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Specialty Hospital Rise Could Add to Full-Service Hospital Woes

Posted on: Tuesday, 19 July 2005, 03:01 CDT

Do physician-owned specialty hospitals adversely affect the communities they are intended to serve? Results of a recent study suggest they do.

Should the moratorium on the construction of new specialty hospitals have been extended? The purpose of extending it would have been to give Congress and the healthcare industry more time to assess whether such organizations have an unfair competitive advantage over community hospitals and other full-service providers in their service areas.

The heart of the question is whether physician self - referral actually produces a negative impact on their service area communities. Could the introduction of such hospitals lead, for example, to a loss of access to critical healthcare services for some members of the community?

It's not as though the opportunity to observe the impact of specialty hospitals has not existed. The moratorium did not apply to specialty hospitals that were deemed by the Department of Health and Human Services to have been in operation or under development before Nov. 18, aoo3.

A Look at the Evidence

To evaluate the impact of specialty hospitals, we conducted a study of existing specialty hospitals throughout the United States. All those identified in the study are located in states with limited or no certificate-of-need requirements. Most were established after 1990.

A centerpiece of the research was a set of case studies that focused on specialty hospitals in service areas surrounding four communities: Rapid City, S.D.; Lincoln, Neb.; Wichita, Kan.; and Oklahoma City. The case studies sought empirical evidence of the specialty hospitals' financial performance and impact on their competitors and communities. Because the case studies represent only about 20 percent of existing specialty hospitals, the conclusions suggested by the evidence cannot be viewed as definitive for all specialty hospitals. The findings do, however, support the view that the nation should-at the very least-proceed cautiously down the path toward greater proliferation of these physician-owned entities.

Key Findings

The case-study findings suggest that a number of activities of specialty hospitals and their physician owners are adversely affecting the full-service facilities and the communities in their service areas:

* Physicians with an equity position in a specialty hospital are redirecting large numbers of their patients to their own facilities.

* Specialty hospitals' market segmentation strategies are targeting the most lucrative surgical procedures and generally healthier patients.

* Specialty hospitals are competing with full-service hospitals for staff, in some instances hiring away nurses and clinical staff from their full-service competitors.

In addition, the focus of specialty hospitals on certain surgical procedures appears to correlate with an increase in the overall volume and utilization of those procedures in at least one casestudy service area, raising concerns about higher healthcare costs and overutilization. Further, rising percentages of uncompensated care provided by full-service hospitals suggest that these hospitals are losing well-insured patients to their specialty counterparts.

Of these key findings, a closer look at the first two is illustrative of the adverse impacts of specialty facilities.

Physician Referral Patterns

In each of the case-study communities, full-service hospitals were experiencing significant losses of patients as physicians with equity interest in specialty hospitals were redirecting patients to their own facilities.

For example, in 1999, BryanLGH Medical Center enjoyed a strong relationship with the Nebraska Heart Institute, a large group of cardiologists. Referrals to BryanLGH's cardiac program numbered 1,51? that year and 1,484 in 2000. in 2,001, the relationship began to unravel: Referrals to BiyanLGH declined to 1,179 as NHI increased referrals to BryanLGH's competitor Saint Elizabeth Regional Medical Center and decided to build its own heart hospital. By the time NHI's heart hospital opened in May 2008, the cardiologists' referrals to both hospitals declined dramatically. In 2008, BryanLGH had only 250 referrals from the group, and by 2004, that number had dropped to only 60.

SPECIALTY HOSPITALS IN THE UNITED STATES AS OF MAY 2005

A similar pattern was noted in the other three case-study communities:

* In Rapid City, neurosurgeons performed 875 outpatient surgeries at Rapid City Regional Hospital in 1996; by 1999, following the opening of the Rlack Hills Surgery Center, only nine outpatient surgeries were performed there.

* At Wesley Medical Center in Wichita, the volume of heart surgeries and net revenues from cardiac services dropped substantially when the Galichia Heart Hospital opened in late 3001.

* In Oklahoma City, the number of heart surgeries performed at INTEGRIS Health and the OU Medical Center by physicians who were members of the Oklahoma Cardiovascular Associates dropped to almost zero after the Oklahoma Heart Hospital opened in August 2003.

Market Segmentation Strategies of Specialty Hospitals

In each case-study area, specialty hospitals appeared to be pursuing four market segmentation strategies:

PAYER MIX OF MAJOR SPECIALTY AND FULL-SERVICE HOSPITALS IN OKLAHOMA CITY

* Targeting the most profitable surgical procedures

* Focusing on serving patients with commercial insurance

* Focusing on providing elective rather than necessary surgeries

* Serving healthier patients on average than are served by full- service hospitals

Most profitable procedures. All of the case-study specialty facilities were focusing on the types of procedures that are widely recognized as being most profitable, including cardiac, orthopedic, spine, and general surgery.

