October 2003 Bulletin

Specialty hospitals vs. general hospitals: Healthy competition or an uneven playing field?

By Carolyn Rogers

The recent release of the U.S. General Accounting Office’s (GAO) less-than-flattering report on specialty hospitals is heating up the long-brewing dispute between community hospitals and specialty hospitals.

The GAO reported that patients at specialty hospitals it had reviewed tended to be less sick than patients with the same diagnosis at general hospitals in the same communities—lending credence to claims that physician-owned specialty hospitals may be “cherry-picking” the most financially rewarding patients.

Specialty hospital advocates disagree. Most doctors who invest in specialty hospitals own such a small share that the incentive to steer sick patients away is very weak, they argue. Proponents also say the reported differences in illness severity may be misleading because the GAO failed to analyze the economic or clinical implications of the differences.

Nonetheless, the findings have buoyed the spirits of community hospital supporters who claim that specialty hospitals are “siphoning off” the most financially rewarding portions of their business, leaving general hospitals with a disproportionate share of indigent and uninsured patient care, and threatening their ability to fulfill their broader mission of providing emergency services and community-wide disaster response.

Since the report was made public, specialty hospital foes have stormed their legislators’ offices—GAO report in hand—to push for legislation to end what they perceive as an unfair playing field. Several states are considering restrictive legislation on specialty hospital development, and language in the U.S. Senate version of the prescription drug bill would effectively kill any future growth of the physician-owned specialty hospital industry.

Small, but growing industry

Although specialty hospitals represent just 2 percent of U.S. hospitals, they’re a growing segment of the health care industry. In the last 13 years, the number of hospitals supplying specialty care has more than tripled—from 29 in 1990 to 92 as of March 2003—with another 20 under development.

Supporters contend that specialty hospitals’ focused approach improves quality of care, increases productivity and reduces costs. They claim that protests by community hospitals are an attempt to stifle competition and maintain the status quo at a time when competition is greatly needed in the health care system.

Key factors driving the trend to establish specialty hospitals include:

“When orthopaedic surgeons work at general hospitals, a number of productivity and quality issues are out of their control, such as access to ancillary services, access to operating room time, availability of equipment and availability of experienced staff,” explains David A. Halsey, MD, chair of the Academy’s Council on Health Policy and Practice. “With the specialty hospital model, the physicians have a controlling ownership that allows them to regain input and control over these variables. This enables them to deliver the care in the most coordinated fashion, with the most experienced team. And it’s realizable time and time again—it isn’t hit or miss.”

Growing concern among AAOS members

As the debate intensifies, a growing number of Academy members are expressing concern about the issue. Several Fellows have contacted AAOS President James H. Herndon, MD, to discuss the matter personally. Concern seems to be strongest among orthopaedic surgeons who have investment interests in specialty hospitals or in ambulatory surgery centers (ASCs) that are being converted to specialty hospitals. However, the issue also affects orthopaedists, in academic medical centers and elsewhere, who fear that the growing number of “for-profit” orthopaedic hospitals could pose a threat to their institutions.

In fact, the majority of specialty hospitals provide either orthopaedic or cardiac care. The GAO study identified 36 orthopaedic specialty hospitals nationwide, and several others are now under development.

“This is an issue that orthopaedics is going to have to wrestle with,” Dr. Halsey says. “We don’t really know yet what the long-term viability for these facilities is going to be if reimbursement comes down, for example. If that happens, I think the bloom is going to come off the rose, so to speak.”

GAO: General hospital patients sicker

The GAO study, Specialty Hospitals: Information on National Market Share, Physician Ownership and Patients Served, was initiated at the request of U.S. Rep. Jerry Kleczka (D-Wis.) and House Ways and Means Committee Chairman Bill Thomas (R-Calif.), who wanted to know how specialty hospitals affect community health services and whether their arrangements with doctors are consistent with the intent of current anti-kickback laws.

The GAO found that 21 of the 25 specialty hospitals studied had a less acute mix of patients than general hospitals in the same community. For example, the study found that 5 percent of patients at the median orthopaedic hospital were classified as severely ill, compared to 8 percent of patients in the same diagnosis groups at the median general hospital.

The GAO also found that approximately 70 percent of specialty hospitals have at least some physician owners, and that doctors’ combined ownership shares averaged slightly more than 50 percent of each hospital. About one-fifth of specialty hospitals are owned entirely, or nearly so, by physicians.

Individual doctors, however, tend to hold relatively small ownership stakes. At half of the hospitals with physician ownership, the average individual share was less than 2 percent. In 72 percent of specialty hospitals with physician ownership, the largest physician-held stake was less than 15 percent.

