Officials divided over national surgery center trends, merits

For decades ambulatory surgery centers grew in number and commonality across the nation as a viable way to reduce the cost of outpatient surgeries. But the successful business model surgery centers enjoyed — high profit from low overhead — hasn’t sustained, a health policy analyst contends.


Ashish Jha, associate professor of health policy for Harvard University’s School of Public Health, said physician-owned surgery centers became a trend in the Lower 48 because of high profits generated for participating surgeons and lower costs for patients.

“What we found is that they were making a tremendous amount of money because the costs were much lower than what it cost for surgeries in the hospital and insurance companies were reimbursing them at the same rate as the hospital rate,” Jha said in a recent interview with the Clarion. “So the surgery centers were cash cows making tremendous amounts of money.”

Over time, however, the national health care market adjusted and as more centers opened insurance companies “got smarter,” Jha said, and started paying them less.

“So what you’ve seen is in markets where too many of these things have built up, of course some of the surgery centers went out of business and while many of them remain profitable, many of them are not as profitable as they once were,” he said.

Kahtnu Ventures, LLC recently proposed building a $9 million, 8,365 square foot ambulatory surgery center in Kenai. The group has said it hopes to eventually perform 1,800 outpatient surgeries per year in the facility with a group of eight local surgeons headed by James Zirul and Henry Krull.

Kahtnu is heralding its proposal as a choice for health care consumers that would lower the cost of outpatient surgeries and prevent medical out-migration to Anchorage.

Central Peninsula Hospital officials are fighting the surgery center idea on the grounds it would take away one of the more profitable service lines it offers, thus damaging less profitable areas and the hospital overall. CPH currently does 1,700 outpatient surgeries with its three operating rooms.

CPH officials contend losses could be in the range of $20 million from a total $150 million the hospital realizes in charges among all services if the surgery center is built.

Currently the state is weighing whether to issue Kahtnu a Certificate of Need to move forward in the process of building the center. The state gathered what officials said was a record amount of public testimony on the subject.

Jha said he would expect a hospital in CPH’s position to respond aggressively if Kahtnu is issued a CON, as is customary when a hospital’s revenues are threatened.

“If a hospital is about to lose a substantial amount of money, smart hospitals respond aggressively because, like any other business, you can’t sustain losses for any long period of time,” he said. “I certainly would not be surprised if this hospital responds aggressively and tries to do whatever it can to keep itself sustainable and profitable. You’d expect them to do that.”

There are several options a hospital in such a position can take — from raising the charges on other services it provides, cutting or reducing non-revenue making services, raising its service area tax collections or negotiating deep discounts with insurance providers to ensure patients are steered to its facility instead of the surgery center, Jha said.

The latter isn’t as uncommon as one might think, he said.

“Hospitals can negotiate whatever they want,” he said. “So if a hospital says, ‘Look, we want you to have zero co-pay for surgeries that are done at our hospital’ that is a perfectly legitimate negotiating stance and insurance companies are going to have to figure out if they are going to want to allow for that or not.

“I don’t know if they can dictate what the co-pay can be for the outpatient surgery center or not. If it is between you and me, I can say, ‘Make me free’ but I can’t say, ‘Make the other guy really expensive.’ But in some ways the effect is the same.”

With the reduced amounts insurance companies are willing to reimburse surgery centers for their services because of cheaper overhead, hospitals are finding they can put a squeeze on surgery centers, Jha said.

“We see this kind of stuff in tough markets and one of them is going to fold over time because at the end of the day, you may not be able to sustain both of them,” he said.

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CPH Chief Executive Officer Rick Davis said surgery centers in the Lower 48 aren’t as lucrative as they once were and the physician-owned centers are “going by the wayside.”

“From talking to people in the Lower 48, what I believe is going on down there is most of them ... would be bankrupt in their original state,” he said. “But my understanding is the majority of those surgery centers have either been sold to a hospital or there are a lot of new, complex joint management structures that are being developed down there.”

Davis said insurance companies have started “cutting (surgery centers) out of contracts because their charges are higher and because they are not subject to the same quality review process that a hospital-owned surgery center is held to.”

Krull agreed there might be a national decline, but the majority of surgery centers are still physician-owned and profitable, he said. They are, however, starting to partner more with hospitals because hospitals “realize the value” in the added service line, Krull said.

Moreover, Krull said comparing Outside to Alaska isn’t quite right because the markets are different — there are bigger cities and communities with several hospitals and surgery centers in an area that compete for a relatively set number of patients. That level of competition hasn’t entered into the state, he said.

“We certainly aren’t seeing any decline in Alaska in the opening of ambulatory surgery centers,” he said. “That business seems to be increasing primarily in communities that have no other options, but also in communities like Anchorage that do have other options. They are still being opened and they are still doing well.”

Davis said CPH hasn’t yet set in stone how it might respond if Kahtnu’s proposal comes to fruition. However, he said, nothing, including raising taxes, cutting services, raising fees or cutting deals with insurance companies is off the table at this point.

