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Waking up to sleep clinics: Growing industry offers eye-opening investments

As the study of sleep disorders grows, so does the number of facilities that address these ailments.

By Mike Norbut — Posted Jan. 5, 2004

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Describing the study of sleep disorders as a late-blooming specialty is an understatement akin to calling the x-ray a decent invention. There are hospital beds and surgical instruments older than many sleep centers across the country.

For years, researchers promoted the importance of sleep studies to little avail. But as studies continue to highlight the harmful effects sleep disorders can have on a person's quality of life, as well as connections to other physical ailments such as congestive heart failure and obesity, the study of sleep has become a more common practice.

Better late than never, say physicians who have dedicated their careers to understanding and helping patients overcome what can be debilitating sleep ailments. The increased attention to their work has meant more patients being funneled their way, and it also has given some doctors the opportunity to make a ground-floor investment in a sleep clinic.

The growth of the sleep industry is undeniable. Membership in the American Academy of Sleep Medicine has more than doubled since 1993, from just more than 2,200 to nearly 4,900. Meanwhile, the academy reports the number of accredited facilities has jumped from three in 1978 to 678 in 2003. Nearly one-third of that growth has occurred since 2000 alone.

"It's a recognition of a large number of patients with significant sleep disorders, and not enough facilities available to them," said Stuart Menn, MD, an internist, pulmonologist and sleep disorders specialist. Dr. Menn is a part-owner of Pacific Sleep Medicine, which started in 1998 and now boasts eight freestanding sleep centers in southern California.

"The expansion has been to meet their needs," he said. "Across the country, more sleep centers are being developed, with some attached to hospitals or universities, [and some] freestanding."

Ironically, Dr. Menn and his partners started building their chain of freestanding clinics after their local hospital closed the sleep clinic that employed them for more than a decade. While the institution decided sleep medicine was not financially viable, "we just knew we were busy," he said.

The hot investment options over the last few years have been specialty hospitals or ambulatory surgery centers, as physicians look for ways to gain clinical and financial control over their work. Few see sleep clinics following as steep a climb to popularity, mainly because sleep experts are not as common as cardiologists or orthopedists, and the profit margins in sleep clinics tend to be slimmer. But as long as physicians continue to recognize sleep disorders as important factors in a patient's health, sleep clinics will continue to grow, doctors said.

Recognizing the need comes first

"The number of people diagnosed with sleep apnea is only about 20% of the people who have it," said internist Lawrence Epstein, MD, a pulmonary care, critical care and sleep specialist who serves as regional medical director of Sleep HealthCenters in Boston. "Part of the problem is physicians hadn't been trained to look for it, and the general public hasn't been sure what to do."

Now, not only are doctors more apt to consider a sleep disorder as a possible diagnosis, but coverage of the studies and treatments is common as well.

Most insurers, including Medicare and many Medicaid programs, cover sleep studies at centers with advance certification. Treatments such as continuous positive airway pressure also are covered for diagnosed medical conditions.

While not every sleep disorder patient is automatically obese and at risk of congestive heart failure, many have several health complications.

Not only is it cheaper to treat the sleep disorder, but it can be the key to controlling the other conditions as well, doctors said.

"There was some resistance early on [to sleep treatment], and the thought was to go after obesity instead," Dr. Menn said. "That today is not considered to be good medicine. We find that if a person has severe sleep apnea, when you can begin to control that, controlling obesity is easier."

There are dozens of CPT codes corresponding with different sleep-related health conditions, but the fact that there is limited coding for a typical polysomnography test is not an indication of a limited specialty, doctors said.

"You use an appropriate code to indicate the need for a sleep study," said Rajesh Patel, MD, a pulmonary care, critical care and sleep care specialist in Dayton, Ohio. "In cardiology, there are different codes for the conditions, but the angiogram is only one code."

