MedPAC to recommend extension of moratorium

Specialty hospitals would be restrained until 2007

The Medicare Payment Advisory Commission (MedPAC) will recommend to Congress that the moratorium on development of specialty hospitals, including surgical hospitals, be extended by 20 months to Jan. 1, 2007. The moratorium in the Medicare Bill affects facilities participating in Medicare and prohibits physicians’ referral of patients to specialty hospitals in which they have an ownership interest, as well as development of new specialty hospitals.

The current 18-month moratorium was scheduled to expire in June.

"We are in total disbelief as to the recommendation for an extension of the moratorium," says Michael J. Lipomi, MSHA, legislative co-chair of the San Diego-based American Surgical Hospital Association. "Certainly, projects that are planning on starting following the sunset of the current moratorium would be devastated by a decision to extend the moratorium."

The industry as a whole will be damaged, he maintains. "One, when there is no growth in an industry, it loses momentum and it affects the short- and long-term value," Lipomi says.

Secondly, the ability to respond to market changes is critical in any industry, he notes. "The moratorium places a restriction on this and, as such, adds risk and detracts from future values."

Finally, the aging of physician investors is a great concern for surgical hospitals, Lipomi says.

"According to the restrictions imposed by the moratorium, aging, retired, or practicing physicians who move out of the area cannot be replaced by adding new investor physicians," he points out.

"We now need to go out and buy back physician investors at a premium in order to make room for new investors." The physician selling has a great deal of bargaining power and often gets a greatly inflated price for selling his or her investment, which puts the facility at a disadvantage, Lipomi notes.

MedPAC also will recommend changes to the Medicare inpatient prospective payment system that could reduce incentives for patient selection. These changes include establishing rates for diagnosis-related groups [DRGs] that more accurately reflect the costs of caring for patients of varying severity of illness and resource consumption.

MedPAC also will recommend refinements to the relative values of existing DRGs, implementation of case-mix measurements, and changes in the outlier policies.

"We agree that some revision to DRGs needs to be done in order for more appropriate and representative payments to be made," Lipomi says.

MedPAC’s recommendations, which will be finalized in March, are the result of a yearlong study on the impact of specialty hospitals on community hospitals. The study found that specialty hospitals:

  • do not have lower costs per case than community hospitals;
  • concentrate on certain DRGs and treat relatively low-severity patients within them;
  • tend to treat lower shares of Medicaid patients.

Lipomi is hopeful that the recommendations will not be approved. "I am confident that the Congress of the United States of America will see through the smoke and mirrors offered by the established, old-fashioned general hospital establishment and offer America new, innovative, and cost-effective alternatives in health care," he says. "Our nation is calling out for innovation and patient choice, and specialty hospitals answer their call."

Also, MedPAC will recommend allowing hospitals to offer incentives to physicians to encourage physician and hospital cooperation to lower costs and improve care. MedPAC reported that such gainsharing arrangements, which are currently prohibited under federal law, could help improve hospital-physician relationships.

In other news, MedPAC voted to recommend a payment update of marketbasket minus 0.4 percentage points for hospital outpatient services in 2006.

The reduction would apply to all hospitals paid under the Medicare prospective payment system, even though the Medicare Modernization Act specified a full update for hospitals that share data on 10 key quality indicators for fiscal years 2005 through 2007.


For more information on surgical hospitals, contact:

  • Michael Lipomi, MSHA, CEO, Stanislaus Surgical Hospital, 1421 Oakdale Road, Modesto, CA 95355.