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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