Competition heats up between hospitals, doctor-owned centers

Physician owners of some freestanding facilities say they can't get managed care contracts and may be forced to sell.

By Mike Norbut — Posted March 7, 2005

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The obstacles appear to be mounting for physicians who have invested in freestanding facilities, as some ambulatory surgery and imaging centers are finding it difficult to secure contracts with insurers.

Physicians say they are being squeezed by exclusive contracts between insurers and local hospitals, which, because of their size, wield considerably more negotiating power than ambulatory surgery centers. It's leaving some physicians scrambling for revenue and considering selling a majority stake in their centers to hospitals just to help them stay financially viable.

"They can't get contracts without the hospital being a major partner," said Kathy Bryant, executive vice president of the Federated Ambulatory Surgery Assn., based in Alexandria, Va. "The irony of this is many physicians opening ambulatory surgery centers would prefer to open them with the hospital, but the hospital tells them no."

In its report on specialty hospitals at its December 2004 Interim Meeting, the AMA Board of Trustees identified exclusive contracts as one of several strategies used by hospitals "to discourage members of their medical staff from investing in competing physician-owned specialty hospitals."

Physicians are no strangers to the backlash doctors face from hospitals that feel their doctors are taking a competitive stance against them. From losing their admitting privileges to losing some referrals because of hospital orders placed on employed physicians, doctors are well aware of the uphill battle they may face just to gain clinical and financial control over their work.

Losing managed care contracts is not as common, but it has been cited as an economic hardship by some doctors. A hospital can discount its inpatient rates and tie them to its outpatient rates, giving the insurer a price break to ensure an exclusive relationship, Bryant said.

Physician owners already are reeling from cuts proposed by the Centers for Medicare & Medicaid Services, which would remove about 100 ASC procedures from the list of those covered by Medicare. CMS plans to issue a final rule this spring.

However, Medicare patients are about the only ones doctors say they can currently refer to The Surgery Center of Olathe in Kansas. Since the physician investors opened the facility a little more than a year ago, they have seen reimbursement rules change and their managed care contracts dwindle.

BlueCross BlueShield of Kansas City, for example, started offering only $200 per outpatient procedure performed, as is its policy for out-of-network facilities, the center said.

Faced with mounting economic pressure, the doctors have started discussions with some hospitals about selling a majority stake in the facility.

"We have no choice but to join up," said Milton Grin, MD, an ophthomalogist and one of the investors in the center. "At $200, you lose money on every case."

Blues executives in Kansas City said the insurer has contracts with 36 of 50 ASCs in the area, though it has "offered a participating agreement to nearly all of them." The insurer, which did not confirm reimbursement figures, said it also cited worries about duplication of services and ASCs cherry-picking the easiest cases and leaving the severely ill for community hospitals.

The American Hospital Assn., a long-time critic of the specialized facilities, tried to buttress that argument with its recent release of an AHA-sponsored study showing that operating margins at physician-owned specialty hospitals were up to 10 times greater than the national average for community hospitals.

"It's our concern that the explosive growth of ambulatory surgery centers in the area will result in rising costs of health care," said John W. Kennedy, the Blues' executive vice president and chief operating officer.

Physicians have disputed that contention, as well as the kind of numbers put forth by the AHA. The AMA House of Delegates in December 2004 endorsed physician-owned specialty hospitals as a means "to support and encourage competition between and among health facilities as a means of promoting the delivery of high-quality, cost-effective health care."

The AMA also endorsed no further extension of the CMS moratorium, scheduled to end in June, on physician referrals to specialty hospitals in which they have an ownership interest. The AHA is lobbying for a permanent ban.

The notion of exclusive contracting brings up antitrust questions, but the size of the market is generally a leading factor in determining grounds for a legal complaint, said Bill Kopit, a health care antitrust attorney with Epstein Becker & Green in Washington, D.C.

A large city, for example, would have plenty of competition and thus virtually guarantee no one facility would control the market, Kopit said.

"Without market power, you have no issue," Kopit said. "At the end of the day, if there's plenty of competition in [inpatient and outpatient care] markets, all payers are doing is making a business choice."

Kopit represents a surgery center in Rome, N.Y., which has been allowed by a district judge to proceed with a lawsuit against a community hospital on three of 12 original claims, including whether the hospital entered into illegal exclusive contracts with insurers.

"The judge ruled there was enough there to go to trial," Kopit said. "It will be up to a jury to find out if the actions were anticompetitive or not."

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