Better payers. In almost every instance, specialty hospitals' patient mix comprised higher percentages of patients with commercial insurance or Medicare coverage, and lower percentages of patients accessing Medicaid coverage or lacking insurance, than did that of their full-service counterparts.

More elective surgeries. Specialty hospitals tended to give precedence to patients whose surgeries could be scheduled well in advance, and were disinclined to provide emergency services. Specialty hospitals in the Rapid City, Lincoln, andWichita areas do not even have emergency departments. Although specialty hospitals in Oklahoma City are required to have EDs, they are (with one exception) token facilities.

Shifting a higher proportion of emergency cases to full-service hospitals gives specialty hospitals the advantages over their full- service counterparts of fewer hours of clinical staffing and greater convenience for the physician owners, who often are free to perform their surgeries in the morning and be finished for the day. Meanwhile, clinical staff at several of the full-service hospitals in the study complained of being under increasing stress as a result of the rising proportion of emergency cases.

Healthier patients. The premise that patients in specialty hospitals tend to be healthier is based on anecdotal information from clinical personnel in full-service hospitals, and supported by differences in all-patient refined diagnosis-related groups (a patient-classification scheme that takes into account measures of acuity) between specialty and full-service hospitals. A comparison of various levels of APR-DRGs for surgical cases performed at several of the case-study specialty and full-service hospitals found that full-service hospitals treat more level 4 (sicker) patients. In its recent study of specialty hospitals, the Medicare Payment Advisory Commission reported similar findings.

ANTI-DRG MIX OF PHYSICIAN-OWNED SURGICAL HOSPITALS AND COMPETING COMMUNITY HOSPITALS (SURGICAL caseS)

OPERATING MARGINS FOR SELECTED PHYSICIAN-OWNED SPECIALTY AND FULL- SERVICE HOSPITALS, 2003

Financial Performance of Specialty Hospitals

The net result of these four market segmentation strategies is higher profits for specialty hospitals. Most of the case-study specialty hospitals with at least three years of experience were able to pro vide data on their financial performance, and the statistics are often striking:

* In 2,002,, the Kansas Heart Hospital earned $18.9 million on $4,3.1 million in net patient revenue (3? percent). Profits for 2,000 and 2,001 were $12.2 million and $18.8 million, respectively.

* The Oklahoma Spine Hospital earned $14.9 million in 2oo3 on net patient revenues of $41.6 million (36 percent). Earnings in 2000 and 2,001, respectively, were $14.3 million and $17.6 million.

The most impressive performance was by the 26-bed Black Hills Surgery Center, which specializes in spine and orthopedic surgeries. BHSC went public in 2004; thus, data on its financial performance through 3008 were available. BHSC earned $16.8 million in 3008 on net revenues of $41.6 million, for a 40.4 percent return on revenues. Also, by selling half of BHSC's future income stream to a Canadian investment group, the facility's 3g physician owners received an additional $71 million (an average of $2 million per physician owner).

Financial Impacts on Full-Service Hospitals

While specialty hospitals have been enjoying strong \financial performance, full-service hospitals in each case study area had a different story to tell.

In 2oo3 and 2004, Rapid City Regional Hospital's net income dropped by about the same amount as was earned by BHSC. Also in the Rapid City area, Lookout Memorial Hospital in Spearfish went from a positive bottom line in the years prior to the opening of the four- bed Spearfish Surgery Center in 1999, to losses from 2000 through 2oo3. By comparison, the surgery center earned more than $1 million for its physician owners in 2,002,, based on the latest data available.

NET INCOME, RAPID CITY REGIONAL HOSPITAL AND BLACK HILLS SURGERY CENTER, 1998-2004

Wesley Medical Center in Wichita suffered substantial drops in both net revenues and earnings following the opening of the Galichia Heart Hospital in -2,001 and the Kansas Spine Hospital in late 2003.

In Oklahoma City, the loss of net revenue and income by OU Medical Center's cardiac program dramatically reduced earnings and threatened the system's ability to provide level ι trauma services. To make up the gap, the state agreed to add $5.7 million a year to the organization's Medicaid payments.

Also in Oklahoma City, the proliferation of specialty hospitals has been a contributing factor to the declining financial fortunes of two long-standing acute care hospitals-St. Anthony Hospital and Deaconess Hospital.

