Dec. 2002
Source: Healthleaders (url at bottom)
Cover story

Battle Ready

When Nancy Farber, CEO of Fremont, Calif.-based Washington Hospital Healthcare System, discovered last summer that her top cardiologists were being courted by an investor group with intentions of opening up a specialty heart hospital nearby, she took quick and decisive steps to squelch a possible deal.

Farber didn't mince words. She summoned physicians for a frank discussion, declaring that it wasn't possible to "serve two masters." She made it clear that a competing for-profit specialty operation would "result in the destruction" of the integrated delivery system's 337-bed, acute-care hospital. It would drain Washington's own thriving heart program, she said, which pays for underfunded services such as its emergency room, a problem echoed by many of her counterparts facing similar scenarios.

Then the feisty CEO put out a distress call to state Sen. Liz Figueroa asking for some swift political intervention. It wasn't the first time the two had come together on the subject of specialty hospitals. Earlier in the year, they had discussed spearheading a statewide emergency room preservation act in the 2003 legislative session that would require any boutique hospital wishing to provide services in the state to operate 24-hour emergency care, among other imperatives.

But Farber feared a year might be too late for Washington, which is embarking next year on a $60 to $80 million, five-year project to build a new emergency room and critical-care unit that is being paid for out of the hospital's own coffers.

"I went to the senator and said 'I need your help now.' If we wait a year, we could be closing the barn door after all the horses have run out," recalls Farber, who has put in 19 years at Washington. "To her credit, she understood what the threat was, and she helped us."

Figueroa wasted no time; she began drafting emergency legislation the very day after her conversation with Farber. In essence, it said that all new hospitals in Washington's 124-mile health district must operate full-time emergency services, and cannot limit their inpatient services to specialized diagnostic or surgical procedures. It was specific to Washington Township Health Care District, once in the heart of an agricultural community of apricot orchards, dairies and rolling fields that today is a bustling, growing bedroom community of Silicon Valley.

Soon after Figueroa's legislative maneuver, Farber launched a public-speaking campaign, going before local chambers of commerce, police and fire departments as well as to state legislators. She also initiated a grassroots letter-writing campaign in support of the emergency legislation that resulted in more than 7,000 letters flooding the desk of Gov. Gray Davis.

Before Washington was built in 1958, notes Farber, the community saved for 10 years to pay for the hospital. It has been going strong ever since, earning $20.1 million for fiscal year 2002 ending June 30. "We have worked very hard to get here," she says. "We would be in real trouble if we didn't have a bottom line and I intend to keep it if I can."

Despite such large-scale efforts the bill was vetoed by the governor in September, leaving Washington to fight its current battle without the benefit of legislative intervention, while Farber, Figueroa and others draw up a new bill for the 2003 legislative session. Detractors, including one of California's largest hospital systems, Sacramento-based Sutter Health, complained that the bill should have been statewide.

While these might seem like drastic measures for one hospital CEO to undertake, Farber is not alone by far. She joins a growing list of healthcare leaders who are doing more than just griping in the face of a perceived threat. They are launching their own campaigns to stop the onslaught of specialty niche services such as heart and orthopedic hospitals, and specialty surgery, ambulatory surgery and outpatient-imaging centers. Some, like Farber, are looking to politicians for a remedy. Others are taking more immediate action-going so far as to revoke the privileges of physicians who invest in competing boutique organizations.

They fear that the proliferation of for-profit specialty services could spell the end for general acute-care facilities. Aside from siphoning off higher-paying and insured patients, many industry leaders charge, specialty providers carve out the more profitable service lines, at the expense of full-service community hospitals, those in most need of such services to shoulder unprofitable areas like trauma, burn and emergency room care. The trend also raises questions about a potential conflict of interest of physicians who invest in such ventures.

Meanwhile, proponents of the specialty model say they are only trying to fill a growing demand for these service lines and say that they can do it cheaper and more efficiently. Despite such assertions, however, it is clear this issue is on the front burner in many hospital boardrooms around the country. According to a study of 45 hospital executives, released in May by management consultancy Cap Gemini Ernst & Young U.S. LLC, "encroaching specialty facilities" make the list of top eight future concerns for healthcare leaders.

