Physician-owned hospitals face restrictions, referral cuts

August 1, 2005

Washington--The federal government is preparing restrictions on the physician-owned specialty hospital industry, an emerging field it says could be a financial boon to physician investors and unfair competition to traditional hospitals and ambulatory surgery centers.

Under the Medicare Modernization Act of 2003, Congress instructed the Centers for Medicare & Medicaid Services to prohibit physician-investor referrals to specialty hospitals until June 8, 2005, unless the hospitals were already under development as of Nov. 18, 2003. Specialty hospitals generally treat only cardiac, orthopedic, or surgical cases, and physicians who refer patients there often have a limited ownership interest. Urologist involvement in the facilities appears to be minimal.

"Urologists are definitely looking for other opportunities to generate professional revenues, and if they are looking at physician-owned specialty hospitals, they should proceed with caution because there is a lot of government attention and we don't know what the outcome is going to be," said Rick Rutherford, AUA's practice management director.

Mark Miller, MedPAC's executive director, testified before a Senate governmental affairs subcommittee in late May, outlining his agency's study conclusions and recommending that the moratorium be extended until January 1, 2007. Meanwhile, CMS said that, in effect, applications for such hospitals will be held up until at least January 2006. The agency said it will make payment changes to eliminate physician windfalls and that applications for hospital provider agreements will be denied if specialty hospitals are not primarily engaged in inpatient care.

"We found that physicians may establish physician-owned specialty hospitals to gain greater control over how the hospital is run, to increase their productivity, and to obtain greater satisfaction for them and their patients," Miller said at the Senate subcommittee hearing.

MedPAC's study found that:

Miller said the study was based on a small number of physician-owned hospitals that have been operating long enough to generate Medicare data.

When the study was done, 12 heart, 25 orthopedic and 11 surgical specialty hospitals were concentrated in states where certificates of need are not required, such as South Dakota, Kansas, Oklahoma, and Texas.

The study found that the average surgical specialty hospital had only 14 beds and appeared to focus more on outpatient care. Under Medicare, CMS said that a hospital must primarily furnish care to inpatients. It issued a proposed rule on May 4 indicating that if specialty hospitals do not meet this test, new applications for provider agreements will be denied and existing provider agreements may be terminated.

CMS said its study indicated that physician-owners "may seek the specialty hospital designation because payment rates for hospital outpatient services under the outpatient prospective payment system are often higher than those for the same procedures when performed in ASCs."

The agency said it is planning to reform the ASC payment system by January 2008 to diminish these differences.