Really good article in the WSJ about specialty hospitals, featuring one surgeon in the thriving metropolis of Rapid City, South Dakota. The founder of Black Hills Surgery Center, a neurosurgeon called Larry Teuber, has made some $9m in selling off his share of a specialty hospital. (I’ll quote fairly liberally as I know most of you don’t have WSJ access).
Medical Facilities Corp., which owns 51% of Black Hills and three other specialty hospitals, went public on the Toronto Stock Exchange last year and now has a market capitalization of just under $300 million. The offering fetched $165 million, of which $145.8 million went to 88 doctors and a handful of other investors in the hospitals. Dr. Teuber says he received about $9 million.The 39 owners of Black Hills, of whom 35 are doctors, together received $37.6 million in profit distributions between 2001 and 2004 and an additional $65 million in the stock offering. For the doctors, that money comes on top of the fees they earn each time they perform surgery.
The success of specialty hospitals illustrates how many doctors, feeling squeezed by health insurers and malpractice-insurance premiums, have found new ways to prosper. Some are trying to get in on the boom in medical imaging via fees for referring patients to scanning centers. Others get paid by pharmaceutical companies to lecture about the companies’ drugs.
What Dr. Teuber doesn’t have is many friends at Rapid City Regional Hospital, the nonprofit general hospital where he used to perform surgery. Regional posted an $8.3 million operating loss last year and has seen its debt rating downgraded. It says Dr. Teuber’s surgery center has siphoned away healthier — and more profitable — patients. Dr. Teuber says his rival’s problems stem from poor management and inefficiency.
Of course the local hospital is taking it in the shorts. Granted all the criticisms Teuber makes about the local hospital are probably true. It probably is inefficient, it probably could be more attractive to patients, etc, etc. And even if Rapid City might be a small town in a low cost state, the pay of the folks running it isn’t exactly second tier.
Dr. Teuber says Regional administrators have gotten too comfortable with the hospital’s longtime monopoly status. For example, when Regional does a hip replacement it lets the surgeon choose the brand of artificial hip. That means many brands are used, and Regional pays a higher price for each. Black Hills, by contrast, uses a single brand and negotiates deep discounts with the supplier, Dr. Teuber says. Regional’s leaders are paid handsomely by Rapid City standards. According to the hospital’s 2003 report to the Internal Revenue Service, the top-earning doctor at Regional earned $480,000 while Dr. Hart’s predecessor as chief executive was paid $410,000. Dr. Hart is paid $346,000 a year.
However, as Medicare is finally fessing up to with McClellan’s recent statements, the overall DRG payment scale is messed up in that leaves the really complex cases to lose money in the general hospital while the cheaper cases generate bigger profits for the specialty hospital. So really all the specialty hospitals are doing is stripping out the most profitable pieces of the community hospitals’ business. This can’t go on forever, hence the moratorium, but it’s just another in a long, long line of self-referral tricks that doctors have used to generate extra cash, going back to the infusion centers of the late 1980s.
And of course the other thing is that the amount of surgery in Rapid City (which was probably below the national average to start with as rural areas usually are) has gone through the roof. It’s been well known forever in healthcare economics that the demand for surgery is extremely susceptible to supply-side inducement — proving that as Bob Evans once told me a good surgeon will operate on anyone who’ll lie down.
Amid the competition for patients, the frequency of surgery in Rapid City has grown rapidly. Outpatient surgeries — those that don’t require a hospital stay — rose to 45 per 1,000 people in 2003, according to numbers provided by the hospitals. That’s more than double the rate in 1997, the year Black Hills opened. Inpatient surgeries were up 50% to 15 per 1,000. Doctors who work at Black Hills reject the notion that patients are getting unnecessary surgery. The doctors say they serve many patients who previously would have traveled far from Rapid City or suffered in silence because the city was short of good surgeons.
So the culprit here is as ever, fee-for-service medicine, with not too fussy payers (which in South Dakota probably means the local Blues and Medicare) making no attempt to manage the overall care of the population and letting a variety of (literally) cowboy surgeons take them and their clients to the bank. Do I sound like Alain Enthoven here?
Probably, but of course all the paydays in Rapid City pale in comparison to how to really make cash in American health care. If you really want to get rich you should start a health plan, lobby the government to ramp up the fees it pays for the Medicare program, and then cash out by selling it to United. Yup, Pacificare execs are about to share a modest $230m payout. Shouldn’t some of that money go to the shareholders, or better yet, to the people responsible for Pacificare’s recent success — the taxpayer?
OK, I’ll stop being an America-hating communist and shut up, Mr O’Reilly.