Specialty Hospitals
Information on Potential New Facilities Gao ID: GAO-05-647R May 19, 2005Beginning in the 1990s, there was a substantial increase in the number of short-term acute care hospitals that primarily treat patients with specific medical conditions or who need surgical procedures. Advocates of such hospitals, commonly referred to as specialty hospitals, contend that their focused missions and dedicated resources can both improve quality and reduce health care costs. Critics contend that specialty hospitals siphon off the most profitable procedures and patient cases, typically without providing emergency care or other vital community services, and thus erode the financial health of neighboring general hospitals. Critics also contend that the ability of physicians to invest in a specialty hospital and then refer patients to that hospital creates financial incentives that may inappropriately affect physicians' clinical and referral behavior. In 2003, we issued two reports on the growth, characteristics, and performance of specialty hospitals. More than two-thirds of the 100 specialty hospitals we identified as being in existence in June 2003 had opened their doors since the beginning of 1990. The specialty hospitals in existence in fiscal year 2000, the most recent year for which we then had data, accounted for about 1 percent of Medicare spending for inpatient services. We also identified an additional 26 specialty hospitals under development in 10 states. Approximately 70 percent of the existing specialty hospitals were owned, in part or in whole, by physicians. Subsequent to our reports, Congress, through the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), established a moratorium which, in effect, temporarily halted further development of physician-owned specialty hospitals that focus on cardiac, orthopedic, or surgical procedures and mandated additional studies of specialty hospital issues. Specialty hospitals in operation as of November 18, 2003, are grandfathered under the moratorium and are allowed to expand within limits. Specialty hospitals not opened as of that date may apply to the Centers for Medicare & Medicaid Services (CMS) and request a determination of their development status. Hospitals not open as of November 18, 2003, but sufficiently advanced in their development may be grandfathered. The MMA moratorium expires June 8, 2005. To help Congress consider the likely consequences of the moratorium's expiration, Congress asked us to provide updated information on the potential growth in the number of physician-owned specialty hospitals. This report responds to that request by presenting information that addresses the following questions: (1) How many applications for grandfather determinations has CMS received from specialty hospitals under development, what types of specialty hospitals applied, where were these hospitals located, and how many of the applications have been approved? (2) What information exists to indicate the likely number, location, and type of specialty hospitals not exempt from the moratorium that may be developed following its expiration?
As of April 29, 2005, CMS had received 40 applications from specialty hospitals under development seeking determinations that they were grandfathered under MMA's moratorium. CMS received 38 applications for new specialty hospitals and 2 applications for specialty hospital expansions. Slightly more than half (22) of the 40 applications were from surgical hospitals, while the rest were from cardiac hospitals (9), orthopedic hospitals (5), or hospitals that did not indicate their specialty (4). Three-fourths of the applications came from hospitals in four states: Texas (19), Louisiana (6), California (3), and Oklahoma (3). Of the 40 applications it received, CMS issued 12 favorable opinions (approvals) and 2 unfavorable opinions (denials). One of the 40 applications had been withdrawn. Comprehensive information about specialty hospitals that may be developed when the moratorium expires is both difficult to acquire and verify, although what does exist indicates continued growth in the number of specialty hospitals--in California, South Carolina, and Texas. Of the 52 facilities tentatively identified by AHA, FAH, and others as specialty hospitals under development, and that did not apply for a determination on whether they were subject to the moratorium, we were able to obtain information corroborating that 6 of the facilities will be physician-owned specialty hospitals. One of the 6 new facilities is planned as a cardiac hospital; the remaining 5 new facilities are slated to be surgical hospitals. Four of the 52 facilities had already opened as physician-owned specialty hospitals, while 4 others were no longer under development. We were unable to obtain sufficient information to determine the status and characteristics of 17 facilities. Finally, the available information for the remaining 21 of the 52 facilities indicated that they would not be physician-owned specialty hospitals. In short, the group of 52 facilities could include anywhere from 6 to 23 specialty hospitals under development. Additional facilities, especially those in the early planning stages, could also be under development as specialty hospitals. Representatives of community hospitals are concerned that the number of specialty hospitals could grow rapidly following the moratorium's expiration. In contrast, most representatives of specialty hospitals said that continued uncertainty over future federal actions and other factors would cause any such growth to be both moderate and gradual. Upon reviewing a draft of our report, CMS acknowledged the usefulness of our report and provided context for the scope of the specialty hospital issue.
