Original Communications

Specialty hospitals: Who do they help?Bhagwan Satiani, MD, MBA, Columbus, Ohio

Although Specialty Hospitals (SHs) represent a very small fraction of the U.S health care market, thecompetition for patients has generated bitter controversy. Owners and investors argue that patients(consumers) deserve a choice of SHs, which contributes revenues for the local community and deliversmore efficient, specialized care compared to general hospitals. General hospitals (mostly not-for-profit)contend that SHs tend to provide nonemergency care for the insured population with ‘‘profitable’’illnesses. It is one of the issues that is proving divisive in the effort to align incentives for physicians andhospitals. A high profile, public debate involving the State legislatures and Congress is currently beingwaged that will determine how, where, at what price, and how much access to healthcare the public willreceive in the future. (Surgery 2008;143:589-98.)

From the Department of Surgery, Division of Vascular Diseases and Surgery, The Ohio State UniversitySchool of Medicine, Columbus, Ohio

SPECIALTY HOSPITALS (SHs) represent a small fractionof the U.S. health care market. In 2005, the Gov-ernment Accountability Office (GAO) identified100 such SHs in operation or under developmentowned by physicians or investors.1 As a compari-son, the Center for Medicare and Medicaid Ser-vices (CMS) estimates that there were 4,800general hospitals, 4,136 Medicare certified ambula-tory surgery centers (ASCs), and 2,403 imagingcenters in 2004.1 General hospitals (for profitand not-for-profit), ASCs, and other types of healthcare institutions provide the majority of healthcare in the United States. Virtually all of the SHsare ‘‘for-profit,’’ whereas between 20% and 38.2%of competitor acute care hospitals are ‘‘for-profit.’’2

SHs are relatively small (average of 15 beds in or-thopedic/surgical and 52 in cardiac SHs), and60% are located in the following 4 states: Kansas,Oklahoma, South Dakota, and Texas.3

DEFINITION OF SPECIALITY HOSPITALS

A ‘‘specialty hospital’’ is defined by the DeficitReduction Act of Congress as a hospital that isengaged exclusively or primarily in the care or

Accepted for publication November 24, 2007.

Reprint requests: Dr Bhagwan Satiani, MD, MBA, The OhioState University, Division of Vascular Surgery, Department ofSurgery N-333, Means Hall, 1654 Upham Drive, Columbus,OH 43210. E-mail: bhagwan.satiani@osumc.edu.

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doi:10.1016/j.surg.2007.11.021

treatment of one of the following categories: pa-tients with a cardiac condition, patients with anorthopedic condition, or patients undergoing anoperative procedure.4 To this category, the Secretaryof Health and Human Services has also added to thegeneral definition ‘‘facilities that have some degreeof physician ownership,’’ as well as ‘‘any other spe-cialized category of services designated by the Secre-tary of Health and Human Services (HHS).’’5

To add to the confusion regarding the specificentities covered by the term ‘‘specialty hospital,’’the Medicare Payment Advisory Commission(MedPAC), which is an advisory body created byCongress to assist with Medicare issues, has goneone step further. MedPAC has been more specific,and identified SHs based on volume as hospitalsthat have at least 45% of their discharges in 1 spe-cialized area or at least 66% of their discharges in2 areas of specialization and for heart hospitals ifthey performed angioplasty or a bypass procedure.6

HISTORY OF SPECIALTY HOSPITALS

SHs are not a new fad. They have existed ascancer hospitals, children’s hospitals, trauma ‘‘cen-ters,’’ and other specialized, semiautonomousunits within large general hospitals. Investmentand growth in SHs have been fueled partly as aresult of public demand for specialized centers ofcare. What is new and has generated controversy isphysician ownership of SHs. Stark II legislationenacted as part of the Omnibus Budget Reconcil-iation Act of 1993 (H.R. 2264, sec. 13562) ex-panded earlier prohibitions on self-referral by

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physicians to include certain ‘‘designated healthservices’’ (DHS). To allow common transactionsbetween physicians and other entities, Congressthen specified several ‘‘exceptions’’ where legiti-mate services and financial relationships wereexempted, including referrals to a hospital atwhich the physician had privileges to performservices, where he/she held an ownership/invest-ment interest. This ‘‘whole hospital’’ exception wasdesigned to dilute the effect of any financial gainby one physician or group. In order to qualify forthis exception, however, the physician must haveprivileges to perform services at the hospital andthe ownership (or investment) must be in thehospital itself and not in a department or subdivi-sion of the hospital. Some physicians have utilizedthis exception within the Stark Law to invest inspecialty hospitals to gain efficiency, to have agreater influence in the patient care processes,and to benefit financially. It is important to under-stand that even if a joint venture fits the ‘‘wholehospital’’ exception, it must also steer clear of thefederal anti-kickback regulations, which prohibitany direct or indirect payment in order to induceor reward the generation of federal health carebusiness.7 A clear financial incentive to specializein ‘‘surgical’’ and other procedural interventionsexisted in the form of greater reimbursement forsurgical ‘‘diagnosis related groups’’ (DRGs) com-pared to medical DRGs. Large health care organi-zations, some of whom were excluded fromownership of SHs, then began lobbying Congressand state legislatures to close the ‘‘whole hospital’’loophole using several arguments explained below.In the meantime, as part of a multipronged aggres-sive approach, some hospitals invoked a conflict ofinterest argument to dismiss physicians on theirmedical staff who invested in competing SHs.8

The growing numbers of SHs represent increas-ing competition for general hospitals and havebeen a flashpoint for large, traditional health careorganizations and trade organizations represent-ing for-profit SHs such as the American SurgicalHospital Association.9 The powerful hospitalgroups led primarily by the American HospitalAssociation convinced Congress to halt all newconstruction of SHs and study the impact ofphysician-owned ‘‘for-profit’’ SHs on general hospi-tals and the communities they serve.

