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CMS has dropped its plan to develop a rule to address so-called niche providers, CMS administrator Tom Scully told attendees at a conference on Wall Street's view of health care.

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There was some question, he said, whether CMS had the regulatory authority to issue such a rule; however, he expressed concern that physician investors have been abusing the "whole hospital" exemption described in current regulations. Under this exemption, physicians are permitted to have an ownership interest in a "whole hospital," in which self-referrals would be insignificant in relation to the overall services of the hospital. If, however, the hospital is a specialty hospital, devoted to a narrow range of services such as cardiac or orthopedic care, the self-referrals of the physician investors would likely be more significant and could be construed as abuse. Critics of such practices assert that niche providers cut into bottom lines of general hospitals and threaten the cross-subsidization of unprofitable services such as emergency care and other essential services. Scully noted that these concerns warrant a change in the current regulations.

The Senate's proposed Medicare Drug and Medicare Improvement Act contains an amendment that would require the HHS secretary to set guidelines for physician investments in hospitals designated as devoted to cardiac, orthopedic, surgical, or some other specialty. The House bill does not contain such language. Scully also commented on the Medicare provider payment provisions of the prescription drug bills Congress was debating at press time. Questioning the need for them, he said, "there is little pain anywhere," noting that hospital margins are at their historical average. He voiced concern that the bill could turn out to be a "gravy train" for certain providers and could result in a legislative backlash in two or three years.

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