Reductions in Community Services

One of the most disturbing results of the incursion of specialty hospitals into the case-study service areas was the loss of some services to the communities. Several of the full-service case-study hospitals were forced to reduce or eliminate programs that required a subsidy. Wesley Medical Center in Wichita, for example, sold its occupational medicine clinic and closed its electron microscopy research center, research program in pharmacy, and outpatient cardiac center. Competition from heart hospitals also prompted Wesley to increase salaries for catheterization laboratory personnel by an average of $2 per hour (for a total cost of $2.5 million annually).

Reductions in community services were particularly pronounced in Oklahoma City:

* OU Medical Center found it was less able to cross-subsidize services, including trauma and pediatrie services.

* St. Anthony Hospital cut back on its outpatient community clinics, occupational medicine, and certain outreach services.

* Deaconess Hospital discontinued its child adolescent day treatment program, closed outpatient clinics around the city, and cut back on community medical education programs.

Impact on Trauma Care

Two case studies-Rapid City and Oklahoma City-provided evidence of the impact of specialty hospitals on physician availability for trauma call coverage.

In Rapid City, three of the five neurosurgeons in the community (all shareholders of the Rlack Hills Surgery Center) do not participate on the medical staff of Rapid City Regional Hospital, and are not available for call-yet the after-hours telephone service at the offices of the neurosurgeons instructs patients experiencing a medical emergency to call the emergency department at Rapid City Regional!

In Oklahoma City, despite the presence of 2,6 outpatient surgery centers, and an additional eight specialty facilities and an orthopedic hospital in line to open, the number of surgeons and anesthesiologists available to take call has shrunk to a point that it jeopardizes the metro area's emergency services delivery system. Several full-service hospitals cut back on their level 3 trauma care, with the result that OU Medical Center's level 1 trauma service was inundated. These circumstances led to a fragile arrangement in which several hospitals agreed to provide level 3 trauma care on a rotating basis, and the state came forth with its $5.7 million subsidy of OU Medical Center to maintain Oklahoma's only level 1 trauma service.

The conclusion that can be drawn regarding ED call coverage is that when physicians shift the bulk of their practices to specialty facilities, they have little or no motivation or financial incentive to be available for emergency call at full-service hospitals.

Reason for Concern?

Although advocates of specialty hospitals are often correct in their claims that the facilities provide high-quality service and care and that patients love them, the overall impact of specialty hospitals on communities raises serious concerns. Will the full- service hospitals in a community have the financial strength to continue to offer valued healthcare services that are not profitable? Can local acute care hospitals continue to offer emergency services at the appropriate levels? And, in some communities, will full-service hospitals be able to survive?

In Wichita, individuals interviewed anecdotally reported that a cardiologist who moved to the city was offered an $850,000 equity interest in one of the heart hospitals. This physician's return on his investment in the first year was $850,000. In that same year, the patients he treated at one of the acute care hospitals cost (in real dollars) $400,000 more than the cash payments received.

Advocates of specialty hospitals argue that competition is good for health care in that it reduces costs and provides higher quality of care. Our question: Does physician ownership of specialty hospitals represent fair competition? Is it in the best interests of the community? On both counts, we believe the evidence indicates that it is not.

AT A GLANCE

* Physicians may refer patients to specialty facilities in which they have an ownership interest, and they have no qualms about doing so.

* Specialty hospitals typically concentrate on delivering the highest-paying procedures and elective surgeries to the healthiest and best-insured patients.

* Most physician-owned specialty hospitals perform exceptionally well financially.

* Where specialty hospitals have proliferated, fullservice hospitals have been damaged financially; one had its bond ratings reduced, and several have been forced to reduce or cut financially marginal services.

* In at least two communities, specialty hospitals appear to be associated with reduced access to trauma care.

RESEARCH APPROACH

The study providing the basis for this article was sponsored by the American Hospital Association and state hospital associations in Colorado, Kansas,, Nebraska, and South Dakota. The research involved two phases: a national overview of specialty providers, including a telephone survey of specialty hospitals, and four in-depth case studies in communities affected by two or more specialty providers. In keeping with the Government Accountabilty Office's definition of specialty hospitals, the study did not include children's, rehabilitation, mental health, and women's hospitals.

The case studies involved site visits and interviews with board members, executives (including CFOs), other key staff (including nurse managers), and community representatives. Data were obtained from a variety of sources, including Medicare cost reports. Where possible, CEOs of specialty providers and representatives of major health plans were also interviewed.

Copies of our summary report and each case study are available on the AHA web site, www.aha.org, or from the authors.