MORATORIUM ENACTED

The Medicare Modernization Act (MMA) wasenacted in November 2003 and passed in Decem-ber 2003 (Table). The MMA prohibited SHs frombilling Medicare unless plans for development of

the SHs already existed prior to January 2004.The intent of the 18-month de facto moratoriumon construction of any new SHs was to allowCMS to develop a strategic plan to address the con-cerns regarding SHs and to postpone the decisionabout the legality of SHs until more data wereavailable regarding the impact on general hospi-tals. Section 507 of the MMA modified the ‘‘wholehospital’’ exception by specifying that physicianownership and investment in the time frame (be-tween December 8, 2003 and June 3, 2005) insuch an entity would not qualify for this exception.The MMA (Section 507) also required both Med-PAC and the Secretary of the HHS to report toCongress on issues related to both SHs and generalhospitals to include, among other topics, the own-ership interests of physicians, referral patterns,cost of services, financial impact of ownership,and tax exemption value.

The Hospital Fair Competition Act or Bill S.102was introduced in the U.S Senate in May 2005 tomake the moratorium expiring in June 2005 in theMMA permanent. The bill also prohibited SHsgrandfathered as a result of being under develop-ment prior to November 18, 2003---from expand-ing any further physician ownership stake ornumber of beds/operating rooms. In addition,gainsharing provisions were strengthened, and thepayment methodology recommended by MedPACwas included. The bill did not make it out of theSenate Finance Committee.

The moratorium was then extended by CMSand Congress, first to February 15, 2006 and againto August 8, 2006.

END OF THE MORATORIUM

CMS announced the end of the 32-monthmoratorium on August 8, 2006. The strategicplan developed by CMS during this period in-cluded addressing the inequities of the paymentsystems, implementing demonstration programsthat promote physician/hospital cooperation, re-fining inter-hospital transfer arrangements, enforc-ing Stark and anti-kickback laws, and demandinggreater disclosure of physician investment in SHs.The ban on SHs was also lifted ultimately due toreporting of data and analyses by governmentagencies addressing the 2 main arguments ad-vanced for instituting the moratorium. First wasthe contention by general hospitals that profitmargins were going to be hurt substantially byproliferation of SHs. The MedPAC report to Con-gress in April 2006, based on 2004 data, showedthat profit margins of general hospitals in marketswith SHs did not experience ‘‘unusual declines in

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Table. Government sponsored studies of SHs

Agency and date Purpose of study Main conclusions

GAO study,April 2003(pre-moratorium)

Impact of SHs on healthcareand particularly oncompeting general hospitals.

SHs were an increasing share of the national hospital market,and physicians owned some part of about 70% of SHs.Patients at SHs were generally less sick compared to acutecare, general hospitals.

GAO study,October 2003(pre-moratorium)

Supplement to April 2003 study. Majority of SHs located in states without certificate of needregulations, less likely to have emergency departments,treated lower % of Medicaid patients, derived less revenuefrom in-patients compared to general hospitals but hadsuperior financial performance compared to generalhospitals.

GAO study,May 2005(pre-moratorium)

Estimate potential growth inphysician-owned SHs.

At a minimum, 37 physician-owned SHs (based onthe number that had requested an advisory opinionfrom CMS) would open as soon as the moratorium ended.The GAO was uncertain as to the number of additionalSHs that would open if the moratorium ended.

HHS MMA study,May 2005(pre-moratorium)

Develop a strategic plan andreport on specific issues relatedto SHs including: proportionalityof investment return, bona fideinvestment, annual disclosure ofinvestment information, charitycare, and care for Medicaidpatients.

Physician investments in SHs, in general, did not appear to benon-bona fide and the returns generated were consistent withthe investment. Although physician owners admitted most oftheir Medicare patients to SH’s they owned, they also admittedthem to other local hospitals.

Medicaid in-patient discharges in SHs were lower than forgeneral hospitals. Compensation arrangements betweenhospitals and physicians were reported in 53.1%. Charity careas a percentage of net patient revenue was greater in generalhospitals compared to SHs.

MedPAC study,May 2005(pre-moratorium)

Clinical care rendered by SHs andthe economic consequences forboth SHs and general hospitals.

Costs for treating Medicare patients were not lower in SHscompared to general hospitals, despite shorter length of stays.

SHs generally treated less severely ill patients, a lower % ofMedicaid patients, and many had no emergency departmentscompared to 93% of general hospitals. The financial impact ofSH’s on competitor acute care general hospitals was notnoticeable. The all-payer margins were higher in SH’scompared to general hospitals. Five major recommendationswere made: improving accuracy of payments, adjust relativeweights according to illness severity, transition in case-mixmeasurements, extend the moratorium till January 2007, andallow gainsharing arrangement, as well as minimize financialincentives related to physician referral.

