The Issue

On August 8, 2006, the Centers for Medicare and Medicaid Services ("CMS") of the U.S. Department of Health and Human Services allowed the existing federal moratorium against expanded physician ownership of specialty hospitals to expire. The agency’s determination now permits growth and expansion of such facilities unless prohibited by specific state law. Raising important issues for the health care delivery system in many communities, this regulatory development will be both heralded and reviled by different stakeholders in the health care industry.

After discussing the law and to provide appropriate perspective, the following summary further reviews CMS’ action using a modified version of the "classic" business planning framework of a SWOT (strengths, weaknesses, opportunities and threats) analysis. Putting aside real or perceived threats, what are the strengths, weaknesses, opportunities and tactics presented and available to interested parties in this emerging business sector?

Regulatory Background

Unless an exception applies, the federal Stark Law generally forbids physician referrals for inpatient and outpatient hospital services reimbursed by Medicare or Medicaid when the referring physician (or any immediate family member) has a financial relationship (ownership or compensation) with the entity supplying the service. Facilities and practitioners must strictly comply with the Stark Law, as well as the related (but distinct) Anti Kickback Statute which prohibits and punishes payments in exchange for referral of health care services reimbursed by Medicare and other governmental health insurance programs.

One important Stark Law limitation is the "whole hospital" exception, under which a physician-owner may lawfully refer patients to a hospital where he/she practices under certain circumstances. While some specialized hospitals have existed for decades without controversy (e.g., children’s, psychiatric and women’s facilities), a new kind of hospital has recently emerged which specializes in cardiac, orthopedic or surgical care. This phenomenon, along with related improvements in medical technology and the burgeoning growth of ambulatory services in profitable surgical and imaging areas, has created a threatening economic environment for some traditional, full service hospitals. Especially in the non profit sphere, some industry groups have opposed physician ownership of specialty hospitals by attacking perceived physician conflicts of interest which "cherry pick" profitable cases at the alleged expense of overall community welfare.

In this context, and notwithstanding economic critiques of the practice, many community hospitals have long subsidized less profitable patient care services such as emergency room, trauma and burn units, as well as indigent care generally, with the higher proceeds received for commercially insured surgical and other cases which are now the subject of competition from physician owned specialty hospitals. Thus, the emergence of successful specialty hospitals challenges the very business model under which some full-service hospitals have operated for many years.

Against this contentious background, in November 2003, Congress modified the Stark Law "whole hospital" exception by enacting an 18 month moratorium against most new or expanded physician ownership of specialty hospitals. A specialty hospital was defined by Congress for purposes of the moratorium as a facility primarily or exclusively engaged in the treatment of patients receiving cardiac, orthopedic or surgical care. While a precise statutory definition of the "primarily or exclusively" concept was lacking, many practitioners accepted the MedPAC definition that a facility is a specialty hospital if at least 45 percent of patient discharges involve cardiac, orthopedic or surgical treatment (CMS has also now affirmed that definition in its Final Report).

Even after the statutory moratorium expired in May 2005, CMS declined to process new Medicare enrollment applications for specialty hospitals, effectively extending the prohibition while debate continued. In February 2006, Congress spoke again in the Deficit Reduction Act, and directed the agency to issue a further report. Consistent with the foregoing, on August 8, 2006, CMS issued its "Final Report to the Congress and Strategic and Implementing Plan" on the topic. In a nutshell, the Final Report provides that the moratorium against new or expanded physician ownership of specialty hospitals has been permitted to expire, and specifies several important new requirements regulating the development of such facilities in a legally permissible manner.

Key Aspects of the CMS Plan

While the entire Final Report merits detailed review, several key issues are highlighted below. 

• Reimbursement Changes
  
  

  Concurrent with the end of the moratorium, CMS also proposed various changes in Medicare reimbursement rates and methodology; such changes often become a benchmark for private insurance changes as well. The proposed revisions involve modification to certain hospital DRGs in addition to reimbursement changes for procedures performed in ambulatory surgery centers. It remains to be seen whether one of the agency’s stated goals – creation of a more "neutral" playing field as between hospital outpatient surgery departments and ASCs – will actually be achieved by the proposals when they are finally implemented.

• EMTALA and Emergency Services
  
  

  Some community hospitals have challenged specialty hospitals by alleging a failure to assume a fair share of emergency (often indigent) care through a formal emergency department, supposedly to the detriment of full service facilities and the overall public. At least to some extent, CMS has apparently heeded this complaint, and has indicated plans to address specialty hospital obligations to accept patient transfers within the scope of a facility’s capabilities; in this context, the agency also anticipates fine tuning the federal Emergency Medical Treatment and Active Labor Act ("EMTALA," sometimes called the "anti-patient dumping" law). While the contours are not yet clear and state law can also significantly affect a facility’s required emergency capacity, it does appear that some specialty hospitals may soon need to expand their emergency care operations in various respects.

