Eye and ear hospitals have been blindsided by recent changes in healthcare delivery.
With typically fewer than 100 beds and an emphasis on providing highly specialized medicine, they have been particularly vulnerable to industry trends. The growing emphasis on managed care, federal cutbacks in Medicare payments and changes in technology have hit them even harder than acute-care hospitals.
Most have been slashing costs and exploring affiliations with other providers. The ones lucky enough to be in relatively open markets and to have access to capital also have been able to diversify and expand.
"These facilities are facing enormous pressures," said Robert Betz, executive director of the American Association of Eye and Ear Hospitals in Washington. "All of them are trying to deal with managed-care problems. All are struggling to maintain their mission."
Currently, Betz estimated, there are nearly 30 independent eye and ear hospitals in urban markets. The oldest and largest in the country is Wills Eye Hospital in Philadelphia, established in 1832. It created the first ophthalmology residency program in the United States in 1839.
Other eye and ear hospitals similarly were formed by philanthropists or by specialists who wanted a facility where they didn't have to play second fiddle to other surgeons and where they could address the special anesthetic and recovery needs of eye and ear patients. Eye and ear hospitals since have become international centers of teaching and research.
But now that patients can drive to a surgicenter at their local mall and get a cataract removed or nearsightedness corrected, eye and ear hospital administrators have taken off the rose-colored glasses and recognized they need to reposition themselves.
"I think that the freestanding eye specialty hospital as we have known it is probably going to come to an end," said Gordon Smith, chief executive officer of Eye Foundation Hospital in Birmingham, Ala. "Market forces are going to drive decisions. We have to continually re-examine our processes and cost structure. There's no such thing as the bottom of the well."
Federal cutbacks in Medicare payments have dealt disproportionate blows to these hospitals, which cater almost exclusively to seniors.
"It's easy to talk about managed-care guys cutting our revenues, but federal cutbacks in Medicare for outpatient surgery is what most dramatically affects these institutions," said D. McWilliams Kessler, executive director of Wills Eye Hospital and CEO of its surgery centers. "In the late '80s, the typical hospital was losing 20% to 25% against costs in performing Medicare outpatient procedures."
In 1987, Congress passed protective legislation that provided eye and ear specialty hospitals with a Medicare payment adjustment for outpatient surgery and services. This provision was extended in 1990 for five years, but its renewal is uncertain. "It's pocket change to HCFA, but it's essential to the survival of these institutions," Kessler said.
Rapid changes in technology have dealt these specialty hospitals another sock in the eye. Community hospitals and ambulatory surgery centers now possess the tools to provide the bread-and-butter treatments of the eye and ear hospitals.
Managed-care companies have responded by steering their patients to these providers, which often are lower priced, and by locking specialists out of their health plans.
"Managed-care plans want to contract with physician groups that have a mix of primary-care doctors and specialists," explained Neesha Lanius, a consultant with Pitts Management Associates in Baton Rouge, La. "They don't want to contract with 50 retina specialists."
Lanius observed that some eye and ear hospitals are trying to offer ophthalmology services to participants in managed-care plans at more competitive prices. "They are reducing their costs so that they will be attractive to managed-care plans," she said. "But it takes a lot of effort to prove that they can control costs and still provide a high quality of care."
A lot of effort, though, is what Wall Street wants to see. Analysts at two New York-based credit-rating agencies have been putting pressure on eye and ear hospitals to continue making aggressive changes.
In a report titled Eye & Ear Specialty Hospitals-A Crash Course in Survival Skills, Standard & Poor's Corp. concluded that the future of eye and ear hospitals is "dependent on them redefining their niche in a different world."
The report noted that the four eye and ear hospitals reviewed by Standard & Poor's have seen declines in their inpatient admissions ranging from 20.7% to 72.5% since 1991.
"These guys have had their admissions base erode faster and deeper than people expected," explained Martin Arrick, a director with Standard & Poor's. "But an eroding admissions base doesn't necessarily mean that the overall business will go down. Nobody is going to make any new eye and ear hospitals, but I don't think that it's inevitable that these will close."
In the aftermath of the transition, Standard & Poor's has downgraded the bond rating of Manhattan Eye, Ear and Throat Hospital in New York City to BBB- from BBB+. "Management for whatever reason was slow to implement a policy of change," Arrick said. "They couldn't rally the troops."
Standard & Poor's also affirmed its previous decision to downgrade the bond rating of Massachusetts Eye and Ear Infirmary in Boston to BB from BBB and slapped the infirmary with a "negative outlook."
"At (Massachusetts) Eye and Ear, the management is astute, but they're in a market where they don't have much room to maneuver," Arrick said. "The changes are happening so fast."
Likewise, Moody's Investors Service recently downgraded the bond rating of Massachusetts Eye and Ear to Ba1 from Baa and downgraded the bond rating of Manhattan Eye, Ear and Throat to Ba1 from Baa.
Hospitals that operate in less saturated markets and have more cash in reserve have received more favorable ratings from the agencies.
Standard & Poor's recently upgraded the bond rating of Richmond (Va.) Eye and Ear Hospital to BBB from BBB-, and Moody's notched it up to Ba1 from Ba.