GAO study,April 2006(post-moratorium)

Review operational and clinicalchanges in general hospitalsdue to the presence ofcompeting SHs.

Almost all general hospitals reported operational and clinicalchanges. No evidence was found to indicate that theseresponses were due to competition from SHs. Thecompetition was felt to be coming from other generalhospitals as well as limited service facilities such as ASCs,imaging centers, urgent care centers, and SHs.

MedPAC study,August 2006(post-moratorium)

Reexamine SHs cost of care,Medicaid share, impact oncommunity hospitals, andimpact of heart hospitals oncardiac surgery volumes.

General hospitals have a higher proportionate share of Medicaidpatients, possibly due to different services such as obstetrics.Whereas heart hospitals’ in-patient costs per discharge aresimilar to those of general hospitals, orthopedic and surgicalSHs have about a 20% higher cost per discharge. Physician-owned heart hospitals were associated with a significantincrease in the rate of cardiac surgeries in the market area,although there was no indication that these were low-severity(high profit) procedures. Despite increasing market share ofprofitable procedures by SHs, community hospitals profitmargins remained stable through 2004.

GAO, Government Accountability Office; MMA, Medicare Prescription Drug, Improvement, and Modernization Act of 2003; CMS, Centers for Medicareand Medicaid Services; MedPAC, Medicare Payment Advisory Commission; SHs, Specialty Hospital; HHS, Department of Health and Human Services.

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their all-payer margins.’’10 The second argumentmade by critics of SH’s was that general hospitalswould be forced to make substantial operationalchanges when competing in the same market. TheGAO surveyed 603 general hospitals in the fall of2005 and collated data obtained from 401 hospitalsin markets with at least 1 SH that had opened since1998 and some regional markets with no SHs in thearea.11 The intent was to report on competitive re-sponses made by urban and rural general hospitalsin terms of 74 potential operational changes (suchas income guarantees for physicians) and 34 poten-tial clinical services (such as any change in providingservices) modified in geographic areas with andwithout SHs. The GAO concluded that although al-most all general hospitals reported operational andclinical changes, no evidence was found to indicatethat these responses were due solely to competitionfrom SHs. The competition was felt to be comingfrom other general hospitals as well as limited ser-vice facilities such as ASCs, imaging centers, urgentcare centers, and SHs.

During the moratorium, 43 additional physi-cian-owned SHs opened their doors because theyqualified as having been under development. Pro-ponents claimed that the ban ‘‘stagnated’’ theindustry by restricting funding for new facilities,delaying planning and development, and forced ashift in strategy from construction of new facilitiesto partnering with community hospitals to operateand manage existing facilities.12

AFTER THE MORATORIUM

Since the end of the moratorium, an incom-plete but clearer picture of the impact of SHs ongeneral hospitals has emerged. First, reports byMedPAC and the GAO suggest that SHs could‘‘coexist’’ with general hospitals. Although long-term data are not available, it has become clearthat general hospitals have responded to SHs bycompeting and adapting by opening new servicessuch as bariatric care. Second, undoubtedly CMShas availed itself of the opportunity to use thedebate to introduce more transparency in theinvestment initiatives, governance, and noncom-pliant compensation arrangements within SHs andnot-for-profit hospitals. Third, CMS has advancedother initiatives, such as alternative ways to alignhospital-physician incentives (gainsharing pro-jects), refinement of an outdated DRG system,and improving patient safety with inter-hospitaltransfers. Finally, CMS likely intended to use thetime to fashion a more accurate reimbursementsystem, which better reflects resources utilized forin-patient and ambulatory care. Despite criticism

from within Congress and the AHA, CMS has notrecommended that Congress eliminate the ‘‘wholehospital’’ exception in the Stark Law. CMS con-cluded that Congress intended to allow physicianownership of hospitals both large and small andurban and rural.

ARGUMENTS AGAINST SHs

Conflicts of interest. A conflict of interest mayexist for investor physicians who have a financialstake in an SH. This argument is particularly trueof physicians who may be in medical staff leader-ship roles at the same time as investing in compet-ing SHs. As mentioned previously, some healthsystems have gone as far as denying admittingprivileges to the investor physicians. Congresspassed the Stark laws specifically to prohibit phy-sicians or their immediate families from referringpatients for such things as laboratory services inwhich they had a financial interest. Two exceptionsapplicable to this discussion were the exceptionsfor whole hospitals and the ambulatory surgerycenters. Hospitals and physicians partnered tooperate ASCs throughout the country within thelaw. ASCs treat patients who are less sick than thoseat in-hospital ambulatory surgery centers. Generalhospitals, however, have objected to the use of the‘‘whole hospital’’ exception by physicians for build-ing and operating SHs ostensibly because of thepotential for excessive utilization by investor phy-sicians. President of the Federation of AmericanHospitals, Chip Kahn has argued that SHs ‘‘.willperpetuate conflicts of interest.,’’ ‘‘weaken com-munity hospitals.,’’ and ‘‘.create an intolerablerisk of irreparable harm to community healthcare.’’13 Intuitively, one would think that physicianowners in SHs would not admit their patients togeneral hospitals. The Research Triangle Institute,on behalf of HHS (required under Section 507 ofthe MMA, May 2005), conducted a study to exam-ine this issue.14 Based on site visits to 11 SHs in 6markets, the data showed that although physicianowners admitted most of their Medicare patientsto SHs they owned, they also admitted them toother local hospitals.

