Heart of the matter

As low Medicare and HMO reimbursement rates combine to push down the incomes of cardiologists and cardiovascular surgeons, physicians are increasingly ponying up money to build their own heart hospitals.

Such hospitals are state-of-the-art facilities specializing in one thing and one thing only: cardiovascular services. They are centers to which physicians can refer patients and from which they take a share of the profits.

For the heart doctors, it's a great deal. They get to practice in an atmosphere conducive to their specialty, have pride of ownership, and see their salaries rise, if and when the hospital makes money.

But for rival local hospitals with existing heart programs, it's bad news when a heart-only hospital opens down the street. Already struggling to make ends meet, acute-care hospitals cannot afford to lose a single patient, especially heart patients whose health insurance dollars are an important part of many hospitals' bottom line.

Although only about a dozen heart hospitals have been built around the country, in almost every case where doctors have opened or tried to open a heart-only hospital, intense debate has erupted.

Usually, the investor-physicians say they are just doing the best thing for their patients. Scott Beau, M.D., a Little Rock cardiologist who invested in Arkansas Heart Hospital with 15 other colleagues, says the doctors' overwhelming motivation "was a desire to take care of patients in a way we think is most beneficial and cost effective."

The existing hospitals charge them with building unneeded facilities simply to increase their incomes. When cardiologists and cardiovascular surgeons in Albuquerque came together to build the for-profit Heart Hospital of New Mexico, leaders of rival not-for-profit Presbyterian Hospital, which long had run the city's leading heart program, were outraged and have called the new hospital a wasteful duplication.

When investor-physicians announced they wanted to open a new heart hospital in Dayton, Ohio, opposition from neighboring hospitals was so intense that the Ohio Hospital Association called for a two-year moratorium on new hospital construction. The moratorium never passed the state Legislature, and the Dayton Heart Hospital opened in September.

When Edward Hospital, in the western Chicago suburb of Naperville, announced plans to build a heart hospital together with local heart doctors, seven nearby hospitals with heart programs waged a battle against the project. One competitor, Good Samaritan Hospital, in Downers Grove, said it could lose $10 million annually, or 35 percent of its volume of heart procedures.

It's not hard to understand the reason for these turf battles. Heart services have been the bread and butter of community hospitals, accounting for up to 20 percent of a hospital's revenues and 50 percent of its profits. Cardiovascular surgery is the most expensive procedure commonly performed in hospitals, averaging more than $41,000 per incidence.

The American Heart Association estimates heart disease costs in the United States this year at $183.1 billion. With overall healthcare costs running around $1 trillion, that is almost one of every five dollars spent.

Peter Snow, senior vice president of strategy development for Presbyterian Hospital in Albuquerque, was one of the leaders in the fight to keep the Heart Hospital of New Mexico from opening, even though he was friends with many of the heart doctors who invested in it. Although Snow is discreet in his criticisms, the meaning of his words is clear enough. The suggestion that the investors were motivated primarily by money "is a legitimate concern," he says, adding, "Physicians respond to the incentives in the system, and there's a strong correlation between increasing use (of a medical facility) and physician ownership, whether it be in labs, diagnostic facilities, or a heart hospital."

It's too early to tell what impact the new hospital will have on Presbyterian, but Snow worries that the financial hit will be significant.

Some circumstantial evidence suggests that financial considerations play a part in the decision of a heart doctor to invest in a heart hospital, even if it is not the primary motive. Cardiologists and cardiovascular surgeons, who long have enjoyed some of the highest incomes in medicine, have seen their incomes suffer in the 1990s.

Beau, the Arkansas cardiologist, says, "Across the board in cardiology, there's been a 9 or 10 percent decrease" in fees paid to heart doctors by Medicare, and he predicts that some cardiology groups will see their incomes plunge by an additional 20 percent over the next several years. While some Medicare fees for cardiac services are up, others have fallen sharply. A HCFA spokesperson, who did not wish to be identified, says, "10 years ago, Medicare paid $3,957 (to the

physician) for a triple bypass; in 2000, the fee will be about $1,700," as a result of rejiggering of the Medicare physician fee schedule.

