Medicare to Cut Payments to Private Specialty Hospitals

The government plans to adjust Medicare (search) payments to remove some financial incentives that have led to a new trend in health care: doctor-owned hospitals that focus on treating more profitable patients.

So-called specialty hospitals (search) often focus on cardiac care, orthopedics or surgery, which tend to net higher reimbursement rates from Medicare.

Construction of about 100 such hospitals nationwide has led to concern that they harm general hospitals' ability to survive and meet the needs of all patients. As a result, Congress placed a moratorium on construction of new specialty hospitals that expires next month.

"Our current payment system may not provide appropriate incentives for maximizing quality and costs for our overall beneficiary population," Mark McClellan, the administrator for the Centers for Medicare and Medicaid Services, told a House subcommittee Thursday.

Supporters of specialty hospitals say they provide competition that improves care and lowers medical costs.

Medicare reimburses providers based on a patient's medical problems. McClellan said CMS would adjust payments to better reflect the seriousness of illnesses. That means payments could go up for providers who treat the sickest of patients. Conversely, payments could go down for providers who specialize in care that is alleged to be overpaid, such as heart surgery.

CMS wants to make the adjustments by the fall of 2006.

The agency also will more closely scrutinize whether specialty hospitals meet the government's definition of a hospital, which is a facility that provides primarily inpatient care. If a facility fails to meet that definition, then it could be classified as an ambulatory surgical center (search), which gets lower reimbursement rates than hospitals.

The increasing number of specialty hospitals is an issue of great interest in the medical community. Community hospitals are a powerful presence in Washington because of their importance back home and their considerable donations to political campaigns. The community hospitals said they are not afraid of competition, but they say specialty hospitals pick and choose patients, often the healthier, well-insured patients, leaving them with the sicker, costlier patients.

"We don't believe many of these hospitals are whole hospitals and we're pleased CMS will investigate whether those institutions deserved to be compensated as hospitals," said Thomas P. Nickels, senior vice president of the American Hospital Association.

Rep. Joe Barton, R-Texas, and chairman of the House Energy and Commerce Committee, said he would oppose any proposal to extend the moratorium on new specialty hospitals.

"The rise of specialty hospitals will press traditional community hospitals to become leaner, faster and better," Barton said.

Barton said he believes McClellan's recommendations are a reasonable compromise, and that no legislative action is necessary. However, prominent senators introduced a bill Wednesday that prohibits physicians from referring Medicare and Medicaid patients to new specialty hospitals in which they have an ownership interest. Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont., have set the effective date of the bill at June 8, 2005, regardless of when it is enacted. The current moratorium expires on that date.

Another influential lobbying group representing doctors gave its support to specialty hospitals Thursday.

"Physician-owned specialty hospitals have not harmed general hospitals financially," the American Medical Association said in a statement to the health subcommittee. "They have improved care for Medicare beneficiaries and other patients, and patient satisfaction with these hospitals is extremely high."