Cherry picking. Opponents to specialty hospi-tals claim that SHs treat the less-sick patientspreferentially and treat fewer than their share ofthe uninsured.3 MedPAC and CMS both agreethat, in general, SHs tend to treat more profitablepatients that may not be as ill as those admitted tocommunity hospitals. A recent study of Medicarepatients undergoing hip and knee joint replace-ment procedures has shown that those admittedto SHs had fewer comorbidities, had a 40% lower

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risk of postoperative complications, and tended tobe from more affluent zip codes compared tothose admitted to general hospitals.15 Gutermanhas suggested that the solution may not be to elim-inate SHs and cancer hospitals (that are not paidthrough regular DRG payment schedules), but tochange the relative weighting so that the DRG pay-ment reflects the resources utilized in the care ofthat patient.3 CMS has stated that SHs do not treatproportional numbers of uninsured patients ascompared to community hospitals; however, theyalso point out that in terms of net benefit to thecommunity, they make up by paying their shareof taxes.

Undermining the purpose of community hospi-tals. A big concern has been the financial impactof SHs on community hospitals. Although somepatients are drawn from community hospitalsresulting in some reduction in Medicare revenues,the community hospitals have responded to thechallenge by compensating for the lost revenue,and their profit margins are comparable to similarhospitals in areas without any SHs.6

Kahn argues the MedPAC conclusion that thefinancial impact of SHs on community hospitals hasbeen limited, relied on older data, and does notreflect the public health costs of cutting services tostay profitable.13 ASCs, however, post a far biggerimpact on hospital bottom lines. The AdvisoryBoard reports that hospitals have foregone over $1billion over the last 20 years due to ASCs siphoningoff profitable procedures.12 SHs have accused largehealth care organizations of working with major in-surers to discourage contracting with SHs. Heart-land Spine & Specialty Hospital in Overland Park,Kansas filed suit against several hospital systemsand managed care insurers alleging a conspiracyby the major hospitals to pressure the insurers in ex-cluding the SH from in-network contracts.16 In Mil-waukee, 2 heart hospitals opened in 2003 and 2004in competition with Aurora St. Luke’s Medical Cen-ter. St. Luke’s launched a massive advertising cam-paign and upgraded its heart services, and, inaddition, made it difficult for cardiologist investorsin the SHs to work at St. Luke’s.16

General hospitals more likely to provide emer-gency room care. One of the reasons for thedisproportionately higher number of Medicaidand uninsured patients in acute care generalhospitals is that a dedicated emergency room isavailable to the community. There is little doubtthat acute care general hospitals and cardiac hos-pitals are more likely to have emergency carecompared to orthopedic and surgical SHs. The2003 GAO report indicated that SHs were much

less likely to have emergency departments (EDs)(92% of general hospitals had EDs compared to72% of cardiac, 33% of orthopedic, and 39% ofsurgical SHs).2 Orthopedic and surgical SHs arealso likely to be smaller and have lower admissionrates than competitor general hospitals.17

General hospitals provide more care for theindigent. It has been argued that general hospitalsprovide more uncompensated care when comparedwith SHs. The MedPAC report of 2006 stated manyreasons for general hospitals shouldering a greatershare of Medicaid patients, including location,services offered, mission, Medicaid managed carecontracts, and types of referral/physician relation-ships.6 Acute care general hospitals, for instance,serve obstetric patients, whereas SHs do not. Thisobservation may account for the 13% share of Med-icaid patients in a general hospital compared to a3% share in cardiac and 2% share in orthopedicand surgical hospitals.6 Similarly, Medicaid in-patients constituted a smaller percentage of the totalin-patient population in SHs compared to generalhospitals in the area.6,16 In an analysis of bad debt(services for which hospitals expected to, but didnot, receive payment), HHS noted that as a percent-age of net patient revenues, a higher burden of baddebt was reported by general hospitals (9.2%) com-pared to SHs (3.8%).17 In contrast to Medicaid pa-tients, Medicare regulations do not require anyprovider to dispense charity care (other than underEMTALA regulations) or treat Medicaid patients.

Utilization increases with physician-owned hos-pitals. MedPAC reported on the increased utiliza-tion in physician-owned cardiac hospitals duringthe period 1996-2002.18 The difference in proce-dure rates of cardiac surgery between marketswith and without physician-owned cardiac hospi-tals was not statistically significant; however, in itsupdated information presented to Congress in2006, MedPAC staff stated that there was a 6% in-crease in cardiac operations after the entry of aphysician-owned cardiac SH into a community.6

There was also a statistically significant increasein coronary artery bypasses and some increase inangioplasties and defibrillator implants from thebase year of 1996-2004. MedPAC could not saywhether the increase was due to increased surgicalcapacity or financial incentives on the part of phy-sician investors.

ARGUMENTS FOR SHs

Arrangements between physicians follow the lawand are bona fide. As much as tax-exempt generalhospitals follow existing law, investors in SHs con-tend that they are also in compliance with the

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Stark anti-kickback laws and are similarly facingconstantly moving targets in terms of Congressionalactions. Under these statutes, an investing physi-cian’s return on an investment in an SH must betied to the percent ownership, not to the numberof procedures/admissions or referrals. HHS hasstated that physician investment in SHs is, in gen-eral, bona fide and that adequate risk is demon-strated by capital investment in the projects.17

Cardiac hospitals reported offering investment inSHs on the same terms to its nonphysician inves-tors. In comparing 130 physician-owned SHs toacute care hospitals in the same hospital serviceareas, HHS reported that compensation arrange-ments for physicians existed in 53.1% of reportingSHs.17 These arrangements, similar to general hos-pitals, were usually for medical directors, on-callcoverage, administrative tasks, and clinical servicessuch as interpretation of diagnostic tests. Similarly,there were very few instances of loans or loan guar-antees made by SHs to investor physicians.

