) and the Federation of American Hospitals (FAH) have begun an aggressive effort to thwart the development of more specialty hospitals.27 They combined forces for many reasons, not the least of which was that the largest member of both organizations, the HCA, attributed one third of its lower-than-expected earnings per share in its first-quarter financial report for 2003 to the increase in competition from physician-owned specialty hospitals and ambulatory-surgery centers.3 Together, the AHA and the FAH wield considerable political muscle, representing, as they do, some 5000 hospitals, many of which are among the largest employers in their communities. Their recommendation is straightforward, as William Petasnick, who chairs an AHA task force on the fragmentation of the delivery system, said in a telephone interview: "Our key message to Congress is to make the moratorium permanent."
By contrast, specialty hospitals argue that they are an innovation that provides new choices for patients and a better quality of care. Moreover, their advocates assert, specialty hospitals stimulate healthy "competition," the watchword of the Republican-controlled Congress and the Bush administration. As John Rex-Waller, the chief executive officer of National Surgical Hospitals, which operates 18 for-profit facilities in joint ventures with physicians, put it at the conference on September 10, 2004, on specialty hospitals: "I think the policy question is, should we be encouraging competition or protecting the status quo? Competition is the issue. Physician ownership I don't think has any relevance to the issue whatsoever but it's a very easy way to attack it. So legislating away the competition is a whole lot easier than competing on service and cost."28
The question is what kind of competition should be encouraged that enhances the choices available to patients and that has the potential for making care more affordable and of higher quality. Congress may address this question when the time comes to chart a new policy on specialty hospitals, but legislators certainly will not settle the issue permanently. In a society in which most goods and services are purchased in a market economy, a lasting definition of the right kind of competition in health care has proved to be elusive. Markets never go away, but finding the right prescription for health care has become more complicated, because no major stakeholder is prepared to give ground in the continuing search for consensus.29,30,31
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