“We’ll just have to look at all that stuff,” he said. “It costs so much money to provide the services we provide and so if you cut out the profitable ones, you have less money to provide everything.”

If CPH, in a hospital-dominated rural market makes a play to have insurance companies steer patients to its facility over the surgery center, Jha said it could cause the Kahtnu’s revenue to shrink.

However Davis said that tactic is how Anchorage hospitals like Providence and Alaska Regional are able to remain profitable with so many other area surgery centers. Officials from both of those hospitals declined to be interviewed for this article.

“That’s just basic managed care contracting,” Davis said. “Right now (CPH) doesn’t discount our managed care contracts too aggressively, but as more competition enters into the market, we would get more aggressive in our managed care contracting.”

Krull said Kahtnu is aware of all the ways CPH could respond, including steering volume away from their facility by health care contracting.

“However, I’m not sure they will ever be able to achieve the same discounted service that we would be able to offer in an ambulatory surgery center even with special contracting,” he said. “In order for them to make surgical services more attractive than an outpatient surgery center charges for surgical services, they are going to have to offer 50 percent-plus discounts on their current rates. They are going to lose revenue and can they make it up with increased volume? I don’t know.”

Said Davis, “That’s crazy.”

“They have a $9 million building and several million dollars worth of operating expenses they are paying for, allegedly, through one little outpatient operating room,” he said. “There is a limit to how much you can push through one OR. No, you can’t charge less for it.

“I hope people call the surgery centers in Anchorage and ask how much it is for a shoulder (surgery) and then call Alaska Regional and ask them because the hospitals are cheaper than the surgery centers in Anchorage and we will be, too.”

Karen Perdue, president and CEO of the Alaska State Hospital and Nursing Home Association, said the competition might ultimately be better for the consumer if the hospital can successfully balance all of its finances including its rates, profits, margins, payment schedules and bad debts.

“The hospital is always trying to find the sweet spot between how low they can leave their price and still have enough to not only keep their doors open, pay their people fairly but also attract and be ready for the new innovations and technology they have to invest in,” she said.

“You have to realize that if people are for lower cost and that’s the argument for having the competition, then they can’t criticize a hospital for lowering their costs. But a hospital can’t afford to lower their costs too much because they have to serve people who can’t pay.” 

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Mark Wade, an orthopedic surgeon who helped start The Surgery Center of Fairbanks, said he went through a similar period of heated discussion with Fairbanks Memorial Hospital when he submitted his proposal.

“It was a pretty hostile time here,” said Wade, who is now part owner of the center.

Fairbanks Memorial CEO Mike Powers did not respond to the Clarion’s requests for comment.

Wade said he approached the hospital twice about building the surgery center and offered to be partners, but was turned down.

“I understand why because there was a fear we were going to hurt them financially,” he said. “I kept telling everybody that we are not going to hurt you for crying out loud. In fact we are going to make things better.”

Such a “battle has been fought” in every town where a surgery center opened, he said.

“It is unfortunate because I know what your community is going through,” he said. “Doctors are labeled as greedy and cherry-pickers and they are just trying to (keep) more money in their pocket. But the hospital is always trying to sound like the altruistic one saying, ‘We are not doing that, we are just trying to keep our head above water.’”

Wade said having a surgery center in Fairbanks has “been a great blessing,” because of the choice it provides to patients.

The Surgery Center of Fairbanks, which also cost about $9 million, has been open for 15 months and has performed about 1,000 surgeries in its facility, Wade said. At least 10 physicians have ownership in the center and at least 15 surgeons operate in it, a staff member said.

Fairbanks Memorial Hospital has six operating rooms that perform outpatient and inpatient surgeries. According to the 2010 Census, the Fairbanks North Star Borough has a total population of 97,581.

Wade said claims that surgery centers can operate at half or two-thirds the cost of what a hospital can for outpatient surgeries are overstatements.

“Usually your costs are lower, but they are not 50 percent or 60 percent,” he said. “You are looking at 10 and 20 percent cheaper when it’s all said and done.”

Wade said he hasn’t seen aggressive insurance contracting by Fairbanks Memorial in response to his center. He contends the two facilities even work well together after a period where the hospital wouldn’t even return his phone calls. But hospitals who respond too aggressively could run into litigation brought against them, he warned.

“You also run into the risk of monopoly, too,” he said. “Man I tell you what, there are attorneys out there that love to sue on the basis of monopolies because I think if you win damages it is like tripled. I had an attorney tell me that one time.”

Wade also acknowledged the trend of surgery centers going out of business in the Lower 48, but said that trend won’t necessarily affect Alaska’s industry.

“They are going out of business because doctors got into them because they thought they were cash cows,” he said. “But they also going out of business because in the Lower 48 because you can drive around and see a surgery center on every corner.”

A compromise between the two sides would be best, Wade said, because then both are “working for what’s best for your community — then you can’t lose.”

“So it is all better if everyone gets along and everyone wants what is best for their community,” he said. “The problem is that you have doctors who have differences of opinions on how things are being done and then you have hospitals and that is where the rub is that there is a difference in how things are being done.”