Specialty hospitals critical of GAO findings

Prior to making the report public, the GAO obtained comments from the American Surgical Hospital Association (ASHA), an association for specialty hospitals, as well as from MedCath Corporation and National Surgical Hospitals—two major specialty hospital chains.

The organizations rejected the insinuation that their physicians are ‘cherry picking,’ claiming the report contained “an inadequate, and potentially misleading, discussion of the financial incentives facing the physician owners of specialty hospitals.”

Many physicians who work in specialty hospitals are totally unaffected by investor-related financial incentives because they have no ownership stake in the facilities, the officials said. “And the average physician who invests in a specialty hospital tends to own such a small share that the incentive to steer sick patients away from the facility is very weak.” Instead, they claimed, “there is a strong incentive for physicians to treat patients in specialty hospitals because high-quality care can be provided efficiently in such facilities.”

The officials also criticized the GAO for failing to examine the relationship between physician ownership and referral patterns.

ASHA downplayed the GAO’s report on differences in patient acuity. “We have always maintained that specialized hospitals don’t skim the cream,” says ASHA President Michael Lipomi. “GAO has confirmed that. According to their study, our patients look pretty much like the surgical patients in any other hospital.”

“The report showed extremely minor differences in the acuity of patients served,” says Scott Becker, JD, CPA, a Chicago-based health care attorney who represents specialty hospitals. “From my perspective, a 2 or 3 percent difference sounds like a reasonable sonable number. It only makes sense that in certain cases, you’re going to want a more acutely ill patient to be in a hospital with immediate access to an ICU, a full-blown cardiac department…so a two or three-point difference in patient acuity doesn’t sound like cherry-picking to me at all.”

Ohio lawmakers move closer to specialty hospital freeze

A number of states are considering legislation to restrict specialty hospitals, much of it prohibiting physician ownership. Ohio continues to be at the forefront of the battle.

The arrival of physician-owned New Albany Surgical Hospital, an in-patient orthopaedic hospital scheduled to open in December 2003, ignited a firestorm of debate in central Ohio last summer. The $38 million venture came under attack from the state’s nonprofit hospital systems, which led to the introduction of a House bill (HB 71) that would prohibit Ohio doctors from referring patients to inpatient hospitals in which they have a financial interest.

The Ohio Hospital Association (OHA) lobbied hard for the legislation, and the group is frank about its goal: To stop more specialty hospitals from being built. Mary Yost, OHA’s vice president of public affairs, admits, “That is clearly the focus of our board—to halt proliferation.”

HB 71 passed the Ohio House on Sept. 19—but without the ban on physician referrals. Instead, the compromise bill places a moratorium on construction of new specialty hospitals for two years while experts study whether specialty hospitals siphon the most profitable procedures from large community hospitals. The bill’s “grandfather” clause means that several new specialty hospitals could still be built during the moratorium as long as their paperwork was filed by Sept. 15, 2003.

Hospitals toughen their tactics

Ohio isn’t alone in seeking a legislative answer to the dispute. Hospital associations in a dozen states, as well as the American Hospital Association (AHA) are crafting legislation directly aimed at specialty hospitals. Some of the desired mandates include:

Community hospitals also are toughening their tactics and fighting for profitable patients by:

Doctors fight ‘economic credentialing’

The practice of ‘economic credentialing’—in which hospitals deny privileges to physicians who have ownership interests in competing facilities—is a controversial one.

Two Columbus, Ohio, hospital systems—OhioHealth and Mount Carmel—approved economic credentialing policies last year in response to the arrival of New Albany Surgical Hospital. Courts in some states have upheld these actions, and several other cases are pending. At least 13 states have issued statutes that limit the use of economic credentialing.

The Ohio State Medical Association (OSMA) strongly disapproves of the practice, and cites it as one of the reasons it strongly opposes HB 71. OSMA claims the portion of the bill intended to prevent hospitals from engaging in economic credentialing is “riddled with loopholes” that would allow administrators to terminate doctors’ employment privileges.

“We’re starting to see a lot of this,” Becker says of the practice. “Hospitals are being very aggressive about trying to threaten doctors’ privileges. At a minimum, it’s bad behavior, but the reality is that a lot of that stuff [economic credentialing] is blatantly unlawful under antitrust laws, and it also raises concerns under kickback laws.”

Physicians are starting to threaten lawsuits over the issue, but “lawsuits are very expensive,” Becker says. “I think it makes a great deal of sense to write your local paper, write your congressman’s office and the inspector general to make sure the hospital board knows that its behavior is being scrutinized. Anything you can do short of a lawsuit.”

Hospital boards vs. medical staff: A power struggle

The balance of power between hospital administrations and medical staffs has become an increasingly contentious issue nationwide. Doctors in California, New York, Ohio, New Hampshire and Florida have filed lawsuits over medical staff independence.

