When MedCath Corp. pulled the plug last week on the Heart Hospital of Milwaukee, it marked the first failure in the brief and almost universally profitable history of U.S. specialty hospitals.
But the demise of the 32-bed cardiac facility in a Milwaukee suburb may be the first sign that the federal government's temporary ban on physician ownership of specialty hospitals isn't the only impediment facing the controversial new delivery model. Indeed, there is a growing sense that a combination of market forces, high startup costs and regulatory constraints may all conspire to halt the growth of niche hospitals or lead to more closures.
"I suspect this is going to send a shock wave throughout the specialty hospital industry in this country," Steve Brenton, president of the Wisconsin Hospital Association, said of MedCath's decision to unload its year-old cardiac hospital. "I think this will cause some to take a deep breath before looking at a similar business model."
David Hunter, a longtime hospital-turnaround specialist who now serves as a consultant to healthcare executives, suggested that MedCath's misstep in Milwaukee is a bellwether that signals a fundamental problem with many specialty hospitals, particularly high-cost cardiac facilities. MedCath, which struggled from the start in Milwaukee, sold its hospital for $42.5 million to not-for-profit Columbia-St. Mary's, Milwaukee, in a deal that could lead to similar transactions, Hunter says. Plans for the building are still uncertain.
"Where cardiologists have made their mistake is in trying to duplicate a hospital," Hunter said. "My gut tells me that this thing just can't work over the long haul. Ultimately, I think at least some of these will be reintegrated into hospitals, like this one was."
Despite these forecasts of a cloudy, uncertain future for specialty hospitals, other industry observers suggested that MedCath's venture with 18 local physician partners was doomed by nothing more than the brutally competitive environment in Milwaukee, which is saturated with about a dozen heart programs. Surgical hospitals and their model of convenient, high-quality and cost-effective care are alive and well, these supporters contend.
"This will not affect specialty hospitals-not one bit," said David Veillette, chief executive officer of the Indiana Heart Hospital in Indianapolis, a joint venture between local physicians and the not-for-profit Community Health Network. "If a specialty hospital closes because of market forces, then that's appropriate. In a competitive world, that's what you want.
"But that doesn't mean the model is wrong," he said. "We want to do what's best for doctors, patients and the community. And that's what we're doing."
Veillette's facility competes with at least three other cardiac programs in Indianapolis, a nine-county metropolitan area with a population of about 1.6 million that ranks along with Milwaukee as one of the nation's most competitive in the high-margin cardiac market. A report last year from the Center for Studying Health System Change described the city as being on the verge of "becoming a battleground among providers."
Donald Burman, chief executive officer of 27-bed Orthopedic Hospital of Oklahoma in Tulsa, said he believes that there are at least "100 facilities out there ready to go if the moratorium" is lifted next June, with many others under consideration. "You could see 250 more in the next few years," he said.
The failure of MedCath's specialty hospital will not weaken the political resolve of the American Hospital Association, which successfully lobbied for the 18-month specialty hospital moratorium that extends through June 7, 2005. The AHA, which is in the midst of an intense effort to either extend that ban or make it permanent, contends that niche facilities rob community hospitals of the profitable patients necessary to offset money-losing services such as burn units and emergency departments.
"The situation in Milwaukee is unique," said Carmela Coyle, the AHA's senior vice president of policy. "It's just one situation, and I think that it in no way suggests that we don't need continued legislative effort and focus on the issue of physician self-referral to limited-service hospitals."
Both sides are gearing up for a costly, high-profile lobbying campaign over the next six months. The AHA spent millions of dollars in its bid to include the moratorium in last year's Medicare bill. The American Surgical Hospital Association, which has 72 members, plans to spend at least $1.5 million on its effort to convince lawmakers that its facilities benefit patients and do not harm community hospitals. The surgical hospital association plans to add a second Washington-based lobbyist sometime early next year.
