Struggling to maintain professional freedom and bolster shrinking salaries, some surgeons are partnering with companies to take ownership in ambulatory surgery centers.
Over the past 10 years, advances in technology have allowed simple surgeries in orthopedics, gynecology and ophthalmology to move from hospitals to outpatient facilities. Surgery center operators contend they can provide lower cost than hospitals because of lower overhead and the exclusion of expensive emergency departments. Patients have responded to the convenience, accessibility and privacy available at outpatient centers, resulting in a growth in the number of centers and procedures performed.
There are 2,726 freestanding outpatient surgery centers in the United States, up from 2,425 in 1996, according to a June 1999 survey by SMG Marketing Group, a Chicago-based research company. More than 5.7 million procedures are performed a year collectively at those centers, up from 4.3 million in 1996, according to the SMG data. Almost 13% of the centers in the SMG survey are owned by a physician partnership.
Alan Pierrot, M.D., founded the Fresno Surgery Center in 1984 and now is CEO of FSC Health, the parent company of that center and a second California center in the works. He cites pride of ownership, control over the workplace, responsive management and another source of income as reasons why doctors take ownership in surgery centers.
"The marketplace has devalued physicians," Pierrot says. "They are looking for ways to recapture dollars. It's a more efficient place to work."
Following its establishment, FSC provided elective outpatient surgeries until 1988, when the facility successfully lobbied the California Legislature to begin a pilot project that allowed the center to keep patients overnight even though it was not technically a hospital. Until FSC added a post-surgical recovery center, surgeries requiring more observation time had to be performed in a hospital.
"When we started out we were focused on not being a hospital," Pierrot says. "That's why we created the special pilot project."
But the center discovered problems with its hazy status between an outpatient clinic and a fully licensed hospital. Medicare and some insurers didn't know how to structure their arrangements with the hybrid facility. Under the pilot project the center could keep patients for a maximum of three days, putting many procedures near the deadline when patients would need to be transferred to a general hospital if there were any complications.
So FSC Health opted out of the pilot project and became licensed as an acute-care hospital.
Because it is a smaller, speciality hospital, FSC has contracts with PPOs and Medicare but has no HMO contracts. Pierrot says not having HMOs available for contracting is a concern. "But so far we've been able to operate at capacity," he says.
Pierrot began FSC in 1984 with 77 physician-owners in an offering that raised $1.6 million. He says doctors then were motivated by not only the investment opportunity but also by dissatisfaction with current hospitals. Earlier this year, the offering to start up a second surgery hospital in Thousand Oaks, Calif., sold 45 shares at $40,000 each for $1.8 million. Some doctors bought more than one share.
"I think the (reasons for investing) were the same" in the 1984 and 1999 offerings, he says.
Patrick Reiten, M.D., is one of the surgeons that partnered with FSC Health to build the Thousand Oaks hospital.
"We're focused on one aspect of the medical industry. We're able to focus on what we do best. And the patient wins," Reiten says.
The company is still privately held, but Pierrot says he would like to go public in the next five years. "We have to prove we can operate multiple facilities in multiple communities," he says.
To help grow the company, FSC added a two-person medical development team to reproduce the Fresno and Thousand Oaks model across the country. Pierrot cited a goal of three new projects a year every year for the foreseeable future.
"We don't want to be the next HealthSouth," he says, referring to the giant rehabilitation and surgery center company. "We just want to continue to grow. We would like to have multiple sites and a national focus."
FSC is still far behind major players in the outpatient surgery center industry. HealthSouth, also founded in 1984, has 225 outpatient surgery centers, says Steve Creel of the company's Web operations department.
Nashville, Tenn.-based AmSurg, which started in 1992, is another leader in developing and operating surgery centers. It owns all of its centers in partnerships with physicians. The company takes at least a 51% percent share, up to a 60% share, when buying existing centers or developing facilities, says Rick Jacques, vice president of development. Because AmSurg owns single-speciality centers, the company usually partners with about three to seven doctors at a center, he says. Approximately 200,000 procedures are performed annually at the company's 54 centers, he says.
