    Specialty Hospitals: Information on Potential New Facilities
    (19-MAY-05, GAO-05-647R).

    Beginning in the 1990s, there was a substantial increase in the
    number of short-term acute care hospitals that primarily treat
    patients with specific medical conditions or who need surgical
    procedures. Advocates of such hospitals, commonly referred to as
    specialty hospitals, contend that their focused missions and
    dedicated resources can both improve quality and reduce health
    care costs. Critics contend that specialty hospitals siphon off
    the most profitable procedures and patient cases, typically
    without providing emergency care or other vital community
    services, and thus erode the financial health of neighboring
    general hospitals. Critics also contend that the ability of
    physicians to invest in a specialty hospital and then refer
    patients to that hospital creates financial incentives that may
    inappropriately affect physicians' clinical and referral
    behavior. In 2003, we issued two reports on the growth,
    characteristics, and performance of specialty hospitals. More
    than two-thirds of the 100 specialty hospitals we identified as
    being in existence in June 2003 had opened their doors since the
    beginning of 1990. The specialty hospitals in existence in fiscal
    year 2000, the most recent year for which we then had data,
    accounted for about 1 percent of Medicare spending for inpatient
    services. We also identified an additional 26 specialty hospitals
    under development in 10 states. Approximately 70 percent of the
    existing specialty hospitals were owned, in part or in whole, by
    physicians. Subsequent to our reports, Congress, through the
    Medicare Prescription Drug, Improvement, and Modernization Act of
    2003 (MMA), established a moratorium which, in effect,
    temporarily halted further development of physician-owned
    specialty hospitals that focus on cardiac, orthopedic, or
    surgical procedures and mandated additional studies of specialty
    hospital issues. Specialty hospitals in operation as of November
    18, 2003, are grandfathered under the moratorium and are allowed
    to expand within limits. Specialty hospitals not opened as of
    that date may apply to the Centers for Medicare & Medicaid
    Services (CMS) and request a determination of their development
    status. Hospitals not open as of November 18, 2003, but
    sufficiently advanced in their development may be grandfathered.
    The MMA moratorium expires June 8, 2005. To help Congress
    consider the likely consequences of the moratorium's expiration,
    Congress asked us to provide updated information on the potential
    growth in the number of physician-owned specialty hospitals. This
    report responds to that request by presenting information that
    addresses the following questions: (1) How many applications for
    grandfather determinations has CMS received from specialty
    hospitals under development, what types of specialty hospitals
    applied, where were these hospitals located, and how many of the
    applications have been approved? (2) What information exists to
    indicate the likely number, location, and type of specialty
    hospitals not exempt from the moratorium that may be developed
    following its expiration?
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-647R
        ACCNO:   A24597
      TITLE:     Specialty Hospitals: Information on Potential New
    Facilities
         DATE:   05/19/2005
      SUBJECT:   Community hospitals
    	     Conflict of interests
    	     Federal law
    	     Health care costs
    	     Health care services
    	     Hospital administration
    	     Hospital care services
    	     Hospital planning
    	     Hospitals
    	     Investments
    	     Medicare
    	     Physicians
    	     Performance measures

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    GAO-05-647R

    United States Government Accountability Office Washington, DC 20548

    May 19, 2005

    The Honorable Charles E. Grassley
    Chairman
    The Honorable Max Baucus
    Ranking Minority Member
    Committee on Finance
    United States Senate

    Subject: Specialty Hospitals: Information on Potential New Facilities

    Beginning in the 1990s, there was a substantial increase in the number of
    short-term acute care hospitals that primarily treat patients with
    specific medical conditions or who need surgical procedures. Advocates of
    such hospitals, commonly referred to as specialty hospitals, contend that
    their focused missions and dedicated resources can both improve quality
    and reduce health care costs. Critics contend that specialty hospitals
    siphon off the most profitable procedures and patient cases, typically
    without providing emergency care or other vital community services, and
    thus erode the financial health of neighboring general hospitals. Critics
    also contend that the ability of physicians to invest in a specialty
    hospital and then refer patients to that hospital creates financial
    incentives that may inappropriately affect physicians' clinical and
    referral behavior.