The severe civil and criminal penalties underexisting laws and qui tam (whistleblower) laws,according to proponents, provide enough protec-tion of the public against profiteering.

SH’s give physicians more control over healthcare delivery and lead to more efficient care withgreater patient satisfaction. Specialist physicians(mostly surgeons and cardiologists) are motivatedto invest for four primary reasons. First is theavailability of prime operating room or catheteri-zation lab time. Second, physicians have morecontrol over the workplace and time to suit theirindividual needs. Third, given that they are famil-iar with the business aspect of healthcare, there isthe expectation of a good return on their invest-ment. Finally, the quality of care is something theycare passionately about and direct responsibilityfor results is a challenge that is appealing. In anHHS report studying the quality of care andpatient satisfaction mandated by the MMA, thequality of care in cardiac SHs was ‘‘at least as goodas’’ and, in some cases, ’’better than’’ local hospi-tals.17 In a study of Medicare claims data by Cramand associates from the University of Iowa on51,788 hip and 99,765 knee joint replacements,even adjusting for the lower-risk patients, therewas a lower complication rate in patients treatedat 38 orthopedic SHs compared to those treatedin the 517 general hospitals.15 Patient satisfactionwas noted to be very high in cardiac, orthopedic,and surgical SHs. Aside from customer satisfaction,2 other issues cited by proponents of SHs are re-lated to presumed ‘‘efficiency’’ of care–the cost ofcare and duration of stay. In its 2005 report to

Congress, MedPAC presented data on the cost ofcare in SHs compared to general hospitals.18 Whilethe cost of in-patient care in cardiac SHs and com-munity hospitals was comparable, orthopedic andsurgical hospital in-patient costs were 20-30%higher in SHs compared to community hospitals.Costs for treating Medicare patients were not lowerin SHs compared to general hospitals. The data forduration of stay, in an analysis of 2004 in-patientsby MedPAC, was shorter consistently by a marginof 20-28% in SHs of various types compared topeer competitive general hospitals.6 The highercost despite the shorter duration of stay was pre-sumed to be due to higher capital costs, differ-ences in staffing levels, employee compensation,and the unused capacity in SHs.

Innovations by SHs force general hospitals tocompete in offering new technology and services.In 2005, the GAO surveyed 603 general hospitalsand collated data obtained from 401 hospitals inmarkets with at least one SH, and some regionalmarkets with no SH in the area to report oncompetitive responses made by urban and ruralgeneral hospitals.2 The survey covered 74 potentialoperational changes (such as income guaranteesfor physicians) and 34 potential clinical services(such as any change in providing services) modi-fied in geographic areas with and without SHs.The GAO concluded that although almost all gen-eral hospitals reported operational and clinicalchanges, no evidence was found to indicate thatthese responses were solely due to competitionfrom SHs. The competition was felt to be comingfrom other general hospitals, other limited-servicefacilities such as ASCs, imaging centers, and urgentcare centers, as well as SHs. A larger percentage ofurban general hospitals perceived competitionfrom limited service facilities (such as SHs andASCs) compared to rural hospitals (90% vs74%).10 In the Columbus, Ohio market, the oper-ation of a specialty joint replacement SH led to vis-ible added value for the patient in terms ofcustomer service. It is clear that general hospitalsinvest significant dollars to build large specialty ser-vice lines, often physically and administratively sep-arate from the mother institution, all within thesame community whether or not there is an SHwithin the region.

The financial impact of SHs on communityhospitals is limited in scope. A study of cardiacSHs showed that about 80% of their patients camefrom competitor community hospitals and theirentry into the local market had a negative effect onthe growth in volume of general hospitals. TheMedPAC analysis in 2006 was a detailed analysis of

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3 multivariate models to test the impact of physi-cian-owned SHs on Medicare revenues, total reve-nues, and total margins.6 Physician-owned hearthospitals (and orthopedic/surgical hospitals) re-duced Medicare revenues generated by communityhospitals but did not have a significant effect ontheir total profit margins. The competitor hospi-tals, however, made up for their lost revenue inother programs and services, and their total mar-gins were no different than the national average.It seems that a region’s population dynamics andan overall decline in Medicare revenue and profitmargin may be more of a factor than loss of reve-nue due to SHs. Whether expansion into otherprofitable service lines, reducing cost of services,supplementing operations through income fromdevelopment funds, and creating demand fornew services will maintain profit margins for com-munity hospitals is uncertain.

