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Cutting into the market: Rise of ambulatory surgery centers

More and more physicians are investing in ambulatory surgery centers as they seek more control and efficiency over the operating room. Primary care physicians -- and Wall Street -- are taking notice.

By Cheryl Jackson, amednews staff. April 15, 2002.

When Susan Whitely, MD, has patients in need of surgery, the Phoenix family physician doesn't automatically assume they'll be checking into one of the local hospitals.

Depending on the specialty involved, her patient might get treatment in a physician-owned ambulatory surgery center.

Why do it

"It's not so much that we prefer ambulatory surgery centers. But we prefer a quick treatment and an effective treatment in a safe environment," she said. "With orthopedic surgeons, a lot of them have backlogs in the OR in the hospitals around town."

More physicians like Dr. Whitely are seeing their patients treated in ambulatory surgery centers, which provide greater incomes to the increasing number of surgeons opening them -- and the increasing number of Wall Street partners entering the field.

Growth of physician-owned surgery centers was in the double digits last year, said Kathy Bryant, executive director of the Federated Ambulatory Surgery Assn. An exact number of centers was not available, but it is well into the thousands.

Technology that allows for less invasive surgeries, pharmaceutical advances and cost consciousness is fueling the expansion. Outpatient surgeries accounted for 70% of all U.S. surgeries performed in 2000, compared to 15% in 1980.

70% of all U.S. surgeries in 2000 were outpatient.

The number of surgeries performed in outpatient surgery centers increased 191% from 2.3 million in 1990 to 6.7 million in 2000. Center advocates say the facilities provide less costly and more efficient care.

Ophthalmology accounted for about 26.8% of procedures performed in the centers in 1998, according to SMG Marketing Group Inc., which tracks 3,300 facilities.

Owners say patients prefer ambulatory centers to hospitals because they provide services for up to a third of the cost and with less hassle than hospitals.

"People often would rather go to a free-standing facility devoted to that particular procedure and would rather not have the red tape of the hospital," said Dr. Whitely, adding that she gives more consideration to who the surgeon is than to where the surgeon performs operations when she refers her patients. There are times, she said, when she doesn't know whether a physician is invested in a facility when she makes referrals. She doesn't make it a point to ask.

Profit potential

Still, physicians who own surgery centers say they tend to get more referrals because primary care physicians trust them to care for patients faster. At the centers physicians often do three times more surgeries than they can perform in a hospital.

"I can do more cases in a shorter amount of time, which means that I can make more money and get finished sooner," said surgeon Kay Kirkpatrick, MD, president of Resurgence Orthopedics, which, as part of a larger group, owns several centers in the Atlanta area.

Surgeries in outpatient centers increased 191% in the last decade.

Dr. Kirkpatrick has seen her income increase by about 25% since the first of her two centers opened. That investment is reaping a 20% to 25% return, she said. She expects similar results from a second facility she's invested in.

Physicians get more from Medicare when they perform procedures in the centers than in a hospital. Medicare is considering a proposal that would increase pay for office-based procedures.

"If a physician is paid $340 for a procedure, rather than $160 for a procedure, it's pretty easy to decide where to perform it," said Karen Bierstein, practice management coordinator at the American Society of Anesthesiologists.

Management companies are taking note of both physicians' and patients' interest in the facilities.

Dr. Kirkpatrick's parent group last year was acquired by Addison, Texas-based United Surgical Partners International Inc. in exchange for stock in the company. United Surgical acquires, develops and operates ambulatory surgical centers.

Last October and November the company paid millions in cash and assumed debt in exchange for a greater than 60% interest in individual facilities in Sarasota, Fla., Los Angeles and Fredericksburg, Va.

Medicare pays physicians more for procedures in a surgery center than in a hospital.

Others are also reaping the benefits of this healthy business. HealthSouth Corp., headquartered in Birmingham, Ala., is growing at a 20% clip, and seeks to acquire more centers. Revenues and acquisitions at Nashville, Tenn.-based AmSurg Corp. surged during the last quarter of 2001.

