Thinking small leads to growing profits

November 1, 2006
Eric Trefelner, MD

Specialty hospitals continue to narrow their focus in order to widen their margins

Specialty hospitals continue to narrow their focus in order to widen their margins

"I heard your mother is in the hospital."

"Hospitals."

"Oh, right. I still haven't gotten used to that. Which ones?"

"Well, first she broke her hip, so she was in Our Lady of Exuberant Returns. They do only hips. Dr. Mose's Orthopedic Specialty Hospital is closer to us, but they primarily do spines. Then she ended up developing a pneumonia, so off she went to the Coughing Virgin of Santa Cruz for treatment."

"Not Sacred Lung and Pleura Hospital?"

"She went there first, but they've decided to focus only on PE patients."

"Oh that's right. Too many patients were going to Sputum Specialty Hospital. I heard it's because SSH has a new celebrity chef in the hospital restaurant. I know it sounds creepy, but Chef Pierre makes the most delicious calves lungs in burgundy sauce."

"The chef at Chez Bladder at the United Unitarian Urologic Hospital does a superb veal kidneys in cream sauce that will send you right to the Queen's Bleeding Heart Cardiac Care Center, where my mother was sent next because of chest pain."

"My wife loves that hospital. Martha Stewart did all their hospital rooms."

"Well, turns out it wasn't a heart attack but a small stroke, so off she went to the Good Shepherd of the Nativity Neurological Institute and Golf Club."

"I am so jealous. I was hoping that one of my parents would have a stroke so I could play that Arnold Palmer-designed course."

"Sadly, I never got to play it. Unfortunately, she was on coumadin for her hip, and that little stroke converted to a large bleed, so she had to have a craniotomy at Regional Extended Stay All-Suites Profiteering Neurosurgical Hospital and Columbarium."

"It still grosses me out that the patient rooms there are lined with niches for their remains. My parents haven't visited my grandmother for months because her urn is right behind the ventilator."

"It's the urns in the bathroom and restaurant that give me the heebie-jeebies."

"This must have cost you an arm and a leg, all those hospital admissions."

"Actually, I'm investor in all those hospitals. I made so much money off Mom's illnesses that we're going to remodel the kitchen."

Aug. 8, 2006, may prove to be a turning point for radiologists. On that day, the Centers for Medicare and Medicaid Services announced that it would resume certification of specialty hospitals.

Only a year ago, most analysts felt that specialty hospitals were about to die an ignoble death. Congress had imposed an 18-month moratorium, citing concerns that the facilities drove up healthcare costs, cherry-picked patients, and imperiled local community hospitals. Much of this conclusion was supported by research undertaken by the Department of Health and Human Services and the Medicare Payment Advisory Commission (MedPAC). In fact, they recommended extending the moratorium past its June 8, 2005, expiration to Jan. 1, 2007, to allow more research into how to address these problems. Congress did extend the ban to August, but then the Bush administration reversed itself, embracing a long-standing Republican tenet that competition is always good for the marketplace.

I am a true believer in capitalism. I believe that competition is a good thing as long as it is played on a level field, but that is not the case here. Referring clinicians who control the patients and can self-refer to their own hospital have an overwhelming advantage motivated by profit, as clearly supported by research. Let us compete on quality, and I know that we would prevail.

MedPAC recognized this fact, and the 16 commissioners unanimously approved recommended policy changes, which they submitted to Congress.

"The commission recommended that Congress direct the secretary of the Department of Health and Human Services to set quality standards for all providers who bill Medicare for performing diagnostic imaging services and interpreting these diagnostic tests. They also recommended that the secretary should measure physician use of imaging services," said John Iglehart's excellent health policy report in the June 29, 2006, issue of The New England Journal of Medicine, "The new era of medical imaging-progress and pitfalls."

But rather than address the root causes demonstrated in numerous studies undertaken by DHHS and MedPAC and published by researchers in JAMA, NEJM, and Health Affairs probing why these specialty hospitals drive up costs, Congress instead chose to ignore its own experts' recommendations and focus only on cutting reimbursement for outpatient imaging services.

I've just returned from a trip across the U.S. visiting current and prospective clients, and I continue to find radiology groups in ongoing turf battles with referring clinicians and hospital administrators. Exclusive imaging contracts are treated with the disdain usually reserved for the Geneva Conventions or Mel Gibson Hanukkah gift sets. Private radiologists' outpatient imaging centers are either forced to close or acquired by hospitals under less than favorable terms. The rights to read imaging studies previously held solely by radiologists are handed on a platter to other specialists, much like lobbyists handing out travel junkets and cash to congressmen, with no concern for the consequences. Some groups are successfully holding their own, but the war goes on.

Self-referring specialists have used the threat of forming their own specialty hospital to extract concessions from skittish hospital administrators. This will only further tip the scales in their favor. And why not? The huge profits from these hospitals have attracted overwhelming interest from hungry investors. Expect a building boom.

"The 35 doctor-owners of Black Hills Surgery Center in Sioux Falls, SD, received $103 million in profit distributions and stock offering proceeds over just four years through 2004. That was on top of the fees they earned performing surgery and the value of hospital stock retained," said a Wall Street Journal article on Aug. 29.

Better start thinking about how to respond to these threats before they start breaking ground across the street.

The most common reasons for specialists to open their own facilities, whether a hospital or outpatient center, have been to free themselves from hospital meddling and constraints and to enjoy greater profits and income. Certainly, this has also been the case for many outpatient imaging centers. If so many specialists have determined that their best interests are served by leaving the traditional community hospitals behind, maybe radiologists should consider following suit. Do you hear any talk in the doctor's lounge about this? If so, pay attention.

Many proposed specialty hospitals have as few as eight to 12 beds. I believe the Jimmy Durante Memorial Hospital for Ginormous Rhinoplasty has only a sofabed. If the Deficit Reduction Act scares radiologists about the risks of opening an outpatient center, they should be even more scared of administrators leaving only defecography to read. Better to stock up on face shields. Or consider partnering with podiatrists and plastic surgeons, putting a few beds in your imaging center, and-voila-you may have your own hospital!

Dr. Trefelner is a radiologist and cofounder of NightShift Radiology. He invites comments by e-mail at ericxray@pacbell.net or fax at 650/728-5099. He also answers questions posed by readers in the "Ask Eric" column on diagnosticimaging.com.

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