SHs provide substantial tax revenue to localcommunities in contrast to tax-exempt generalhospitals. Not-for-profit tax-exempt organizationsare expected to provide indigent care. No suchquid-pro-quo is required from for-profit entities asthey pay local, state, and federal taxes. The HHSstudy required by the MMA Act of 2005 studied thetax revenues and benefits of SHs as compared tothe amount of uncompensated care provided bytax-exempt general hospitals.17 The study deter-mined that, in general, net revenue generated bySHs for their local communities is greater thanthe value of uncompensated care provided by com-petitor tax-exempt hospitals. A study of federal taxrecords by a health care workers’ union has shownthat Ohio hospitals received $898 million in taxbreaks and provided $219 million in charity carein 2003.19 A similar study of 21 not-for-profit, tax-exempt hospitals in Cook County, Illinois foundthat state and local taxes accounted for 96% ofthe tax benefits given to the hospitals.20 The reportestimated that for every $1 in charity care providedby the hospitals, they received $3 in tax benefits.The Illinois Hospital Association disagreed withthese findings and stated that its member hospitalsreport over $3 billion in benefits to the state andover $1.3 billion to Cook County specifically (inother words, 5 times the tax benefit derived byhospitals).21

FUTURE

What is a ‘‘hospital?’’ While cardiac SHs (andsome orthopedic SHs) more often resemble gen-eral hospitals providing predominantly in-patientcare, most orthopedic and surgical SHs are akin toASCs that provide outpatient care. An initial push

to have CMS adopt a fixed definition of a hospitalas an entity ‘‘primarily engaged’’ in furnishingservices to in-patients has faltered because of op-position by not only SHs but also some communityhospitals for 2 main reasons.17 First, the continuedmigration to outpatient care due to advances intechnology would probably render a rigid defini-tion quickly obsolete. Second, small rural hospitalswould oppose any attempt by large urban generalhospitals to impose a stricter definition, because ru-ral hospitals may not be able to meet the narrow re-quirements. CMS considered quantitative measuressuch as percentage of services or ratio of in-patientto out-patient services to differentiate general andSHs, but no common measure to date seems prac-tical without excluding both types of hospitals.While CMS continues to use the term ‘‘primarilyengaged’’ to define a hospital (as required on a stat-utory basis but not by regulations) and review thesituation on a case-by-case basis, it is likely that fur-ther efforts will be made to narrow the definition ofa ‘‘hospital.’’

Equity in payment systems. Community hospi-tals have complained that orthopedic and cardiacSHs take advantage of the higher payment throughthe outpatient prospective payment system forservices that could be performed in ASCs. Thephysician self-referral (Stark) law applies only toreferrals for designated health services (DHS),which include, among others, in-patient and out-patient services.8,22 The law does not apply to phy-sician referrals to an ambulatory surgery center(ASC), because an ASC does not provide a DHS.This is one reason for ASCs to convert to an SH.In contrast, SHs point out that acute care generalhospitals receive a far greater portion of the addi-tional reimbursement by Medicare and Medicaidfor serving poor and uninsured patients (dispro-portionate share hospitals or DSHs). DSH pay-ments are adjustments to payments to hospitalsby Medicare and Medicaid as recognition thatthey serve a higher proportion of poor and unin-sured populations. Because SHs are less likely toserve this population, only about 10% receiveDSH reimbursement compared to 63% of generalhospitals.17

Better alignment of incentives for physiciansand hospitals. Despite many hurdles, physicianinterest in ownership of SHs remains high, becausethey have real authority in governance, operations,and quality of care, and they derive financial bene-fits when these efforts are successful. True partner-ships that result in sharing management functionsand financial gains in a joint venture with a tax-exempt, not-for-profit general hospital is limited,

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among other things, by numerous regulatory im-pediments. There are encouraging signs of progressin this area. The IRS has issued an opinion thatallows hospitals more leeway to support electronichealth records in their physicians’ offices. Gainshar-ing programs, to some degree, are being imple-mented, and CMS is exploring ways for physicians toparticipate in the governance, management, andany financial rewards within general hospitals. Phy-sician-hospital partnerships have been successful injoint ventures related to ASCs, specialized out-patient cancer treatment facilities, and alternativemedicine centers. MedPAC has identified recentlyways for physicians and hospitals to work togetherwhich include hospitals compensating physiciansfor their time on call and uncompensated care,comanagement agreements, hiring hospitalists, andshared accountability agreements.23 The ‘‘line inthe sand’’ currently drawn by general hospitals,with respect to any physician ownership in SHs,may have to blur a little to allow cooperative, mutu-ally beneficial partnerships.

Mandatory disclosure of financial relationshipsbetween physicians and hospitals. The not-for-profit general hospitals have demanded that shortof a total ban on physician ownership of SHs, CMSrequires SHs to disclose all ownership, compensa-tion, and investment relationships with physiciansto ensure compliance with the Stark Law. As aresult, the additional administrative burden borneby some hospitals has now been extended to bothSHs and general hospitals. CMS proposed recentlysurveying hospitals---ALL hospitals---concerningtheir ownership, compensation, and investmentrelationship with physicians to ascertain compli-ance with the Stark Law (Agency InformationCollection Activities: Proposed Collection; Com-ment request, 72 Fed. Reg. 28056, May 18, 2007).Detailed information will be solicited regarding:hospital ownership for each physician owner orinvestor; loan guarantees; leases or other arrange-ments; physician compensation including salary,space, and equipment rental; personal servicearrangements; and recruitment incentives. In ad-dition to information by physician identificationnumber, hospital-audited financial statements willbe required along with a certification statementsigned by the appropriate hospital executive. Fi-nally, in the recent FY 2008 proposed In-patientProposed Payment System (IPPS), CMS is requir-ing SHs to disclose ownership interest, and namesof physician owners on request, and alert patientsin writing if physician coverage is not availablecontinuously (and if not, explain plans for emer-gency coverage).24

At the state level, it is likely that legislators willrequire disclosure of any physician ownership inSHs to the state, particularly in the wake of theoccasional adverse outcomes reported in the me-dia at any of the SH facilities. Texas is currentlyone of the few states that requires such a disclo-sure. It is also more than likely that all patientsadmitted or treated at physician-owned SHs will beprovided information about ownership of thefacility. In the same context and to demonstratefairness, CMS will be under pressure to have for-profit corporations disclose investor lists and not-for-profits provide information to the public onownership of physician practices or employment oftreating physicians.

