Medicare Compliance & Reimbursement

Legislators agree with community hospitals; self-referral abuse is wrecking the system.

A new study backs community hospitals' objections to controversial patient referrals to physician-owned specialty hospitals.

In a recent article published in Health Affairs, the  authors support community hospitals' complaints that the growth in the number of limited-service specialty hospitals in recent years has diverted profitable cases away from their operating rooms and limited their ability to absorb the costs of uninsured or money-losing patients.

Arizona cardiologists who are part-owners of cardiac specialty hospitals were more likely than physicians with no ownership stake to treat low-acuity, high-profit cases in their own facilities--and to refer the more complex, lower-profit cases to community hospitals, according to a study published in the Oct. 25 Health Affairs.

Status Quo Supporters Cite Improved Outcomes

Lawmakers enacted prohibitions on physician self-referrals during the early 1990s in response to several empirical studies' findings that physician self-referral arrangements resulted in increased use of services and higher third-party reimbursements. Federal and most state laws, however, exempt "whole hospitals" and ambulatory surgery centers.

Advocates of maintaining the present exemption contended that such arrangements result in better patient care and outcomes because physician-owners have direct control over management decisions.

Additionally, because such facilities organize care along product lines or by type of illness, economies of scale occur, resulting in lower production costs.

Physicians Often Self-Refer More Profitable Patients

The study analyzed six years of inpatient discharge data to compare the practice patterns of physicians who were owners of cardiac specialty hospitals in Phoenix and Tucson with those of physicians who only treated patients in competing full-service community hospitals with an accredited cardiac care program.

The study found that physician-owners of limited-service cardiac hospitals treated significantly higher volumes of the profitable cardiac surgical DRG cases than did nonowners treating patients at competing full-service community hospitals.

Data also indicated that owners treated a less severe case-mix of both cardiac surgical and medical DRGs relative to non-owners.
 
Finally, comparisons of payer mix reveal that physician-owners treated significantly higher percentages of patients with generous insurance (Medicare fee-for-service and commercial indemnity/Preferred Provider Organization) but significantly lower percentages of patients enrolled in Health Maintenance Organization-type care plans.

Physician self-referral arrangements have major effects on physician practice patterns, the report's authors argued. One accompanying commentary explained the issue in terms of how physician-owners respond to financial incentives and take advantage of variations in profitability within Medicare's hospital payment system, claiming that the growth of physician-owned specialty hospitals reflects parallel growth in profit opportunities. Prohibiting physicians'
use of hospitals they own, however, might be unnecessary and could make identifying future distortions in Medicare prices more difficult.

Legislators Support Ban On Self-Referral
 
In May 2005, Senators Charles Grassley (R-IA) and Max Baucus (D-MT) introduced legislation known as the Hospital Fair Competition Act of 2005, which would close the exemption loophole and prohibit physicians from making referrals to specialty hospitals in which they have an investment interest.

The study authors concluded that their findings provide evidence in support of this legislation and urge legislators to require physician-owners to divest their investments in existing limited-service hospitals within 18 to 24 months.