A booming specialty hospital market has the AHA and state hospital associations working to balance competing interests
Story originally published September 30, 2002
The debate over specialty hospitals is often portrayed as a battle between greedy doctors and benevolent not-for-profit hospitals that say the physicians are stealing away patients from profitable services used to subsidize money-losing but necessary services.
But a closer look by Modern Healthcare reveals that not-for-profit hospitals themselves are just as responsible for the boom in specialty hospitals as they enter joint ventures with physician investors to open facilities that focus on specialized services, such as cardiovascular, orthopedic, and women's and children's care.
This specialty hospital paradox leaves the American Hospital Association and state hospital associations in a predicament as the trade groups try to strengthen regulation of specialty facilities at the same time some of its own members are embracing such ventures.
* In Wisconsin, not-for-profit Aurora Health Care last year opened its only for-profit facility of the 13 hospitals it owns. Aurora Health Care owns 60% of the new 108-bed Aurora BayCare Medical Center in Green Bay. BayCare Health Systems, a 73-physician multispecialty practice in Green Bay, owns 40% of the hospital.
* In Tennessee, Kingsport-based Wellmont Health System, a five-hospital not-for-profit system, plans to build a 65-bed for-profit hospital in Johnson City. Wellmont's joint venture partner in the $56 million project is a 70-physician multispecialty practice.
* In Missouri, Saint Francis Healthcare System, the parent of 249-bed Saint Francis Medical Center in Cape Girardeau, announced plans earlier this year to build a new medical campus in Poplar Bluff. Saint Francis will own 30% of the campus, and the 39-physician medical group called Physicians Advanced Health Care Group will own 70%. The $30 million campus will include an ambulatory surgery center, diagnostic cardiac catheterization laboratory, radiation oncology center and 50-bed hospital.
* In Indiana, not-for-profit hospital systems are building two heart hospitals through joint ventures with physicians. Central Indiana Health System, which operates not-for-profit 796-bed St. Vincent Hospitals and Health Services, is building a $60 million, 120-bed for-profit heart facility just three miles from its hospital campus in Indianapolis. Scheduled to open in December, the Heart Center of Indiana will consist of a joint venture between Central Indiana Health and Care Group, a group of more than 60 cardiologists and cardiovascular surgeons. They each will own a 50% stake in the center.
Community Health Network, which operates four-hospital system Community Hospitals Indianapolis, meanwhile, is preparing for the opening of its joint venture, the Indiana Heart Hospital, in February 2003. The 60-bed facility will sit on 11 acres and include a medical office building attached to the hospital. Community Health owns 85% of the facility, while a group of cardiologists and cardiovascular surgeons owns the remaining 15%.
The boom in joint ventures between not-for-profit hospitals and physician groups has left the AHA in the awkward position of trying to balance the positions of competing interests. Some of the AHA's not-for-profit members are screaming at the association to stomp out the mushrooming ranks of specialty hospitals whose growth ironically is being fueled by other not-for-profit members.
The AHA, which created a task force to study the growth in specialty hospitals, is not about to endorse stopping the joint ventures between not-for-profits and physician groups, experts say.
"This is going to be a growing trend," says Brett Brodnax, senior vice president and chief development officer at United Surgical Partners International, which has entered 10 joint ventures since 1998 with not-for-profit hospitals to create ambulatory surgery centers. "As there are more and more competitors, the hospital systems are going to need to do something to protect their business and their market share. They are concerned about getting niched to death."
The AHA is focusing on regulating the specialties and wants stiffer rules governing physician self-referrals to hospitals in which they invest. The AHA also wants comparable standards for specialty hospitals when they perform services similar to those of acute-care hospitals.
Carmela Coyle, the AHA's senior vice president of policy, says her members, including hospitals that have entered joint ventures, want better regulation.
"This is not a black-and-white issue," Coyle says. "Some of these organizations (that enter joint ventures) wouldn't mind some of these changes to level the playing field. Why wouldn't those standards be equally as important in an alternative setting?"
Coyle says she wants a change in the federal regulations, known as the Stark laws, which govern conflicts of interest between physicians and hospitals. Under the regulations, physicians are prohibited from making self-referrals to hospitals in which they have invested.
But Coyle says physicians get around the regulation through the "whole-hospital exemption," which allows doctors to invest in the general hospital. The theory is their investment in the large organization would be too diluted to significantly benefit any particular physician. Because specialty enterprises are considered part of the larger, "whole" hospital, the doctors can invest in and refer to those facilities.