Requirements for emergency departments.Most hospitals are required to follow either statemandates and/or EMTALA requirements for emer-gency care. Full-service hospitals have tried and willcontinue to try to convince Congress to mandateemergency departments for all SHs. CMS, afterdeliberating whether to require an emergencyroom as a condition of participation in Medicare,has declined to support this position. A more robustprogram for an established and formal tertiaryreferral relationship between an SH and an acutecare general hospital is part of the IPPS.

Added value for patients and the taxpayer.Several attempts have been made to re-enact themoratorium by revoking the ‘‘whole hospital’’ ex-ception to the Stark Law. CMS has been successfulin using the debate to push through many changesthat render the need for a moratorium question-able. The advent of SHs and the strong oppositionby general acute-care hospitals resulting in incre-mental steps to balance and focus the debate onpatient care may have been a boon for patients andthe taxpayer. At the beginning, SHs were buildingat will and claiming more specialized and, there-fore, efficient care, cost savings, better quality ofcare, and superior customer satisfaction. This ap-proach forced the general hospitals to compete forpatients by borrowing these service concepts, whilesimultaneously countering SHs in the legislature.The SHs in turn pointed to the questionablereturn on the tax breaks for general hospitalsand the generally cozy and secretive nature of thehospital board/executive staff relationship. As aresult, not-for-profit, tax-exempt general hospitalshave been forced to justify their tax-exempt status,modify their policies for charging full prices fromindigent patients, and disclose executive/boardand physician relationships. The general hospitalsresponded by persuading Congress to authorizeseveral investigations in order to disprove many of

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the stated advantages of SHs to patients. CMS hasfollowed all 5 recommendations made by MedPACin its 2005 report,18 as well as others,25 to furtherlevel the playing field by rebasing DRG payments,reforming ASC reimbursement, tightening physi-cian ownership disclosure rules, and clarifyingrules for emergency transfers from SHs. The argu-ments and counter arguments have resulted ingreater transparency of the conflicting interestsof all parties, reconsideration of gainsharing con-cepts, improvement in services, better idea of thecost of care, refinement of protocols for inter-hos-pital transfers, and a glimmer of progress towardthe goal of more accurate reimbursement. Thepoint is obvious: The result may be added valuefor patients and the taxpayer.

REFERENCES

1. United States Government Accountability Office, ‘‘GAO-05-647R Specialty Hospital Moratorium,’’ May 19, 2005, www.gao.gov/new.items/d05647r.pdf (accessed May 15, 2006).

2. United States Government Accountability Office, ‘‘GAO-04-167 Specialty Hospitals: Geographic location, Services pro-vided, and Financial Performance.’’ October 2003. http://www.gao.gov/new.items/d04167.pdf (accessed September16, 2007).

3. Guterman S. Specialty hospitals: a problem or a symptom.Health Affairs 2006;25:95-105.

4. Medicare Prescription Drug, Improvement, and Moderniza-tion Act of 2003 (Public Law 108–173 108th Congress)http://www.ustreas.gov/offices/public-affairs/hsa/pdf/pl108-173.pdf (accessed September 16, 2007).

5. Inglehart JK. The uncertain future of specialty hospitals.New Engl J Med 2005;352:1405-8.

6. http://www.medpac.gov/documents/Aug06_specialtyhospital_mandated_report.pdf (accessed August 12, 2007).

7. Satiani B. Anti-kickback laws and safe harbor protections: abrief review for surgeons. Ann Vasc Surg 2003;17:693-6.

8. Satiani B. Specialty hospitals and the Stark Act. Bull AmColl Surg 2003;88:22-4.

9. American Surgical Hospital Association, www.surgicalhospital.org (accessed May 29, 2006).

10. United States Government Accountability Office. GAO-06-520 General Hospitals. Operational and clinical changeslargely unaffected by presence of competing specialty hospi-tal. April 7, 2006. http://www.gao.gov/new.items/d06520.pdf (accessed August 8, 2007).

11. http://energycommerce.house.gov/reparchives/108/Hearings/05122005hearing1517/Hackbarth.pdf (accessed 9-17-2007).

12. The Advisory Board Company. Maximizing current resources,www.advisoryboard.com (accessed February 23, 2006).

13. Kahn C. Intolerable risk, irreparable harm: the legacy ofphysician-owned hospitals. Health Affairs 2006;25:130-3.

14. Specialty Hospital Evaluation: Final report, September2005. http://www.cms.hhs.gov/reports/downloads/crom-well3.pdf (accessed September 17, 2007).

15. Cram P, Vaughan-Sarrazin MS, Wolf B, Katz JN, RosenthalGE. A comparison of total hip and knee replacement inspecialty and general hospitals. J Bone Joint Surg 2007;89:1675-84.

