Specialty Hospitals Offer Savings, Improved Care in Future

Published January 1, 2005
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 included an 18-month moratorium on the development of new physician- and investor-owned medical 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 offered the first of a three-part series, examining the development of specialty hospitals in the U.S. The December issue explored the charges against specialty hospitals by their competitors. In this final installment in the series, Sean Parnell examines the industry’s future in the U.S.

The moratorium on new physician- and investor-owned specialty hospitals is scheduled to expire on June 7, 2004. What is not scheduled to expire is the debate over these facilities.

The American Hospital Association (AHA) is seeking a permanent extension of the moratorium. Citing concerns over physician self-referral and a loss of the most profitable medical procedures to their more efficient rivals, the group claims local general hospitals will face financial difficulties if specialty hospitals are allowed to operate.

Experts in health care, anti-trust policy, and economics are generally skeptical of the AHA’s claims, suggesting the group is primarily interested in helping its members keep their market share.

AMA Weighs In

The Board of Trustees of the American Medical Association (AMA) has announced it will oppose extension of the moratorium. The AMA’s House of Delegates is expected to endorse a report from the Board of Trustees that makes the following recommendations:

  • The AMA supports and encourages competition among providers in order to provide high-quality and cost-effective health care.
  • The AMA opposes all efforts to extend or make permanent the moratorium on specialty hospitals.

The report accuses the AHA, Federation of American Hospitals (FAH), and their member hospitals of engaging in distortion and “aggressive tactics” in their campaign against specialty hospitals, including mischaracterizing the AMA’s ethical standards on physician self-referral and refusing staff privileges to doctors with ties to specialty hospitals.

The Medicare Payment Advisory Commission (MedPAC), which is studying the issue of competition between general and specialty hospitals, will be presenting its conclusions and recommendations to Congress in the Spring.

To date, MedPAC’s tentative findings have given ammunition to both sides. According to Modern Healthcare magazine, an interim report by MedPAC concluded there is no evidence specialty hospitals have hurt the profit margins of community hospitals, although the former do take patients away from the latter. This would seem to disprove the contention that specialty hospitals are taking only the most profitable patients.

Potential for Health Care Improvement

Competition generally helps to restrain prices and keep expenses low, and health care is no exception. Competition between specialty hospitals and general hospitals prevents either from charging excessive prices: If a specialty hospital is charging 20 percent more than a general hospital for a service of similar quality, few patients will go to the specialty hospital, and few insurers would cover the cost of those who did. The specialty and general hospitals are forced to keep their prices down so they do not lose business.

Competition also spurs innovation as competitors look for ways to be more efficient and provide either a better service for the same price or the same service for a lower price. Linda Gorman, who follows health care policy for the Colorado-based Independence Institute, noted on a tour of a MedCath hospital in San Antonio that “the physical plant of the specialty hospital was designed to emphasize proximity and reduce staff travel time.”

Innovations such as redesigned hospital layouts help lead to lower costs and help explain why specialty hospitals report spending approximately 30 percent of their operating costs on labor, while general hospitals spend between 40 and 60 percent.

Specialization leads to better quality and lower prices. Dr. Madeline Cosman, author of the forthcoming book Who Owns Your Body?: Doctors and Patients Behind Bars, notes, “Medical specialists and specialty hospitals are focused factories that usually are better, faster, safer, and have a vested interest in the newest science and deepest clinical experience.” She says specialty hospitals usually cost less; would be effective for treating “asthma, diabetes, AIDS, and other chronic diseases that consume 80 percent of our health care dollars”; and would be ideal for treating underserved populations like the uninsured.

Moreover, by adding new capacity to the health care system, particularly in areas like cardiac surgery and orthopaedics, specialty hospitals could play a major role in ensuring there is enough capacity to treat the growing number of elderly who require more health services, particularly as the Baby Boomer generation begins to retire.

Challenges Remain

Recent trends in health care policy have clearly been in the direction of greater competition and increased reliance on market forces to restrain costs while improving care. The rise of specialty hospitals is part of that trend.

As has been true in other industries previously dominated by a single provider or type of provider, competition in hospital care is not welcomed by the incumbent–in this case, general hospitals. Even if they fail to get the moratorium extended or made permanent, they will continue to fight against specialty hospitals.

To stifle the competition from specialty hospitals, general hospitals are lobbying state governments to enact or strengthen certificate-of-need (CON) laws. These laws were first passed in the 1970s with the goal of reducing medical costs by reducing or eliminating competition among medical facilities. Under CON laws, proposed new medical facilities or expansions of current facilities cannot go forward without government approval–which would be withheld if the reviewing body decided the proposal would duplicate existing services or add unneeded capacity.

A July 2004 report from the Federal Trade Commission and Department of Justice found CON laws have not restrained or reduced health costs, but have instead prevented competition in health care that could have done so.

In addition to their attempts to hamstring specialty hospital rivals, general hospitals are responding to the competition by, among other things, creating their own “centers of excellence” to focus on specialized care. According to the AMA report, some also are offering physicians multi-year contracts with a guaranteed salary to make employment at a general hospital more attractive than specialty hospital work.


The future of specialty hospitals depends largely on whether Congress accepts the mounting evidence that competition in hospital care can provide significant benefits, and whether states repeal or decline to pass CON laws.

Although incumbent general hospitals clearly feel threatened by their competitors, there is little evidence to indicate their concerns are well founded. That many of them are creating “centers of excellence” suggests they are beginning to accept trends toward competition in health care and positioning themselves to respond to their rivals.

General hospitals are able to compete successfully, as was demonstrated recently in Milwaukee, Wisconsin when a specialty heart hospital closed after being unable to compete with the established general hospitals. Indeed, competition from specialty hospitals may end up saving general hospitals, as they are forced to modernize and reform themselves in order to survive.

“All hospitals, but particularly the large public service hospitals, have got to embrace change in the delivery of health care,” Dr. Thomas Bertuccini, a neurosurgeon and one of the physician-owners of a specialty hospital in Lafayette, Louisiana, told the Lafayette Daily Advertiser in April 2004. “Change is difficult but possible, if there is the will to do it. We can all improve.”

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