SPECIALTY HOSPITAL UPDATE

In December 2003, Congress called a halt to one of the fastest growing trends the health

care industry has seen in years. As part of the Medicare Prescription Drug and Modernization

Act, the federal government imposed an 18-month moratorium on physicians’ referral of patients

to hospitals, not under planning before November 18, 2003, and where the referring physician

has an ownership interest. The moratorium applies only to certain physician-owned hospitals;

referrals to hospitals owned by others are not subject to the moratorium.

“Specialty” hospitals are not new. For years, communities have been accustomed to

hospitals dedicated to women’s and children’s health issues, as well as to the needs of cancer and

psychiatric patients. Women’s Hospital in Baton Rouge is a “specialty” hospital. So why all of

the fuss now? It’s because physicians have joined together as investors to open small hospitals

to treat patients they refer. This drew the ire of full-service hospitals which claim that high

reimbursement services are drained by physician-owned specialty hospitals. These high-end

services are necessary, full-service hospitals argue, to balance such money losers as emergency

departments and caring for the uninsured and indigent,.

According to the General Accounting Office (GAO), the federal investigating agency,

Louisiana has been a hot bed of activity in specialty hospital development. A key reason for this

is that Louisiana is one of a number of states where new hospitals are not required to obtain

certificates of need which justify the necessity for constructing new facilities. The GAO

estimates that there are 100 specialty hospitals and 5000 full-service hospitals nation-wide. At

least 15 specialty hospitals are in operation or under construction in Louisiana.

Since 1999 two specialty hospitals have opened in Baton Rouge: Vista Surgical Hospital

and Surgical Specialty Centre. The NeuroMedical Center and a surgical hospital in North Baton

Rouge are expected to open in 2004 or 2005. All have physician investors; none has an

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emergency department. Advocates of specialty hospitals argue that focusing care and treatment

on a single specialty or limited number of specialties results in higher quality of care and

efficiency in operations, and physicians have greater control over scheduling than they do in a

full-service hospital. Surgical specialty hospitals cite lower rates of infection. Some anecdotal

evidence suggests that the efficiencies lower costs. Physician investors also point out that these

hospitals have been created in compliance with all state and federal laws.

What is a Hospital?

State law regulates hospitals and other types of health care facilities, such as ambulatory

surgery centers and nursing homes. In Louisiana, the Department of Health and Hospitals

oversees hospitals under the Hospital Licensing Standards. There is no separate definition for a

specialty hospital. Hospitals may be full-service or focus care in a special area but must have at

least ten beds. According to the Standards, hospitals must provide directly or under arrangement

the following services: organization and general services; nursing services; pharmaceutical

services; radiological services; laboratory services; food and dietetic services; medical record

services; quality assessment and improvement; physical environment; infection control and

respiratory care services.

Hospitals may provide the following additional services: surgical services; anesthesia

services; nuclear medicine services; outpatient services; rehabilitation services; psychiatric

services; obstetrical and newborn services; pediatric services and emergency services.

There is no requirement under the Standards for a hospital to treat the uninsured or

indigent, although laws do prohibit discrimination. Some private and not-for-profit hospitals

choose not to have an emergency department for reasons related to such issues as cost, staffing

and reimbursement. The GAO reports that 42% of specialty hospitals offer emergency care,

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compared to 92% of general hospitals. The emergency department is the most likely area of a

hospital to treat the uninsured and indigent, many of whom seek primary care in emergency

rooms. State and federal laws prohibit discrimination based upon the ability to pay, and there are

legal requirements that anyone presenting to an emergency department must be medically

screened and stabilized without regard to ability to pay. Hospitals without emergency rooms

eliminate one of their biggest potential money losers.

Other hospitals serve as safety nets for the uninsured and indigent either by law or their

mission and cannot avoid treating emergencies. This would include Louisiana’s unique charity

hospital system. Certain other hospitals are established under the law as Hospital Service

Districts. These not-for-profit, tax-exempt hospitals are created by law to serve the citizens of a

district defined by certain geographic boundaries. The Hospital Service District law provides

that the mission of these hospitals is to serve the health care needs of its citizens. Thus, these

charity and community hospitals are constrained to provide emergency room care to their

constituents. They argue that to survive they cannot lose their market share of high-end services,

given their obligation to provide the low-end services.