While specialty hospitals are often built in competitive markets where demand is high, the growth of sleep clinics has been related more to a low supply in many areas, doctors said.

That means that while there are significant start-up costs, doctors generally don't have to depend on extensive market studies to develop a sleep clinic. Some simply expand their practices to add room for beds and equipment to study patients. Because a general polysomnography test is not considered a designated health service, there are no Stark law restrictions, said Bill Maruca, a health care attorney and partner with Fox Rothschild LLP, a Pittsburgh-based firm.

Physicians still can come under anti-kickback scrutiny if, for example, a group of internists without sleep expertise open a center and start referring patients there, he said.

There are companies that seek physician partnership in new facilities, similar to the way a health system may collaborate with a group of cardiologists on a heart hospital. For example, Dr. Patel recently opened a clinic in Dayton, Ohio, as a joint effort with Sleepcare Diagnostics, a growing company based in nearby Mason, Ohio.

Unable to generate much interest from a local hospital in a freestanding facility, Dr. Patel said he looked for a company to manage the business side of the clinic while he and his partner could concentrate on the clinical side of their practice.

The clinic, which opened early last year, is ahead of projections, but still not profitable, Dr. Patel said.

"We had to offer some freebies to build our volume, and the initial setup is costly," he said.

Other drawbacks

The first couple of years are often a financial struggle for sleep clinics, as they attempt to make up the money invested in equipment and the technology needed to run the center. Staff members who work overnight to monitor the patients also do not come cheaply, doctors said.

"You have a sizable up-front investment, and you have to bankroll that," said Dr. Epstein, who also serves as a board member of the American Academy of Sleep Medicine. "Hospitals can do that and large medical groups can do that."

Privately owned companies such as Sleep HealthCenters, which provide sleep care to some Boston hospitals on an outsourcing basis, also can afford the initial investment.

What helps private companies improve their bottom line is the ability to sell CPAP equipment and other treatment devices, a luxury denied physician-owned facilities because of Stark regulations.

Sleep clinics also have to contend with differences in reimbursement policies across the nation. The lack of a standardized system makes it more profitable to own a facility in some states than others, and reimbursements for urban centers might be higher than for rural ones, according to American Academy of Sleep Medicine officials.

"My feeling is the viability of these things is tougher than people think," Dr. Menn said. "However successful we are, we would be more successful if we were not in California."

Certification is an issue as well. Some insurers won't reimburse a center until it has been certified, but it takes several months for that to happen, physicians said.

"It's a 'Catch-22,' " said Dr. Patel, who noted out that facilities in some states can receive reimbursement even if they're not certified.

Still, industry growth indicates investors must see some advantage to owning a sleep clinic. Whether it's a hospital opening a center as a complement to other services or a group of doctors opening a freestanding facility, the study of sleep is positioning itself more firmly in the framework of the medical community.

"Twelve months ago, when we looked at our stats, less than 10% of our referrals came from primary care physicians. They were more from pulmonary physicians and [otolaryngologists]," said Pradip (Pat) Patel, executive vice president and chief operating officer of Sleepcare Diagnostics.

"With an emphasis on education, today, almost 40% of our referrals are from primary care physicians."

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ADDITIONAL INFORMATION

The rise of sleep clinics

The number of accredited U.S. centers has increased dramatically over the last 25 years. Nearly one-third of that growth has occurred since 2000.

Clinics Change
1978 3 --
1979 3 0%
1980 10 266%
1981 16 60%
1982 19 19%
1983 23 21%
1984 26 21%
1985 34 31%
1986 46 35%
1987 66 43%
1988 92 39%
1989 123 34%
1990 137 11%
1991 164 20%
1992 199 21%
1993 228 15%
1994 247 8%
1995 277 12%
1996 297 7%
1997 337 13%
1998 374 11%
1999 417 11%
2000 442 6%
2001 502 14%
2002 566 13%
2003 678 20%

Source: American Academy of Sleep Medicine

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