Specialty Hospitals Criticized by Competitors

Published December 1, 2004

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 included an 18-month moratorium on the development of new physician- and investor-owned surgical facilities. These facilities, generally known as specialty hospitals, typically focus on a few areas of surgical practice such as heart surgery or orthopedic surgery.

The October issue of Health Care News presented the first article in a three-part series, examining the development of specialty hospitals in the U.S. In this issue, Sean Parnell explores claims made by opponents of specialty surgical hospitals. The series will conclude next month with part 3, a look at the industry’s future in the U.S.

Specialty hospitals offer high-quality health care in a setting outside of the traditional general hospital, care that often is delivered at lower cost. But specialty hospitals have drawn intense criticism from the general hospitals they compete with, who successfully lobbied Congress to include a moratorium on construction of new specialty hospitals in the recently passed Medicare Prescription Drug, Improvement and Modernization Act of 2003.

The moratorium is scheduled to expire in June 2005. During the moratorium, the Centers for Medicare & Medicaid Services (CMS) and the Medicare Payment Advisory Commission (MedPAC) will study the issues raised by general hospitals and their allies against specialty hospitals.


One major concern expressed by the American Hospital Association (AHA), which represents general hospitals and health care networks, is that because specialty hospitals are typically owned by doctors, there is an incentive for doctors to refer patients to a specialty hospital in order to generate profits, regardless of what is in the best interest of patients.

Two different studies conducted in 2003 by the General Accounting Office (GAO) found a substantial majority (70%) of physicians with admitting privileges at specialty hospitals had no financial interest in the hospital. Of those physicians who had a financial interest, most owned 6 percent or less of the hospital.

Greg Scandlen, a health policy expert at the Galen Institute in Washington, DC, expresses doubt about the charge that doctors improperly direct patients to clinics in which they have an ownership stake. In his “Consumer Choice Matters” column (see page 8), Scandlen writes, “Given the scandalous track record of hospitals in patient safety and quality, it is entirely possible that physicians invest in facilities in order to assure better quality, and naturally refer their patients to facilities in which they have some influence over the quality of the care provided.”

Limited Service

Another criticism leveled by the AHA is that specialty hospitals “do not have emergency departments.”

The GAO research confirmed this. While 92 percent of general hospitals have emergency departments, fewer than half–45 percent–of specialty hospitals have emergency departments.

Health care experts, however, say this charge misses the point of specialization. “These hospitals are more efficient exactly because of specialization. They deliver the highest standard of quality care since they are not expected to be all things to all people by offering everything from an ER to a maternity ward,” says Conrad Meier, senior fellow in health care for The Heartland Institute. “This is like a supermarket trying to shut down a drugstore because it doesn’t sell fresh meat and produce, but it’s ok for the supermarket to sell prescription drugs.”

Many specialty hospitals, including Medcath, a chain of 13 specialty hospitals focusing on cardiac care, do have emergency departments. Those departments are open 24 hours a day, are staffed by physicians, and have an average of seven beds each. Medcath’s emergency departments treated more than 60,000 patients over the past year, nearly two-thirds of them for non-cardiac-related conditions.

In a letter to Congress dated October 12, 2004, MedCath CEO John Casey and CFO James Harris point out that even large general hospitals typically don’t offer every possible type of medical care, such as trauma or burn care. They note, “by focusing on cardiovascular disease and creating a center of excellence … MedCath hospitals have been able to improve the quality of care, reduce the average length of stay of our patients, save Medicare money, and achieve a high level of patient satisfaction.”


Critics say doctors at specialty hospitals refer healthier, more profitable patients to their own facilities while sending less healthy, more expensive patients to general hospitals. Because they do not operate emergency rooms, critics charge, specialty hospitals get a better mix of patients and serve fewer Medicaid and uninsured patients.

Caroline Steinberg, vice president of policy at the AHA, said, “Preliminary data from MedPAC … shows that cardiac surgery has greater profit margins compared to other types of surgery, and if you adjust for the severity of patient illness, orthopedic and general surgery also show greater profit margins, up to 15 percent more profit.”