In the case of Washington Hospital, says Figueroa, you have a financially viable hospital "that has worked hard not to go to its constituency to ask for more bonds to grow" that is now being threatened by a boutique hospital that is "cherry-picking" the most profitable services and does not have an emergency room. Other areas of the state are also seeing the encroachment of specialty facilities. For instance, Bakersfield Heart Hospital, owned by Charlotte, N.C.-based MedCath Corp., opened in September 1999, and in Fresno, a freestanding heart hospital-a joint venture between area physicians and a local nonprofit health system-is under construction and scheduled to open August 2003.

Industry observers are also anxious that niche providers such as ambulatory surgery centers, specialty hospitals and specialty surgery centers will lure specialists away from general hospitals because such facilities are not required under EMTALA (the federal Emergency Medical Treatment and Active Labor Act) to operate an emergency room. The alarmist's view is that over time, this could lead to more closures of the nation's already financially troubled ERs. In California alone, at least 60 emergency rooms have closed their doors since 1990, according to a 2001 report by the California Medical Association.

The Arizona debate

"You don't have to be a rocket scientist to see this eventually destroys our whole system of ER services," says Arizona Hospital and Healthcare Association president and CEO John Rivers, of the rise of specialty facilities. Yet he doesn't fault the physicians for wanting to get in on the bottom floor. "We know for a fact that these hospitals are offering phenomenal rates of return on their investment."

Like Farber, Rivers is working aggressively with state legislators and other healthcare leaders to address the issue in Arizona. "Virtually every medical specialty in Arizona is in some stage of discussion about building and operating their own surgical hospital and that is forcing us to take a long-term view of how these institutions will affect the delivery system throughout our state," says Rivers, who also participated this year in an American Hospital Association-sponsored national task force that is looking at the issues niche providers present.

Rivers says the buzz in Arizona has focused on physician-owned surgical hospitals, not on heart services. He and others are fretting over two orthopedic hospitals-one that recently opened and one that recently broke ground and could be fully operational by the spring. Such niche purveyors operate under a special hospital license in the state, he says, and are not required under Arizona statute to have an emergency room.

State hospital officials certainly have their hands full. Currently there are three specialty heart hospitals in Arizona: Tucson Heart Hospital, which is owned by MedCath-a for-profit company with nine heart hospitals in seven states-the Arizona Heart Hospital in Phoenix (in partnership with the Arizona Heart Institute), also owned by MedCath, and Banner Health System-owned Lutheran Heart Hospital on the campus of Mesa Lutheran Hospital. Over the years, MedCath has been buffeted by criticism in its markets chiefly from hospital leaders who accuse the company of profiteering off their heart business.

But Rivers says MedCath has stayed in the association's good graces because it operates under a general acute-care license, providing the same type of emergency room care as other acute-care hospitals, although they do usually refer non-cardiac emergencies to other facilities. "Our real concern is not with the MedCaths of the world," he says. In January Arizona legislators, with support of the hospital association, introduced state Senate Bill 1341, which required "special hospitals" (hospitals that provide services only for a particular category of patient or condition) to provide basic emergency services 24 hours a day, seven days a week. While the bill passed easily in the Senate, it floundered in the House due to opposition from the state's medical association. With a legislative session dominated by budget issues, says Rivers, "The medical association found it pretty easy to foul up the bill and get it killed."

David Landrith, vice president of policy and political affairs at the Arizona Medical Association, doesn't disagree that specialty hospitals are a problem. But, he says, "We opposed the bill vigorously...because bottom line we feel it is a poor solution to a real problem." Landrith says the association was unhappy with the bill because it would have mandated that physicians have privileges at certain hospitals against their will.

But, like Farber, Rivers will be back next year. Large hospital systems in the state are also entering the debate. Peter Fine, president and CEO of Phoenix-based Banner Health System, a 20-hospital health network, stays active in state healthcare politics. "Anyone who isn't tuned in to the legislative doings of their local government is probably making a mistake," warns Fine.

