Surgical Hospitals Fight to Hold Their Ground


Surgical Hospitals Fight to Hold Their Ground

By Kelly M. Pyrek

The victor in a David vs. Goliath battle between small specialty surgical hospitals and large tertiary community hospitals could be determined by a piece of legislation currently circulating in Congress as of presstime. On July 12, 2001, Congressmembers Jerry Kleczka (D-Wis.) and Pete Stark (D-Calif.) introduced HR 2490, "The Hospital Investment Act of 2001," which would close the loophole contained in current conflict-of-interest laws exempting physician self-referrals to hospitals in which they have ownership interest. These laws, commonly called Stark I and Stark II, ban physician referral of Medicare patients to physician-owned auxiliary services.

"The bill would prohibit physician ownership or investment in hospitals and virtually all of these specialty hospitals have physician ownership to some extent," explains Randy Fenninger, a Washington, D.C.-based lobbyist. After the bill was introduced, Fenninger was hired by the American Surgical Hospital Association (ASHA) to engage lawmakers in discussions about the benefits of specialty hospitals. He intends to work closely with the Federated Ambulatory Surgery Association (FASA)'s lobbyist and the American Association of Ambulatory Surgery Centers (AAASC) lobbyists to ensure the surgical hospital's side of the debate is heard by the General Accounting Office (GAO) and others that will influence the outcome of HR 2490.

"Whether it's a minority stake or complete ownership, HR 2490 intends to stop physician ownership activity," Fenninger says. "The bill is of real concern to existing surgical hospitals and to physicians interested in this alternative."

Surgical hospitals, sometimes called "boutique" hospitals for their appeal to the well-heeled patient, carve out a niche in a specialty such as orthopedics, neurosurgery or cardiovascular services -- the lucrative "bones, brains and hearts trade." The hospitals tend to be profitable because they often belong to national chains and command dominance in certain markets, or they are part of a joint venture between physicians and healthcare systems. They are attractive to investors and insurers because costs are generally lower than those of full-service facilities. There are approximately 100 specialty surgical hospitals in operation, according to ASHA.


Fenninger says HR 2490 was introduced because of a debate in Milwaukee involving several healthcare systems and the development of physician-owned specialty hospitals.

"The same hospitals you think would be opposed to it are also organizing these for-profit physician specialty arrangements in their own systems," Fenninger says. That's the deal in Milwaukee where you have two large not-for-profit, tertiary healthcare systems partnering with cardiothoracic surgeons to develop these specialty hospitals. Any time one of these opens up, the local hospital system complains but it's like the pot calling the kettle black; they see the advantages of creating a surgical hospital for themselves, for their doctors, for their patients and for their position in the marketplace. There is no limit to the hypocrisy."

If HR 2490 passes, Fenninger says everyone stands to lose, and not just the physician-owned specialty hospitals that would have to radically change the way they are organized and governed.

"Surgical hospitals believe strongly that physician participation is critical to the success of the facility and the quality of services provided," Fenninger says. "They say it doesn't work unless the doctors are active participants in the venture. However, one could argue that the ultimate loser would be the patient whose healthcare choices are narrowed again. The winners are the institutions that maintain status quo; in most communities it's the tertiary-care hospital that controls the medical marketplace. There's always reasons why a specialty hospital develops in a particular community, and the biggest ones are usually physician and/or patient dissatisfaction with the local hospital. If hospital administrators did their jobs and had happy patients and physicians, the chances of having to ever deal with a specialty hospital would be remote. Specialty hospitals are a response to displeasure within the community."

Fenninger points to a current fight in Columbus, Ohio where a healthcare system closed a facility and displaced 18 surgeons. "I guess they are supposed to go on welfare," Fenninger says. "Their response was, 'We need to work, so we'll organize a specialty hospital and do our surgery there.' Now the system wants to deny hospital privileges to anyone participating in this venture. There are doctors who want to use the specialty surgical hospital and surgeons who need access to a main hospital, and everyone is denied access."