Veillette said he thinks MedCath was driven from Milwaukee not only by intense competition but also by a long-established but ill-advised business model that effectively "pitted doctors against not-for-profit hospital systems," a strategy that triggered debilitating battles over everything from referral patterns to insurance coverage. In the last year, MedCath has modified its business plan, adopting a more conciliatory approach by seeking joint ventures with hospital systems.
Surgical hospitals are a long way from becoming an endangered species, Veillette said. He said every U.S. specialty hospital earns a profit, including his $60 million facility, which opened in 2002 and boasts a profit margin of approximately 10% annually. The best model for a successful surgical hospital is a partnership with a local not-for-profit, acute-care hospital, he said.
"As long as (hospital executives) continue to fight this and aren't willing to work with doctors, there's not going to be a stoppage of surgical hospitals," Veillette said.
John Casey, MedCath's president and CEO, said the failure of the Milwaukee-based facility does not point to a larger, systemic problem. The other 12 MedCath facilities are all profitable, with cash flow margins averaging in the mid-teens, he said. "This is the first time we've had any difficulty-I think it was specific to this market," he said.
Still, the once-booming surgical hospital business, now effectively at a standstill as a result of the moratorium, faces some serious obstacles in addition to the temporary ban. Along with the 110-odd facilities now in operation, an estimated two dozen are in some stage of development, while about 35 others are hoping to win approval from the CMS. So far, CMS officials have approved three projects and rejected one based on their level of development when the moratorium took effect in No-vember 2003.
Developers of surgical hospitals also must contend with state certificate-of-need laws. About two-thirds of all surgical hospitals are located in seven states, including California, Oklahoma and Texas.
What's more, the cost of building a typical specialty hospital-approximately $10 million to $15 million for an orthopedic hospital-can be prohibitive. Costs for cardiac hospitals are considerably higher. Even with a partner like MedCath or one of the several other big surgical-hospital chains, doctors are often reluctant to invest their own money in specialty hospitals despite the model's proven track record.
At an annual meeting of the surgical hospital association last month, an official with United Surgical Partners International outlined the typical costs of a niche facility. The average startup cost, this official said, is about $16 million, a price tag split between $8.5 million in third-party financing and $7.5 million in equity. One of the key messages of her presentation: "If you are preparing your first feasibility analysis, find someone with experience to review your assumptions."
The key to success is selecting a good market with strong population growth and pairing doctor-investors in a joint venture with a professional management company like MedCath or National Surgical Hospitals, among others, said Randy Fenninger, a lobbyist for the surgical hospital association. The bottom line, he said, is that banks aren't likely to provide the loans needed to build a multimillion-dollar facility in a community that's already overbedded.
"There is no guarantee when you open a surgical hospital; there's always a risk," Fenninger said.
But even the best market analysis might not be enough for long-term survival, turnaround consultant Hunter said.
Sky-high capital costs and the threat of reduced reimbursement will ultimately combine to make specialty hospitals superfluous, he said. Industry observers have said the Medicare Payment Advisory Commission may reduce payments to surgical hospitals to help offset the higher costs of care for all services at most community hospitals, where overhead is greater. At the same time, Hunter added, specialty hospitals are duplicating high-profit hospital services with extremely expensive equipment and paying premium prices for staffing, including nurses.
While the quality of care may be on par with community hospitals, these niche facilities do not have the range of either medical equipment or personnel necessary to handle emergencies, a factor that may cause many patients to favor acute-care hospitals, Hunter said. St. Luke's Medical Center in Milwaukee seized on this point when it launched an advertising campaign earlier this year that included 60-second commercials featuring medical professionals who highlighted the comprehensive care and full roster of specialists available 24 hours a day at the 787-bed hospital.
Hunter said he expects that a significant number of specialty hospitals will follow the path of MedCath's heart hospital and become reintegrated into a not-for-profit community hospital or system. "I just don't think the economics will work in the long run," he said. "I don't think payers will pay big bucks for these services. They are not going to reduce healthcare costs. People are going to look at what happened in Milwaukee and say, 'If MedCath can't make it there, who can?' "
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