Moratorium nearing its expiration date: Experts don’t expect flurry of new specialty hospitals

Health care experts don’t predict a surge in specialty hospital construction after a federal moratorium expires next month. Even so, the rift between competing industry interests is expected to intensify.

Moratoriums on new physician-owned heart, orthopedic and surgical specialty hospitals dating back to the Medicare Modernization Act of 2003 temporarily stalled the rapid growth of the facilities.

In Indianapolis, three such hospitals-the Heart Center of Indiana, the Indiana Heart Hospital and the Indiana Orthopaedic Hospital-opened between December 2002 and March 2005. They skirted the moratorium, however, because planning had already begun.

In Indiana, it’s doubtful the number of specialty hospitals will increase anytime soon, despite the lull in construction, said Duane Sobecki, a senior partner at the Indianapolis-based medical consulting firm Sobecki and Associates.

“I don’t see any great land rush at all,” he said. “People knew the moratorium was coming, so the ones who were going to build did.”

Specialty hospitals in which physicians have at least partial ownership came into prominence during the early part of the decade as doctors dissatisfied with outside control over patient care opted to invest in their own operations.

There are roughly 150 physician-owned facilities in the United States, according to the American Surgical Hospital Association in Sioux Falls, S.D. The trade association formed in 2001 to represent the burgeoning industry.

The Washington, D.C.-based American Hospital Association represents the competing interests of general hospitals and opposes those owned by physicians.

The AHA is disappointed the Centers for Medicare & Medicaid Services, or CMS, likely will not extend the congressional moratorium with one of its own following the Aug. 8 deadline and hopes to sway legislators to support its position.

The AHA ultimately wants federal lawmakers to permanently ban the practice of physicians referring patients to hospitals in which they have a direct stake, said Caroline Steinberg, the AHA’s vice president for trends analysis.

“There is a potential for a conflict of what is in the best financial interest of the physician and the best clinical interest of the patient,” Steinberg charged. “We believe that is a serious conflict of interest that should not exist in the practice of medicine.”

John Stewart, president and CEO of the Indiana Heart Center-a partnership between The Care Group and St. Vincent Health-is bracing for what he expects to be a contentious battle.

“The AHA is not going to give up, trust me,” he said. “They still believe this is a threat, not an opportunity to improve health care.”

‘Cautiously optimistic’

After the 2003 moratorium expired in June 2005, CMS indicated it would not OK new specialty hospitals for at least another six months while the agency reviewed enrollment procedures for the facilities.

The federal agency is involved because about 40 percent of specialty-hospital patients receive Medicare benefits, according to the ASHA. Further, private insurers are hesitant to embrace a facility that has not been certified by CMS, said Molly Gutierrez, executive director of the ASHA.

Legislation enacted in February further prohibited specialty hospital enrollment in Medicare for another six months, which expires Aug. 8.

“They [will] have found no reason to renew the moratorium,” Gutierrez said. “That is our cautiously optimistic expectation.”

But CMS is revising payment policies for inpatient and outpatient care to reduce price distortions that have helped spur specialty hospital development.

The changes, which are set to go into effect Oct. 1, should help general hospitals better compete with the specialty-care facilities that concentrate on relatively profitable conditions, according to the Medicare Payment Advisory Commission.

Moreover, some employers and insurers suggest certificate-of-need regulations are necessary in states without the laws to limit the growth of specialty hospitals.

In 2004, Indiana legislators making up the Indiana Health Finance Commission met to hear from several supporters and opponents of certificate-of-need laws and moratoriums on building, neither of which Indiana had at the time. No such laws have been passed since.

Indiana is one of 14 states without a certificate-of-need law. The measure would require anyone who wants to build or expand a health care facility to obtain a certificate from the state indicating the project fulfills conditions in the market.

Indiana lawmakers repealed a previous certificate-of-need law Dec. 31, 1984, because they felt then that it had little effect on cost control.

Sobecki at Sobecki and Associates deems both certificates of need and moratoriums as unnecessary.

“I’m a big believer in letting the market determine these kinds of things,” he said. “If the health care market or the insurance companies said they aren’t going to put [specialty hospitals] in the network, then that would have solved the problem.”

Demand for services increasing

To be sure, supporters of the hospitals say they play a vital role in improving the delivery of health care.

Stewart at the Indiana Heart Center said the city’s two heart facilities are especially necessary considering the state’s poor showing in several health surveys.

Indeed, 27.6 percent of Hoosiers smoke, the fourth-highest rate in the nation, according to a 2002 United Health Foundation study. Further, the state has the 10th-highest rate of obesity and ranks 15th in the percentage of the population with hypertension, the study said.

Combine the statistics with the growing number of aging baby boomers and it’s difficult to convince Stewart that there’s not room for both specialty hospitals and general hospitals.

“I think the AHA’s efforts are misguided,” he said. “It is not based on fact but purely anti-competitive reasons. In a free market, that flies in the face of what we believe is necessary.”

St. Vincent partnered with its physicians who formed The Care Group to offer patients an alternative to receive treatment, said Kevin Speer, St. Vincent’s senior vice president and chief strategy officer. Meanwhile, St. Vincent continues to operate its heart center at the 86th Street campus.

Steinberg at the AHA doesn’t buy the argument. She thinks the practice of physicians who refer patients to their hospitals will only drive up the cost of health care. If they have an MRI machine, they may order more MRIs than necessary, she argued.

“There’s a whole range of self-referral that is illegal in most other settings,” Steinberg said. “This kind of trend could add increased costs to the system.”

In Indiana, only one physician-owned hospital, in Merrillville, is under construction. But it does not fall under the specialty-hospital definition because it offers both surgical and non-surgical services. Construction on the facility operated by Merrillville-based Pinnacle Health Care should be finished by Jan. 31.