Product Focus: Specialty Hospitals (June 2006)

CMS does not plan to extend suspension

SPECIALTY HOSPITALS MIGHT BE ABLE TO COMMENCE DEVELOPMENT IN AUGUST

 

By Sonja Pedersen-Green

The Centers for Medicare and Medicaid Services (CMS) recently announced that it is unlikely to extend the suspension on medical payments to new physician-owned specialty hospitals. The ban, which is due to expire on Aug. 8, 2006, will mark the end of what was, in effect, an almost three-year moratorium on the development of this kind of hospital.

In November 2003, Congress passed an 18-month moratorium as part of the Medicare Modernization Act, which prohibited physicians from investing in specialty hospitals after Nov. 18, 2003. This provision augmented the Stark Act of 1989, which prohibits self-referral by physicians of Medicare patients to new specialty hospitals where the physician has an ownership interest.

The original ban ended on June 8, 2005, but was extended until Feb. 15, 2006, by CMS. At that time, Congress extended the suspension until Aug. 8 under the Deficit Reduction Act. This act, rather than prohibiting investment, eliminated Medicare and Medicaid payments to specialty hospitals.

Although these provisions will lapse in August, the Deficit Reduction Act will continue to make the development and management of physician-owned specialty hospitals difficult, as these hospitals will likely be subject to tighter financial disclosure. CMS will also modify the weights of diagnosis-related groups (DRGs) based on hospital cost and severity. These changes aim to rectify the existing imbalance in payments by CMS.

Randy Fuller, manager of market intelligence at GE Healthcare Financial Services, says, “CMS has the data that shows that there are differences in the mixes of patients taken in at specialty hospitals… they tend to be a little bit less acute and there are differences in the payer mix. All things considered, they want to make sure they are paying the cases appropriately.”

These changes will make the profit margin more equal across all DRGs and eliminate higher profit margins in areas such as cardiac and orthopedic services. As specialty hospitals perform a high volume of these high-profit procedures, they might feel less incentive to develop.

However, Fuller says he does not think these changes will greatly effect the development of new specialty hospitals.

“Ultimately there are other reasons, especially for physicians, to want to build specialty hospitals,” he says. “By having direct ownership, [physicians] can affect the way the hospital is ultimately run and perhaps make it more efficient.”

The cardiac sector is expected to see the greatest reduction in reimbursement, by 11.7 percent, while the orthopedic sector is expected to see a reduction of 9.4 percent. CMS will present its final report on specialty hospitals to Congress this summer.

Meanwhile, specialty hospitals that were grandfathered in continue to open. In Santa Fe, N.M., a 42,000 square foot for-profit surgical hospital is scheduled to open next summer following a six-year battle. The owners of Physicians’ Medical Center of Santa Fe have been granted permission from the city and the state Department of Health.

Investors in the project claim that the hospital will meet an increasing demand for surgical services. They say the area’s major hospital, St. Vincent Regional Medical Center in Santa Fe, cannot keep up with that demand. The investors also argue that the new facility will raise the quality of care and provide services that St. Vincent does not offer.

St. Vincent, on the other hand, devoted an entire department and substantial funds to an effort to defeat of the development. Its officials claim that the new specialty hospital will lead to job loss and diminished services.

However, supporters of the development claim that the Cancer Institute of New Mexico, which opened almost three years ago, increased the range of services offered at St. Vincent’s cancer center and that these changes have prevented patients from having to travel nearly 60 miles to Albuquerque for care. q