    In 2003, we issued two reports on the growth, characteristics, and
    performance of specialty hospitals.1 More than two-thirds of the 100
    specialty hospitals we identified as being in existence in June 2003 had
    opened their doors since the beginning of 1990.2 The specialty hospitals
    in existence in fiscal year 2000, the most recent year for which we then
    had data, accounted for about 1 percent of Medicare spending for inpatient
    services. We also identified an additional 26 specialty hospitals under

    1Specialty Hospitals: Geographic Location, Services Provided, and
    Financial Performance, GAO-04167 (Washington, D.C.: Oct. 22, 2003) and
    Specialty Hospitals: Information on National Market Share, Physician
    Ownership, and Patients Served, GAO-03-683R (Washington, D.C.: Apr. 18,
    2003).

    2We considered a hospital to be a specialty hospital if the
    diagnosis-related group (DRG) classification for at least two-thirds of
    its Medicare patients (or two-thirds of all of its patients where such
    data were available) fell into no more than two major diagnosis
    categories, such as diseases of the circulatory system, or if at least
    two-thirds of its patients were classified in surgical DRGs. We excluded
    hospitals that were government owned or that specialized in providing
    long-term care or otherwise had missions largely distinct from the
    missions of short-term, acute care hospitals. Our analysis included
    specialty hospitals that were owned, in whole or in part, by physicians
    and those that had no physician owners.

    development in 10 states. Approximately 70 percent of the existing
    specialty hospitals were owned, in part or in whole, by physicians.3

    Subsequent to our reports, Congress, through the Medicare Prescription
    Drug, Improvement, and Modernization Act of 2003 (MMA), established a
    moratorium which, in effect, temporarily halted further development of
    physician-owned specialty hospitals that focus on cardiac, orthopedic, or
    surgical procedures and mandated additional studies of specialty hospital
    issues.4 Specialty hospitals in operation as of November 18, 2003, are
    grandfathered under the moratorium and are allowed to expand within
    limits. Specialty hospitals not opened as of that date may apply to the
    Centers for Medicare & Medicaid Services (CMS) and request a determination
    of their development status. Hospitals not open as of November 18, 2003,
    but sufficiently advanced in their development may be grandfathered. The
    MMA moratorium expires June 8, 2005.

    To help you consider the likely consequences of the moratorium's
    expiration, you asked us to provide updated information on the potential
    growth in the number of physician-owned specialty hospitals. This report
    responds to your request by presenting information that addresses the
    following questions: (1) How many applications for grandfather
    determinations has CMS received from specialty hospitals under
    development, what types of specialty hospitals applied, where were these
    hospitals located, and how many of the applications have been approved?
    (2) What information exists to indicate the likely number, location, and
    type of specialty hospitals not exempt from the moratorium that may be
    developed following its expiration?

    We determined the number and characteristics of specialty hospitals under
    development that had applied for a grandfather determination by obtaining
    summaries of the applications from CMS. Facilities that submitted such
    applications included potential new specialty hospitals and existing
    specialty hospitals with expansions underway as of November 18, 2003. We
    included both new and expanding facilities in our analysis of the
    applications that CMS received and in that analysis refer to both types of
    facilities as "under development." To gather and assess information about
    the number of specialty hospitals potentially under development that are
    not exempt under the moratorium, we contacted representatives from
    national and selected state associations of community hospitals, including
    the American Hospital Association (AHA) and the Federation of American
    Hospitals

    3In its 2005 report to Congress, the Medicare Payment Advisory Commission
    (MedPAC) stated that there were 48 physician-owned cardiac, orthopedic, or
    surgical specialty hospitals in 2002. MedPAC identified fewer specialty
    hospitals than we did in our previous reports primarily because MedPAC
    excluded from its count women's specialty hospitals and specialty
    hospitals that had no physician owners. See Medicare Payment Advisory
    Commission, Report to the Congress: Physician-Owned Specialty Hospitals
    (Washington, D.C.: March 2005).

    4MMA imposed an 18-month moratorium during which a physician who has an
    ownership or investment interest in a new specialty hospital (or has
    immediate family members who do) may not refer Medicare patients to that
    hospital for designated health services. Thus, in effect, the moratorium
    halted further development of physician-owned specialty hospitals. Pub. L.
    No. 108-173, S:507, 117 Stat. 2066, 2295-97.