GAO-05-647R, Specialty Hospitals: Information on Potential New Facilities
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May 19, 2005:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
Subject: Specialty Hospitals: Information on Potential New Facilities:
Beginning in the 1990s, there was a substantial increase in the number
of short-term acute care hospitals that primarily treat patients with
specific medical conditions or who need surgical procedures. Advocates
of such hospitals, commonly referred to as specialty hospitals, contend
that their focused missions and dedicated resources can both improve
quality and reduce health care costs. Critics contend that specialty
hospitals siphon off the most profitable procedures and patient cases,
typically without providing emergency care or other vital community
services, and thus erode the financial health of neighboring general
hospitals. Critics also contend that the ability of physicians to
invest in a specialty hospital and then refer patients to that hospital
creates financial incentives that may inappropriately affect
physicians' clinical and referral behavior.
In 2003, we issued two reports on the growth, characteristics, and
performance of specialty hospitals.[Footnote 1] More than two-thirds of
the 100 specialty hospitals we identified as being in existence in June
2003 had opened their doors since the beginning of 1990.[Footnote 2]
The specialty hospitals in existence in fiscal year 2000, the most
recent year for which we then had data, accounted for about 1 percent
of Medicare spending for inpatient services. We also identified an
additional 26 specialty hospitals under development in 10 states.
Approximately 70 percent of the existing specialty hospitals were
owned, in part or in whole, by physicians.[Footnote 3]
Subsequent to our reports, Congress, through the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA), established a
moratorium which, in effect, temporarily halted further development of
physician-owned specialty hospitals that focus on cardiac, orthopedic,
or surgical procedures and mandated additional studies of specialty
hospital issues.[Footnote 4] Specialty hospitals in operation as of
November 18, 2003, are grandfathered under the moratorium and are
allowed to expand within limits. Specialty hospitals not opened as of
that date may apply to the Centers for Medicare & Medicaid Services
(CMS) and request a determination of their development status.
Hospitals not open as of November 18, 2003, but sufficiently advanced
in their development may be grandfathered. The MMA moratorium expires
June 8, 2005.
To help you consider the likely consequences of the moratorium's
expiration, you asked us to provide updated information on the
potential growth in the number of physician-owned specialty hospitals.
This report responds to your request by presenting information that
addresses the following questions: (1) How many applications for
grandfather determinations has CMS received from specialty hospitals
under development, what types of specialty hospitals applied, where
were these hospitals located, and how many of the applications have
been approved? (2) What information exists to indicate the likely
number, location, and type of specialty hospitals not exempt from the
moratorium that may be developed following its expiration?
We determined the number and characteristics of specialty hospitals
under development that had applied for a grandfather determination by
obtaining summaries of the applications from CMS. Facilities that
submitted such applications included potential new specialty hospitals
and existing specialty hospitals with expansions underway as of
November 18, 2003. We included both new and expanding facilities in our
analysis of the applications that CMS received and in that analysis
refer to both types of facilities as "under development." To gather and
assess information about the number of specialty hospitals potentially
under development that are not exempt under the moratorium, we
contacted representatives from national and selected state associations
of community hospitals, including the American Hospital Association
(AHA) and the Federation of American Hospitals (FAH); several large
companies that own and operate specialty hospitals; the American
Surgical Hospital Association; and the Medicare Payment Advisory
Commission (MedPAC). Many of these representatives provided us with
information about specific facilities that they had tentatively
identified as specialty hospitals under development. Because MMA's
moratorium applies only to physician-owned cardiac, orthopedic, and
surgical specialty hospitals, our analysis focused on facilities that
had been tentatively identified as such by one or more of the above
representatives. We then sought to ascertain the characteristics and
status of each facility by contacting a facility official or, if that
was not possible, obtaining corroborating information from news reports
or other sources. We also solicited the views of the representatives
mentioned above regarding the potential for specialty hospital growth.
Additional details regarding our methodology are contained in enclosure
I. Our work was performed during April and May 2005 in accordance with
generally accepted government auditing standards.
