Specialty Hospitals
by K. Robert Wendel

The recent passage of the massive $500 billion federal Medicare Bill may be a boom for insurance and drug companies, but it's a bust for the construction industry.

The new bill, which narrowly passed Congress, puts an 18-month construction moratorium on physician-owned specialty hospitals, a growing - and lucrative- niche market for architects, engineers and contractors.

Since the moratorium, plans for at least two heart hospitals in the metro Phoenix area have been canceled.

According to the Government Accounting Office, the number of physician-owned specialty hospitals has tripled since 1992 to 92 across the nation. As of February 2003, another 20 were in various stages of development. To move forward, the 20 hospitals must have reached significant design and construction milestones by November 2003.

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"Clients won't have the ability to build anymore specialty hospitals," said Paul Alessio, director of development for the Rowland Companies, a Scottsdale medical developer and contractor. "That was about 55 percent of our market, so it's had an impact. We have been forced to focus more strategically.

If the American Hospital Association has its way, the moratorium would become an outright ban on new specialty hospital construction across the nation. Officials from the AHA said the specialty hospitals drain away the profitable services such as open-heart surgeries, leaving hospitals with less lucrative procedures and expensive emergency rooms to operate.

"The argument is that specialty hospitals are drawing resources away from the larger, full-service community hospitals," said Jennifer Armstrong, a spokesperson for the AHA. "The specialty hospitals open in a high- profit sector, but they are not opening burn units or neo natal units. The facilities also don't take patients with Medicaid."

Although children's hospitals were among the first "specialty hospitals," the category has grown to include heart, orthopedic, surgical and women. The AHA is also concerned that physicians, who refer their patients to the specialty hospitals, own many of the specialty hospitals.

According to the GAO, physicians own more than 70 percent of the specialty hospitals.

"Physicians who have ownership interests in facilities they are referring patients to is not in the best interest of the patients," Armstrong said.

Members of the American Surgical Hospital Association said full-service hospitals are just trying to stifle competition.

"The only good I see coming out of this moratorium is that it alleviates traditional hospitals from having to worry about competition," said Lloyd Scarrow, CEO of Arizona Spine and Joint Hospital in Mesa, Ariz. "The legislation really had no other goal."

Both Scarrow and Beverly Carpenter, CEO of Arizona Surgical Hospital LLC, denied that specialty hospitals don't take Medicaid patients.

"Essentially they are saying that we take the cream of the crop and they get all the 'junk' patients," Carpenter said. "That simply isn't true. The only true thing is that we can control costs better, and in the long run, I think the facts will come out."

Some states, such as Nevada, already have bans on the construction of specialty hospitals.

"Our perspective is that if you want to build specialty hospitals, fine, but build a full- service emergency room, too," said Bill Welch, president of the Nevada Hospital Association. "They are cherry picking the highly technical and insured patients."

New Mexico joined Arizona last year to allow specialty hospital construction, although both states have mandates that specialty hospitals must provide emergency services to indigents, regardless of their ability to pay.

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