    (FAH); several large companies that own and operate specialty hospitals;
    the American Surgical Hospital Association; and the Medicare Payment
    Advisory Commission (MedPAC). Many of these representatives provided us
    with information about specific facilities that they had tentatively
    identified as specialty hospitals under development. Because MMA's
    moratorium applies only to physician-owned cardiac, orthopedic, and
    surgical specialty hospitals, our analysis focused on facilities that had
    been tentatively identified as such by one or more of the above
    representatives. We then sought to ascertain the characteristics and
    status of each facility by contacting a facility official or, if that was
    not possible, obtaining corroborating information from news reports or
    other sources. We also solicited the views of the representatives
    mentioned above regarding the potential for specialty hospital growth.
    Additional details regarding our methodology are contained in enclosure I.
    Our work was performed during April and May 2005 in accordance with
    generally accepted government auditing standards.

    Results in Brief

    As of April 29, 2005, CMS had received 40 applications from specialty
    hospitals under development seeking determinations that they were
    grandfathered under MMA's moratorium. CMS received 38 applications for new
    specialty hospitals and 2 applications for specialty hospital expansions.
    Slightly more than half (22) of the 40 applications were from surgical
    hospitals, while the rest were from cardiac hospitals (9), orthopedic
    hospitals (5), or hospitals that did not indicate their specialty (4).
    Three-fourths of the applications came from hospitals in four states:
    Texas (19), Louisiana (6), California (3), and Oklahoma (3). Of the 40
    applications it received, CMS issued 12 favorable opinions (approvals) and
    2 unfavorable opinions (denials). One of the 40 applications had been
    withdrawn.

    Comprehensive information about specialty hospitals that may be developed
    when the moratorium expires is both difficult to acquire and verify,
    although what does exist indicates continued growth in the number of
    specialty hospitals-in California, South Carolina, and Texas. Of the 52
    facilities tentatively identified by AHA, FAH, and others as specialty
    hospitals under development, and that did not apply for a determination on
    whether they were subject to the moratorium, we were able to obtain
    information corroborating that 6 of the facilities will be physician-owned
    specialty hospitals. One of the 6 new facilities is planned as a cardiac
    hospital; the remaining 5 new facilities are slated to be surgical
    hospitals. Four of the 52 facilities had already opened as physician-owned
    specialty hospitals, while 4 others were no longer under development. We
    were unable to obtain sufficient information to determine the status and
    characteristics of 17 facilities. Finally, the available information for
    the remaining 21 of the 52 facilities indicated that they would not be
    physician-owned specialty hospitals. In short, the group of 52 facilities
    could include anywhere from 6 to 23 specialty hospitals under development.
    Additional facilities, especially those in the early planning stages,
    could also be under development as specialty hospitals. Representatives of
    community hospitals are concerned that the number of specialty hospitals
    could grow rapidly following the moratorium's expiration. In contrast,
    most representatives of specialty hospitals said that

    continued uncertainty over future federal actions and other factors would
    cause any such growth to be both moderate and gradual.

    Upon reviewing a draft of our report, CMS acknowledged the usefulness of
    our report and provided context for the scope of the specialty hospital
    issue.

    Background

    Federal law, in general, prohibits physicians from referring Medicare
    patients for designated health services to facilities in which they (or an
    immediate family member) have an ownership or investment interest. In
    addition, the law prohibits such facilities from billing Medicare or the
    beneficiary for services rendered as a result of a prohibited referral.5
    Before MMA, an exception to this general prohibition, commonly called the
    "whole hospital" exception, allowed physicians who have an ownership or
    investment interest in an entire hospital, and who are authorized to
    perform services there, to refer patients to that hospital. MMA's
    specialty hospital moratorium excludes from this exception those hospitals
    that are primarily or exclusively engaged in the care and treatment of
    patients with cardiac or orthopedic conditions, or patients receiving
    surgical procedures or other specialized categories of services designated
    by the Secretary of Health and Human Services.6, 7 Therefore, a physician
    with an ownership or investment interest in a specialty hospital may not
    refer Medicare patients to that hospital, and the hospital may not bill
    Medicare or the beneficiary, for inpatient or outpatient hospital services
    or other designated health services while the moratorium is in effect.