It's a battle unfolding everywhere. In Arizona, where outpatient surgery was born 30 years ago, debate rages over a general hospital in Phoenix wanting to become a surgical hospital. Critics say Phoenix Memorial Hospital is jettisoning its low-paying emergency department for higher-paying cases performed in a boutique hospital which is not required to see everyone who walks through the facility door nor required to provide emergency medical care. There's a long list of criticisms levied against surgical hospitals, including the diversion to their facilities of insured patients from acute-care hospitals, which have traditionally used this income to offset the cost of caring for uninsured patients. The metropolitan Phoenix region has several specialty hospitals, including the Arizona Surgical Hospital, the Arizona Heart Hospital and a handful of facilities either on the drawing board or waiting in the wings.


"The big hospitals don't like the competition with which specialty surgical hospitals threaten them," says John Rex-Waller, CEO of National Surgical Hospitals. National, a surgical hospital management company with 12 freestanding facilities across the country, plans to construct a new facility in Arizona later this year. "They are trying to put an albatross around the neck of specialty hospitals and it's an anticompetitive tactic. Federal bills like HR 2490 and state legislation are more arrows in the quiver; big hospitals are gathering all the ammunition they can as they try to fight against specialty hospitals. It's getting aggressive."

One way states have attempted to control hospital development is through certificates of need (CON), to document the need for additional healthcare services in the community. About 30 states restrict the development of surgical hospitals through CON laws.

"In states where a CON requirement exists you generally need the big hospitals' blessing to get any beds or ORs, and they're not going to give that," Rex-Waller says. "In a CON state, the big hospitals will protect their turf to the extent they can. In other markets where there are for-profit hospitals, the competition has been very good for the market because those hospitals generally improve the level of their services to attract doctors and to keep cases. Critics of specialty hospitals say these facilities are skimming off the cream and taking all the good cases; therefore the not-for-profit community hospital will fold, there won't be emergency services, there won't be any hospital in town save for those money-grubbing doctors, and there won't be any healthcare in the community. The threat of increasing taxes to support the community hospital is always something that's trotted out. A surgical hospital has never forced another hospital to close; all you had was improved competition that was good for everyone."

Rex-Waller says the CON requirement was a way to "limit the medical arms race" in the 1970s and 1980s. "The free-market forces showed that CON didn't really help and that you get better healthcare and improved prices when you allow the market to have its way," he adds.

If the arguments sound familiar, that's because they are based on recent history, Rex-Waller says.

"Critics of specialty hospitals may have huge legislative, political, marketing and lobbying clout but I don't think there's any validity to their criticism," he emphasizes. "Look at the reaction hospitals had to surgery centers in the 1970s and 1980s. Now the ambulatory surgery centers are competing against the hospitals for outpatient cases. It's the same argument now as it was then: not only are these facilities taking the best cases they are performing surgery in unsafe facilities. When surgery centers came along, hospitals said, 'We're going to crush you, you'll never get a managed-care contract.' That didn't happen. And hospitals didn't close because of surgery centers. Now, hospitals recognize the efficiencies inherent in surgery centers and are building them, too. Hospitals have climbed on the outpatient surgery bandwagon because it's a more efficient way to do surgery. Hospitals are again trying to crush surgical hospitals but they won't succeed; surgical hospitals will out-service the big general acute-care hospitals. The physicians will demand these facilities, hospitals will give in reluctantly and set up specialty hospitals of their own -- which they are doing already."

Rex-Waller says healthcare systems that don't recognize the need for surgical hospitals are dinosaurs courting extinction. He says the rules they created are the rules by which they will die slowly.

"Hospitals often are stuck in their commitments to large size and capacity as opposed to efficiency," Rex-Waller says. "They like being big, and it's a legacy of cost-based reimbursement. They think, 'When you build a bigger wing you get paid more, so why wouldn't you build another one?' Now hospitals suffer through overcapacity, a model that no longer works. Different pieces of the hospital have been leaving the mother ship for years, such as imaging; you don't need beds for this, so take them out. You don't need beds for outpatient surgery, dialysis, eye care ... take it all out and what you should be left with, and granted this is going 20 years ahead, is an acute-care hospital that only cares for incredibly sick patients who need a wide range of services. A straightforward hip replacement is not a big deal; let's get those, and all of the ancillary services, out of the hospital and let's drive the cost down for those kinds of surgeries."


