The Hospital Wars

Surgery and imaging centers owned by doctors are swiping patients from traditional hospitals. Competition is good, right? Not always in health care, where an arms race keeps the costs rising

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Kevin Conlin in the Cyberknife operating room at Via Christie Hospital in Wichita, Kansas.

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Money isn't the only motivator. Entrepreneurial physicians say they're tired of waiting for inefficiently scheduled hospital ORs to open up, that they're more productive and have better nursing support at their own facilities. Scott Barlow, CEO of the Central Utah Clinic in Provo, which runs an ASC, says that until the clinic bought its own imaging machines, patients had to wait up to 24 days to get a diagnostic scan at the nearby hospital. "This is about convenience, lower cost and higher quality," says Glen Tullman, CEO of Allscripts, an electronic-medical-records firm that works with ASCs and specialty hospitals. "Nobody in health care wants to be on the wrong side of that equation."

But is the competition fair? Within two years after Galichia Heart Hospital opened in Wichita in 2001, Wesley's net revenues from its cardiovascular program plummeted from a notch above $18 million to roughly $2 million. In 2003 the Kansas Spine Hospital opened, and in a year Wesley's neurosurgery revenues dropped $8.8 million, to roughly $1 million. Via Christi cardiovascular surgeries declined from 4,334 in 1998 to an estimated 2,950 this year. In that period, its executives say, the number of nonsurgically treated cardiac patients--who, say, have heart failure--remained relatively steady, around 4,300.

This matters, as Medicare reimburses most surgeries above the cost of care and nonsurgical treatments at lower rates, sometimes below cost. Hospitals make up the losses--and those from treating the uninsured--largely with profits from surgeries. They also hike the prices they charge insurers and employers, who give hospitals a 22% margin, according to researchers at the Lewin Group, a consultancy, helping cover overall losses of 5% or more from Medicare and Medicaid. That comes back to the rest of us as higher insurance premiums, making health care all the more costly to employers.

Physician-owned facilities do less charity care and treat fewer Medicaid patients than community hospitals do, government research shows. And they treat healthier (hence more profitable) patients, or--as in the case of heart hospitals--favor well-remunerated treatments. Not surprisingly, doctors who own a piece of the action are more likely to send patients to their own facilities.

The shift of patients can be devastating. Regionally owned Lincoln General Hospital in Ruston, La., lost about $2.5 million in business a year to imaging centers and an ASC, but was managing to stay afloat, according to CEO Tom Stone. Then, in 2003, the 40 physicians who ran the ASC opened the Green Clinic Surgical Hospital. Lincoln's inpatient and ambulatory surgeries halved, and by 2005 the hospital was $8 million in the red. "They've gone beyond cherry-picking," says Stone. "They've removed virtually everything they could take out of this facility." He is selling the hospital to a for-profit chain.

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