Medicare Compliance & Reimbursement

Hospitals raise their defenses, fearing that specialty outfits may soon take over the neighborhood.

Cardiac, orthopedic and surgical specialty hospitals are threatening to erode competing community hospitals' profitability--even in the absence of significant price competition.

Competition for high-profit cases is leading community hospitals to leave quality and efficiency measures on the back burner, according to a Jan. 25 study from the Center for Studying Health System Change. The new study challenges recent hospital comparison reports from the Centers for Medicare & Medicaid Services and the Medicare Payment Advisory Commission.

Specialty hospitals' impact on the health care industry has incited ambivalence among politicians and health care workers. Debate over whether specialty hospitals meet the definition of a hospital--and more specifically, whether Congress should encourage or impede specialty hospital development--sparked CMS in 2005 to extend the moratorium on allowing physician-owners of specialty hospitals to refer Medicare patients to their hospitals.

Significant physician ownership among specialty hospitals is at the center of the debate. Physicians have an aggregate 34-percent ownership share in cardiac hospitals and an aggregate 80-percent ownership share in orthopedic and surgical hospitals, according to the May 2005 study from CMS and the Department of Health and Human Services. Although the average share per physician for these hospitals is about 1 percent to 2 percent, physician ownership raises three primary conflict-of-interest concerns among industry experts and competing community hospitals.

First, physicians who own or invest in specialty hospitals may find it difficult to balance clinical decisions with financial ones. Second, physician-owners' influence on patient flow could lead them to favor the most profitable cases. This threatens community hospitals' financial viability--high-profit cases help community hospitals to subsidize costs related to low-profit cases and community services. Third, it's in specialty hospitals' financial interest to avoid treating patients who are underinsured or uninsured. The Siphoning Effect: Specialty Hospitals Draw From Community Hospitals' Bread And Butter One of the health care industry's most prevalent underlying concerns is whether specialty hospitals undermine the financial viability of community hospitals. Specialty hospitals are a new market that's already growing rapidly in concentrated areas. Today, Kansas, Oklahoma, South Dakota and Texas are home to 60 percent of the nation's specialty hospitals. Many industry experts are so concerned about their effects on competing community hospitals that they suggest imposing certificate-of-need requirements to limit their growth, HSC points out. If specialty hospitals continue to grow, their effects on community hospitals may become more significant. Employers and health plans fear that specialty hospitals are contributing to a "medical arms race" that's driving up coverage costs, notes HSC.

Specialty hospitals obtain most of their patients by capturing market share from community hospitals, according to MedPAC's March 2005 study. But because specialty hospitals are not currently as widespread as [...]