Results in Brief:
As of April 29, 2005, CMS had received 40 applications from specialty
hospitals under development seeking determinations that they were
grandfathered under MMA's moratorium. CMS received 38 applications for
new specialty hospitals and 2 applications for specialty hospital
expansions. Slightly more than half (22) of the 40 applications were
from surgical hospitals, while the rest were from cardiac hospitals
(9), orthopedic hospitals (5), or hospitals that did not indicate their
specialty (4). Three-fourths of the applications came from hospitals in
four states: Texas (19), Louisiana (6), California (3), and Oklahoma
(3). Of the 40 applications it received, CMS issued 12 favorable
opinions (approvals) and 2 unfavorable opinions (denials). One of the
40 applications had been withdrawn.
Comprehensive information about specialty hospitals that may be
developed when the moratorium expires is both difficult to acquire and
verify, although what does exist indicates continued growth in the
number of specialty hospitals--in California, South Carolina, and
Texas. Of the 52 facilities tentatively identified by AHA, FAH, and
others as specialty hospitals under development, and that did not apply
for a determination on whether they were subject to the moratorium, we
were able to obtain information corroborating that 6 of the facilities
will be physician-owned specialty hospitals. One of the 6 new
facilities is planned as a cardiac hospital; the remaining 5 new
facilities are slated to be surgical hospitals. Four of the 52
facilities had already opened as physician-owned specialty hospitals,
while 4 others were no longer under development. We were unable to
obtain sufficient information to determine the status and
characteristics of 17 facilities. Finally, the available information
for the remaining 21 of the 52 facilities indicated that they would not
be physician-owned specialty hospitals. In short, the group of 52
facilities could include anywhere from 6 to 23 specialty hospitals
under development. Additional facilities, especially those in the early
planning stages, could also be under development as specialty
hospitals. Representatives of community hospitals are concerned that
the number of specialty hospitals could grow rapidly following the
moratorium's expiration. In contrast, most representatives of specialty
hospitals said that continued uncertainty over future federal actions
and other factors would cause any such growth to be both moderate and
gradual.
Upon reviewing a draft of our report, CMS acknowledged the usefulness
of our report and provided context for the scope of the specialty
hospital issue.
Background:
Federal law, in general, prohibits physicians from referring Medicare
patients for designated health services to facilities in which they (or
an immediate family member) have an ownership or investment interest.
In addition, the law prohibits such facilities from billing Medicare or
the beneficiary for services rendered as a result of a prohibited
referral.[Footnote 5] Before MMA, an exception to this general
prohibition, commonly called the "whole hospital" exception, allowed
physicians who have an ownership or investment interest in an entire
hospital, and who are authorized to perform services there, to refer
patients to that hospital. MMA's specialty hospital moratorium excludes
from this exception those hospitals that are primarily or exclusively
engaged in the care and treatment of patients with cardiac or
orthopedic conditions, or patients receiving surgical procedures or
other specialized categories of services designated by the Secretary of
Health and Human Services.[Footnote 6],[Footnote 7] Therefore, a
physician with an ownership or investment interest in a specialty
hospital may not refer Medicare patients to that hospital, and the
hospital may not bill Medicare or the beneficiary, for inpatient or
outpatient hospital services or other designated health services while
the moratorium is in effect.
MMA grandfathers specialty hospitals that as of November 18, 2003, were
in operation or under development. Hospitals may apply to CMS and
request an advisory opinion on their development status as of November
18, 2003. In determining whether a hospital was under development as of
that date, CMS is required to consider whether the following had
occurred: architectural plans were completed; funding was received;
zoning requirements were met; and necessary approvals from appropriate
state agencies were received. CMS may also consider other evidence in
reaching its determination. Specialty hospitals that had Medicare
provider agreements in effect as of November 18, 2003, were considered
to be in operation as of that date and thus grandfathered under the
moratorium. During the moratorium, a grandfathered specialty hospital
is not allowed to bill for physician investor referrals of Medicare
designated health services if the hospital expands by increasing the
number of its physician investors, changing the specialized services it
provides, or increasing its size by more than five beds or 50 percent
of the number of beds in the hospital as of November 18, 2003
(whichever is greater).[Footnote 8]
Although MMA's moratorium specifically pertains to physicians'
referrals of Medicare patients and any corresponding billing for the
referred services, the moratorium in effect curtails further
development of physician-owned specialty hospitals. Existing specialty
hospitals grandfathered under the moratorium, although limited in their
ability to expand, may continue to bill for services rendered to
patients referred to them by physicians who have ownership or
investment interests in the facilities.