"There's a huge upside," said HealthSouth's CEO Richard Scrushy. "This market hasn't even begun. I would say this market is not even 10% built-out." Most of the surgery centers HealthSouth has bought were started by physicians.

"Sometimes [physicians] reached a point where they felt like they couldn't run it any more, and they wanted to bring in professional management," Scrushy said.

Efficiency is key

Physicians are not just looking for the money when building these facilities, said Stephen W. Earnhart of Earnhart & Associates, a health care consulting firm based in Dallas that develops and manages centers.

Interviews with 5,000 surgeons indicate money is actually fifth highest on the list of reasons surgeons develop the centers. Tops, Earnhart said, is efficiency.

"They want to have some control over their work environment," Earnhart said.

In their own facilities, they get expanded operating room hours and accountability from staff members in meeting the needs of the patients.

"They just want a place where they can get the six- to seven-minute turnaround time," Earnhart said.

Such facilities take an average of two years to complete, said Bryant, of the ambulatory surgery centers association. Owners must find a building or have one designed, get licensed, buy and install equipment, and hire staff.

Factors that hinder growth of physician-invested centers might be hospital opposition, increased oversight and fear of breaking laws, experts say.

The fastest-growing segments are orthopedics, accounting for 9.8% of procedures done at ambulatory facilities, and ear, nose and throat, which accounts for 6.9%. Hospitals are fighting to keep those specialties in-house, having given up urology, gastroenterology and pain management long ago.

"I think generally hospitals are going to push back and try to get these patients that they're losing to the centers," said Jennifer Marks, SMG's acute care product manager.

In Georgia, physician-owned centers recently hired a lobbyist saying the hospital industry is trying to stunt growth. Hospitals, though, say they need to keep revenue and that the centers are cherry-picking patients.

"Every hospital must take every person that shows up. That's not true for privately owned ambulatory surgery centers," said Holly Snow, vice president for government relations and public affairs for the Georgia Hospital Assn.

Bierstein of the ASA speculates that more physicians would make such investments if they didn't fear breaking the law.

Safe harbor laws protect investment interests in centers by physicians in positions to refer patients directly to and perform procedures at the centers.

"The anti-kickback laws are not entirely clear, so people tend to be a little bit leery about the possible ramifications of investing," she said. "If there were clear ways to make sure your investment was safe and was not going to trigger any investigations, you'd likely see more interest." Bierstein said.

Joint ventures

About 50% of the projects at Aspen Healthcare Inc. are physician-driven, said Tom Yerden, president and CEO of the Boulder, Colo.-based company. That's up from a couple of years ago when Aspen was doing one physician-owned project for every 10 multispecialty joint-venture projects between hospitals and doctors.

Aspen has about 3,800 surgery centers in 26 states. It expects to have 10,000 by the end of the decade.

He said in most cases, his 10-year-old firm prefers hospitals as partners. Joint-venture projects are easier to get approved, he said.

Earnhart & Associates is developing 15 to 24 surgery centers for physicians a year and is so full it's not taking on new clients.

"There is just incredible growth this year. Especially in the area of hospital-physician joint ventures," Earnhart said.

Nonprofit hospital-physician ventures account for about 85% of his business. The balance is independent physicians groups.

"It's a simple matter of hospitals not responding to the needs of their customers, which is the surgeons," Earnhart said. "The patients will follow the surgeon."

When physicians do work with hospitals "they're looking for cash, credibility, contracting and certificate of need," he said. "That's all they want from the hospital -- the four Cs."

Earnhart estimates it takes $4 million to $5 million to build a surgery center, not including real estate. Doctors should have 25% to 50% of that in cash to limit the need to borrow, he said.

Specialists and family physicians say that in most cases center owners get referrals because of the work they do, not where they do it.

"It's not a big factor in my referral pattern," said Dr. Whitely of Phoenix. "It has to do with the physician-physician relationship."

"I don't care where the surgeon does the hip replacement. I just care about the hip replacement, assuming they have the proper safeguards," she said.