Second GAO Report Confirms Advantages of Specialty Hospital Model.

Business Editors/Health/Medical Writers

CHICAGO--(BUSINESS WIRE)--Oct. 27, 2003

National Surgical Hospitals (NSH), the nation's leading developer and manager of specialty surgical hospitals, today commented on the second installment of a report from the General Accounting Office (GAO) that examines the role of surgical hospitals in the nation's healthcare system.

The key findings of the GAO report corroborate what experts in healthcare have long understood - that smaller, patient-friendly and focused healthcare facilities provide a superb vehicle for quality care.

While Congress continues to discuss the future of specialty hospitals, it is important to point out that the GAO report reinforces the point that states, not the federal government, are responsible for regulating the hospital industry. From site location to emergency rooms, states now dictate how a hospital must be structured. Therefore, NSH believes it is duplicative for the federal government to intrude into this arena of traditional state regulation.

In the Company's view, an important finding in the GAO report relates to the location of specialty hospitals. The report found that specialty hospitals are located in 28 states, with a majority concentrated in seven of those states. This clearly indicates that many states have made an affirmative decision to welcome a competitive and thriving healthcare market so their citizens have the option to choose a doctor and hospital that is right for them, based on their own individual circumstances. NSH believes it would be wrong to deny this option for patients.

Likewise, states also regulate the need for any hospital to build or operate an emergency room. While not every specialty hospital has an emergency room, it is also fair to say that not every community hospital does either.

John Rex-Waller, President and CEO of NSH, stated, "Specialty hospitals are uniquely and specially designed and equipped. These facilities focus on providing the highest quality of surgical healthcare in the specialties for which they are planned. It should be no surprise that some specialty hospitals don't have emergency rooms and don't hold themselves out as emergency care providers. That is not their mission." Rex-Waller noted, however, that many NSH specialty hospitals are in states that require emergency rooms and all comply with local and state laws regarding emergency care and the availability of emergency room facilities.

Rex-Waller said it was unfortunate that the GAO did not indicate which states require emergency rooms and which ones do not when it made its comparisons. NSH believes the statistics in the report are devalued by the lack of information on the specific requirements of state laws.

"The GAO report confirmed what we and other specialty hospital operators have experienced regarding physician use of these facilities," Rex-Waller observed. "Physicians bring their patients to specialty hospitals because they and their patients are treated right. This is expressed in the GAO's conclusion that more admissions come from physicians who are not investors than come from the physician investors themselves. "Detractors of specialty hospitals have attempted again and again to falsely portray specialty hospitals as totally reliant on physician investor referrals for their success. The GAO has rightly found that nothing could be further from the truth. The specialty hospital model of healthcare delivery works because it is less institutional, more user-friendly, and provides better value. Quality healthcare, not the physician's financial interests, is what makes these hospitals succeed."

NSH noted that the GAO report reached mixed results in its analysis of the financial performance of specialty hospitals. As a general statement, specialty hospitals tended to perform about as well as general hospitals on their Medicare inpatient business. When comparing specialty hospitals to other for-profit hospitals the report concludes that, for Medicare cases, specialty hospitals are less profitable. These findings directly contradict the claims by the American Hospital Association and the Federation of American Hospitals that specialty hospitals "cherry pick" Medicare admissions. The report also compared the profit margins of specialty hospitals and general hospitals based on all payer margins for the total facility. There, the GAO found that specialty hospitals derive higher margins. This result is not surprising, however, considering that the majority of hospitals in the GAO sample are not-for-profit facilities. Having no profit motive, it is reasonable to expect that margins would be lower in these hospitals. Such general hospitals have vastly different missions and constituencies than specialty hospitals, and so a comparison of margins is of questionable value.

"The fact that specialty hospitals achieve reasonable profit margins for rendering valuable services further validates this model of providing specialized healthcare," said Rex-Waller. "Keep in mind that these margins are achieved while paying property taxes, sales and use taxes, and franchise taxes and generously providing charitable care to the community. Our not-for-profit competitors that operate acute-care general hospitals can't say the same. Additionally, the profits produced by the specialty hospitals are again taxed as income at the state and federal level, further contributing to the overall good of the community."

While the report answers most of the specific questions posed by the requesting members of Congress, NSH believes that it leaves other important issues unaddressed. The report does not address the varying competitive environment in which the hospitals operate and fails to reach any conclusion on the financial impact they may have on one another. With this and other critical questions unanswered, the report validates the need for additional study and lays the foundation for the more comprehensives Medicare Payment Advisory Commission study called for in H.R. 1.

Concluding, Rex-Waller added: "It is truly unfortunate the American Hospital Association and the Federation of American Hospitals choose to misinterpret and misrepresent the conclusions of the GAO Report. The GAO report offers no evidence that physician ownership of specialty hospitals causes adverse effects upon community hospitals or patients. To the contrary, the GAO categorically denies any such conclusion, stating, 'we did not attempt to determine the financial effect that specialty hospitals may have on neighboring general hospitals.' The GAO is to be commended for its efforts in producing this report, and their contribution to the current debate over specialty hospitals is a very good first step. MedPAC should be allowed to build on this foundation. In the meantime, Congress should not stifle hospitals that provide high quality care to all kinds of patients in a very efficient manner."

NSH is a partner in 17 surgical facilities in operation or being developed. NSH facilities specialize in orthopedics, neurosurgery, and more complex general surgery cases. NSH partners with physicians to develop and operate these facilities and provides services in all administrative aspects of a surgical facility's operations.