The American Surgical Hospital Association (ASHA), a trade group for specialty hospitals, strongly disputes those charges. They say their members provide services to Medicaid and uninsured patients. They also note the nonprofit status of most general hospitals allows them to better absorb the costs associated with lower-paying Medicaid and uninsured patients, compared to a hospital that must pay taxes on revenue.

Research by the Lewin Group also contradicts the charge that specialty hospitals are treating only the healthiest, most profitable patients. In a study of MedCath’s 13 hospitals, Lewin researchers found Medicare cardiac patients treated by MedCath had a Case Mix Index (a measure of patient severity and case complexity) 20 percent higher than their counterparts at general hospitals, indicating MedCath facilities were generally treating patients less healthy than those of competing hospitals.

It is not difficult to understand why doctors might refer their most difficult cases to specialty hospitals, where they feel the most confident about being able to offer the best care to these patients. Linda Gorman, who follows health care policy for the Colorado-based Independence Institute, noted, “specialty hospitals may provide an alternative for doctors who are dissatisfied with the quality of care, efficiency, and bureaucracy of general hospitals.”

Medical outcomes for cardiac patients at MedCath hospitals would seem to support that idea. Although MedCath patients generally enter the hospital sicker than average, they have shorter stays, lower mortality, and fewer complications when compared to patients at general hospitals in their peer group.

Draining Resources

Critics also charge that by focusing on procedures that attract higher reimbursement rates from insurance companies and government programs like Medicare, specialty hospitals drain away from general hospitals revenues that would otherwise be used to subsidize medical treatments reimbursed at less than cost. Cardiac, orthopedic, and general surgery are among the procedures with the highest reimbursement rates compared to cost, according to the AHA.

ASHA notes, however, that a survey of its 71 members shows they provide services in six different specialties on average, not just the three high-reimbursement specialties noted by AHA. Only five ASHA members are single-specialty hospitals.

Scandlen also notes specialty hospitals can hardly be blamed if general hospitals accept reimbursement from insurers and the government at less than cost for some procedures. He questions whether such internal cross-subsidies are appropriate. “Is it really fair or rational to have maternity or cardiac patients singled out to pay for the costs of a trauma center?” he asks. “If trauma centers are a valued community service, shouldn’t the whole community subsidize the costs?”

Laws, Tougher Regulation Sought

Citing these complaints and others against specialty hospitals, the AHA, Federation of American Hospitals, state affiliates, member hospitals, and allies are fighting to stop the growth of specialty hospitals. They are seeking tougher and more widespread Certificate of Need (CON) laws, lobbying to make permanent the Medicare reform law’s moratorium, and denying admitting privileges to doctors involved with specialty hospitals.

CON laws require that the construction or expansion of any medical facility be approved by government officials. Health policy experts say efforts to expand and strengthen CON laws are nothing more than using the government to stifle competition. “Certificate of Need and other anti-competitive regulations inhibit innovation and protect the market position of existing players,” charges Scandlen.

A July 2004 report from the Federal Trade Commission and Department of Justice confirms Scandlen’s criticism, finding that CON laws “are not successful in containing health care costs, and … pose serious anticompetitive risks. … Market incumbents can too easily use CON procedures to forestall competitors from entering the incumbents market.”

Resistence to Innovation

Specialty hospitals are what many health policy observers term a “disruptive innovation,” delivering health care in a new way that disturbs the status quo and reduces the market share of previously dominant players. A Harvard Business Review article in 2000, titled “Will Disruptive Innovations Cure Health Care?” notes, “health care may be the most entrenched, change-averse industry in the United States.”

Specialty hospitals undoubtedly represent a change that threatens to disrupt the market dominance enjoyed by many general hospitals. By offering medical facilities that specialize in a few specific procedures, specialty hospitals can improve the quality of care while also reducing price through competition. It should come as little surprise that the dominant players, general hospitals, are fighting back and pointing out what they perceive as the negative consequences of upsetting the status quo.

Next month: Do specialty hospitals have a future in the United States?

Sean Parnell ([email protected]) is vice president – external affairs for The Heartland Institute.