    MMA grandfathers specialty hospitals that as of November 18, 2003, were in
    operation or under development. Hospitals may apply to CMS and request an
    advisory opinion on their development status as of November 18, 2003. In
    determining whether a hospital was under development as of that date, CMS
    is required to consider whether the following had occurred: architectural
    plans were completed; funding was received; zoning requirements were met;
    and necessary approvals from appropriate state agencies were received. CMS
    may also consider other evidence in reaching its determination. Specialty
    hospitals that had Medicare provider agreements in effect as of November
    18, 2003, were considered to be in operation as of that date and thus
    grandfathered under the moratorium. During the moratorium, a grandfathered
    specialty hospital is not allowed to bill for physician investor referrals
    of Medicare designated health services if the hospital expands by

    5Certain aspects of the physician self-referral prohibition have been made
    applicable to the Medicaid program, 42 U.S.C. S:1396b(s)(2000).

    6CMS has not issued guidance to define the phrase "primarily or
    exclusively engaged." For example, CMS has not stated whether the
    definition of "primarily" is based on the number of patients, percent of
    revenues, or other factors.

    7Certain types of hospitals, for example, psychiatric hospitals and
    children's hospitals, cannot be designated specialty hospitals for the
    purposes of the moratorium. CMS has not designated other types of
    specialty hospitals in addition to the ones (cardiac, orthopedic, and
    surgical) specifically mentioned in MMA.

    increasing the number of its physician investors, changing the specialized
    services it provides, or increasing its size by more than five beds or 50
    percent of the number of beds in the hospital as of November 18, 2003
    (whichever is greater).8

    Although MMA's moratorium specifically pertains to physicians' referrals
    of Medicare patients and any corresponding billing for the referred
    services, the moratorium in effect curtails further development of
    physician-owned specialty hospitals. Existing specialty hospitals
    grandfathered under the moratorium, although limited in their ability to
    expand, may continue to bill for services rendered to patients referred to
    them by physicians who have ownership or investment interests in the
    facilities.

    Forty Specialty Hospitals Applied for a Determination of Their Development
    Status under the Moratorium

    As of April 29, 2005, CMS had received 40 applications for grandfather
    determinations from specialty hospitals that sought to continue to develop
    or expand under the

    9

    moratorium. CMS had approved 12 of the applications. Two of the
    applications were denied, although 1 of these 2 decisions is being
    reviewed by CMS at the request of the specialty hospital. Another of the
    40 applications was withdrawn, while the remaining 25 applications are
    pending. The tables below provide detailed information on the status of
    the applications by type of application-new facilities or expansions of
    existing facilities (see table 1), hospital specialty (see table 2), and
    hospital location (see table 3).

    Table 1: 	Status of Applications for Specialty Hospital Grandfather
    Determinations, by Type of Application, April 29, 2005

                                   Application status

        Application type    Approved    Denied    Withdrawn    Pending      Total
          New facilitya             12         2            1     23
            Expansion                0         0            0          2
              Total                 12         2            1     25

    Source: CMS.
    aNew facilities include ambulatory surgery centers that were being
    converted to specialty hospitals.

    8An increase in the number of beds is allowed only on the main campus of
    the hospital.

    9CMS indicated that 3 of the 40 applicants also requested determinations
    that the hospital in question was not a specialty hospital. In addition to
    the 40 applications, CMS received 8 applications from physician-owned
    specialty hospitals seeking advisory opinions on issues other than whether
    or not the hospital was under development as of November 18, 2003.

    Table 2: 	Status of Applications for Specialty Hospital Grandfather
    Determinations, by Hospital Specialty, April 29, 2005

                                   Application status

        Hospital specialty    Approved    Denied    Withdrawn    Pending    Total
              Cardiac                  1         1            0         7       9
            Orthopedic                 2         1            1         1       5
             Surgical                  9         0            0    13          22
            Uncertaina                 0         0            0         4       4
               Total                  12         2            1    25          40

    Source: CMS.
    aApplication did not indicate hospital's specialty.

