Big Hospitals Squeeze Specialists

The major chains want to slow down the niche players who have been grabbing lucrative business.
By Melissa Davis ,

The hospital industry is seeking a miracle cure in one of its major markets.

It hopes to outlaw physician-owned specialty hospitals in the state of Texas. It claims that the facilities pull patients and profits from full-service hospitals by focusing on lucrative services, such as cardiology and orthopedics, and pose a threat to the state's entire health care system as a result.

Thus, the Texas Hospital Association -- which represents for-profit and not-for-profit hospitals alike -- is fighting for new laws to reverse that recent trend.

"Studies conducted by several federal agencies and confirmed by the Texas Hospital Association in its study document that physician ownership in healthcare facilities creates an inherent conflict of interest between the physician and patients," the association says. "Additionally, the proliferation of physician-owned facilities has had a significant negative impact on full-service hospitals in affected markets."

Already, the federal government has blocked thedevelopment of new physician-owned hospitals as itevaluates their impact on health care costs andservices. But Texas -- a major hotbed for the nichefacilities -- may go a step further. If the TexasHospital Association gets its way, physicians would beforced to stop referring patients to the specialtyhospitals and, ultimately, sell the facilities in theend.

For-profit hospital chains like

HCA

(HCA) - Get Report

,

Tenet Healthcare

(THC) - Get Report

and

Universal Health Services

(UHS) - Get Report

-- which compete with the niche players -- would stand to benefit as a result. But the industry argues that the health of Texas residents, not just the community hospitals that treat them, is at stake.

"The proliferation of physician-owned limitedservice facilities in Texas and the corresponding lossof revenues undermine the ability of full-servicehospitals to continue to provide the public withaccess to the full range of essential services," theTexas Hospital Association states. "The large numberof niche hospitals operating and being developed inTexas poses a significant potential impact on thestate's healthcare system."

Texas Trend

To be fair, specialtyhospitals do have their fans.

Even Senator Charles Grassley -- the Iowa Republicanwho supports extending the ban on new facilities --sees some advantages. Because niche hospitals treatonly one type of patient, he says, they can capitalizeon unique opportunities to improve efficiency, cutcosts and enhance patient care. Moreover, he says,patients like the facilities because they feature"great amenities such as easy parking and gourmetmeals." In addition, he says, doctors like to practiceat the hospitals because they enjoy more control overtheir services.

Even so, Grassley expressed grave concerns.

"My colleagues and I are learning much more aboutthis very important issue," he said earlier thismonth. And "the more we learn, the less we like it."

Meanwhile, specialty hospitals continue to pop up.

Since 1997, the Texas Hospital Association says,specialty hospitals have nearly tripled in number. Ofthe 100-plus specialty hospitals now in operation, the association says, nearly half -- or 47 -- count Texas as their home. Another 27 niche facilities are under development in the state.

The Texas market has proven attractive for goodreasons. Most notably, the state is among those thatrequires no so-called "certificate of need" to buildhospitals. Moreover, it features a number of cities --such as Austin and Dallas -- that boast significantpopulation growth. It, therefore, presents uniqueopportunities for physicians hoping to boost theirincomes.

Take at look at the Heart Hospital of Austin, forexample. Doctors there invested $1.5 million to launchthe facility, the Texas Hospital Association says, andwound up with a stake valued at $11.25 million justfive years later. Moreover, the group says, doctorsface only minimal risks before achieving such bigreturns.

"Physicians are referring -- almost from day oneof their investment -- virtually all of theirprofitable business to the facility in which they have investments," the Texas Hospital Association explains. "The rates of return on investments by physicians are extraordinary, with physicians making at least three to five times their original investment in a short period of time."

The facilities succeed, thereport says, by focusing on specialties that bringgenerous reimbursements. At the same time, the reportsays, the facilities rely on community hospitals toprovide those services -- such as emergency care forthe poor -- that bring in little or no money.

Fewer than half of all specialty hospitals evenoperate emergency rooms at all, the report says. Andat least one of those seems to do little business.

"At one hospital visited by (Medicare) staff," thereport says, "hospital staff had to turn on the lightsof its emergency room to show the space."

Profit Centers

Physicians have established a reputation forfavoring more lucrative services instead.

Even before niche hospitals took off, the TexasHospital Association claims, physicians were findingnew ways to profit from their services. For example,the group says, past studies show that physicians tendto order far more diagnostic tests -- such as MRIs,ultrasounds and complex X-rays -- when they own thelabs that perform the services.

Thus, the group says, physician ownership ofentire specialty hospitals "raises serious publicpolicy concerns."

The group goes on to question whether doctorsshould have ever been allowed to own specialtyhospitals in the first place. Federal laws prohibitphysicians from referring Medicare patients to certain facilities that they own. But those laws feature exceptions. One, known as the "whole hospital" exception, allows physicians to refer patients to a hospital if they have invested in the entire facility.

"The legislative intent of the exception was toallow for ownership in general hospitals that offer afull spectrum of healthcare services, where a singlereferral would produce little personal economic gain,"the Texas Hospital Association explains. But "sincelimited service hospitals are much smaller ... thepotential for personal financial gain to influencephysician referral is more likely."

For example, the reportstates, cardiac hospitals feature just 59 beds onaverage. Orthopedic and surgical hospitals operateeven fewer beds.

And those beds tend to get filled, the reportindicates, and leave community hospital rooms empty.

"For example," the report says, "physicianinvestors in the Lubbock Heart Hospital began movingpatients to their facility as soon as it was openedand -- over a period of eight months -- reduced their performance of cardiac services at Covenant Health System hospitals by 71%."

The Texas Hospital Association sees a clearconflict. Thus, it has urged state lawmakers to passnew legislation this year that would ban physiciansfrom referring patients to their own specialtyhospitals and penalize any violators. It has alsoasked the legislature to establish a "reasonabledivestiture period" so that physicians can sell theirhospitals in order to comply with the proposedchanges.

Otherwise, the group warns, patients could facenew hardships all across the state.

"Left unaddressed," the report states, "theproliferation of these facilities will continue todrive up healthcare costs in the state and may putsome full-service hospitals in rural areas atfinancial risk of closure and will undermine theability of full-service hospitals in urban areas tosubsidize unprofitable, but essential services."

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