Grappling with growth

Hard figures are not available on how many specialty hospitals are setting up shop across the nation. It is still early. According to SMG Marketing Group, as of 2000 there were slightly more than 3,000 ambulatory surgery centers in the United States, a 31 percent increase over the 2,400 in existence in 1996. But anecdotal evidence suggests that there is a pattern of growth occurring in non-certificate-of-need states. Ohio, Arizona, California and Indiana, to name a few, are experiencing an influx of specialty service activity.

Many say the drive to carve out specialty services is due to the dual forces of advances in technology that are enabling the industry to provide services in multiple settings and disenfranchised physicians who want more say over their work environment and a bigger piece of the action.

This has led to a flood of potential investors in high-end service lines. With more competitors targeting these areas, explains Kelly Devers, Ph.D., health researcher at the Center for Studying Health System Change, "Specialists are in a better position to compete with hospitals through collaborative relationships." When this happens, she says, local hospitals feel compelled to respond. Those who don't look to legislators for help are simply choosing to build their own competitive organizations.

Indianapolis is a prime example. The city's four major hospital systems are investing in heart services; three of these are building for-profit freestanding facilities. Community Health Network and Central Indiana Health System, which are partnering with physician groups, are both expected to open in late 2002. St. Francis Hospital & Health Centers will also open a new cardiac and vascular care center in 2004 and Clarian Health has consolidated its cardiac offerings by completing a $30 million renovation last year. All wanted to beat MedCath to the punch, assesses Devers. Earlier, physicians, had been in discussions with MedCath to build a heart hospital in Indianapolis, but ended up partnering instead with the two local hospitals.

"Initially, these local hospitals might not have wanted to develop heart hospitals, but in the face of losing prominent cardiovascular groups to an exclusive arrangement with an outside organization, they built a similar kind of facility," says Devers. She calls this kind of reaction the new medical arms race. "When you have a highly competitive environment for the same types of services, hospitals feel like they have to mimic or one-up their competitor," she explains. "They try to stay one step ahead. And so basically it is 'uh-oh my competitor is offering a new specialized heart wing, I better do the same.'"

Devers says her organization will be studying this issue further. "It is all very interesting. You could say that is really taking a stand about what they think about these facilities. But, you could also say they are trying to minimize competition."

Carmela Coyle, AHA senior vice president of policy, says many members hold other views. "If there is a misunderstanding in this issue, it is that some people as they have listened to this debate say this is about competition, and hospitals don't want to compete," she says. "I can't stress strongly enough that as we talk to our members more broadly, they are strident in saying this is not about competition...I think their concern is if there is going to be competition, it has to be fair and on a level playing field."

Columbus takes a stand

In Columbus, Ohio, the scheduled opening of New Albany Surgical Hospital in September 2003 is causing a stir among the local hospitals. But Edward Alexander, president of the controversial orthopedic hospital's founding company, Surgical Alliance Corp., doesn't see the uneven playing field that Coyle and others suggest exist-at least not in Columbus. "There are 3,000 hospital beds in Columbus and our facility has 30 beds," he says. "The advent of our hospital is not going to close anybody."

Critics, meanwhile, worry that the new hospital will be a direct hit to the bottom line of area nonprofit hospitals offering charity care and will aggravate the region's healthcare staffing shortage.

For-profit Surgical Alliance, founded in July 2001, is headquartered in Nashville, Tenn., and acquires and manages ambulatory surgery centers and specialty surgical hospitals in partnership with physicians. The 95,000-square-foot hospital in New Albany, Ohio, is the group's first venture and will cost more than $40 million to build. It is co-owned by 30 local physicians who have a 60 percent stake.

Chiefs at the city's three leading systems, Mount Carmel, OhioHealth, and Ohio State University Health System, and the city's children's hospital have gone to the mat over the last year to block the opening of New Albany Surgical Hospital. They have taken their troubles to legislators, they have worked to iron out problems with disgruntled specialists who are investing in the outfit and have waged a sophisticated PR campaign in the local press. Mount Carmel-a three-hospital integrated delivery network-has even taken the fight to a whole new level. Officials there say they will not extend privileges to new physicians who are investing in the boutique hospital. Current medical staff who are investors will retain their privileges but will be monitored to be sure they are not referring the "good cases."

