February 2002

Trends and Issues

By Cherilyn G. Murer, JD, CRA

As the Focus Narrows

With lower overhead costs and insular concentration, specialty hospitals are transforming the hospital landscape.

The overwhelming majority of hospitals in the United States are general hospitals that provide care for a full range of medical conditions. A sizeable number of hospitals throughout the country operate for the purpose of providing care to a select patient population. In recent years, the health care facility landscape has increasingly expanded to include smaller hospitals that specialize in treating a particular disease or condition, such as cancer or rehabilitation, or focus on one type of patient, such as children or the elderly.

The Specialty evolution

The concept of a hospital functioning to specifically provide care for only a select patient population is not a recent innovation. Some specialty hospitals, especially those dedicated to children's health, have long been a standard in most large communities. However, one of the emerging trends within the hospital industry is the proliferation of smaller, physician-owned hospitals that focus on treating a particular disease or condition that was historically treated at general hospitals. Health care facilities with a specialized focus have now expanded to include: orthopedics, oncology, cardiology, rehabilitation, psychiatry, respiratory care, otolaryngology, and women's health.

The new model of specialty care hospital that has emerged in the past few years is characterized by a relatively small facility, ranging in size from 15 to 70 beds, that provides amenities not seen often in the traditional general hospital. Many of the newest specialty hospitals offer lavish furnishings often reserved for upscale hotels such as leather furniture, fine artwork, fresh-cut flowers, and flat-screen televisions in each patient room. The narrow clinical focus and state-of-the-art settings of these hospitals have led many to classify such facilities as boutique hospitals.

State Licensing
Specialty hospitals have gained prominence primarily in states that do not require hospitals to obtain a certificate of need from a state agency in order to begin operations. Under the certificate of need process, new facilities must establish a case for the community's need for the type of services that will be provided at a proposed site. More than half of the states maintain a certificate of need process in various forms, although a number have recently abandoned or modified their processes to create a less regulated marketplace. Due to the burdensome and often costly nature of the certificate of need process, as well as possible opposition from area hospitals, specialty care hospitals are most likely to develop in states, such as California and Oklahoma, that do not perform a certificate of need review for new hospitals. Although data verifying the prominence of specialty hospitals in states lacking a certificate of need process are not available, industry experts agree that development is far more likely in states that do not require potential providers to undergo this often burdensome process.

Specialty hospitals are typically licensed as acute care hospitals by state health departments. However, many states have separate licensing categories for hospitals limiting their services to one category of care, such as rehabilitation, orthopedics, psychiatry, and other specialized facilities. Under state licensing standards, a specialty hospital may be required to provide many of the same ancillary services associated with larger, general hospitals. Depending on state regulations, a specialty hospital may be required to directly provide laboratory, physical therapy, radiology, pharmacy, and emergency services. In some states, specialty care hospitals are required to operate a full-time emergency department. However, in most states many of these services can be outsourced.

Efficient, Quality Care
Many believe that specialty hospitals can be profitable while providing exceptional care at competitive prices. With a limited focus, specialty hospitals may have the ability to create a niche and develop reputations as centers of excellence for specific clinical conditions. By dedicating all of their resources toward one type of care, specialty hospitals are often in a position to offer the most advanced equipment and technology in that field.

According to proponents, these facilities are able to manage their resources more efficiently than larger hospitals that provide a wide array of services for a broad range of conditions and diseases. Operational processes and costs can be streamlined, thus providing a competitive advantage over general acute care hospitals that incur the high fixed costs associated with delivering care for the whole spectrum of health care.

The trend toward specialty hospitals has not been embraced by all in the health care arena. Critics are concerned that specialty hospitals will challenge the financial health of general hospitals in the community by competing for some of the highest paying procedures. Others claim that the smaller facilities cannot provide the comprehensive care offered by full-service hospitals because they often lack many important supplementary services.

Physician-Owned and Operated
A common theme in the proliferation of specialty hospitals is physician ownership in the facilities. Some specialty hospitals are owned completely by doctors, others share ownership through joint ventures with acute care hospitals. Many independent specialty hospitals use management companies for administrative activities while maintaining complete control over clinical care.

Physician ownership in health care facilities is not a revolutionary concept. In the late 1980s through the 1990s, stories of failed physician-owned full-service hospitals were common. However, specialty hospitals, with their narrowed focus and lower overhead costs, offer physicians an opportunity to once again take greater control over the hospital environment without facing the complexity of management challenges posed by full-service hospitals. The attraction to physician ownership in a specialty hospital is primarily an issue of control. Physician owners can be involved at all stages, from the design of the facility to major decisions regarding strategic issues affecting operations. Physician owners at specialty hospitals have the opportunity to control scheduling and purchasing, and to dictate what types of procedures will be offered in the facility.

The Stark Act is a major consideration with respect to the ownership structure of a specialty hospital. Under the Stark Act, physicians are prohibited from referring Medicare patients for certain "designated health services," including all inpatient and outpatient hospital services, to entities in which the physician has an ownership or other financial interest. However, physicians can maintain ownership in a specialty hospital under what is commonly termed the "whole hospital" exception. The whole hospital exception acts to permit physician ownership in a specialty hospital where the referring physician has an ownership in the entire hospital (and not a subdivision of the hospital) and the referring physician is authorized to perform services at the hospital.

Under the whole hospital exception, a specialty hospital can be owned by physicians and avoid running afoul of Stark laws. However, on July 12, 2001, Congressmen Stark (D-Calif) and Kleczka (D-Wis) introduced the Hospital Investment Act of 2001, which would amend current Stark law to require that ownership interests offered to physician investors be "purchased on terms generally available to the public at the time." In a press release, Congressman Stark makes clear that the new law is intended to respond to increased physician ownership in specialty hospitals and its possible impact on full-service hospitals. The fate of this bill, which is uncertain at this time, could have an impact on the continued trend toward development of physician-owned specialty hospitals.

Cherilyn G. Murer, JD, CRA, is CEO and founder of the Murer Group, a legal-based health care management consulting firm in Joliet, Ill, specializing in strategic analysis and business development. She can be reached at (815) 727-3355 or via the Web: www.murer.com.

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