16. Sneider JA. A healthy debate. The Milwaukee Business Jour-nal, www.bizjournals.com/industries/health_care/hospitals/2005/08/15/Milwaukee_focus1.html (accessed February 20,2006).

17. United States Department of Health and Human Services.Final Report to the Congress and Strategic and ImplementingPlan Required under Section 5006 of the Deficit ReductionAct of 2005. http://www.cms.hhs.gov/PhysicianSelfReferral/06a_DRA_Reports.asp (accessed August 12, 2007).

18. http://www.medpac.gov/documents/Mar05_SpecHospitals.pdf (accessed August 12, 2007).

19. Hoholik S. Non-profit hospitals look to aid poor; Polish im-age. Columbus Dispatch, May 3, 2006, p. A8.

20. Center for Tax and Budget Accountability. An analysis of thetax exemptions granted to Cook County non-profit hospitalsand the charity care provided in return, www.ctbaonline.org(accessed May 31, 2006).

21. Illinois Hospital Association. ‘‘IHA analysis of flawed reportof hospitals’’ tax-exempt value and charity care. May 30,2006, www.ihatoday.org/issues/payment/charity/analysis.html (accessed June 9, 2006).

22. Section 1877 (h)(7)(A) of the Social Security Act, 42 U.S.C.§ 1395 nn(h)(7)(A), as added by section 507 (a) of theMedicare Prescription Drug, Improvement, and Moderniza-tion Act of 2003 (MMA). http://www.ssa.gov/OP_Home/ssact/title18/1877.htm, and http://www.treas.gov/offices/public-affairs/hsa/pdf/pl108-173.pdf (accessed August 8,2007).

23. Lubell J. MedPAC: can’t we all get along. Mod Healthcare2007;37:8.

24. http://www.cms.hhs.gov/HospitalOutpatientPPS/HORD/itemdetail.asp?filterType=none&filterByDID=0&sortByDID=3&sortOrder=descending&itemID=CMS1201238&intNumPerPage=10 (accessed September 20, 2007).

25. Greenwald L, Cromwell J, Adamache W, Bernard S, DrozdE, Root E, et al. Specialty versus community hospitals: refer-rals, quality and community benefits. Health Affairs 2006;25:106-18.

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APPENDIX: Definitions of common terms

AHA = American Hospital Association: The AHA is thenational organization that represents the interests ofall types of hospitals.

ASC = Ambulatory Surgical Center: ASCs are facilitieswhere procedures that do not require hospitaladmission are performed.

CMS = Centers for Medicare and Medicaid Services:Formerly known as the Health Care FinancingAdministration (HCFA).

DHS = Designated Health Services: DHS is a CMS listingof certain groups of services for purposes ofidentifying services that are subject to physician ‘‘self-referral’’ laws (Stark).A complete list is found in section 1877 (h)(6) of thephysician self-referral statute.

DRA = Deficit Reduction Act of 2005: Signed by PresidentBush in February 2006, the DRA is aimed at slowing thepace of growth in both Medicare and Medicaid inaddition to addressing student loans, energy, andreauthorizing welfare reform for another 5 years.

DRG = Diagnosis Related Group: This grouping (538groups) was introduced in the 1980’s to describe andclassify illnesses for in-patients expected to utilizesimilar resources.

EMTALA = Emergency Medical Treatment & Labor Act:The EMTALA is a statute which governs patienttreatment and transfer when he/she is in an unstablemedical condition. EMTALA is Section 1867(a) of theSocial Security Act and is included as part of thesection of the U.S. Code that governs Medicare.

GAO = Government Accountability Office: Theinvestigative arm of Congress, or the congressionalwatch-dog, GAO is an independent and nonpartisanagency that studies how the federal governmentspends taxpayer dollars.

HHS = Department of Health & Human Services: TheHHS is one of the largest federal agencies, comprising12 operating divisions, charged mainly with overseeingpublic health, biomedical research, Medicare andMedicaid, welfare, and social services.

IPPS = In-patient Proposed Payment System: The IPPS isa payment for services to hospitalized Medicarepatients.

MedPAC = Medicare Payment Advisory Commission:MedPAC is an independent group appointed byCongress as part of the Balanced Budget Act of 1997(BBA), charged with reviewing Medicare paymentpolicies and recommending changes to cover the costof the Medicare program.

MMA = The Medicare Prescription Drug, Improvement,and Modernization Act of 2003: MMA requiredMedPAC, under section 507 of the legislation, toinvestigate several aspects of specialty hospitals.

MS-DRG = Medical Severity Diagnosis Related Groups:MS-DRG is the new DRG classification system underCMS directives that replaces and phases in over 2 yearsthe previous 538 codes with 745 codes, and designedto more accurately measure severity of illness, and,therefore, a fairer payment system.

OIG = Office of Inspector General: Created within HHSto meet the statutory mission of overseeing efficiencyand accountability under the Social SecurityAdministration programs.

Physician self-referral statute (Stark Law): Section1877 of the Social Security Act (added by the Ethics inPatient Referrals Act of 1988 or Stark Law) prohibitsphysician referral of a Medicare patient for designatedhealth services to an entity with which the physician (oran immediate family member of the physician) has afinancial relationship, unless an exception applies. In1993, the same prohibition was made applicable to theMedicaid program.