Tensions at Community Memorial Hospital in Ventura, Calif., reached the breaking point in April 2003, prompting the medical staff to file a lawsuit contesting many hospital policies. The suit charges the hospital with putting financial gain above the interests of patients and trying to destroy the legally recognized role of the medical staff in protecting the hospital’s patients, among other allegations.

Although problems had been building for years, the conflict began in earnest in November 2002, when the medical staff elected orthopaedic surgeon John V. Hill, MD, as chief of staff. The hospital administration refused to recognize Dr. Hill and other elected officers, alleging that they have financial conflicts of interest with the hospital. Dr. Hill has a 1.2 percent interest in a Ventura surgery center.

Soon after, the board unilaterally imposed a policy stating that any doctor who has a financial stake in an entity that competes with the hospital cannot hold a medical staff leadership position, be a member of any medical staff committee or vote on any medical staff matter. The hospital also adopted a 20-page ‘Medical Staff Code of Conduct,’ and gave itself authority to investigate and discipline physicians who don’t meet the standards. Physicians say the hospital also unilaterally amended medical staff bylaws so they wouldn’t conflict with new corporate bylaws and took control of the $250,000 staff dues fund.

The hospital defends its actions by claiming they’re based on economics and competition, but that’s just “spin,” says Dr. Hill, who served on the AAOS Board of Councilors for six years and just finished his term as president of the California Orthopedic Association. “The reality is they’ve used this ‘competition’ issue as a way of selectively getting rid of certain physicians from medical staff governance.”

Aware that this could be a drawn-out battle, Dr. Hill appreciates the support from other physicians, as well as the financial and legal support of the American Medical Association and the California Medical Association. “Their involvement has really helped morale and makes us feel like we are not a voice in the wilderness,” he says.

In terms of the final outcome, “If we don’t win, it would not bode well for the medical staffs in California or even the country,” he says. “It’s going to be the patients who suffer if the hospital prevails.”

As this issue went to print, the Los Angeles Times reported that Community Memorial Hospital trustees had forced the resignation of the hospital’s CEO of 25 years, Michael Bakst—a move intended to stop the flow of disgruntled physicians to other facilities and end the lawsuit.

“I think the board has finally realized that there are so many problems that emanated from Bakst’s regime, which was very aggressively repressive had a component of vindictiveness.” Dr. Hill told the LA Times. “This is a very positive first step, but a lot still has to be done to restore loyalty and trust.”

Impending federal legislation: A “Stark” reality?

The most immediate legislative threat to physician ownership of specialty hospitals lies in the U.S. Senate’s version of the prescription drug bill. The Senate and the House are conferring to reconcile their versions, each of which poses a different degree of threat to the industry.

The Senate version of the bill, The Prescription Drug and Medicare Improvement Act of 2003, contains an amendment—proposed by Sen. John Breaux (D-La.)—that excludes specialty hospitals from the “whole hospital exception” to the Stark Act’s ban on physician “self-referrals.” Physicians have relied on the “whole hospital exception” in structuring their ownership of specialty hospitals.

Specifically, the provision bans physician ownership in a hospital that is primarily or exclusively devoted to cardiac, orthopedic, surgical, or other specialties designated by the Department of Health and Human Services—even if the hospital is located in a rural area. The bill grandfathers certain existing specialty hospitals and others under development as of June 12, 2003.

The House Bill, The Medicare Prescription Drug and Modernization Act of 2003, requests that the Medicare Payment Advisory Commission (MedPAC) study the issues surrounding physician-owned specialty hospitals and report back to Congress within one year.

“It’s unclear whether the House and Senate will be able to reconcile the bills or whether lawmakers will adopt the Senate version,” Becker says. “My best estimate is that it will be hard for the Senate version, the Breaux amendment in particular, to prevail. But we want to watch this very closely.”

AAOS to survey the issues, determine proper response

Although the current number of specialty hospitals is relatively small, the Academy believes that physician-owned orthopaedic hospitals—and the many legal, financial and ethical issues surrounding them—merit special attention.

“Based on input from individual Fellows, the Presidential line has asked the Council on Health Policy and Practice Management to survey the environment and consider the appropriateness of the Academy taking a position on the issue of orthopaedic specialty hospitals—particularly on the issue of physician ownership,” explains Dr. Halsey.

Dr. Halsey has specifically charged the Health Care Delivery Committee, chaired by Lowry Jones, Jr., MD, to explore this issue and report to the Council at their January 2004 meeting. At that point, the Academy will determine whether it should take a position on this issue and become involved in any regulatory or legislative issues that affect specialty hospitals.

“Lowry Jones has developed a single specialty orthopaedic hospital in Kansas City, so he’ll bring a depth of experience to this issue,” Dr. Halsey says. “I’m looking forward to hearing what the committee has to say.”


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