As medical director of and physician-investor in North Carolina Specialty Hospital in Durham, N.C., Thomas Dimmig, M.D., knows first-hand of the conflict escalating between acute care and specialty hospitals.
Three times since 2000, North Carolina authorities have denied requests by NCSH physicians to replace their cramped 77-year-old facility, a former ENT hospital, by building a new hospital at another location. Authorities said a new specialty hospital would be too competitive for the county-owned hospital, Durham Regional Medical Center, which is losing money and has empty beds.
But on Dec. 30, a state administrative law judge recommended that the state grant the specialty hospital a certificate of need to rebuild at 14 beds-down from the 24 currently licensed because 10 beds haven't been used in years. The state CON authority must respond to the recommendation by the end of March, and either side can appeal the decision in court.
It's been a long fight that has cost the specialty hospital hundreds of thousands of dollars in legal fees so far, but "we are not going away," Dimmig says of his small facility, a joint venture between National Surgical Hospitals in Chicago, Dimmig's orthopedics practice and an otolaryngology group.
Such fights are brewing across the country, as the rise of specialty hospitals makes officials at acute care hospitals increasingly anxious. They claim these upstart institutions, usually in cardiac care and orthopedics, are siphoning away their most lucrative business, ruining their budgets and making it impossible to subsidize money-losing community services, such as burn units, full-blown emergency rooms and AIDS clinics. Acute care hospitals even complain that these facilities contribute to the nursing shortage by drawing away talented nurses who want a more reasonable work schedule.
With about 100 specialty hospitals in operation and 20 to 30 more under construction this year, concerns at acute care hospitals are deepening. In a survey last year by Cap Gemini Ernst & Young, hospital executives listed "encroaching specialty facilities" as one of their top eight future concerns.
The backlash of acute care hospitals against surgery hospitals is "the hottest issue in the country right now in healthcare," says Lorin Patterson, a lawyer at Shook, Hardy & Bacon in Overland Park, Kan., who represents the new surgery hospitals.
The CON battles have gone on for years, but a new development is denial of privileges by acute care hospitals to physicians who invest in specialty hospitals.
The tactic was bolstered in January 2001, when the South Dakota Supreme Court ruled that Avera St. Luke's Hospital in Aberdeen, S.D., was in the right when it decided to deny privileges for newly arrived surgeons joining nearby Dakota Plains Surgical Center, an orthopedic surgery hospital.
As a result, John Gluscic, M.D., who arrived at the orthopedic hospital just months before the decision, has no privileges at the acute care hospital. About 10% of his patients have to go there, and they must be handed over to partners who still have privileges.
"To say I have a little bit of bitterness about the situation would be an understatement," Gluscic says. "What happened to me is just plain wrong."
But in testament to the success of surgery hospitals, Gluscic reports his income is steadily rising and the new hospital just recruited a sixth orthopedic surgeon, who also won't have privileges at Avera St. Luke's.
Specialty hospitals claim to be more efficient than acute care hospitals because they have shorter turnaround times between surgeries, less bureaucracy and physician-investors who are totally aligned with the hospital's interests. For example, surgeons at specialty hospitals say surgeons typically want their own favorite supply item at the acute care hospital but will agree to order only one brand at the specialty hospital, realizing big savings in bulk purchasing.
But acute care hospitals argue that the big savings come from physician-investors straddling the fence-sending the more lucrative cases to the specialty hospital in which they have a financial interest and leaving the rest behind.
At Durham Regional, orthopedic surgeons at the specialty hospital "left behind people without insurance and people unlikely to pay their fees," says Duncan Yaggy, chief planning officer for Duke University Health System, which runs Durham Regional.
Physicians at the Durham specialty hospital deny that they are skimming off the most lucrative work. But in any case, acute care hospitals say removal of privileges is the ultimate way to stop this problem, and many of them are threatening to use it.
Since the South Dakota decision, Patterson says virtually every time he meets with acute care hospital officials, "they bring up loss of staff privileges in the form of a threat." These threats, the Kansas lawyer says, have sometimes convinced doctors to drop their plans for surgery hospitals.
"Who wants to be the test case?" he says.
In Columbus, Ohio, however, a confrontation over privileges is brewing, and neither side is backing down.
Thirty orthopedic surgeons are building a specialty hospital in the Columbus suburb of New Albany, due to open in November. In July 2002, Ohio Health, which owns three acute care hospitals in the area, decided that physicians who invest in surgical hospitals would be removed from staff 30 days after the facility opens.
In the same month, officials at three-hospital Mount Carmel Health System in Columbus said they would reserve the right to remove any physician-investors in surgery hospitals from their staff.
Unlike founders of the South Dakota surgery hospital, the New Albany physicians face the prospect of the entire group being cut off from staff privileges. This has prompted them to expand their new surgical hospital from a planned 32 beds to 40, says Adolph Lombardi Jr., M.D., one of the investors.
They've also lawyered up, though Lombardi says it is too early for lawsuits, as no action has been taken against the doctors.
Attorneys for specialty hospitals say one potentially powerful legal tool against removing credentials is the Medicare anti-kickback laws that traditionally prohibit hospitals from compensating a physician for admitting patients to the facility.