    Table 3: Status of Applications for Specialty Hospital Grandfather
    Determinations, by Hospital Location, April 29, 2005

                                   Application status

        Hospital location    Approved    Denied    Withdrawn    Pending     Total
              Texas                   7         1            0     11
            Louisiana                 3         0            0          3
            California                1         0            0          2
             Oklahoma                 0         1            0          2
              Othera                  1         0            1          7
              Total                  12         2            1     25

    Source: CMS.
    aOther states include Arizona, Arkansas, Colorado, Indiana, Kansas,
    Nevada, Ohio, and Pennsylvania.

    Limited Verifiable Information Suggests Continued
    Growth in the Number of Specialty Hospitals
    When the Moratorium Expires

    Comprehensive information about specialty hospitals that did not apply for
    a grandfather determination and that may be developed when the moratorium
    expires is not readily available, variable in its quality, and often
    difficult to verify. Although AHA, FAH, and others had tentatively
    identified 52 facilities as potential physicianowned specialty hospitals
    under development, the information available to us corroborated this
    status for only 6 facilities. Available information on the remaining
    facilities was either insufficient for us to determine the status and
    characteristics of the facility or it indicated that the facility was not
    under development or was not a physician-owned specialty hospital. Other
    facilities, in addition to the 52 we attempted to confirm, could be under
    development as specialty hospitals. This is particularly true of
    facilities that are in the early planning stages, because those efforts
    are often not publicized. Because of the lack of comprehensive, verifiable
    information, the extent to which the number of specialty hospitals will
    increase when the moratorium expires is uncertain. Representatives of
    community hospitals told us they believe that there will be a rapid
    expansion in the number of new specialty hospitals, while most
    representatives of the specialty hospital industry said they believe that
    any such growth will be both modest and gradual.

    Of the 52 facilities tentatively identified as specialty hospitals under
    development, we obtained corroborating information that 6 were being
    planned as physician-owned specialty hospitals. (See table 4.) Five of the
    6 specialty hospitals were slated to be

    surgical hospitals and 1 was being built as a cardiac hospital. (See table
    5.) The 6 specialty hospitals are located in three states: California (2),
    South Carolina (1), and Texas (3). An additional 4 facilities had opened
    as physician-owned specialty hospitals during the moratorium.10 We also
    identified 4 facilities that had been under development as specialty
    hospitals, but those projects had been terminated.

    Table 4: Characteristics of Facilities Identified as Potential Specialty
    Hospitals under Development that Did Not Apply for Grandfather
    Determinations, April 2005

         Physician-owned Number of specialty hospital? Facility characteristics
                                       facilities

    Yes Under development

    Opened after November 18, 2003

    No longer under development

    Uncertain Information insufficient to determine characteristics

    No Physician-owned general hospital

    Not a hospital or not physician owned a

    Total

    Source: GAO.
    Note: The facilities included in the table had been identified by
    representatives of community hospitals, state
    hospital associations, representatives of specialty hospitals, and GAO as
    potential specialty hospitals under
    development. We classified each facility based on available corroborating
    information regarding the
    characteristics of that facility.
    a Five of the nine facilities are ambulatory surgery centers, two are
    general hospitals that are not physician
    owned, one is a physician's office, and one is a recovery center.

    Table 5: Location and Type of Specialty Hospitals that Did Not Apply for
    Grandfather Determinations and Were Verified as under Development, April
    2005

                                     Specialty type

                State               Cardiac          Surgical               Total
              California                       0         2
            South Carolina                     1         0
                Texas                          0         3
                Total                          1         5

    Source: GAO.
    Note: We did not identify any orthopedic specialty hospitals under
    development.

    The information available on 17 of the 52 facilities was insufficient for
    us to determine whether they were being developed as physician-owned
    specialty hospitals. Consequently, the 52 facilities could include from 6
    to 23 physician-owned specialty hospitals under development. In another 21
    of the 52 cases, the available information indicated that the facility
    would not be a physician-owned specialty hospital.