It might seem like a hard line, but Mount Carmel president and CEO Joe Calvaruso says, "We fear that the health system that has served this community very well for over a century is in jeopardy from the potential influx of limited-service for-profit hospitals." Last year, he notes, the area's four nonprofit systems provided $200 million in charity care. Ohio abolished its CON law in 1995.

In the meantime, before the new hospital opens Calvaruso says Mount Carmel is working to resolve the very problems that drove physicians away and hopes they will be back on board. "Many of our physicians are telling me the reason they are investing is that they can't get patients scheduled at our campus so we are expanding and paying more for nurses so they can get capacity."

David Morehead, M.D., chief medical officer at OhioHealth, a nonprofit eight-hospital system, is also concerned about the impact the facility will have on the area-one that is suffering from a serious shortage of nurses and radiology technicians. "The problem in Columbus is not that we don't have enough beds but that we don't have enough staff to open all of our beds." A limited-service hospital that is open during the day, he says, will draw staff away from full-service hospitals that are open around the clock.

Like Mount Carmel, OhioHealth, which affiliates with a group of orthopedists who are investors in the New Albany hospital, is also looking to discourage physician investors and has publicly stated that the opening of the facility could slam the system with losses of up to $25 million a year. In view of that, the board of directors took action in July, passing a resolution stating that physician investors in the new venture must voluntarily give up their privileges at OhioHealth. However, because "of the concern and anxiety" this mandate produced, says Morehead, the board agreed to take a three-month cooling-off period to revisit the issue for other possible solutions. But by early October the board voted to revoke the privileges of physician investors.

Last summer, the three hospital systems joined forces and went public with their concerns-hiring a public relations agency to develop a position paper on the issue. Various hospital leaders did interviews with local newspapers and appeared on news and broadcasts in opposition to the orthopedic hospital.

On the legislative front, a special committee of the Ohio legislature met during the same time to hear both sides of the issue. Cathy Levine, executive director of nonprofit Universal Health Care Action Network of Ohio, who spoke out against specialty hospitals before the committee, says the organization, which promotes universal healthcare, "has grave concerns about physicians being able to refer patients to hospitals in which they have an ownership interest." In September two bills were introduced by Ohio Representatives Ray Miller, Catherine Barrett and Barbara Sykes, that if passed would prohibit certain referrals by physicians to "special hospitals" and "restore certificate of need for the establishment of new hospitals."

Moreover, the Ohio Hospital Association is cautiously considering backing tort reform around physician conflict of interest, but does not want to do battle with the state's medical association in the process, according to Mary Yost, vice president of public affairs. "We are hoping that we can find some common ground with them."

Alexander, of Surgical Alliance, for his part isn't concerned about future legislation. "I don't think there will be anything done that will hurt us. It is hard to believe that a state that does away with its CON process would then come in and try to reinstate it."

The AHA Viewpoint

With its membership becoming more and more vocal, the AHA has entered the fray, taking aim at physician-owned niche providers. This summer the board came out with a list of recommended public policy options on dealing with the upsurge of specialty services. The list includes enforcing the same quality standards for the same clinical practices, whether in a hospital or a specialty service setting; having public disclosure of physician-owned interests; and amending the Stark laws, which prevent physicians from referring Medicare patients to physician-owned laboratories and other outpatient services.

"The concerns that are raised with this new kind of evolution of the healthcare system is that as more and more services-and in general it is the more profitable services-are pulled out of the hospital setting it makes it very difficult for hospitals to continue to meet their missions to serve their community in terms of providing what have traditionally been some of the unprofitable services," says Coyle.

But she is quick to point out that the problem goes beyond specialty hospitals. It includes the increased number of specialty services being offered in a variety of settings, including in ambulatory surgery centers, physician offices, and specialty facilities that have no emergency department, she explains.

