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.

It’s my birthday and I’m taking the day, more or less, off, if you don’t count cooking dinner for 30 of my closest friends who are coming by tonight…see you tomorrow!

You can treat this as an open thread!

If you read the Bruce Bodaken interview referenced in my other post today you’ll see that he complains about a certain hospital organization pricing too aggressively and being cut out of part of the CalPERS HMO network that Blue Shield runs. That unnamed organization is of course Sutter Health, which has used it’s local oligopoly power gained by a series of quasi-mergers in the mid-1990s to raise its prices and its profits considerably.

Now I’m not clever enough to really understand who is accountable for what in a big non-profit hospital, and by the time you add into that mix a "system" made up of all types of different management and ownership arrangements, without any clear stockholding ownership, then I’m lost completely. Back in the mid-1990s when it joined Sutter, Cal Pacific medical center was bleeding money. I speculated to my clients back then that I wasn’t sure that other parts of the Sutter system would have bailed it had it gone under. But Sutter took advantage of its bargaining power to push up costs, and the plans took it in the shorts for a few seconds until they realized that they could turn round and stick that cost onto their clients, and still make record profits. (Actually that’s not exactly how this long 2003 article on Sutter’s integration describes Sutter’s strategy, so you might read it for a more balanced view!) So everyone was happy.

Or almost everyone. Now Cal Pacific is making too much money. So much that the City of San Francisco, which I assume is pretty broke given the way it comes after me for egregious property taxes and parking tickets, and is increasing bus & train fares for its poorest residents again, is revoking its non-profit classification and is going after Cal Pacific for property taxes.

Which leads us to the old age question of, what exactly is non-profit about wealthy hospital systems that throw off a ton of margin? Or for that matter similarly profitable health plans? I suspect this question will come back again.  But don’t worry guys, my in-depth analysis of oil companies seems to indicate that you won’t have to pay any tax on all those profits anyway.