As of May 2005, specialty hospitals (not including children's, rehabilitation, mental health, or women's hospitals) existed in 17 states.

Among case-study organizations in Oklahoma City, specialty hospitals tend to have a higher percentage of patients with commercial insurance or Medicare coverage than do full-service hospitals.

CASE-STUDY SPECIALTY HOSPITALS

Rapid City, S.D.

* Black Hills Surgery Center

* Same Day Surgery Center

* Spearfish Surgery Center

Lincoln, Neb.

* Nebraska Heart Hospital

* Lincoln Surgical Hospital

Wichita, Kan.

* Kansas Heart Hospital

* Galichia Heart Hospital

* Kansas Spine Hospital

* Kansas Surgery & Recovery Center

Oklahoma City, OkIa.

* Bone& Joint Hospital

* Northwest Surgical Hospital

* Lakeside Women's Hospital

* Surgical Hospital of Oklahoma

* Renaissance Women's Center

* Oklahoma Spine Hospital

* Oklahoma Heart Hospital

* Oklahoma Center for Orthopedic & Multi-Specialty Surgery

* McBride Clinic Orthopedic Hospital

Analysis of all-patient refined diagnosis-related groups for surgical cases performed at case study specialty and full-service hospitals suggests that full-service hospitals, on average, treat sicker patients.

Operating margins of case-study specialty hospitals far exceeded those of their full-service counterparts and the U.S. average for community hospitals.

During 1998-2004, Rapid City Regional Hospital saw a steady decline in net income and a downgrade in its bond rating, which corresponded with a steady rise in net income experienced by its specialty competitor Black Hills Surgery Center during the same period.

ACTION STEPS FOR CFOS AND OTHER LEADERS OF FULL-SERVICE HOSPITALS

WHAT CAN YOU DO TO AFFECT PUBLIC POLICY REGARDING SPECIALTY HOSPITALS?

* Support the American Hospital Association's pursuit of its theme regarding the harmful effects of physician self-referral.

* Support state hospital association efforts on behalf of full- service hospitals

* Work to influence state legislatures in states that do not have certificate-of-need laws to implement such laws. (Specialty hospitals do not exist in states with strong CON laws.)

* Work with state medical societies, hospital associations, and Medicaid programs to ensure that physicians involved in specialty facilities continue to provide emergency call coverage. (Passing laws requiring that specialty hospitals offer emergency departments tends to be an ineffective solution.)

* Cooperate with local media in efforts to educate the public on the comprehensive impacts of fragmenting the local healthcare marketplace.

HOW CAN YOU PREPARE FOR THE POTENTIAL ENTRY OF A SPECIALTY HOSPITAL INTO YOUR COMMUNITY?

* Preempt specialty hospital opportunities by developing high\ly patient- and physician-friendly initiatives in the best-reimbursing services.

* Make sure hospitals and physicians are included in key managed care contracts. Thus, if physicians leave, they can't expect to be included as part of a panel of providers with their acute care hospital.

* Seek better pricing for services, such as emergency care, that require investments in standby capacity.

HOW CAN YOU COMPETE WITH, OR MITIGATE THE NEGATIVE EFFECTS OF, SPECIALTY HOSPITALS THAT ALREADY EXIST IN YOUR COMMUNITY?

* Revoke medical staff privileges for physicians who own an interest in a specialty facility and refer most of their patients there.

* Actively recruit physicians to replace those who focus their practices on their own specialty facility. This strategy is difficult, expensive, and high risk, but some hospitals are pursuing it. BryanLGH Medical Center, for example, has developed its own competing cardiology and cardiovascular surgery group.

* Work with local health plans to provide cost-effective services and reduce the financial incentives for them to contract with specialty hospitals.

* Provide high levels of nursing care and focus on quality.

* Make sure that your nurses' salaries and working conditions are competitive with those offered by specialty hospitals.

* Carefully evaluate services that do not cover their full costs, and consider cutting back or eliminating some of these services.

* Actively engage in community public information campaigns to demonstrate the impact of specialty hospitals on the community safety net.

* Develop a strong primary care network and encourage the physicians to make referrals to specialists who are loyal to your community full-service hospital.

About the authors

Keith Moore is chairman and CEO, McManis Consulting, Greenwood Village, CoIo.

Dean Coddington is a senior consultant, McManis Consulting, Greenwood Village, CoIo., and a member of HFMA's Colorado Chapter. Questions or comments about this article may be sent to him at dcoddington@ mcmanisconsultinn.com.

Copyright Healthcare Financial Management Association Jul 2005

Source: Healthcare Financial Management

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