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Physician investments in specialty hospitals

By Jeffrey B. Miller, Esq.

For years many physicians have experienced the squeeze of decreasing incomes and soaring costs. At the same time, many have desired increased control over their relationships with hospitals. One method physicians have employed is hospital ownership, and in particular, ownership in specialty hospitals. Not only can physician ownership in specialty hospitals can add a significant income source, physician and specialty hospital advocates also assert that physician-owned specialty hospitals can provide higher quality clinical services for patients, with higher efficiency than their community hospital counterparts. Moreover, they contend that physicians and patients of these hospitals enjoy better service, greater convenience and increased comfort due to more effective physician control, such as control over hospital facilities and equipment, nursing and support personnel and patient scheduling.

As many physicians know, since December 8, 2003, with the passage of the Medicare Modernization Act of 2003 (MMA), Congress prohibited physicians from referring patients to specialty hospitals in which they have an ownership interest. That prohibition was scheduled to expire on June 7, 2005. However, with the release of the Medicare Payment Advisory Commission’s (MedPAC) Report to the Congress on Physician-owned Specialty Hospitals, the status of the expiration of that prohibition may now be in jeopardy until at least January 1, 2007.

The current circumstances surrounding MedPAC’s recommendation that the moratorium on physician ownership in specialty hospitals be extended arose out of a two-year process of review and analysis. As physician ownership in specialty hospitals has gained popularity over the years, more than simply physicians and hospitals have taken notice; Congress has also taken note. Many community hospital advocates have aggressively lobbied Congress seeking to limit or prohibit physician ownership in specialty hospitals, citing unfair competition between physician-owned specialty hospitals and community hospitals, and concerns regarding the financial viability of community hospitals in specialty hospital markets.

In 2003 Congress responded to community hospital advocates by issuing the MMA moratorium on physician-specialty hospital joint ownership. Implementing this prohibition, the Center for Medicare and Medicaid Services (CMS) defined specialty hospitals to include hospitals that are primarily or exclusively engaged in the care and treatment of patients with cardiac conditions, orthopedic conditions or which are caring for patients receiving surgical procedures. Psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, certain cancer hospitals and existing specialty hospitals that were in operation or under development as of November 18, 2003 were exempted from this prohibition.

Following the passage of the MMA Congress referred the matter to MedPAC and to the Department of Health and Human Services for its analysis and advice on long term solutions. MedPAC is an independent federal body that was established by the Balanced Budget Act of 1997 to advise the Congress on issues affecting the Medicare program. Among MedPAC’s responsibilities are making recommendations to Congress on payment issues, analyzing patient access to care and reviewing quality of care. MedPAC analyzed hospital Medicare cost reports and inpatient claims from 2002 (the most recent year available), and reviewed the issues with members of the physician and hospital communities, along with associations and advocates on both sides. After more than a year of investigation, debate and analysis MedPAC announced its findings and recommendations in a March 8, 2005 Report to Congress on Physician-Owned Specialty Hospitals.

In 96 pages, with the caveat that its findings were not statistically valid, and that more information and study would be necessary to confirm them, MedPAC stated that it appeared that physician-owned specialty hospitals, to date, have not had significant financial impacts on their community hospital counterparts. In general, community hospitals in physician-owned specialty hospital markets have appeared to perform economically comparably to community hospitals in markets without physician-owned specialty hospitals. As this finding is consistent with long-contended physician and specialty hospital positions, physician and specialty hospital advocates generally welcomed it.

Additional findings were less welcomed by physician and specialty hospital advocates. Specifically, MedPAC continued to express its concern that physician-owned specialty hospitals, if left unchecked, could have a negative financial effect on community hospitals and on the communities that they serve. Moreover, MedPAC expressed concerns that physician-owned specialty hospitals could have incentives to disregard their role in effectively serving Medicare and Medicaid beneficiaries in their communities or to compromise clinical judgment in the pursuit of hospital financial goals. As an example, MedPAC stated that physician-owned specialty hospitals actually appeared to be slightly less efficient that their community hospital counterparts, with slightly higher Medicare costs per case. Additionally, physician-owned specialty hospitals treated lower shares of Medicaid beneficiaries and treated generally less acute cases, while concentrating on providing services within more profitable Diagnostic Related Groups (DGRs).

Based upon the above findings, MedPAC issued a series of recommendations, the most immediately significant of which was that Congress extend the current moratorium on physician ownership in specialty hospitals to January 1, 2007. According the MedPAC, extending the moratorium for an additional 18 months would allow for time to gather information on its concerns regarding physician-owned specialty hospitals. Specific questions it cited as outstanding included whether and to what extent physician-owned specialty hospitals select lower acuity patients over higher acuity patients, avoid serving lower reimbursed Medicaid patients, have a financial incentive to over-utilize patient care services and have less efficiency than their community hospital counterparts. Additionally, MedPAC remains concerned about whether physician-owned specialty hospitals would economically damage community hospitals. Their concern is that physician-owned specialty hospitals could take higher profit patients and services away from community hospitals, requiring those hospitals to operate on low margin patients and services, and as a result, economically damaging those community hospitals, eventually limiting the care that can be provided to their communities.

MedPAC’s other recommendations are designed to address these economic issues by limiting physician financial incentives for referring their patients to their owned specialty hospitals. Believing that most of these incentives are due to problems inherent in Medicare’s hospital reimbursement system, MedPAC recommended specific improvements in the accuracy of the DRG reimbursement system. First, it recommended that the Secretary of the Department of Health and Human Services refine the current DRG system to more fully capture differences in the severity of illnesses among patients, and to re-base the relative weights of DRGs in order to more accurately represent the costs of providing patient care, helping to eliminate the financial advantages of providing care for patients of lower acuity. Second, MedPAC recommended that Congress provide the Secretary with the authority to adjust DRB relative weights so that he may account for differences in high-cost outlier cases. Affecting specialty hospitals and general acute care hospitals, this recommendation would be implemented over a transitional period so that hospitals can adjust to the refined payment system.

Finally, MedPAC recommended that Congress amend current law to allow for, and to regulate, gainsharing arrangements between physicians and hospitals, while protecting quality of care and minimizing physician financial incentives for referrals. Gainsharing arrangements are currently limited in most forms by a variety of federal laws, including the federal Civil Monetary Penalties Law, the Anti-kickback Statute, the Ethics in Patient Referral Act (a.k.a. Stark), and for not-for-profit hospitals, the Internal Revenue Code. According to MedPAC, permitting gainsharing opportunities could provide a viable alternative for physicians who are considering purchasing ownership interests in specialty hospitals.

Should Congress accept MedPAC’s recommendations, physicians would be prohibited from referring patients to hospitals that are primarily or exclusively engaged in the care and treatment of patients with cardiac conditions, orthopedic conditions or which are caring for patients receiving surgical procedures in which they have an ownership interest until at least January 1, 2007. Psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, certain cancer hospitals and existing specialty hospitals that were in operation or under development as of November 18, 2003 would not be included in this prohibition. Additionally, physicians who currently have ownership interests that are not limited by this prohibition could be affected by a refined DRG system designed to rebalance the costs of care among patients of lower and higher acuities.

Physicians who would like more information about MedPAC, or about its recommendations, can find that information on MedPAC’s website, located at http://www.medpac.gov/. MedPAC’s Report to the Congress on Physician-owned Specialty Hospitals can be found at http://www.medpac.gov/publications/congressional_reports/
Mar05_SpecHospitals.pdf
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Jeffrey B. Miller, Esq., is Associate Corporate Counsel for Mercy Health System of Southeastern Pennsylvania. His office is located in Conshohocken, Pa.

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