Fast forward to the late 1990s and the hospital market re-directed the hue and cry to yet another new breed of healthcare facility: Specialty surgical hospitals.

"Same song, different verse," harrumphed James Grant, chief operating officer of Chicago-based National Surgical Hospitals Inc., one of the leading specialty hospital chains in the nation. Grant also serves as president-elect of the American Surgical Hospital Association (ASHA), the trade group representing the market. "Ambulatory surgery centers were called charlatans that treated patients poorly. All they’ve done is dusted off those old arguments," he said. "Anytime hospitals are confronted with change it’s the worst thing ever. But we’re providing better results in a more pleasant and safer environment and that scares the heck out of these guys."

Michael Lipomi, CEO of Stanislaus Surgical Hospital (Modesto, CA) recognizes the similarities, too. His facility began as an ambulatory surgery center in 1985 with him at the helm before converting to a surgical hospital 15 years later. "We’ve been open since 1985 but all of the other hospitals in our local area are adding buildings, reporting 85 percent to 90 percent occupancy rates and making hundreds of millions of dollars. How is that possible if facilities like ours are hurting them?

"Amidst all of the hoopla hospitals are just trying to maintain their monopoly or oligopoly situations in local markets," said Lipomi, who also serves as ASHA’s president. "It’s easier to maintain the status quo and cast aspersions on the new guys."

No one really wants competition, Grant admitted, particularly if a group of doctors decide to develop a surgery center or surgical hospital independent of the community hospital. "So the hospital screams loud and hard about how those money-grubbing doctors will damage their facility," he said. "When I ran hospitals I felt I was in a much better position when I had competition. It’s human nature to abhor anything that changes the status quo. If I were still running a hospital, however, I’d probably do the same thing. But is there any beef to the argument? The idea that we’re taking away business is absolute unadulterated baloney." Grant once served as a hospital CEO and was president of Quorum Health Group Inc.’s eastern region, representing more than 70 for-profit hospitals.

The great debate

By definition and function, specialty surgical hospitals typically concentrate on such areas as cardiac, orthopedic, surgical or women’s care. In many states, such as California, they’re fully licensed as acute care hospitals even though they primarily deliver outpatient care. "We see ourselves as ambulatory surgery centers with beds as opposed to mini-hospitals," Grant added.

But this small, upstart group of specialized surgical hospitals rankles its full-service general acute-care siblings that are larger in size as well as in number. They give two justifiable and legitimate reasons: Fair competition and conflicts of interest.

Because specialty surgical hospitals tap into more profitable areas of care – primarily ones that generate higher reimbursement – they siphon funds from a revenue base that general hospitals use to subsidize the charity care they provide in emergency rooms for homeless, Medicaid, under-insured and uninsured patients. And critics indicate that specialty surgical hospitals don’t have to operate ERs, even though many do. Incidentally, not all general hospitals have ERs.

Detractors also argue that profit-motivated physicians refer patients to those specialty surgical hospitals in which they have ownership stakes, compromising their objectivity and social responsibility in providing care.

But Grant dismisses the charity care argument. "We handle roughly the same percentage of Medicare patients as traditional acute care hospitals," he said. "Our bad debt exposure, which includes providing charity care, is about the same, too. I would put our numbers up against anybody that offers similar service lines."

Grant and Lipomi question how ERs can represent such a financial drain for general hospitals when they are expanding and upgrading them? "Roughly 50 percent of inpatients come through the ER, that’s why," Lipomi said. "They’re admitted for additional procedures where charges can make up for those losses. ERs are charitable loss leaders like McDonald’s marketing is a loss leader. Sure it is. But it brings customers into the restaurants and they buy food. The ER simply moves patients throughout the facility and any revenues they generate are reapplied on the balance sheet to the ER that brought them in. Call it creative accounting."

Both acknowledge that EMTALA regulations require all facilities with ERs to accept and treat everybody who enters. "We can’t refuse anyone," Grant said. "We would never attempt to cherry pick patients based on their reimbursement abilities." But the ER at some facilities may not be the wisest care choice for selected patients. "If we don’t provide cardiac care how much sense does it make for us to treat a heart-attack victim in the ER only to transfer him to another facility?" Lipomi asked.

Profit doesn’t motivate all physicians involved in specialty surgical hospitals either – at least it’s not the primary motivator. Some merely want more control over scheduling and the procedures they perform. Doctors who work with National Surgical Hospitals tend to be frustrated with the administrative process at general hospitals, including surgery delays and last-minute changes that can upset productivity. "Typically, we’re a last resort after a physician group has been beating their heads against the wall for three, four or five years with a hospital," Grant said. "It’s not about the money. It’s about quality of life, quality of care and the ability to influence that."

Because specialty surgical hospitals focus on fewer clinical areas and frequently perform surgical procedures in those selected areas they become more proficient at them, according to Lipomi. This can improve quality and lower pricing, which translates into efficiency. "Our motivating factor is quality," he added. "Clinical and non-clinical quality of care." That includes lower infection and medical error rates.