"This is an issue of a conflict of interest," Coyle says. "There is an impact on the patient and the community."
William Petasnick, chief executive officer of Froedtert Memorial Lutheran Hospital in Milwaukee, serves on the AHA committee studying the specialty hospital issue. He wants more disclosures from specialty hospitals regarding their status as full-service facilities and wants to change the wording of the whole-hospital exemption in federal law. Physicians are taking advantage of the situation, he says. "Patients don't know doctors are investing," he says.
Stanley Hupfeld, president and CEO of Integris Health, an Oklahoma City-based healthcare system that operates 11 hospitals throughout Oklahoma, also serves on the AHA's specialty hospital committee. He says the association needs to push for more regulations, even though its own members are opening specialty hospitals. "I don't see it as hypocritical," he says. "The AHA's members have a social obligation. If you destroy our ability to have profitable services, you kill the safety net of American healthcare."
Hupfeld even favors consideration of a taxation system on the specialty facilities that would help fund not-for-profit operations.
"If the future is in niche providers, how are we going to finance things such as burn units?" he asks. "These ventures that are entrepreneurial represent some unfair competition. We really are arguing for the heart and soul of American healthcare."
But William Corley, president and CEO of Community Health Network, Indianapolis, defends his decision to enter a joint venture with cardiologists and cardiovascular surgeons. "You have to be proactive before a MedCath comes to town," Corley says, referring to the Charlotte, N.C.-based cardiovascular-care provider. "And it is not just MedCath, but local physicians, too. You are not going to give up your profitability to somebody else. That is why specialty hospitals are increasing."
The AHA's task force has studied the specialty hospital issue and made several recommendations to board members, who support the concepts, such as changing the whole-hospital exemption, Coyle says.
In the meantime, Rep. Gerald Kleczka (D-Wis.) co-sponsored a bill last year that would limit physician investments in specialty hospitals to "terms generally available to the public," according to the legislation. The bill, a proposed amendment to the Stark laws, is now in the hands of the House Ways and Means health subcommittee.
"It is designed to go after the investment aspect," Coyle says. "It doesn't address all the issues."
A balancing act
Steven Brenton, president and CEO of the Wisconsin Hospital Association, has not taken a stand on the issue in his state. In addition to the Green Bay joint venture, Milwaukee-based Covenant Healthcare System plans to open a joint venture heart hospital in Milwaukee in 2003, he says.
"We have members who have grave concerns and we have others with joint ventures," he says. "It is an issue high on our radar screen."
Brenton says he wants specialty hospitals to accept Medicare and Medicaid patients and have emergency room facilities or partnerships with standby hospitals if patients need to be transferred. "They have to provide certain community accountability," he says.
"As you talk to hospitals, one thing is made very clear," Coyle says. "This is not an issue about competition. The issue is (whether) competition is occurring on a level playing field. We now have a healthcare industry that has evolved and changed."
Specialty hospitals have changed the landscape of the healthcare industry, leaving administrators at not-for-profit hospitals to demand that the competition be forced to play by the same rules. They want the specialty hospitals to provide charity care and take on unprofitable cases, too, instead of leaving them for not-for-profit hospitals or public facilities.
"We are beginning to see some signs in states that don't have certificate-of-need laws that not-for-profit community hospitals' survivorship is being directly threatened," says Dennis Barry, president and CEO of not-for-profit Moses Cone Health System in Greensboro, N.C., that operates five hospitals.
In Wichita, Kan., Randy Nyp, president and CEO of Via Christi Regional Medical Center, says he's seeing firsthand the effect specialty hospitals have on not-for-profit general acute-care hospitals. He has seen two cardiac hospitals enter the scene in the past three years but has decided against entering a joint venture with cardiologists. Nyp says he wants specialty hospitals to "be under the same standards we are."
As cardiac patients throughout the state flock to Kansas Heart Hospital and Galichia Heart Hospital in Wichita, Nyp says he's looking for ways to recoup from $26 million to $30 million annually in lost net patient revenue. Via Christi reports a 30% annual decline in cardiac admissions and 50% drop in bypass surgeries, he says.
When the Kansas Heart Hospital entered the scene three years ago, cardiologists began investing in the new startup and took patients with them.
"You can't stop these from being developed," Nyp says. "The specialty hospitals expect community hospitals to continue to provide unprofitable services. Long term, that doesn't bode well for the community."