As hospitals struggle with the unbundling of acute-care services, they also struggle with the demand for emergency services in the community and the growing need for critical care. Fenninger believes this dilemma "shouldn't be laid at the doorstep of surgical hospitals."

"Some states require hospitals to have emergency rooms, and many states don't," Fenninger says. "Many hospitals, including specialty surgical hospitals, don't have ERs because emergency services are provided elsewhere in the region and there's no need for duplication. In states that require an ER, all ASHA-member surgical hospitals have ERs. They are licensed like everyone else; whatever other facilities have to do to get a license, ASHA-member hospitals have to do the same. Even if not required, some specialty surgical hospitals will install an ER because that may be the best way to serve the community's medical needs."

Fenninger says critics are misinformed about state licensing and federal requirements. "They say surgical hospitals don't have the responsibilities of the federal Emergency Medical Treatment and Active Labor Act (EMTALA), don't have to deal with uncompensated care; it's true that if you don't have an ER, EMTALA is not an issue for you. The presence or absence of surgical hospitals will not deal with problems associated with EMTALA, which is problematic on its own. If surgical hospitals disappeared, big hospitals would still have EMTALA problems. They just want to share the misery."

He adds a common misconception is that surgical hospitals are licensed differently than other hospitals. Many states do not classify surgical hospitals separately from other hospitals, so many times these facilities must be licensed under the general hospital licensing statute.

"It does depend on the state," Fenninger admits. "Some states offer a specialty facility license; for example, in Arizona, that specialty license is designed for psychiatric facilities or inpatient rehabilitation. You can squeeze a surgical hospital into that license category; it's one way to avoid meeting the ER requirement because these specialty facilities don't need an ER. In Arizona, some facilities have opted not to put themselves into that bucket."


In response to HR 2490, Congressman William Thomas (R-Calif.) and the Ways and Means Committee in the House of Representatives has requested the GAO to study how specialty surgical hospitals fit into the healthcare delivery framework. According to industry experts Scott Becker and Nicholas Harned, authors of the white paper, "Surgical and Specialty Hospitals: A Legal Primer," the GAO will determine:

  • The financial impact of specialty hospitals on full-service hospitals within their market
  • Whether or not the presence of specialty surgical hospitals increases utilization in a market
  • If specialty hospitals exacerbate the growing shortage of healthcare professionals that could lead to closures of units associated with full-service hospitals
  • If ownership in specialty hospitals creates incentives for physicians to under- or overutilize services based on financial rewards
  • If specialty hospitals could provide better, more cost-efficient care than the hospitals they replace or with which they compete

Fenninger says his strategy is to keep Congress from taking any action until the GAO report is complete later this year. The complexity of the issue, along with an election-associated break for Congress, may give lobbyists the time they seek. Utilization issues, referrals and kick-backs could be closely scrutinized by the GAO.

"The question is, if you build a surgical hospital, does utilization go up in some way it shouldn't?" Fenninger says. "Say you are a one-hospital town and you have insufficient operating space; you're going to show lower utilization rates. If you build capacity, your rates would go up. Where surgery is concerned, utilization rates at best are misleading and at worst are absolutely fraudulent. They're not a good way to gauge what kind of healthcare the community needs. If surgeons in a surgical hospital were trying to do unnecessary surgery just to make money, they would be foiled by state checks and balances against those kinds of problems. If you are a licensed hospital and you let your physicians do unnecessary surgery, your license is at risk and your surgeons risk malpractice. The presence of a hospital can change utilization in a community because it adds to capacity. Before jumping on the too-many-surgeries bandwagon, look at controls on surgical utilization, especially on the kind of surgery the government and insurance pays for. There are too many controls to prevent hospitals from cheating in a significant way."