The American Hospital Association notes that hospital privileges are still not considered compensation under the anti-kickback laws. But after prompting from the AMA, which supported the South Dakota physicians' legal case, the HHS Office of the Inspector General says it is reconsidering the traditional view.
On Dec. 9, the OIG called on all interested parties to comment on extending the anti-kickback laws to loss of hospital privileges, but the agency has not said if or when it would issue an opinion on the matter.
Mark Rust, an attorney at the Chicago office of Barnes & Thornberg who has represented the AMA on the matter, argues that removal of privileges is a kind of negative kickback. That is, the acute care hospital takes a thing of value away from the physician for not cooperating with the hospital, he says.
As precedent for this theory, Rust cites a 1991 OIG advisory opinion saying a hospital could be cited under the anti-kickback laws for breaking its hospital services contract with a radiology group that, for example, refuses to help finance a new hospital project.
In another tack, attorneys for specialty hospitals also cite a 1969 Internal Revenue Service ruling saying a not-for-profit hospital should allow all qualified physicians in the area onto its staff as a demonstration of its benefit to the community.
Scott Becker, a lawyer at Ross & Hardies in Chicago who represents surgical hospitals, predicts that few hospitals will actually pull privileges. In a competitive market, he says, an orthopedist or heart surgeon, representing millions of dollars in hospital revenue, can easily get privileges at another acute care hospital.
Also, "you still need surgeons to do call, and it is not easy to find a replacement," he says, because these surgeons are in short supply.
Meanwhile, another battlefront could become more deadly for specialty hospitals. Many acute care hospitals are calling for an end to an exemption to federal self-referral laws that allows a physician to invest in a hospital.
"That exemption was never intended to apply to narrowly defined specialty hospitals," says Ellen Pryga, director of policy development at the AHA. "It was intended for situations where a physician's investment was so diffuse that the diffusion took away the conflict of interest problem."
An AHA task force last summer called for an end to the exemption, but the AHA has yet to endorse legislation to do so, perhaps because some of its own members have joint ventures with physicians for specialty hospitals.
Meanwhile, the key bill on this issue, sponsored by Reps. Gerald Kleczka (D-Wis.), and Pete Stark (D-Calif.), takes a different tack. The bill would limit investments in specialty hospitals to interests purchased "on terms generally available to the public," such as securities.
The bill was first introduced in 2001 and has never reached the House floor, but it has attorneys for specialty hospitals worried.
"If Stark-Kleczka passes," Becker says, "you can forget about physician ownership of surgery hospitals."
Not only are securities deals expensive and time-consuming to put together, but the arrangement would water down physicians' control of the hospital to the point where they would not want to invest in it, Becker says.
Though Kleczka aides report the bill will be reintroduced soon, Becker says the bill and any other legislation on specialty hospitals that might be introduced are essentially on hold until the General Accounting Office completes a long-awaited study on the impact of specialty hospitals.
Kleczka and Rep. Bill Thomas (R-Calif.), chairman of the Ways and Means Committee, ordered the report in July 2001. But due to short staffing, GAO officials say the agency only began researching the request this February and will not complete it until the end of the year.
Physicians say they can make perhaps $20,000 to $30,000 a year from their investment once the hospital is finally in the black, but that amount is no reason for founding a hospital. Rather, physicians like George Rogers, M.D., say they seek a surgical volume that can be double what they see in an acute care hospital.
Rogers is an investor in the 58-bed Heart Hospital of Austin, Texas, a joint venture with Charlotte, N.C.-based MedCath Corp.
"The Pete Starks of the world have the notion that it is immoral for physicians to be aligned with hospitals financially," says Rodgers, "but is anybody going to make so much money that they're going to retire? I think not."
Efficiency and outcomes
Surgical hospitals are now amassing data to show the GAO, OIG, Congress, Medicare and anybody else who asks that they are more efficient and have better outcomes than acute care hospitals.
A 2002 study of MedCath hospitals by the Lewin Group reported that surgical hospitals have better outcomes, lower mortality rates and lower aggregate Medicare expenditures than acute care hospitals; at the same time, they are about average in the number of Medicaid and uninsured patients they treat.
Even some acute care hospitals are now joining the specialty hospital trend.
St. Vincent Hospital in Indianapolis decided to offer a partnership for a heart hospital with local physicians after the physicians started talking with MedCath. On Dec. 2, the hospital-physician partnership opened the Heart Center of Indiana, a $60 million hospital with 60 beds.
"We decided it was better to go with the hospital than with MedCath," says Richard Fogel, M.D., a cardiologist who is chairman of the new specialty hospital. "We have been a partner with the hospital for 30 years, and we wanted to work with the people we know."
Even so, Fogel says the hospital has adopted aspects of "the MedCath model" of surgical hospital, such as keeping the patient in one bed during the whole hospital stay to increase efficiency.
Fogel says St. Vincent welcomed a heart hospital outside of its walls because heart patients were taking up about 40% of its beds and it would not be easy to expand the acute care hospital to accommodate other patients.
"If we can grow our business and bring in more patients than the hospital would, then the hospital shares in the proceeds," he says.
"There is an evolutionary trend toward specialty hospitals," Fogel says. "Just like any other industry, you have to grow your business or adapt to a different business model."
Click here to see a list of specialty hospitals.