"They are all creating the same kinds of unintended consequences," Coyle says. "But the remedy depends on the type of organization, its structure and the regulations that it does or doesn't meet today."

For example, she says, the issue of a heart hospital or an orthopedic hospital "really drives you toward this issue of amending the Stark laws as a whole hospital exception." Meaning, the law should "curb the whole hospital exception that permits self-referral for inpatient or outpatient services when a physician has an interest in the whole hospital. "The Stark laws were put together now so long ago. It is time to take a look at them again," Coyle says. "It raises the questions as to whether the conflict of interest concerns that Congress was trying to address continue to be addressed when you now have a hospital that used to be a single department, and where today investors can in fact directly benefit from investing in that type of a hospital."

In July 2001 U.S. Reps. Pete Stark, D-Calif., and Jerry Kleczka, D-Wis., introduced the Hospital Investment Act of 2001, which would close conflict of interest loopholes. It was then referred to the House Committee on Ways and Means, which in turn has asked the Government Accounting Office to investigate...will this bring back CON?

As hospital officials and politicians examine the growth of specialty services, the subject of CON definitely enters the mix. To date 14 states have repealed their CON laws, according to the Health Policy Tracking Service.

Although frustrated by the infiltration of specialty services, leaders have mixed feelings about seeing CON reinstated.

John Rivers, with the Arizona Hospital and Healthcare Association, says people in his state, which repealed the law in 1985, aren't interested in bringing it back. "People see CON as just taking these decisions out of the economic arena and putting them in the political arena where you can waste every bit as much time, money and energy trying to influence the political process." There are other ways of dealing with the issue, he asserts, such as requiring that "special hospitals" not only operate emergency rooms but also have transfer agreements and cross privileges for medical staff under their state licensure laws.

Devers, with the Center for Studying Health System Change, looks to the recent past for guidance. "Past research has shown that [the CON process] only had a modest effect in slowing the growth of the supply of services and a moderate impact on the overall total health expenditures. So some people aren't real positive about the possibilities for CON laws to slow some of this down."

For the time being, at least in California-also a non-CON state-Washington Hospital's Farber sees legislation as the solution to the specialty services drumbeat and plans to return to the state capitol next year for some renewed lobbying on behalf of a statewide bill. She doesn't know if the investor group eyeing her community will be back, but sees the specialty services issue as societal, dating back 10 to 15 years when the country began embracing market-based reform. Farber concludes that this ideology "is entirely insensitive to the human factor" because it leaves the uninsured at the doorsteps of the community hospital ER, which is forced by the government to pick up the ticket.

"If you allow all of these proprietary companies to come in and operate these hospitals that have no exposure in terms of being responsible to care for the medically are going to see disintegration of the hospital system upon which the federal government is depending," she says. "It doesn't happen all of a sudden. It is like creeping rot; it takes awhile."

The final irony, Farber says, is that "if the affluent patients go down the street to [the heart hospital] that doesn't have an emergency room and subsequently have a heart attack, they will be taken to us at Washington and you better hope we are in good financial shape and can take care of them."

Michelle Rogers is assistant editor and staff writer with HealthLeaders.

Action Items

What steps can hospital executives take if concerned about the possible encroachment of a competing specialty hospital? Some advice from the experts:

  • Take time to talk to local and state legislators about spearheading legislation.
  • Start a letter-writing campaign to politicians in support of legislation.
  • Educate community groups such as chambers of commerce, police and fire departments and rotary clubs about the challenges that specialty services present to community hospitals.
  • Take your facility's case to the media, but first know the issues and prepare talking points.
  • Enlist the support of national advocacy groups such as the American Hospital Association in establishing grassroots campaigns.
  • Stay sensitive to the concerns of physicians and be sure administration is aware of any unmet needs.

Source: HealthLeaders research

Defending Niche Players

A for-profit orthopedic hospital due to open next year in New Albany, Ohio, a Tony Columbus suburb, already is causing ripple of discontent at area hospital systems OhioHealth, Mount Carmel and others. System officials claim that 30-bed New Albany Surgical Hospital, owned by Nashville, Tenn.-based Surgical Alliance Corp., will aggravate regional worker shortages and bleed millions out of nonprofit hospitals in Columbus. Unflinching, Edward Alexander, president of Surgical Alliance, which is partnering with 30 area physicians, defends the company's right to enter the fray and says many arguments against specialty services are unfounded.