Cardiac patients who come to Via Christi usually have been patients at one of the heart hospitals and arrive with complications. Physicians at the specialty hospitals refer the patients to Via Christi because it has an emergency room, something lacking at the specialty facilities.
Fighting a losing battle, Via Christi decided to focus efforts elsewhere. Hospital administrators are working with local groups to try to recruit more cardiologists, which would lead to more patients, he says. They also are putting a higher emphasis on other lines of care, such as neurology, he says.
"The reality is we have to adjust to the reduced revenue and reduce our costs accordingly," Nyp says.
It is a scene that is played out around the country. In Albuquerque, Presbyterian Healthcare Services experienced an approximate 25% decline in heart patients when for-profit MedCath Corp. opened a heart hospital in 1998. The hospital is still trying to rebound.
"We are looking for regulatory relief," says Jim Hinton, Presbyterian's president and CEO. "The unfair part is the competitor is picking patients and selecting what will be offered. We believe specialty hospitals are inconsistent with broader community healthcare."
In Milwaukee, local hospitals are preparing for new competition in 2003 when MedCath opens the Heart Hospital of Milwaukee, a $16.5 million facility that will be jointly owned and operated by local physicians and parent company MedCath. Covenant Healthcare System also has plans for a heart hospital next year in Milwaukee. The 60,000-square-foot hospital will have 32 intensive-care unit beds, two operating suites, three heart catheterization laboratories and an eight-bed emergency room. MedCath still is developing partnerships with physicians and has not determined its ownership stake.
Physicians will be using the latest in technology, too. About $14 million will be invested in equipment including nuclear medicine systems and digital X-ray platforms.
The new facilities worry Petasnick, Froedtert's CEO. "They have the potential for eroding the financial integrity of full-service hospitals," he says.
A better model?
David Crane, president and CEO of MedCath, defends his company's business model. He has opened eight heart hospitals around the country and is planning five more by the end of 2003.
Crane boasts that his organization gets results. According to a company survey comparing MedCath with 946 community hospitals, the company had a 12.1% lower in-hospital mortality rate for Medicare cardiac cases on a risk-adjusted basis. Cardiac patients also have shorter hospital stays, averaging 4.12 days compared with 4.99 days at general hospitals. MedCath patients also are more likely to be discharged to their homes, 89.6% versus 72.4% at general hospitals.
"We believe we can offer the patients a better model," Crane says. "Every community we have gone into has had a shortage of cardiovascular intensive-care beds. We think we have every right to exist."
Crane denies that his organization "skims" the profitable cases from general hospitals and says MedCath accepts Medicare patients. "The critical question is, `Who can provide the best quality care?' " he says. "The model clearly works. It is a very viable and successful way to provide care."
Not-for-profit hospitals that have eschewed joint ventures have gotten their piece of the specialty hospital pie by opening not-for-profit specialty units on their own campuses.
Clarian Health Partners, Indianapolis, last fall opened Clarian Cardiovascular Center, a consolidation of Clarian's cardiovascular resources and faculty members at Indiana University School of Medicine's Krannert Institute of Cardiology.
"It certainly takes revenue," says Carl Martinson, senior vice president of marketing at Clarian. "We have marketed ourselves as a heart hospital within a full-service hospital."
That is important, Martinson says, because patients can be close to an emergency room if complications arise. The cardiovascular center is on the grounds of Methodist Hospital of Indiana. "They wouldn't be transported out," he says. "We think it is a better way to go about that."
Still, with four heart hospitals in the same city, Martinson knows Clarian has a tough road ahead competing with the joint ventures. The bottom line remains that not-for-profit hospitals will continue to see their more profitable cases leave for specialty hospitals, says Barry of Moses Cone.
"You directly threaten the long-term sustainability of those not-for-profit general hospitals that provide those services that are financially unattractive," Barry says. "They need the profitable services, too."
Other administrators caught up in the specialty hospital wars believe the tide eventually will turn in favor of not-for-profits once regulations, such as the whole-hospital exemption for physician investors, are strengthened.
Martinson says the for-profit companies and joint ventures between physicians and not-for-profits are seeing success now, but it could be a different story down the road.
"There will be some profitable cases that go to these organizations," he says. "We believe there will be some attrition. Eventually the market sorts itself out."
For now, Coyle says the AHA will focus on "leveling the playing field" between specialty hospitals and not-for-profit hospitals. "They are not regulated in the same way a (full-service) hospital is," she says. "We have to assure the public that someone is monitoring the quality of those services."