In 1983, Medicare changed the reimbursement to hospitals from simply paying costs to

paying a fixed set of rates for medical treatment and procedures. Reimbursement is generally

higher for surgical and other high-tech medical procedures. General hospitals argue they cannot

afford to lose specialties with higher reimbursement.

Times have been tough for physicians too.

In the last two decades, reimbursement to physicians has been reduced, regulations have

increased, malpractice premiums have soared, and the traditional relationships between

physicians and hospitals have been drastically altered. Numerous laws and regulations target

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hospital incentives to physicians, claiming such conduct is “suspect.” Virtually any activity that

could influence where a physician refers a patient is within the sights of government regulators.

The federal government and many states prohibit physicians from referring patients to entities

with which the physician, or an immediate family member, has a financial or ownership interest.

The federal law, commonly referred to as the “Stark” law, has certain exceptions, including

investments in large publicly traded companies, ambulatory surgery centers (ASC) and hospitals

as a whole. The theory of the “whole hospital” exception is that there is less risk that profit is the

motive for the referral of a patient where the physician’s investment bears the financial and

regulatory burdens of an entire hospital. In addition, the Stark law acknowledges that profit

motives are lessened or eliminated when physicians perform the services on the patients they

refer to the ASC or hospital in which they have an ownership interest.

The American Medical Associations’ Council on Ethical and Judicial Affairs weighed in

on the self-referral and conflict of interest issue. The Council stated that many potential

advantages are associated with physician referrals to entities in which the physician has an

investment interest, such as better access, quality control and decreased costs. The AMA sees

nothing unethical in physician referrals to physician-owned entities where the physician provides

services.

Full-service hospitals fight back.

Last year, full-service hospitals mounted a campaign in Congress and state legislatures

seeking to prohibit physician-owned hospitals. In the 2003 Louisiana legislative session several

bills were filed to prohibit physician-owned hospitals. None passed and most didn’t make it out

of various committees.

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 Some estimate that the American Hospital Association out-spent the American Surgical

Hospital Association 100 to 1 to get the moratorium attached to the Medicare bill. What

Congress did was to amend the Stark law to define “specialty hospital” and to place the 18-

month moratorium on physician referrals to specialty hospitals in which they have an ownership

interest. A specialty hospital is now defined in the Stark law as a hospital that is primarily or

exclusively engaged in the care and treatment of patients with a cardiac condition, orthopedic

condition, a condition requiring a surgical procedure and “any other specialized category of

services that the Secretary of Health and Human Services designates.” Hospitals under

development as of November 18, 2003 are exempt from the moratorium. After the 18 months,

Congress must decide whether further action is warranted. Without additional legislation, the

moratorium will expire in May 2005.

Hospitals also have begun to use a more direct tactic, denying or revoking the medical

staff privileges to physicians who are in competition with the hospital. Physicians protest this

tactic that they call “economic credentialing.” But in 2001, the South Dakota Supreme Court

upheld a lower court ruling permitting a general hospital to deny privileges to doctors who were

also involved with a local specialty hospital. In Arkansas, six cardiologists who are investors in

a heart hospital filed suit against Baptist Health for terminating their medical staff privileges.

The hospital argues that it has a responsibility to protect the hospital and to give the public

access to a broad range of services; the physicians’ competition threatens that. This may be the

beginning of a trend. In January, OhioHealth terminated 17 physicians who invested in a nearby

surgical hospital, and Eastern Idaho Regional Medical Center terminated the privileges of five

physicians who had invested in a multi-surgery facility.

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 In addition to the lawsuit, the Arkansas physicians have testified before the Federal Trade

Commission arguing that the hospitals’ actions are anti-competitive and violate fraud and abuse

laws.

What does the future hold?

Just who will win this stand-off is anyone’s guess. The moratorium was designed to give

federal officials time to study the issues. Congress directed the Medicare Payment Advisory

Commission (Med Pac), the GAO and HHS to report to Congress before the moratorium expires.

Policy experts expect that the study will focus on costs, reimbursement, referral patterns

and quality issues. Two prior GAO reports did not support physician over-utilization in

physician-owned ASCs or hospitals. Future legislation may require physician-owned hospitals

to provide emergency services and treat a minimum number of indigent, Medicaid and Medicare

patients. Congress may modify reimbursement so that payments are not so heavily skewed

toward surgery and high-tech procedures.

However this particular debate ends, there will continue to be economic challenges that

may force physicians and hospitals to take opposite sides on health care issues.

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