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The $1 billion bet

UGHS-Alliance deal brings together several hot-button healthcare issues.


By Jessica Zigmond
Posted: February 5, 2007 - 12:01 am ET
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Former stockbroker Kamran Nezami and his physician partners believe their business plan for physician-owned hospitals is the healthcare model of the future, and a North Carolina development company is betting $1 billion that they're right.

Although the physician-ownership concept is not new, the agreement between Nezami's University General Hospital Systems in Houston and Charlotte, N.C.-based Alliance Development Group is unique not only for its size, but also because it involves many of healthcare's hottest issues. Patient-care, payer mix, physician financial interest, managed-care network contracts, and the ongoing struggle between small, "boutique" facilities and their large community hospital counterparts -- this deal has it all.


The Houston flagship and other UGHS facilities
will have the "look and feel of a Four Seasons
hotel."

In the $1 billion transaction -- which the two companies announced in early December 2006 -- Alliance will work with UGHS to build 10 physician-owned, general acute-care hospitals in various markets nationwide. Alliance will handle the real estate and lease the facilities to UGHS, which will manage and operate the approximately 80-bed hospitals. The companies expect to break ground on a facility in Houston's Chinatown area this quarter, and plan to begin building a new facility every three months, Nezami says. In addition to Houston, he lists Dallas, Denver and Phoenix as some of the sites, and says other markets would be announced later.

All of the markets are in states without certificate-of-need laws except for one, Nezami says. W.J. "Bill" Burk, president and chief executive officer at Alliance, identified Hawaii (which has a CON program) as another site, and there could be additional projects, but 10 is an appropriate number for now. Nezami says UGHS would like to build in Hawaii, but it would be a "tough battle" because it's a CON state.

The project is likely to attract a lot of attention with so many eyes already focused on the specialty-hospital industry, and acute-care hospital executives making a case with Congress to limit physicians in their ownership of hospitals.

"For us, the issue all along has been physician ownership and self-referral," says Carmela Coyle, senior vice president for policy at the American Hospital Association. "It is less (about) limited service. The concern is whether the physicians are acting in the best interest of the patients or their own financial interest."

But the outcry over specialty hospitals and physician ownership hasn't deterred Nezami and his partners from the project, the roots of which go back more than a decade.

As a stockbroker with Merrill Lynch & Co. in the mid-'90s, Nezami says he had physician clients and understood that baby boomers would be putting their money into healthcare. Originally, Nezami had planned to develop an ambulatory surgery center until physician partner Hassan Chahadeh, M.D. said they should build a hospital. "What happens with these major hospital systems is there is a huge bureaucracy. Things rarely get done. Nobody (is) motivated to make decisions or any changes," Nezami says. University General Hospital Systems has set out to fix that, and Nezami says he thinks the model will change the face of healthcare in America.

The company began in May 2005, when Nezami and physicians Chahadeh, Octavio Calvillo, M.D., Henry Small, M.D., and Felix Spiegel, M.D.,  formed University Hospital Systems, a private, for-profit company that developed University General Hospital -- a 72-bed Houston-based facility that opened in September 2006, and was granted accreditation by the Joint Commission, effective Dec. 1, 2006.

About 70 physicians are limited partners and own about 65% of the facility, or roughly 1% each, while Nezami, Chahadeh, Calvillo, Small and Spiegel are general partners and own the remaining 35% interest. The company later formed UGHS, which will oversee the future projects and have a similar ownership breakdown. UGHS includes the same general partners except for Calvillo, Nezami says.

Some practitioners agree with Nezami that physician ownership is an effective model. Robert Davis, a limited partner and general surgeon who works at both University General Hospital and 910-bed Methodist Hospital in Houston is among those. Davis, who has been a physician for 30 years, says physician groups have left Methodist because they don't see "eye-to-eye" with administrators on care.

"There is nothing wrong with Methodist," Davis says. "But there is a very deep bureaucracy. ... If you want to get an instrument you need, the layer may be 20-30 layers deep, whereas in the new hospital, we get it tomorrow. ... We can also control our expenditures. We doctors own the hospital."

Methodist executives weren't available for comment. Representatives for St. Luke's Episcopal Health System and 760-bed Memorial Hermann Hospital, located close to University General Hospital in Houston, also were not available for comment.

Similar to the flagship, University General Hospital, the new facilities will have the "look and feel of a Four Seasons hotel," but will provide full services, and accept any patient who walks through the door, Nezami says. They will also have strong bariatric and orthopedic components, but aren't specialty hospitals, he says.

Nezami says the real criticism from opponents is whether these hospitals care for the underinsured and uninsured. "Do we target the indigent population? No. Can we handle anyone who walks through our doors? Yes."

A Congressional Budget Office report released in December found one area where the for-profit industry serves the poor better than the not-for-profit industry. Charity care and bad debt as a percentage of operating expenses was slightly higher among not-for-profits than for-profits, the CBO found. The analysis included 2003 expenses for roughly 1,050 hospitals in California, Florida, Georgia, Indiana and Texas. On average, charity care and bad debt made up 4.7% of not-for-profit hospitals' operating expenses compared with 4.2% among for-profits, a 0.5 percentage point difference that widened marginally to 0.6 after being adjusted for demographics, hospital size and patients' illness, the CBO said.