Forty Specialty Hospitals Applied for a Determination of Their
Development Status under the Moratorium:
As of April 29, 2005, CMS had received 40 applications for grandfather
determinations from specialty hospitals that sought to continue to
develop or expand under the moratorium.[Footnote 9] CMS had approved 12
of the applications. Two of the applications were denied, although 1 of
these 2 decisions is being reviewed by CMS at the request of the
specialty hospital. Another of the 40 applications was withdrawn, while
the remaining 25 applications are pending. The tables below provide
detailed information on the status of the applications by type of
application--new facilities or expansions of existing facilities (see
table 1), hospital specialty (see table 2), and hospital location (see
table 3).
Table 1: Status of Applications for Specialty Hospital Grandfather
Determinations, by Type of Application, April 29, 2005:
Application type: New facility[A];
Application status: Approved: 12;
Application status: Denied: 2;
Application status: Withdrawn: 1;
Application status: Pending: 23;
Application status: Total: 38.
Application type: Expansion;
Application status: Approved: 0;
Application status: Denied: 0;
Application status: Withdrawn: 0;
Application status: Pending: 2;
Application status: Total: 2.
Application type: Total;
Application status: Approved: 12;
Application status: Denied: 2;
Application status: Withdrawn: 1;
Application status: Pending: 25;
Application status: Total: 40.
Source: CMS.
[A] New facilities include ambulatory surgery centers that were being
converted to specialty hospitals.
[End of table]
Table 2: Status of Applications for Specialty Hospital Grandfather
Determinations, by Hospital Specialty, April 29, 2005:
Hospital specialty: Cardiac;
Application status: Approved: 1;
Application status: Denied: 1;
Application status: Withdrawn: 0;
Application status: Pending: 7;
Application status: Total: 9.
Hospital specialty: Orthopedic;
Application status: Approved: 2;
Application status: Denied: 1;
Application status: Withdrawn: 1;
Application status: Pending: 1;
Application status: Total: 5.
Hospital specialty: Surgical;
Application status: Approved: 9;
Application status: Denied: 0;
Application status: Withdrawn: 0;
Application status: Pending: 13;
Application status: Total: 22.
Hospital specialty: Uncertain[A];
Application status: Approved: 0;
Application status: Denied: 0;
Application status: Withdrawn: 0;
Application status: Pending: 4;
Application status: Total: 4.
Hospital specialty: Total;
Application status: Approved: 12;
Application status: Denied: 2;
Application status: Withdrawn: 1;
Application status: Pending: 25;
Application status: Total: 40.
Source: CMS.
[A] Application did not indicate hospital's specialty.
[End of table]
Table 3: Status of Applications for Specialty Hospital Grandfather
Determinations, by Hospital Location, April 29, 2005:
Hospital location: Texas;
Application status: Approved: 7;
Application status: Denied: 1;
Application status: Withdrawn: 0;
Application status: Pending: 11;
Application status: Total: 19.
Hospital location: Louisiana;
Application status: Approved: 3;
Application status: Denied: 0;
Application status: Withdrawn: 0;
Application status: Pending: 3;
Application status: Total: 6.
Hospital location: California;
Application status: Approved: 1;
Application status: Denied: 0;
Application status: Withdrawn: 0;
Application status: Pending: 2;
Application status: Total: 3.
Hospital location: Oklahoma;
Application status: Approved: 0;
Application status: Denied: 1;
Application status: Withdrawn: 0;
Application status: Pending: 2;
Application status: Total: 3.
Hospital location: Other[A];
Application status: Approved: 1;
Application status: Denied: 0;
Application status: Withdrawn: 1;
Application status: Pending: 7;
Application status: Total: 9.
Hospital location: Total;
Application status: Approved: 12;
Application status: Denied: 2;
Application status: Withdrawn: 1;
Application status: Pending: 25;
Application status: Total: 40.
Source: CMS.