    Many community hospital representatives that we spoke with said that the
    expiration of the moratorium will lead to a rapid increase in the number
    of specialty hospitals. The representatives stated that such development
    would occur, in part, because

    10None of the four specialty hospitals (one cardiac, one orthopedic, and
    two surgical) had applied to CMS for a determination of their development
    status under the moratorium. CMS stated that the agency strongly
    recommends, but does not require, entities to seek a favorable grandfather
    determination before opening as a specialty hospital.

    physicians view specialty hospitals as an attractive financial
    opportunity. Community hospital representatives said that, in some
    instances, it would be relatively easy for physician-owned general
    hospitals to change their missions and begin functioning as specialty
    hospitals. The representatives also raised concerns about some
    physicianowned hospitals, in existence and under development, that
    classify themselves as general hospitals. The representatives said that
    some of these self-classified general hospitals predominately focused, or
    will focus, on surgical procedures, and thus should be considered
    specialty hospitals by CMS and be subject to MMA's moratorium.

    Most of the specialty hospital representatives we spoke with expected that
    any growth in the number of specialty hospitals following the moratorium's
    expiration would likely be both modest and gradual. Officials representing
    companies that own specialty hospitals said that continued uncertainty
    regarding future federal restrictions would dampen their interest in
    developing new specialty hospitals and make it difficult to obtain the
    financing necessary for such projects.11 Some company representatives said
    that the lack of a clear definition of what constitutes a specialty
    hospital has led their companies to avoid investments in certain
    facilities. The representatives said that they were concerned that if
    Congress extends the moratorium, CMS could later classify the facility as
    a specialty hospital, potentially subject to the moratorium or other
    restrictions. Specialty hospital representatives also said that not all
    physician-owned specialty hospitals have been financially successful and
    that some such hospitals have closed and physicians have lost their
    investments. Some representatives added that, although physicians are
    primarily interested in specialty hospitals for nonfinancial reasons, the
    financial risks are now more apparent and may dampen some enthusiasm for
    future development. The representatives said they believed that any growth
    in the number of specialty hospitals will be gradual because not all of
    the specialty hospitals under development will open immediately and that
    it typically takes 2 or more years to develop, construct, and open a new
    facility. Finally, they added that it is likely that some of the planned
    specialty hospitals, especially those in the early stages of planning, may
    never be built or opened.

    Concluding Observations

    Whether or not MMA's moratorium is allowed to expire, the number of
    physicianowned specialty hospitals will increase from present levels. If
    the moratorium is extended, at least 12, and perhaps eventually as many as
    37, new specialty hospitals could be completed and opened within a year or
    two. The exact increase would depend in part on the number of applications
    that CMS approves. If the moratorium is allowed to expire, the increase
    would likely be greater, but how much greater is uncertain. Specialty
    hospitals under development whose applications for grandfather status have
    been denied, and specialty hospitals that have not applied, could open.

    11Some specialty hospital representatives stated that uncertainly also
    exists with regard to potential state legislative efforts. Several states
    are considering legislation that would prohibit or discourage future
    specialty hospital growth.

    We identified 6 specialty hospitals under development that had not
    applied. In addition, some or all of the 17 facilities where we had
    insufficient information to classify the facility could also be
    physician-owned specialty hospitals under development. The lack of
    comprehensive, verifiable information makes it difficult to know exactly
    how many hospitals may be under development. Ultimately, the extent to
    which physicians and other investors are attracted to specialty hospitals,
    or are deterred by the uncertainty of future federal restrictions or other
    factors, will decide how quickly the industry grows when the moratorium
    expires.

    Agency Comments

    We provided a draft of our report to CMS for review. In written comments,
    CMS acknowledged the usefulness of our report concerning physician-owned
    specialty hospitals under development. CMS provided context for the
    relative potential growth of physician-owned specialty hospitals, stating
    that if the agency were to approve all pending applications for
    grandfather determinations and if all of the 37 potential specialty
    hospitals identified by GAO were to open, the number of acute care
    hospitals would increase by just over 1 percent. We have reprinted CMS's
    letter in enclosure II. CMS also provided technical comments, which we
    incorporated where appropriate.

    As agreed with your offices, we plan no further distribution of this
    report until 30 days after its date. At that time, we will send copies of
    this report to appropriate congressional committees and other interested
    parties. We will also make copies available to others upon request. This
    report will be available at no charge on GAO's Web site at
    http://www.gao.gov.