To find the best surgeon-partners in a town, Pierrot says the company will use networking and recommendations from its own doctors. About 110 physician-owners make up FSC Health, which owns all of the Fresno center and half of the Thousand Oaks venture. The other half is owned by about 40 physicians.
Pierrot says the focus on customer service is FSC's key market advantage over traditional hospitals.
"We're coming from the surgery center side of the equation, not the hospital side. We think of ourselves as a surgery center with beds rather than a hospital with a surgery center. We want to preserve the surgery center culture."
Hospitals are regulation-focused, Pierrot says, interested in compliance with JCAHO and insurers. While surgery centers must also adhere to regulations, their roots in customer service keep them focused on the patient. "Somewhere in the shuffle (at a hospital) the patient gets lost," he says. Surgery centers can react to marketplace demands, he says. "That's the core of our strategy. Hospitals find it difficult to respond to customers.
"We are service driven, patient-oriented and surgeon-oriented. It's a profound difference in customer satisfaction."
But one hospital in Fresno says the centers aren't the only way to respond to changes in the marketplace and consumer tastes. Community Medical Centers of Fresno, a not-for-profit with three acute-care hospitals and other facilities in the area, is building a heart hospital (see December, page 50) in response to consumer demands. "Niche hospitals are certainly on the rise," says Philip Hinton, M.D., CEO of Community Medical Centers. "We are becoming a niche competitor."
The not-for-profit will hold a 51% ownership stake in the $30 million Fresno Heart Hospital, set to open in late 2002. Physician investors will hold a 49% stake. Tony Carr, CEO of the Fresno Heart Hospital, says 25 cardiologists and cardiac surgeons have invested in the project so far and as many as 40 to 50 are expected to participate. Shares were $10,000 each, with the opportunity for a doctor to buy more than one share. The offering may eventually include some nonreferring physicians, such as emergency department and primary-care physicians.
In another move sparked by patient and doctor demand for convenience, Community Medical Centers has divided its surgeries, performing inpatient and outpatient procedures at two separate facilities. The goal, Hinton says, is to provide better efficiency for the surgeons, with strong nursing and quick turnaround time. "It's a matter of satisfying the doctor," he says.
Despite having foundations as an outpatient clinic, Pierrot says being a licensed hospital is preferred. "We think the surgery center with beds is superior to the surgery center without beds."
And Pierrot now is ready to duplicate his model in Thousand Oaks. Reiten, the general surgeon, says that after Columbia/HCA acquired both hospitals in the area in 1994 and closed one, surgeons were not satisfied with the care at the hospital. A committee of six surgeons began looking for a partner with business knowledge to help the group start a surgery center, Reiten says.
The committee and FSC signed a deal, bought land and plan to break ground this year on Thousand Oaks Surgical Hospital, a licensed surgery hospital set to open in 2001. The 27-bed hospital will have six operating rooms.
"It was a business opportunity for all of us to get involved," says Reiten, a spokesman for the Thousand Oaks group. The hospital will be owned 50% by the physician group in Thousand Oaks and 50% by FSC Health. Reiten says he likely will be one of three physicians on a governing joint operating committee with three FSC representatives.
"On the professional side, it's a quality institution in which quality care can be given (and we can) improve patient outcomes. On the business side, it's an investment opportunity that if done correctly can be a successful venture as well."
Reiten says the new hospital, like the original facility, is not likely to have contracts with HMOs. The hospital will have no emergency department and no intensive care unit. Surgeries for conditions such as colon cancer will be performed at a general hospital because an ICU is needed, Reiten says.
Reiten, for one, is ready for the new hospital to begin operating. "Anybody who sees this as a successful model is interested. As a physician, this is very exciting."