[A] Other states include Arizona, Arkansas, Colorado, Indiana, Kansas,
Nevada, Ohio, and Pennsylvania.
[End of table]
Limited Verifiable Information Suggests Continued Growth in the Number
of Specialty Hospitals:
When the Moratorium Expires:
Comprehensive information about specialty hospitals that did not apply
for a grandfather determination and that may be developed when the
moratorium expires is not readily available, variable in its quality,
and often difficult to verify. Although AHA, FAH, and others had
tentatively identified 52 facilities as potential physician-owned
specialty hospitals under development, the information available to us
corroborated this status for only 6 facilities. Available information
on the remaining facilities was either insufficient for us to determine
the status and characteristics of the facility or it indicated that the
facility was not under development or was not a physician-owned
specialty hospital. Other facilities, in addition to the 52 we
attempted to confirm, could be under development as specialty
hospitals. This is particularly true of facilities that are in the
early planning stages, because those efforts are often not publicized.
Because of the lack of comprehensive, verifiable information, the
extent to which the number of specialty hospitals will increase when
the moratorium expires is uncertain. Representatives of community
hospitals told us they believe that there will be a rapid expansion in
the number of new specialty hospitals, while most representatives of
the specialty hospital industry said they believe that any such growth
will be both modest and gradual.
Of the 52 facilities tentatively identified as specialty hospitals
under development, we obtained corroborating information that 6 were
being planned as physician-owned specialty hospitals. (See table 4.)
Five of the 6 specialty hospitals were slated to be surgical hospitals
and 1 was being built as a cardiac hospital. (See table 5.) The 6
specialty hospitals are located in three states: California (2), South
Carolina (1), and Texas (3). An additional 4 facilities had opened as
physician-owned specialty hospitals during the moratorium.[Footnote 10]
We also identified 4 facilities that had been under development as
specialty hospitals, but those projects had been terminated.
Table 4: Characteristics of Facilities Identified as Potential
Specialty Hospitals under Development that Did Not Apply for
Grandfather Determinations, April 2005:
Physician-owned specialty hospital? Yes;
Facility characteristics: Under development;
Number of facilities: 6.
Physician-owned specialty hospital? Yes;
Facility characteristics: Opened after November 18, 2003;
Number of facilities: 4.
Physician-owned specialty hospital? Yes;
Facility characteristics: No longer under development;
Number of facilities: 4.
Physician-owned specialty hospital? Uncertain;
Facility characteristics: Information insufficient to determine
characteristics;
Number of facilities: 17.
Physician-owned specialty hospital? No;
Facility characteristics: Physician-owned general hospital;
Number of facilities: 12.
Physician-owned specialty hospital? No;
Facility characteristics: Not a hospital or not physician owned [A];
Number of facilities: 9.
Number of facilities: Total: 52.
Source: GAO.
Note: The facilities included in the table had been identified by
representatives of community hospitals, state hospital associations,
representatives of specialty hospitals, and GAO as potential specialty
hospitals under development. We classified each facility based on
available corroborating information regarding the characteristics of
that facility.
[A] Five of the nine facilities are ambulatory surgery centers, two are
general hospitals that are not physician-owned, one is a physician's
office, and one is a recovery center.
[End of table]
Table 5: Location and Type of Specialty Hospitals that Did Not Apply
for Grandfather Determinations and Were Verified as under Development,
April 2005:
State: California;
Specialty type: Cardiac: 0;
Specialty type: Surgical: 2;
Total: 2.
State: South Carolina;
Specialty type: Cardiac: 1;
Specialty type: Surgical: 0;
Total: 1.
State: Texas;
Specialty type: Cardiac: 0;
Specialty type: Surgical: 3;
Total: 3.
State: Total;
Specialty type: Cardiac: 1;
Specialty type: Surgical: 5;
Total: 6.
Source: GAO.
Note: We did not identify any orthopedic specialty hospitals under
development.
[End of table]
The information available on 17 of the 52 facilities was insufficient
for us to determine whether they were being developed as physician-
owned specialty hospitals. Consequently, the 52 facilities could
include from 6 to 23 physician-owned specialty hospitals under
development. In another 21 of the 52 cases, the available information
indicated that the facility would not be a physician-owned specialty
hospital.