    If you or your staffs have any questions, please call me on (202) 512-7101
    or James Cosgrove on (202) 512-7029. Other contributors to this report
    include Zachary Gaumer and Jennifer Podulka.

    A. Bruce Steinwald Director, Health Care

    Enclosures

    Enclosure I Enclosure I

                                 Scope and Methodology

    This enclosure provides additional details about the scope of our work,
    our methodology, and key limitations. First, it describes the data that we
    obtained from the Centers for Medicare & Medicaid Services (CMS) regarding
    specialty hospitals under development that applied for a determination
    that they were grandfathered under the moratorium. Second, it describes
    the approach we used to identify information about other specialty
    hospitals under development and to verify the accuracy of this
    information.

    Information on Specialty Hospitals under Development that Applied for
    Grandfather Determinations

    CMS provided information on the 40 specialty hospitals under development
    that had applied for grandfather determinations as of April 29, 2005. From
    CMS, we obtained summary information on each hospital's name, state
    location, and area of specialization; whether the application was for a
    new facility or an expansion of an existing one; and the current status of
    the application: approved, denied, withdrawn, or pending.

    Information on Other
    Specialty Hospitals under Development

    To gather information about specialty hospitals potentially under
    development that had not applied for a determination that they were
    grandfathered under the moratorium, we consulted organizations and
    individuals most likely to be aware of such development. Specifically, we
    contacted the two government agencies mandated by the Medicare
    Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) to
    study specialty hospital issues for Congress: CMS and the Medicare Payment
    Advisory Commission. Because hospital officials and hospital associations
    are likely to be aware of developments in their industry, we contacted
    representatives from both community hospitals and specialty hospitals.
    Specifically, the community hospital representatives included officials
    from the American Hospital Association, the Federation of American
    Hospitals, the Coalition of Full-Service Community Hospitals, and nine
    state hospital associations.12 We selected the nine state hospital
    associations because our October 2003 report on specialty hospitals
    identified those states as having concentrations of specialty hospitals in
    existence or under development at that time.13 Officials of specialty
    hospitals that we contacted represented the American Surgical Hospital
    Association and five corporations that own specialty hospitals: Baylor
    Health Care System, Hospital Partners of America, MedCath Corporation,
    National Surgical Hospitals, and United Surgical Partners

    12The nine states were Arizona, California, Idaho, Kansas, Louisiana,
    Oklahoma, South Dakota, Texas, and Wisconsin.

    13GAO-04-167.

    Enclosure I Enclosure I

    International. Many of the organizations and individuals we contacted
    provided us with information on specific facilities that they said were
    likely specialty hospitals under development and offered their views on
    the potential for specialty hospital growth after the moratorium expires.

    We consolidated the information we obtained from the sources described
    above, along with the information on specialty hospitals under development
    that we had identified for our October 2003 report. After excluding those
    facilities that had submitted applications for grandfather determinations
    to CMS, we were left with a list of 52 potential new specialty hospitals.

    We then sought corroborating information that the 52 facilities in
    question (1) were under development, (2) would specialize in treating
    cardiac or orthopedic patients or in treating patients that need surgical
    procedures, and (3) that these facilities would be owned, at least in
    part, by one or more physicians. If sufficient information was available,
    we attempted to contact a representative of the facility. When we were
    successful in making contact, we used the information we obtained to
    determine the status of the facility. If we could not make contact with
    the facility directly, we turned to a variety of independent news sources
    to obtain information about the facility. These sources included local
    newspapers, local business journals, health care industry publications,
    and company Web sites. Following the process outlined above, we determined
    the status of 35 of the 52 facilities tentatively identified as specialty
    hospitals under development. In 17 instances, we could not locate
    sufficient information within the time frames allotted for the study to
    determine the status of the facility. Although our findings are based on
    the best information available to us, it is very likely that we do not
    have a complete list of all specialty hospitals under development. Some
    facilities, particularly those in the initial planning stages, may not
    have come to the attention of the individuals and organizations we
    contacted. Our work was performed during April and May 2005 in accordance
    with generally accepted government auditing standards.

                               Enclosure II Enclosure II

               Comments from the Centers for Medicare & Medicaid Services

    (290453)

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