Laura Comer, director of managed care at University General Hospital, says the hospital expects to receive its Medicare license within the month. The hospital must wait for its Medicare license before it applies for Medicaid.

One of University General Hospital's goals is to be an in-network provider, which has been proven to be a challenge. Comer says big players Aetna, Humana and UniCare have all denied University General Hospital access to their networks, and local competitors don't want the hospital in the networks for fear it might take away lucrative business.

A similar struggle happened in Kansas in 2005, when physician-owned Heartland Spine & Specialty Hospital in Overland Park filed suit against several hospitals and insurers for allegedly excluding 19-bed Heartland from obtaining in-network contracts. Now in the discovery stage, the case is set for trial in April 2008, according to an attorney for Heartland.

Jared Wolfe, executive director of the Texas Association of Health Plans, acknowledges that this is a legitimate concern: "I've been told of cases in Houston in which hospitals have threatened to drop health plans based on whether or not they decide to contract with other hospitals in the area."

An Aetna spokeswoman confirms that University General Hospital is not in its network but did not elaborate on why; a Humana spokesman says in a written statement that Humana considers "the topic of network contracts to be proprietary and confidential"; and a spokeswoman for UniCare says while it is true that University General is not in the carrier's network, the company could not comment on the specific case.

Blue Cross and Blue Shield of Texas agreed to an indemnity insurance contract with University General Hospital for 55,000 lives pending the hospital's certification, according to a Blues spokeswoman.

Nezami says the business plan was set up to prepare for potential payer problems. "You have to have the right volume," Nezami says. "You have to find the busiest physicians to sustain the volume you need to survive, because you can't have all patients out of network."

This raises the question of payer mix. Patients who can afford services at an upscale facility such as University General Hospital benefit, while questions linger about those who cannot pay.

"The community hospital complaint is that the physicians are very selective in the patients they are treating," says Charles Bailey, spokesman for the Texas Hospital Association, of which University General is a member. "They are less acute and potentially more profitable."

These concerns mirror the arguments in the physician-owned specialty hospital debate, which culminated in August 2006 with the end of a federal moratorium on such facilities. Bailey says it is not surprising that some companies developing physician-owned hospitals will broaden their services so they do not fall under the specialty hospital definition.

At the state level, the Idaho Board of Health and Welfare voted in December to deny a petition from the Idaho Hospital Association to temporarily suspend applications for new hospital beds. According to Steve Millard, president of the hospital association, the group filed the petition after it learned of plans for a physician-owned specialty hospital in southwestern Idaho. The measure would have affected all hospitals, including some of the association's members, Millard says. As of early February, Millard said the Idaho Hospital Association has finalized its proposal -- which would essentially make Idaho a CON state -- but the proposal has not yet been introduced to the legislature as a bill.

In Arizona, where UGHS plans to build, the Arizona Hospital and Healthcare Association agreed that the core of the issue is physician self-referral and that Congress should address the issue. But John Rivers, the association's president and CEO, also notes that 225,000 people have moved to the region in the past 12 months and that nearly all hospitals are operating at capacity. Rivers says the association takes issue with hospitals that may not have an emergency department or an emergency physician on staff.

Sharon McDonough, vice president of operations and chief nursing officer at University General Hospital, which is near the Texas Medical center, says its emergency department has a unit secretary, two registered nurses and a physician on staff at all times, and that the new system's facilities will follow a similar model.

"They are generally welcome as long as they are playing by the same rules as everyone else, and it sounds like UGHS is not a model that would be troublesome to us at all," Rivers says. Rivers also cited the MedCath model as one that has been controversial to some, but not to the association.

MedCath Corp. owns a 51% stake in its Arizona Heart Hospital, with physicians owning the remaining 49%. Licensed as an acute-care hospital, the 59-bed facility provides all services, including an ER, even though most of its business is in heart care.

MedCath's hospitals are licensed as general acute-care facilities with a focus on patients who have cardiovascular disease. The company's model is to "bridge the gap between the practice of medicine and the business of medicine" by partnering with cardiology physicians, according to the company's Web site. Ed French, president and CEO of MedCath, says the company's hospitals are unique because of their physician joint ownership and strong core of heart services.

As the various players push their own agendas, there is still ambiguity about how to distinguish a specialty hospital from a general acute-care hospital. The AHA's Coyle says she is hopeful the new Congress will be more favorable to addressing the issues of physician ownership and self-referral. Rep. Pete Stark of California, the ranking Democrat on the House Ways and Means Health Subcommittee and longtime opponent of physician ownership, offered a written statement on the topic: "For years, I've been concerned that physician-owned hospitals are pulling profit centers out of community hospitals. In the next Congress, I hope to work with colleagues on both sides of the aisle to stop their proliferation."

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