Many community hospital representatives that we spoke with said that
the expiration of the moratorium will lead to a rapid increase in the
number of specialty hospitals. The representatives stated that such
development would occur, in part, because physicians view specialty
hospitals as an attractive financial opportunity. Community hospital
representatives said that, in some instances, it would be relatively
easy for physician-owned general hospitals to change their missions and
begin functioning as specialty hospitals. The representatives also
raised concerns about some physician-owned hospitals, in existence and
under development, that classify themselves as general hospitals. The
representatives said that some of these self-classified general
hospitals predominately focused, or will focus, on surgical procedures,
and thus should be considered specialty hospitals by CMS and be subject
to MMA's moratorium.
Most of the specialty hospital representatives we spoke with expected
that any growth in the number of specialty hospitals following the
moratorium's expiration would likely be both modest and gradual.
Officials representing companies that own specialty hospitals said that
continued uncertainty regarding future federal restrictions would
dampen their interest in developing new specialty hospitals and make it
difficult to obtain the financing necessary for such projects.[Footnote
11] Some company representatives said that the lack of a clear
definition of what constitutes a specialty hospital has led their
companies to avoid investments in certain facilities. The
representatives said that they were concerned that if Congress extends
the moratorium, CMS could later classify the facility as a specialty
hospital, potentially subject to the moratorium or other restrictions.
Specialty hospital representatives also said that not all physician-
owned specialty hospitals have been financially successful and that
some such hospitals have closed and physicians have lost their
investments. Some representatives added that, although physicians are
primarily interested in specialty hospitals for nonfinancial reasons,
the financial risks are now more apparent and may dampen some
enthusiasm for future development. The representatives said they
believed that any growth in the number of specialty hospitals will be
gradual because not all of the specialty hospitals under development
will open immediately and that it typically takes 2 or more years to
develop, construct, and open a new facility. Finally, they added that
it is likely that some of the planned specialty hospitals, especially
those in the early stages of planning, may never be built or opened.
Concluding Observations:
Whether or not MMA's moratorium is allowed to expire, the number of
physician-owned specialty hospitals will increase from present levels.
If the moratorium is extended, at least 12, and perhaps eventually as
many as 37, new specialty hospitals could be completed and opened
within a year or two. The exact increase would depend in part on the
number of applications that CMS approves. If the moratorium is allowed
to expire, the increase would likely be greater, but how much greater
is uncertain. Specialty hospitals under development whose applications
for grandfather status have been denied, and specialty hospitals that
have not applied, could open.
We identified 6 specialty hospitals under development that had not
applied. In addition, some or all of the 17 facilities where we had
insufficient information to classify the facility could also be
physician-owned specialty hospitals under development. The lack of
comprehensive, verifiable information makes it difficult to know
exactly how many hospitals may be under development. Ultimately, the
extent to which physicians and other investors are attracted to
specialty hospitals, or are deterred by the uncertainty of future
federal restrictions or other factors, will decide how quickly the
industry grows when the moratorium expires.
Agency Comments:
We provided a draft of our report to CMS for review. In written
comments, CMS acknowledged the usefulness of our report concerning
physician-owned specialty hospitals under development. CMS provided
context for the relative potential growth of physician-owned specialty
hospitals, stating that if the agency were to approve all pending
applications for grandfather determinations and if all of the 37
potential specialty hospitals identified by GAO were to open, the
number of acute care hospitals would increase by just over 1 percent.
We have reprinted CMS's letter in enclosure II. CMS also provided
technical comments, which we incorporated where appropriate.
As agreed with your offices, we plan no further distribution of this
report until 30 days after its date. At that time, we will send copies
of this report to appropriate congressional committees and other
interested parties. We will also make copies available to others upon
request. This report will be available at no charge on GAO's Web site
at http://www.gao.gov.
If you or your staffs have any questions, please call me on (202) 512-
7101 or James Cosgrove on (202) 512-7029. Other contributors to this
report include Zachary Gaumer and Jennifer Podulka.
Signed by:
A. Bruce Steinwald:
Director, Health Care:
Enclosures:
Scope and Methodology:
This enclosure provides additional details about the scope of our work,
our methodology, and key limitations. First, it describes the data that
we obtained from the Centers for Medicare & Medicaid Services (CMS)
regarding specialty hospitals under development that applied for a
determination that they were grandfathered under the moratorium.
