Editor's note: This story has been changed to correct a reference to the 91 percent drop in Central Peninsula Hospital's net income, orginally referred to incorrectly as a drop in revenue.
The Surgery Center of Kenai plans to add a second operating room to its facility in Kenai, potentially increasing the competition for outpatient surgery procedures between the independently-owned surgery center and Central Peninsula Hospital.
State regulators will allow the surgery center — which specializes in outpatient surgeries, also known as ambulatory surgeries, that don’t require an overnight hospital stay — to add its second operating room and two observation rooms after making a May 30 decision that the clinic will not need to get a Certificate of Need before building its expansion.
President Joseph Hurley of Alaska Medical Group Management, which manages the Surgery Center and other Alaskan medical facilities, said that having a single operating room “caused a big clog in our scheduling.”
“This unclogs it, to have two ORs,” Hurley said. “It helps round out some of the things we’re already doing a little bit, and it helps us expand a little bit as far as some of the things we can do with the surgeons who are there and the operations they can do with their patients.”
Central Peninsula Hospital in Soldotna — operated by the nonprofit Central Peninsula General Hospital, Inc. under lease from the Kenai Peninsula Borough, which owns the physical building and assets — has four operating rooms, the most recent added in 2012, which do both outpatient surgeries and inpatient surgeries which require longer hospital stays. In the past, CPH officials have said independent surgery providers take patients from CPH’s outpatient surgery, lessening its ability to remain financially self-supporting.
CPH External and Government Affairs Manager Bruce Richards wrote in an email that the surgery center’s new planned operating room and observation rooms “will cause major financial damage to CPH” by creating competition for surgeries.
“All outpatient surgeries completed in the surgery center since its inception are surgeries that would have been performed here at Central Peninsula Hospital,” Richards wrote. “This has had a significant impact on the financial health of our community-owned hospital.”
In 2014, CPH opposed the then-nascient Surgery Center of Kenai by declining a transfer agreement — an agreement required by the national Centers for Medicare and Medicaid Services for one medical facility to send patients to another in case of an emergency — with the surgery center, limiting the surgery center’s potential customer base by making them unable to take Medicaid or Medicare payments. The denial led to the surgery center “being blocked from half of our patients by Central Peninsula’s unwillingness to give us a transfer agreement,” said the surgery center’s vice president of outpatient surgery Harold Gear in a July 2014 Clarion story.
Hurley said his business budgets for 120 surgical procedures a month in its single present operating room. For outpatient surgeries such as hernia repair, hysterectomy, ear, nose and throat procedures, Hurley said that more limited surgery centers such as his offer a better deal than hospitals.
“The hospitals are huge organizations that are very expensive, and they’re expensive because all these different pieces of it are running parts that cost money,” Hurley said. “Our Surgery Center of Kenai is not a ginormous beast. It’s a lot smaller, a lot scaled-back. That’s what helps save costs.”
Directly comparing surgery prices, Richards wrote, is difficult because of the many variables in surgical practice and billing. The surgery center’s precise impact on CPH’s finances is likewise difficult to quantify, Richards wrote.
“Health care is changing so rapidly on so many levels that it would be difficult to attribute revenue changes to one thing with any sort of accuracy due to the compression that is occurring from payers,” Richards wrote.
CPH has experienced a 91 percent drop in net income between the first three quarters of fiscal 2016 and fiscal 2017, due to factors including higher deductibles and co-pays in commercial insurance plans, flat Medicaid reimbursement rates for the past two years, a decrease in commercially-insured patients caused by job losses and a lower number of elective inpatient surgeries which have been a large revenue source for the hospital in the past. Outpatient surgeries lost to the surgery center may also contribute to the drop, Richards wrote.
Hurley said he is also seeing a rise in Medicaid patients, both from increased unemployment and the state’s 2015 decision to expand Medicaid eligibility, and that the change “has dropped our volume considerably.” Though the surgery center can’t accept Medicaid payments without the CPH transfer agreement, Hurley said they are nonetheless getting a sufficient volume of patients to need a new room.
Certificate of Need
Alaska’s Department of Health and Social Services attempts to control medical costs by limiting medical groups from spending more than $1.45 million on expanding their facilities unless DHSS judges the investment is necessary. The agency’s Office of Rate Review permits medical expansions by granting a certificate of necessity.
When the Surgery Center of Kenai began construction in January 2014, it spent roughly $1.13 million to install one operating room and one procedure room — for smaller surgeries that can be done with local, rather than general, anaesthesia — in the medical complex at 100 Trading Bay Road in Kenai. Because this cost was below the $1.45 million threshhold, the Surgery Center was allowed to progress without a certificate of necessity, the Office of Rate review announced in July 2013.
In its expansion, the surgery center is planning to add a second procedure room and two observation rooms as well as the new operating room. With the addition — expected to cost $678,376 — the surgery center’s total construction cost since opening will be $1.81 million. Though the total is more the threshold for the Certificate of Need, attorney Peter Deimer argued in a letter to DHSS on behalf of the surgery center that the two constructions are separate rather than two phases of one project. DHSS concurred in a May 30 response.
Failure to get a Certificate of Need has ended other local independent medical initiatives, including a previous attempt to open an independent surgery center in Kenai by Kahatnu Ventures, LLC, a group of eight local surgeons who in 2011 planned to make Kenai the location of a $9 million surgery center expected to perform 1,800 outpatient surgeries per year — more than the 1,700 annual outpatient procedures CPH performed at the time, according to previous Clarion reporting. The group failed to get a Certificate of Need in April 2012 and unsuccessfully appealed the denial the following month. A DHSS analysis made during Kahatnu’s Certificate of Need process estimated that, using different projections of population and surgery demand, the Kenai Peninsula Borough would need between 3-4 operating rooms through 2019.
With six operating rooms in the central peninsula, Richards wrote that DHSS — which considers all facilities within a service area in its methodology for issuing Certificates of Need — is unlikely to give certificates to any further operating rooms. More stringent hospital building requirements would not allow new operating rooms at CPH to be built below the expense threshold, Richards wrote.
23-hour observation rooms
The observation rooms the surgery center plans to build are described in its correspondence with DHSS as “23-hour observation rooms.” Many commercial insurers define 24 hours under medical care as the dividing line between inpatient and outpatient procedures, which are billed and paid for differently. Richards wrote that with the observation rooms, the surgery center will “be able to do surgeries that would otherwise be considered inpatient surgeries, causing further harm to the hospital.”
Hurley said the surgery center’s focus on outpatient surgery complements CPH rather than competes with it. With additional facilities offering outpatient procedures, he said, the hospital would be able to devote more resources to speciality services, such as the catheterization lab CPH is planning to build.
“Everyone can be succeeding together, and nobody will have to be worried about, ‘Is one going to succeed at the cost of another?’” Hurley said.
Reach Ben Boettger at email@example.com.