• Financial Disclosures
  
  

  CMS also intends to mandate substantial disclosure of physicians’ investment interests at specialty (and other) hospitals. The compliance rationale is to help assure that profit distributions to referring physicians are in fact proportionate to investment interests, and are not a subterfuge disguising prohibited kickbacks in exchange for patient referrals. Significant monetary penalties may be assessed by the agency to punish non-compliance with the new agency disclosure requirements. Physician-owners will also be required to disclose their investment interests to patients in connection with treatment, an apparent agency response to criticism of possible referring physician conflicts of interest.

• Gainsharing
  
  

  As a potential alternative to the perceived lure of specialty hospital ownership, some have advocated expanding hospital-physician gainsharing arrangements. Such arrangements are designed to allow physicians to participate in cost savings enjoyed by hospitals which are realized from product and supply standardization and development of more efficient treatment protocols. While gainsharing programs can sometimes generate additional income for surgeons and proceduralist physicians without the need for facility ownership, they can also yield legal problems under federal fraud and abuse laws unless structured in a very precise manner. In its Final Report, CMS does recognize the possible utility of such endeavors and announced its intent to promote their development under some circumstances.

• Charity Care Variables
  
  

  CMS also discussed the relative amount of charity care and care for Medicaid patients furnished by specialty hospitals in comparison to other facilities. While further discussion is sure to follow, the Final Report contains no specific recommendation on the subject of required provision of uncompensated or undercompensated care. For some, this lack of agency response may seem a lost opportunity to address the issue of access to care by the uninsured and underinsured in a variety of settings. Nonetheless, CMS declined to take action at this time.

A "SWOT" Analysis for Specialty Hospital Development

Health care stakeholders will now need to evaluate and apply CMS’ new approach to specialty hospital development. In the health care context, some skilled business planners use the well known SWOT format to assess the prospects of a given business strategy. Reflecting upon CMS’ significant regulatory step, use of the SWOT rubric – modified slightly to emphasize available tactics, rather than merely focusing upon threats – may suggest several important points for health care decision-makers grappling with specialty hospital issues.  

• Strengths
  
  

  From the perspective of free market competition, the end of the moratorium can be viewed as a healthy and beneficial step. Viewed through this lens, a specialty hospital is an efficient, technologically advanced "focused factory" in the positive spirit of free market capitalism envisioned by Adam Smith two centuries ago. The removal of needless government barriers to entry will, in this view, greatly benefit the consuming public by applying necessary market discipline to all providers, which will be particularly beneficial in an era of consumer driven health care and increased individual financial responsibility for personal health expenditures.

• Weaknesses
  
  

  Specialty hospital opponents vigorously contend that such facilities unfairly undermine the fiscal viability of full service community hospitals, to the public’s ultimate detriment. By "losing" better-reimbursed cases to specialty hospitals (which, it is argued, result from alleged physician conflicts of interests rather than greater efficiencies or consumer preferences), community hospitals will become unable to cross-subsidize indigent care and other unprofitable services with the revenue now flowing to the new competitors. Whether such subsidization is itself an economically negative and inefficient practice that merits deference is a topic for genuine debate, as is the proper way to calculate the relative "community contribution" of tax paying specialty hospitals when compared with tax-exempt facilities. Such debate seems likely to reverberate among policymakers for the foreseeable future.

• Opportunities
  
  

  Opportunities now abound in the specialty hospital field, certainly for proponents and, to some extent, for opponents as well. Subject to careful assessment of economic (e.g., reimbursement) and business (e.g., managed care contract availability) issues, physicians, hospitals and entrepreneurs are now free under federal law to pursue specialty hospital development to meet perceived consumer demand.

  In contrast, specialty hospital detractors may well switch their focus to individual state legislatures in an effort to gain legal protection that was rejected by CMS at the federal level. Whether by expanding state "mini-Stark" physician referral prohibitions, creating new certificate of need requirements or otherwise, there will probably be legislative efforts to limit development in some jurisdictions. A clear legal analysis of local requirements will become essential to developing a specialty hospital strategy – whether pro or con – in any event.

• Tactics
  
  

  For physicians as well as established hospitals the overriding decision from which other specific tactics will flow, is the basic but ultimate choice of being "for" or "against" specialty hospital development in an overall sense. This tactical determination may be reminiscent of parallel debates which occurred during the earlier development of a distinct ASC sector. In that context, many hospital systems initially chose to oppose ASC development by affiliated physicians under any circumstances, but ultimately decided to pursue mutually beneficial joint ventures when it became apparent – sometimes at significant cost – that the "problem" would not simply go away by itself. In many such instances, creating strategic alliances proved to be a more effective step for all stakeholders rather than choosing sides for a fight to the finish.

  A similar path seems likely to unfold for specialty hospitals. In any event, the overriding "yes or no" tactical decision may have lasting repercussions involving more than mere opposition to a possible threat or pursuit of short term economic gain. Such a decision should certainly be made in a dispassionate and well informed manner by all concerned parties.

Conclusion

CMS’ newly issued determination will likely affect delivery of health care in the United States in significant respects. Especially when viewed in context with other pending regulatory developments proposed by the agency, affected parties would be well advised to seek specific financial and legal review of a particular situation as they evaluate their overall objectives in this evolving field.

A revised version of this article is appearing in MGMA Connexion. Copyright 2006, Medical Group Management Association. All rights reserved.