Specialty Hospitals Under Fire

The federal physician self-referral or "Stark" law prohibits physicians from making referrals for "designated health services", including hospital services, to entities with which the physician has an ownership, investment or compensation arrangement, unless an exception applies. The Stark law currently includes an exception for "investment in hospitals." In recent years physicians and provider organizations, including the MedCath organization, have relied on the Stark law’s "investment in hospitals" exception to develop specialty hospitals that focus on highly profitable cardiology, orthopaedic and other service lines. Specialty hospitals are commonly owned in whole or in part by specialist physicians who use the facilities for their hospital-based procedures. Recent developments in Washington, D.C. suggest that specialty hospitals and the competitive response to such ventures may come under scrutiny in the months and years ahead.

Regulatory changes? On the regulatory front, a May 27, 2003 Federal Register announcement outlining the Department of Health and Human Service’s proposed regulatory agenda listed a proposed rule related Stark law. Although no detailed description of the rule is yet available, the abstract states:

"This proposed rule would revise the regulations to specify that, for purposes of the physician self-referral prohibition, certain physician ownership or investment interests in specialty hospitals would not qualify for the "whole hospital" exception. In addition this proposed rule would amend the definitions of "radiology and certain other imaging services" and "radiation therapy services and supplies" to include diagnostic and therapeutic nuclear medicine services and supplies, respectively."



68 Fed. Reg. 30258 (May 27, 2003).

The regulatory agenda indicates that the proposed rule dealing with specialty hospitals may be published as early as July 2003, although CMS officials have acknowledged in private discussions that the proposal (along with the Phase II rule to the Stark law) are at least three or more months behind their anticipated publication schedules.

The reference to nuclear medicine services in the announcement also illustrates the potentially changing landscape related to the Stark law and its associated regulations. The Phase I final rule governing the Stark law, published in January 2001, expressly excluded nuclear medicine procedures from inclusion in the designated health service category of "radiology and other imaging services." The apparent proposal to now include such services through the proposed rule may be due to concerns regarding perceived increases in the volume of such procedures (and associated cost to the Medicare program), or related developments. As such, the proposed addition may constitute a one-time change, or perhaps more likely, may illustrate how regulatory officials in CMS may be planning to use the Stark law and rule-making process to achieve policy goals.

Stark III? On the legislative front, in April, 2003, Rep. Fortney "Pete" Stark (D. Calif.) and Rep. Jerry Kleczka ( D. Wis.) introduced HR 1539, the "Hospital Investment Act of 2003", which would change the requirements of the "investment in hospitals" exception. The amendment would retain the Stark law’s investment in hospitals exception, but would require that a referring physicians’ interest be "purchased on terms generally available to the public at the time." The amendment would apply to a physician’s investment and ownership interests purchased on or after July 12, 2001. If enacted, the Hospital Investment Act of 2003 would likely require many specialty hospitals to unwind their physician ownership structure or make other changes to promote legal compliance.

Competitive Concerns. The executive branch’s Federal Trade Commission and Department of Justice also examined specialty hospitals during hearings held in late March, 2003. The hearings were the first to be conducted by the anti-trust authorities on the competitive effects of specialty hospitals and the responses by general hospitals and others who oppose specialty hospital development. Unlike the proposed Stark law amendments, the hearings focused on the perceived positive and negative implications specialty hospitals have for competition in health care.

Many local hospitals have expressed concerns that the new specialty-focused institutions are taking the "cream" of highly profitable specialty procedures from local hospitals and in the process, undermining the ability of community hospitals to provide emergency services and other less profitable forms of care. In contrast, representatives of specialty hospitals and affiliated sectors of the health care industry advocated that the specialty-focused institutions are pro-competitive and good for consumers in light of their more focused attention on particular service lines, ability to generate improvements in quality and patient satisfaction and other benefits. The hearings also examined actions by community hospitals to exclude physicians who own interests in specialty hospitals from their medical staffs through the use of "economic credentialing."

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As of today, none of the proposed activities outlined above have modified the legal landscape governing specialty hospitals or the competitive environment that surrounds their operation. Nevertheless, these recent legislative and executive branch actions, coupled with the ongoing exploration and development of such ventures, suggests that specialty hospital ventures and their investors will most likely continue to be subject to debate and potential legislative or other action in the months and years ahead.