"These surgeons and cardiologists," says Bernard Lirola, a research analyst with the New York investment firm Needham & Co., "have to make up their income loss in some form, so there's a natural migration to get a piece of the facility fee."

But investor-physicians take umbrage at the suggestion that profit is their primary motive. "This whole notion of mercenary physicians is insane," says Beau. In fact, he adds, "the (Little Rock) investors had to be strongly persuaded they would not lose their shirts." Rather, he says, the physicians acted out of concern for their patients. "The absolute best thing is that we got to design the hospital the way physicians would design it, not administrators."

The jury is still out regarding incomes, but one thing is clear: Heart doctors call the shots when it comes to which hospital to admit a patient to. And if many or most of an area's heart doctors band together to invest in a heart hospital, it stands to reason they would refer their patients to it, at the expense of the existing hospitals, with whom they may still have admitting privileges.

Dennis Kelly, vice president for development at the nation's leading developer of heart-only hospitals, Medcath, says the company is studying the effect of "focused factory" care and says a national physician journal will publish the findings sometime early in 2000.

So far, the bitterness of the turf battles outweighs the actual number of instances in which they've occurred. But the trend represented by the new heart hospitals is unmistakable, and if Medcath has its way, the landscape soon will be dotted with single-specialty heart hospitals from coast to coast.

Medcath, based in Charlotte, N.C., virtually wrote the rules of the heart hospital game. Ironically, when Medcath started up in 1989, running heart hospitals seemed unlikely for the future of the company. Instead, its strategy was to run mobile and fixed-site catheterization labs. The company opened its first heart hospital in 1996, in McAllen, Texas, and by fall of 1999, it was operating eight.

The company, which had $275 million in revenues last year, recently announced plans for its ninth and 10th heart hospitals, in Harlingen, Texas, and Sioux Falls, S.D. So far, Medcath has concentrated on smaller cities, but the company is having discussions about opening hospitals in larger metropolitan areas, Kelly says.

In a typical Medcath deal, heart doctors invest anywhere from $10,000 to $100,000 each, depending on the number of physicians involved and the amount of risk the physician wishes to carry. The average cost of each facility is $50 million. The physicians' return is then prorated according to the size of their investment, if and when the new hospital makes money. Medcath, which reverted to private ownership when two Wall Street investment firms bought its stock back in July 1998, also contributes a share.

In a few recent instances, so do some of those other local hospitals, whose strategy seems to be, if you can't beat 'em, join 'em. "At first, Franciscan (Medical Center) was opposed to Medcath coming into the Dayton market," explains hospital spokesperson Nancy Thickel, "but then we reviewed our situation and felt it was better to be a partner, so we are now a one-third partner with Medcath" and the local physicians.

Medcath gives the heart doctors no guarantees of a return on their investment, and the physicians are warned that it could be a few years before they see any profits, given the time it takes to build a facility, market it, and fill its beds. But anecdotally, Medcath is said to tell the physicians they can earn $75,000 or more a year. And there's little doubt that Medcath hospitals quickly rise to the top in their markets once they open. McAllen (Texas) Heart Hospital performed 45 percent of open heart surgeries and angioplasties after its first year. And Medcath's second hospital, Arkansas Heart Hospital, opened in March 1997, has become a leading player. Beau says, "We're doing almost as many (procedures) as the other two hospitals in the city (with heart programs) combined."

Kelly says Medcath's physicians also can increase their incomes by 20 percent because the facilities are so efficient. "They either get 20 percent more income for working the same amount of hours (because productivity rises) or they have the ability to maintain their professional fees (while) working less hours."

So far, according to Kelly, only two Medcath hospitals have paid out formal prorated distributions to investors, McAllen and Arkansas, although Kelly would not reveal what the pay-outs were. Beau concedes that his payout was "not an insignificant portion" of his income, but he emphasizes, "I can tell you that the idea behind building the hospital was not driven by the idea of making more money."