HealthLeaders: Why are community hospitals so anxious about your entrance into the Columbus market?

Edward Alexander: If you look at their argument they tend to attack us because we are a big, bad for-profit. We are the first in Columbus, so we are taking the heat that typically HCA and Tenet take for everybody. The reason they are making a big stink about it has as much to do with that, as it is that we are a boutique hospital. But, we pay taxes and they don't. And we will see our share of charity cases, probably more as a percentage of revenue than they do.

HealthLeaders: What is going on with specialists and community hospitals in Columbus?

Alexander: We found that the doctors were having a lot of trouble getting their cases done because there are not enough functioning operating rooms to handle the volume of cases that they wanted to see in a timely fashion. But it really transcends that. Doctors' incomes have shriveled over the last several years as reimbursements decline, so there is a desire to capture a bigger piece of the healthcare dollar. There is also a huge desire to control their ORs and they can't do that at for-profit and nonprofit hospitals. When you have an orthopedic surgeon who goes in at 6 a.m. to do a case, has four more scheduled and thinks they will be out by noon, it drives him and patients crazy when they end up leaving at 6 o'clock at night due to hospital inefficiencies.

HealthLeaders: Detractors contend that New Albany Surgical Hospital will whisk away the more affluent patients, thus leaving community hospitals with the uninsured and poorer patients.

Alexander: Hospitals always say we will cherry-pick, but our doctors already devote a huge piece of their practices to folks who can't pay. And those same people are going to have surgery at our hospital. We will see every single patient who wants to come to our hospital, period.

HealthLeaders: Some argue that most specialty providers don't have ERs, so the community hospitals are left to take those more costly patients and this cuts into their bottom line.

Alexander: I hear them say that and I have to roll my eyes and say that I worked for Team Health, the country's largest hospital emergency room management company. They are a $700 million company. Those emergency rooms make a lot of money. It is again another fallacy. Most patients are admitted to hospitals through the emergency room. So, give me a break. The fact that we don't have an ER can in some ways hurt our profitability, not help it.

-Michelle Rogers

The AHA Weighs In

With a boom in specialty services nationwide, anxious hospital executives are urging legislators to protect their interests. Last summer, the American Hospital Association handed out a set of public policy recommendations on how to curb niche providers.

Stop physician conflicts of interest. Amend the Stark laws' "whole hospital" exception so that physician investors may not be allowed to make a self-referral to a specialty facility in which they have a financial stake. The law currently allows self-referrals for inpatient and outpatient services when the physician has ownership interest in a facility that provides a whole spectrum of inpatient services.

Disclose physician ownership interest. Providers must tell patients and the community in which they work when they have a financial interest in a facility to which they refer patients.

Enforce the same quality standards. Specialty service settings should be held to the same federal quality standards as a hospital when delivering exact clinical services. Reports claim that ambulatory surgery centers do not have the same rigorous oversight as hospitals.

Mandate transfer agreements. To ensure that there are enough specialist services available in a community, ambulatory surgery centers and specialty hospitals must have transfer agreements with area hospitals for emergency services. Also, ambulatory surgery center physicians must have staff privileges at that hospital.

Pay the same. Medicare must change its payment system so that hospital outpatient departments receive the same pay as ambulatory surgery centers for the same procedures. Medicare now has different pay methods for the two, creating hospital-pay inequities.

Change state licensure laws. Require that all providers serve Medicare and Medicaid patients and that they all meet the same quality and patient-safety requirements.

Source: American Hospital Association

Do these goof balls know that the Suspension of a Surgeon results in a Databank entry and the referral to the State Board of Medical Examiners and if it is in the Great State of Texas, a Temporary Suspension of a License? Yes, they know. Do they care?

Yes they do.

They care about their Bottom Line.

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