Consumers Lose Round in Battle over Specialty Hospitals

Published May 1, 2005

On March 8, the Medicare Payment Advisory Commission (MedPAC)–ignoring its own research and new studies showing the benefits of competition and specialization–recommended to Congress that it extend the moratorium on development of new specialty hospitals until January 2007. The moratorium, passed in late 2003, will end in June of this year if Congress takes no action.

Passed as part of the Medicare Modernization Act of 2003, the moratorium law also asked MedPAC to study the pros and cons of specialty hospitals and report back to Congress with its findings and recommendations.

Differing Opinions

Congress included the moratorium in the Medicare reform measure amid concerns that specialty hospitals threatened the ability of community hospitals to provide essential services to patients and that physician ownership of specialty hospitals created incentives for doctors to recommend unneeded care. The MedPAC study largely refuted those concerns.

Members of Congress and policy experts were quick to weigh in on MedPAC’s report and recommendations.

Dr. Alan Pierrot, an orthopedic surgeon and past president of the American Surgical Hospital Association, told the Senate Finance Committee on March 8, “No proof of harm to general hospitals, risk to patients, or abuse of the Medicare program because of excessive or unnecessary surgery has been found. There is no justification to continue the moratorium beyond the legislated expiration date.”

Pierrot’s views were not shared, however, by Senator Max Baucus (D-MT). “When it comes to physician ownership of specialty hospitals, I’m not sure the playing field is level,” he said.

Study Finds Improved Productivity

The MedPAC study compared profit margins at community hospitals in markets that have specialty hospitals with the profit margins of such hospitals in markets that don’t. In both markets, profit margins declined modestly between 1997 and 2002, but the decline in profits was greater for community hospitals that did not face competition from specialty hospitals.

The study also found little that would suggest physicians with ownership stakes in specialty hospitals were performing unnecessary treatment. The research showed there were slight differences in utilization of heart procedures between markets with specialty heart hospitals compared to those without them, but most of the differences were not statistically significant.

MedPAC researchers also visited several specialty hospitals. The report notes that in their discussions with physician-owners, “the primary issue … was greater control of hospital operations.” Frustration with the bureaucracy at general hospitals was given as a key reason many physicians established specialty hospitals.

Addressing the criticism from physicians that they had unsuccessfully tried to enact changes at community hospitals, some administrators admitted they had been “slow to react to their physicians’ demands for changes,” according to the report.

Physician-owners at specialty hospitals also described to MedPAC how greater control over their facilities results in improved productivity. Among the factors they cited were fewer disruptions to schedules, less down time between surgeries, and better control of operating room staff.

Outside Study Confirms Findings

Another report, released on February 4, 2005, found many of the same benefits from specialty hospitals the MedPAC study did, and also confirmed that community hospitals did not suffer financial losses as a result of competition from specialty hospitals. The report was prepared by the Health Economics Consulting Group (HECG) of Iowa City, Iowa and was commissioned by the American Surgical Hospital Association.

The HECG report concluded “there is no evidence … to suggest that general hospitals have been financially harmed by competition from specialty hospitals.” Moreover, “general hospitals residing in markets with at least one specialty hospital have higher profit margins than those that do not compete with specialty hospitals.”

One of the main arguments against specialty hospitals is that they don’t offer as much care to indigent and Medicaid populations as community hospitals do. Both the MedPAC and HECG studies provide support for that claim.

The HECG study, however, noted community hospitals are nonprofit entities not required to pay property or income taxes, and that they benefit from tax-free donations and tax-exempt bond financing.

HECG cited research showing “the amount of charity care provided by [general] hospitals is significantly less than the amount of tax benefit accrued through non-profit status,” meaning the benefits of nonprofit status exceed the costs incurred by treating more indigent and Medicaid patients. The report also noted the value of charity care provided plus state and federal taxes paid at specialty hospitals represents more than 7 percent of their revenues, compared to the 5 or 6 percent of revenues spent on charity care by nonprofit general hospitals.

Additional Research Needed

In a March 8 presentation to the Ways and Means Committee of the U.S. House of Representatives, MedPAC Chairman Glenn Hackbarth recommended an 18-month extension of the moratorium. His recommendation was based not on any finding of harm caused by specialty surgical hospitals, but rather on concerns that such harm may occur in the future.

“Our evidence on physician-owned specialty hospitals raises some concerns about patient selection, utilization, and efficiency, but it is based on a small sample of hospitals, early in the development of the industry.” Hackbarth said in his prepared testimony. “We do not know yet if physician-owned hospitals will increase their efficiency and improve quality. We also do not know if … they will damage community hospitals or unnecessarily increase use of services. … Further information on physician-owned specialty hospitals’ performance is needed.”

Hackbarth also recommended Congress and the secretary of Health and Human Services consider revising the Medicare payment system to better reflect the actual costs of providing hospital care. He singled out the need to adjust payments for the severity of illness of patients, and to change the formula for high-cost outlier cases.

Reform Ideas Endorsed

Although critical of MedPAC’s recommendation to extend the moratorium, proponents of specialty hospitals endorsed Hackbarth’s proposals for revising the Medicare payment system.

“The reforms to Medicare’s inpatient payment system and the hospital pay for performance recommendations would greatly benefit the Medicare program and should be adopted,” said Pierrot in his testimony.

“However,” he continued, “there is no evidence to justify putting specialty hospitals under another moratorium or any other operational limitation during the period these needed changes are implemented.”

Sean Parnell ([email protected]) is vice president of The Heartland Institute.

For more information …

Statements delivered at the March 8, 2005 hearing on physician-owned specialty hospitals are available online at