Wills Eye in Philadelphia was boosted by Standard & Poor's to A+ from A, and Moody's reconfirmed its A rating.
"The primary reason Wills has such a high rating is because it has a fair amount of cash relative to its low debt levels," said Lisa Martin, an analyst with Moody's.
Wills Eye generally is regarded as the most progressive of the group. At the same time Wills Eye is trying to salvage its inpatient admissions, it is diversifying into related services and constructing or acquiring a total of 12 ambulatory surgery centers that will bear the Wills Eye name, Kessler said.
The hospital thus far has dedicated a third of its 85 inpatient beds to a new geriatric psychiatric unit, which cares for about 20 patients a day, Kessler said. By the end of the summer, the hospital plans to have fully implemented a neurosensor program that will offer brain, neck and back surgery treatments.
The high-tech equipment required for the neurosensor program alone cost the hospital about $18 million, Kessler noted. An additional $10.5 million has gone toward the development of three ambulatory surgery centers that Wills Eye has opened in the suburbs of Philadelphia since September.
Kessler said these capital intensive projects are essential to the future of Wills Eye. "I would go to the capital markets to do this if I didn't have the operating cash," he said.
Kessler explained that the new inpatient services have allowed Wills Eye to continue to qualify as a hospital for Medicare reimbursement purposes and as a teaching hospital in order to receive funding for its residency program.
They also have created a cash pool that can be used to finance the start-up costs of the new ambulatory surgery centers, which he expects to put a heavy strain on resources during their first few years.
Although the ambulatory surgery centers are less than a year old, Wills Eye appears to be sound. In 1994, Wills Eye brought in $54.4 million in total revenues, compared with $49 million in 1991, according to HCIA, a Baltimore-based healthcare information company.
Eye Foundation Hospital has similarly restructured its delivery system, using a cash cushion fluffed up during the '80s when the hospital reduced its cataract surgery costs to $1,300 per case from $1,800 by shortening its length of stay, changing some services from inpatient to outpatient, streamlining its purchasing operations and eliminating almost 60 staff positions through attrition or layoffs, Gordon Smith said.
Last year, the foundation created an ambulatory surgery unit in the hospital's facility. Most of the foundation's patients now receive their surgical treatments through the center. Some 450 patients visit the center each month for surgical procedures and stay an average of two hours, Gordon Smith said. Meanwhile, about 125 patients are admitted to the 91-bed hospital each month and stay an average of one to two days.
So far, the foundation has seen revenues climb to $15.7 million in 1994, from
$13 million in 1991, according to HCIA.
By contrast, Massachusetts Eye and Ear is still in the midst of charting its course.
In 1992, the infirmary saw 50%, or 4,600, of its ophthalmology patients on an inpatient basis, said Curt Smith, its president. Just four years later, it now sees only 5%, or 400, of its patients on an inpatient basis.
The declining inpatient admissions have not been totally offset, and revenues have seen corresponding dips. Total revenues have dropped to $77.6 million in 1994, from $80.8 million in 1991, according to HCIA.
Curt Smith partly attributed the declines to an increased managed-care presence in the Boston area. The managed-care penetration in Massachusetts was 35% at the end of 1994, making it one of the top 10 states based on managed-care presence.
Curt Smith also blamed an oversupply of ophthalmologists in the area for giving insurance companies the upper hand and encouraging a willingness to compromise on professional rates.
To address these issues, Chief Financial Officer Peter Chinetti said the infirmary has looked for options that have relatively low capital requirements.
A major focus, Curt Smith said, is to work with the infirmary's neighbor, Massachusetts General Hospital, in developing a regional managed-care network. He said the infirmary would like to remain independent and provide ophthalmology services to several networks to ensure a wide patient base.
In addition, the infirmary has diversified to include such services as a voice and speech lab and has opened five ambulatory sites.
Curt Smith is confident the battleship can be turned around. "It's clear to me that we will maintain our mission," he said. "The details of how we accomplish that must be changed. How we provide our services must be changed. That's the challenge."
Wall Street has not turned a deaf ear to these efforts. "Massachusetts Eye and Ear is on the right track in terms of convincing us," said Lisa Goldstein, an analysts with Moody's. "They're taking the decline in inpatient admissions very seriously."
In New Orleans, Eye, Ear, Nose and Throat Hospital also is exploring its options.
Acknowledging that the hospital does not have the capital to open significant outpatient facilities, CEO William F. Finegan said he is focusing on expanding into other services, such as plastic surgery and becoming a center of excellence for refractive surgery.
Although his goal is to keep the hospital independent, he also has hired an investment banking firm to see if there is interest in the market for purchasing or affiliating with the hospital.
"This hospital is 108 years old," Finegan said. "I wouldn't want it to go out on my watch. We can't leave any stone unturned in order to continue the organization and its rich history."
Betz warned that if eye and ear hospitals start shutting their doors, patients with serious injuries and long-term problems will suffer.
"These are national healthcare resources that our country cannot afford to lose," he said. "We are going to have to decide as a matter of public policy whether subsidies will be there to support these tertiary facilities so that they can take care of the patient with a screwdriver in his eyeball."