Second, it describes the approach we used to identify information about
other specialty hospitals under development and to verify the accuracy
of this information.
Information on Specialty Hospitals under Development that Applied for
Grandfather Determinations:
CMS provided information on the 40 specialty hospitals under
development that had applied for grandfather determinations as of April
29, 2005. From CMS, we obtained summary information on each hospital's
name, state location, and area of specialization; whether the
application was for a new facility or an expansion of an existing one;
and the current status of the application: approved, denied, withdrawn,
or pending.
Information on Other Specialty Hospitals under Development:
To gather information about specialty hospitals potentially under
development that had not applied for a determination that they were
grandfathered under the moratorium, we consulted organizations and
individuals most likely to be aware of such development. Specifically,
we contacted the two government agencies mandated by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) to
study specialty hospital issues for Congress: CMS and the Medicare
Payment Advisory Commission. Because hospital officials and hospital
associations are likely to be aware of developments in their industry,
we contacted representatives from both community hospitals and
specialty hospitals. Specifically, the community hospital
representatives included officials from the American Hospital
Association, the Federation of American Hospitals, the Coalition of
Full-Service Community Hospitals, and nine state hospital
associations.[Footnote 12] We selected the nine state hospital
associations because our October 2003 report on specialty hospitals
identified those states as having concentrations of specialty hospitals
in existence or under development at that time.[Footnote 13] Officials
of specialty hospitals that we contacted represented the American
Surgical Hospital Association and five corporations that own specialty
hospitals: Baylor Health Care System, Hospital Partners of America,
MedCath Corporation, National Surgical Hospitals, and United Surgical
Partners International. Many of the organizations and individuals we
contacted provided us with information on specific facilities that they
said were likely specialty hospitals under development and offered
their views on the potential for specialty hospital growth after the
moratorium expires.
We consolidated the information we obtained from the sources described
above, along with the information on specialty hospitals under
development that we had identified for our October 2003 report. After
excluding those facilities that had submitted applications for
grandfather determinations to CMS, we were left with a list of 52
potential new specialty hospitals.
We then sought corroborating information that the 52 facilities in
question (1) were under development, (2) would specialize in treating
cardiac or orthopedic patients or in treating patients that need
surgical procedures, and (3) that these facilities would be owned, at
least in part, by one or more physicians. If sufficient information was
available, we attempted to contact a representative of the facility.
When we were successful in making contact, we used the information we
obtained to determine the status of the facility. If we could not make
contact with the facility directly, we turned to a variety of
independent news sources to obtain information about the facility.
These sources included local newspapers, local business journals,
health care industry publications, and company Web sites. Following the
process outlined above, we determined the status of 35 of the 52
facilities tentatively identified as specialty hospitals under
development. In 17 instances, we could not locate sufficient
information within the time frames allotted for the study to determine
the status of the facility. Although our findings are based on the best
information available to us, it is very likely that we do not have a
complete list of all specialty hospitals under development. Some
facilities, particularly those in the initial planning stages, may not
have come to the attention of the individuals and organizations we
contacted. Our work was performed during April and May 2005 in
accordance with generally accepted government auditing standards.
[End of section]
Enclosure II: Comments from the Centers for Medicare & Medicaid
Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
DATE: MAY 9 2005:
TO: A. Bruce Steinwald:
Director, Health Care - Economic and Payment Issues:
FROM: Mark B. McClellan, M.D., Ph. D., Administrator:
Signed by: Mark B. McClellan:
SUBJECT: Government Accountability Office's (GAO) Draft Report:
Specialty Hospitals: Information on Potential New Facilities (GAO-05-
647R):
The Centers for Medicare & Medicaid Services (CMS) appreciates the
opportunity to review and comment on this report. The growth of
physician-owned specialty hospitals in the last ten years has been the
subject of much debate. Much of the concern has focused upon the impact
of these new specialty hospitals upon community hospitals, the type of
care rendered by these facilities, the types of patients treated at
these facilities, and particularly financial incentives for physician
owners to refer patients to facilities in which the physicians have an
ownership or investment interest. This report is particularly timely in
light of the Medicare Payment Advisory Commission's recently released
study and our soon to be released study and recommendations concerning
this issue.