Everything revolves around quality of care, Grant added. "We’re focused and we’re not trying to be all things to all people like [general] hospitals," he said. "Our facilities run efficiently because they’re 100 percent physician driven. Doctors are actively involved side-by-side with the leadership team to create a better environment for patients. As owners they’re more focused on the decisions they make."

Lipomi agreed. "They know what’s best for the patients and not the administrators, and as with any owner, to perpetuate the business is in their best interests.

"Many hospitals may be poorly run businesses that are losing a lot of money because of the inefficiencies in their programs," he continued. "Surgical hospitals represent a good business model." Why? They simply cut out much of the operational fat. That helps because their profit margins are smaller than the larger hospitals, he noted. "All of my profit generated in the first four months of a given year goes to pay taxes," he added. "My facility is not publicly traded and I don’t have millions of dollars to spend on things. Most of our facilities are privately owned."

Austin Surgical HospitalStanislaus Surgical Hospital

Regulatory wrangling

Like their ambulatory surgery center cousins, specialty surgical hospitals have emerged as another one of the fastest-growing market segments in healthcare. But federal Medicare reform legislation is slowing that growth a bit, thanks to some language nestled deep within the Medicare Prescription Drug, Improvement & Modernization Act (H.R. 1) that President Bush signed into law last December. Under the considerable lobbying influence of a number of general hospital organizations the government imposed an 18-month moratorium (expiring May 2005) on specialty surgical hospitals, capping further physician investment in them and limiting physician self-referrals except to existing facilities and to those under development as of Nov. 18, 2003.

Prior to the law’s enactment, however, the General Accounting Office issued two reports last year (June and October) that shed some light on the specialty hospital debate. The GAO review found that while specialty hospitals "tended to perform about as well as general hospitals did on their Medicare inpatient business," they also "tended to outperform general hospitals when the costs from all lines of business and the revenues from all payers were considered."

Among the other noteworthy findings:

•Overall, specialty hospitals as a group were "much less likely to have emergency departments, treated smaller percentages of Medicaid patients and derived a smaller share of their revenues from inpatient services" when compared to general hospitals.

•Even though specialty hospitals housed much fewer beds than general hospitals they tended to treat "more patients in their given fields of specialization," which typically spanned four areas: Cardiac, orthopedic, surgical and women’s health.

•More specialty hospital admissions came from physicians who were not investors in those facilities, blunting conflict of interest claims leveled by the general hospital groups.

The GAO identified 100 specialty surgical hospitals operating in 28 states with roughly two-thirds of them concentrated in seven states – Arizona, California, Kansas, Louisiana, Oklahoma, South Dakota and Texas. The agency also found that at least 26 more specialty hospitals were under development last year.

If you can’t beat ‘em…

Lipomi attributes hospital rancor to the market’s slow reaction time and resistance to change. But what he finds noteworthy is that many of the hospitals that condemned and rejected ambulatory surgery centers now operate their own outpatient care departments and freestanding surgery centers. "Part of it as that hospitals have become dependent on government payments rewarding them for their inefficiencies. There’s no incentive for them to provide better service or better care," he said. "They may not understand this and they may not want to do this right now. But eventually they’re going to do exactly what we’re doing," he said. "It’s just a matter of them realizing that they have to in order to compete."

Grant acknowledged that an increasing number of hospitals have expressed interest in developing joint ventures with doctors, with companies like National Surgical Hospitals and with other ASHA members.

Texas Health Resources (Arlington, TX), is one multi-hospital system investing in specialty surgical hospitals under joint venture arrangements with its physicians. Such hybrid facilities in which THR maintains a financial interest are part of a separate management division so that THR can concentrate on its core business of 13 general hospitals. To date, THR has invested in five surgical hospitals.

"We’d rather partner with them than fight it or split the market and compete head-on with them and lose out on any opportunities," said John Gaida, senior vice president of supply chain management. "Time will tell if it was the smart thing to do. Do you remember what happened when hospitals and hospital systems bought physician practices and HMOs in the 1990s? It turned out to be a disaster. We’ll see how this decision plays out long-term. Hospitals just have to become better at what they do and not worry so much about specialty hospitals pulling some of those higher-revenue procedures away. We have to adapt as healthcare continues to morph itself."

Depending on THR’s ownership stake in these facilities, they can participate in THR’s supply contracts with Premier Inc. either as an affiliate or as an owner like THR. "We steer clear of wrapping our arms around their day-to-day operations," Gaida said. "Those facilities are free to take advantage of what we have to offer but it’s their choice. We think it’s a cleaner way of doing business." HPN

For more information on ASHA, visit their Web site at www.surgicalhospital.org. To access the GAO report, visit: http://www.gao.gov/new.items/d04167.pdf.