The GAO also may examine current fair share laws, such as the one introduced in Oklahoma designed to prevent surgical hospitals from "cherry-picking" preferred private-pay patients. Under this kind of law, all new healthcare providers must provide at least one-third of its services to Medicare, Medicaid or indigent patients. Facilities that do not reach this 30 percent threshold must pay an assessment fee equal to the difference, up to 30 percent of the facility's total gross revenue.

But no matter what parameters are placed on specialty surgical hospitals, there's no denying the next several years could bring a significant amount of development of these facilities as patients discover their convenience and quality of service.

Proponents of surgical hospitals say they provide physicians with an environment that promotes "high-touch, high-tech" specialty care without hospital bureaucracy. Physicians say they also enjoy greater efficiency within a facility geared to their practice needs. Surgical hospitals' competitive returns on investment can be a boon to physicians' bottom lines, and these specialty facilities enable physicians to capture additional revenue streams including inpatient surgery, radiology/imaging or physical therapy. Full-service hospitals are increasingly faced with physician migration to specialty hospitals and must decide if they want to beat them or join them. If a group of talented yet disgruntled physicians is making noise about leaving, some hospitals may make a counter offer to build their own specialty facility to keep these sought-after professionals on board.

"Hospitals will use whatever tools they have to protect their franchises," Fenninger says. "The next phase is to go after physician ownership of ambulatory surgery centers. If you outlaw physician ownership, much of the drive for these surgical hospitals and ambulatory surgery centers will disappear. A few companies will try to do them without physicians but what's the point if the physicians aren't on board? The surgical hospital would disappear."

But not without a tough fight from patients, Fenninger and Rex-Waller believe. They say specialty surgical hospitals deliver healthcare in a customer-oriented environment that is friendlier, more personalized and far more patient-driven.

"Patient feedback about our surgical hospitals has been incredible," Rex-Waller says, adding that healthcare consumers are demanding more control, more personal attention, a better value and a less institutional environment. "If we can get the managed-care contracts we need, we will out-service everybody. If people say surgical hospitals are like ambulatory surgery centers, I take that as a huge compliment. If it's like a surgery center then we have done our job well because people view it as a friendly, open, non-institutional center."


Fenninger says his camp is "getting some traction" on its pro-surgical hospital message. He says the next few months could be dicey, as Congress will finish its legislative work in September and October and then break for the November elections. "If they don't act on this bill, it dies and will have to be reintroduced in the next Congress. In the meantime, the GAO will do its work. This issue could come back in January or February; by then we could have the GAO report and a new Congress can introduce whatever legislation they'd like."

While healthcare organizations are still choosing sides, Fenninger thinks the debate will encourage healthcare professionals and consumers to think about new options surgical hospitals pose. "I am concerned, however, about the American Hospital Association (AHA) deciding to weigh in opposition to these hospitals and try to strike back through Medicare. If they somehow get a Medicare rule that makes it difficult to do something, small specialty hospitals are at a significant disadvantage."

Fenninger continues, "The opposition is fairly fractured right now. What we have not seen is an association like the AHA taking on the issue in a major way. Their board may decide they need to develop policy on this issue, get control and try to put surgical hospitals out of business. If they do that, the nature of this fight will change significantly. They are very powerful and well organized, with lots of money and lots of lobbyists. The more surgical hospitals grow, the more of a target they become. If the GAO report comes out critical of surgical hospitals, I expect to see more opposition and support for legislation like HR 2490."

Fenninger says, however, that surgical hospitals have a lot of fight left in them. "I would ask big, full-service hospitals why smaller specialty hospitals are so successful. What are they doing that you're not? You'll get a lot of hemming and hawing. If you have happy doctors and patients you don't have to worry about the competition."

Fenninger points out the irony of the situation. "The AHA's own members are developing these same specialty facilities. The AHA must balance the irritation of some members with the satisfaction of others. They are probably trying to read the tea leaves. It's to my advantage as a lobbyist that they are paralyzed right now."


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