As of May 3, 2005, there are approximately 5,000 acute care hospitals
currently participating in the Medicare program. There are 25 "under
development" advisory opinion requests pending a determination from
CMS. In addition, the GAO report projects that between l 1 and 37
additional specialty hospitals may open within a year or two. To
provide some context, if CMS were to approve all pending advisory
opinion requests, and i f all those specialty hospitals plus the
projected 11 to 37 additional specialty hospitals actually opened, this
would represent only a 1.24 percent increase in the current number of
acute care hospitals.
Thank you for your efforts to study this matter. The report will assist
us in formulating recommendations to the Congress concerning the impact
of specialty hospitals. Attached are our technical comments on the
report.
[End of section]
(290453):
FOOTNOTES
[1] Specialty Hospitals: Geographic Location, Services Provided, and
Financial Performance, GAO-04-167 (Washington, D.C.: Oct. 22, 2003) and
Specialty Hospitals: Information on National Market Share, Physician
Ownership, and Patients Served, GAO-03-683R (Washington, D.C.: Apr. 18,
2003).
[2] We considered a hospital to be a specialty hospital if the
diagnosis-related group (DRG) classification for at least two-thirds of
its Medicare patients (or two-thirds of all of its patients where such
data were available) fell into no more than two major diagnosis
categories, such as diseases of the circulatory system, or if at least
two-thirds of its patients were classified in surgical DRGs. We
excluded hospitals that were government owned or that specialized in
providing long-term care or otherwise had missions largely distinct
from the missions of short-term, acute care hospitals. Our analysis
included specialty hospitals that were owned, in whole or in part, by
physicians and those that had no physician owners.
[3] In its 2005 report to Congress, the Medicare Payment Advisory
Commission (MedPAC) stated that there were 48 physician-owned cardiac,
orthopedic, or surgical specialty hospitals in 2002. MedPAC identified
fewer specialty hospitals than we did in our previous reports primarily
because MedPAC excluded from its count women's specialty hospitals and
specialty hospitals that had no physician owners. See Medicare Payment
Advisory Commission, Report to the Congress: Physician-Owned Specialty
Hospitals (Washington, D.C.: March 2005).
[4] MMA imposed an 18-month moratorium during which a physician who has
an ownership or investment interest in a new specialty hospital (or has
immediate family members who do) may not refer Medicare patients to
that hospital for designated health services. Thus, in effect, the
moratorium halted further development of physician-owned specialty
hospitals. Pub. L. No. 108-173, §507, 117 Stat. 2066, 2295-97.
[5] Certain aspects of the physician self-referral prohibition have
been made applicable to the Medicaid program, 42 U.S.C. §1396b(s)(2000).
[6] CMS has not issued guidance to define the phrase "primarily or
exclusively engaged." For example, CMS has not stated whether the
definition of "primarily" is based on the number of patients, percent
of revenues, or other factors.
[7] Certain types of hospitals, for example, psychiatric hospitals and
children's hospitals, cannot be designated specialty hospitals for the
purposes of the moratorium. CMS has not designated other types of
specialty hospitals in addition to the ones (cardiac, orthopedic, and
surgical) specifically mentioned in MMA.
[8] An increase in the number of beds is allowed only on the main
campus of the hospital.
[9] CMS indicated that 3 of the 40 applicants also requested
determinations that the hospital in question was not a specialty
hospital. In addition to the 40 applications, CMS received 8
applications from physician-owned specialty hospitals seeking advisory
opinions on issues other than whether or not the hospital was under
development as of November 18, 2003.
[10] None of the four specialty hospitals (one cardiac, one orthopedic,
and two surgical) had applied to CMS for a determination of their
development status under the moratorium. CMS stated that the agency
strongly recommends, but does not require, entities to seek a favorable
grandfather determination before opening as a specialty hospital.
[11] Some specialty hospital representatives stated that uncertainly
also exists with regard to potential state legislative efforts. Several
states are considering legislation that would prohibit or discourage
future specialty hospital growth.
[12] The nine states were Arizona, California, Idaho, Kansas,
Louisiana, Oklahoma, South Dakota, Texas, and Wisconsin.
[13] GAO-04-167.
