CMS Lifts Ban on Physician-Owned Specialty Facilities

Published October 1, 2006

The U.S. Centers for Medicare and Medicaid Services (CMS) in August ended a three-year-old ban on Medicare payments going to new specialty hospitals. Under new rules, physicians must inform patients and the CMS when they own medical facilities.

Under the ban, physicians were not allowed to refer Medicare and Medicaid patients to medical facilities in which they have financial interests.

Hospital Groups, Experts React

“Specialty hospitals have been shown to provide high quality care, and the objections to physician ownership are weak,” said Sean Parnell, vice president of The Heartland Institute, who has written and spoken extensively about specialty hospitals. “The lifting of the ban will be a benefit to patients who will have choices about where to receive their care, and may even benefit big hospitals by exposing them to competition that forces them to improve.”

But Richard Coorsh, a spokesperson for the Federation of American Hospitals (FAH), which represents most of the nation’s for-profit community hospitals, warned physicians’ self-referring patients to their own specialty hospitals creates a conflict of interest that can be detrimental to consumers.

“These hospitals that we represent believe very strongly in competition,” Coorsh said. “They believe that consumers are served well by having a competitive marketplace.

“However, physician-owned specialty hospitals wish to compete on an unlevel playing field,” Coorsh said, “and they are able to do so because of a loophole in federal law, which allows these physician-owned specialty hospitals to set up a business model which is dependent upon physician self-referral. If a full-service community hospital were to do something like that, the hospital would be violating federal law.”

That charge was disputed by Parnell. “The physician self-referral argument is not credible,” Parnell said. “The big hospitals are simply trying to shut down competition.”

Parnell pointed to a 2005 report by the Centers for Medicare and Medicaid Services (CMS), Study of Physician Owned Hospitals, in which researchers said they were “unable to conclude that referrals were driven primarily based on incentives for financial gain.” The report also found many procedures at specialty hospitals were performed by physicians who had no ownership interest.

The American Hospital Association also opposed lifting the ban, citing a 2005 study conducted by McManis Consulting, a group that conducts research for the health care industry. McManis researchers concluded that when physician-owned specialty hospitals opened, community hospitals wound up struggling financially in all four geographic areas studied: the Black Hills region of South Dakota; Lincoln, Nebraska; Wichita, Kansas; and Oklahoma City.

Competition Encouraged

U.S. Sen. Mike Crapo (R-ID), who supported lifting the ban on new specialty hospitals, said allowing specialty hospitals to compete with general hospitals will encourage fair, healthy competition among hospitals to provide quality health care for patients.

“For too long, physicians and patients have been thwarted in their efforts to seek high-quality health care with high-quality outcomes,” Crapo said. “I support a level playing field and competition for all hospitals that result in more efficient and effective care for patients. This decision by CMS will promote this move toward health care excellence.

“Transparency should be the great equalizer in the delivery of health care and quality outcomes,” Crapo said. “Patient satisfaction and efficient care are the best tools to drive the market and if bad participants are discovered, then the appropriate enforcement is already available to punish those players.”

High Quality

Several studies by the federal government, independent researchers, and paid researchers have found specialty hospitals generally deliver care that is higher in quality than provided by general hospitals. A September 2005 CMS report, Specialty Hospital Evaluation: Final Report found “…the proportion of patients that died while hospitalized was significantly less for specialty hospitals …” compared to general hospitals. For example, orthopedic specialty hospitals had a mortality rate of .03 percent compared to a 1.25 percent rate for general hospitals.

Specialty hospitals also performed better than general hospitals in complication rates. The CMS study compared 14 areas, including complications of anesthesia, infections due to medical care, and post-op hip fracture. Specialty hospitals led in 13 of the 14 areas, in some cases by wide margins.

Nevertheless, Coorsh questioned the quality of care for patients at specialty hospitals. Citing a study published in the April 7, 2005 edition of the New England Journal of Medicine, he noted, “the quality of care delivered in cardiac physician-owned specialty hospitals was no better than the care being delivered at full-service community hospitals.”

The study focused on Medicare beneficiaries who were at least 65 years old and who underwent either angioplasty or heart bypass surgery in 2000 and 2001. Patients received treatment at one of 15 cardiac specialty hospitals or one of 80 general hospitals in the same markets.

The lead author of that study, Dr. Peter Cram of the University of Iowa School of Medicine, has done more recent research on specialty hospitals and now believes they offer a higher level of care than general hospitals.

“It is probably not fair to say that specialty hospitals are no better than general hospitals,” said Cram when contacted by Health Care News. “More recent research has shown that the quality of orthopedic specialty hospitals is very good compared to general hospitals, and cardiac hospitals are also probably slightly better, although not by as wide a margin.”

Cram also noted, “When it comes to patient satisfaction, which few people seem to measure, specialty hospitals are likely to excel compared to general hospitals.”

Mary Susan Littlepage ([email protected]) is a freelance writer in Chicago.

For more information …

Statement by Sean Parnell to the House Ways and Means Committee,

The September 2005 report, Specialty Hospital Evaluation, prepared for the Centers for Medicare & Medicaid Services, is available through PolicyBot™. Point your Web browser to, click on the PolicyBot™ button, and search for document #19680.

The 2005 report, Study of Physician-owned Specialty Hospitals Required in Section 507(c)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, is also available through PolicyBot™. Search for document #19681.

“The Impact of Physician-Owned Limited-Service Hospitals: A Summary of Four Cases Prepared for: American Hospital Association, Colorado Health and Hospital Association, Kansas Hospital Association, Nebraska Hospital Association, South Dakota Association of Health Care Organizations,” by McManis Consulting, February 16, 2005,

“Cardiac Revascularization in Specialty and General Hospitals,” by Peter Cram, M.D., M.B.A., Gary E. Rosenthal, M.D., and Mary S. Vaughan-Sarrazin, Ph.D., New England Journal of Medicine, April 7, 2005,