Healthcare Industry Analysis: Physician Owned Hospitals Roundtable
Recently, the healthcare and life science investment banking professionals at Brown, Gibbons, Lang & Company spoke with four key leaders in the Physician Owned Hospital space. A brief excerpt from our interview is below.
What strategies have physician-owned hospitals (POH) taken since the enactment of the Affordable Care Act to continue to grow and expand capabilities to meet the needs of patients?
BRETT BRODNAX: What we’ve done with most of our hospitals is evaluate what are limiting resources in terms of beds, operating rooms (ORs), and procedure rooms and then determine if we can reallocate the mix without increasing the magic number. Most often it’s been converting a bed or two to ORs, because generally speaking, a lot of the capacity constraints end up being in the ORs. Driving the OR efficiency can, of course, increase the performance of the facility. That is one alternative.
Another alternative is increasing the community outreach. So, as opposed to a single campus, developing a network around the physician-owned hospital, e.g., urgent care centers, imaging, and/or other clinical services, has been advantageous. Now we see more and more physician-owned hospitals either acquiring or developing ASCs that are either partially- or fully-owned by the hospital. They’re still licensed as ASCs, so they don’t generally impact the magic number. A lot of hospitals are beginning to see that having a lower-cost alternative within the network and aligned with the hospital is going to be important going forward.
Expanding service lines has continued, with MSK and bariatrics and robotics, cardiac, and other service lines. These surgical hospitals are no different than some of the larger acute care hospitals. They are going to continue to need to attract higher complexity business, as that lower complexity business is pushed to ASCs, and in some cases, physician offices.
BOB JUNEJA: When we invested in National Surgical Healthcare (NSH) in 2011, we weren’t put off by the POH moratorium. The ACA limited the quantum of rooms that had to stay constant in a POH but not the mix of rooms. As more procedures are being done in outpatient settings, it meant that you needed fewer beds, on average, and more ORs and procedure rooms. The ability to change that mix around allowed you to increase the productive capacity of the asset provided you had sufficient patient demand.
Optimizing the room mix not only makes sure you have the capacity in the right place, it also makes the facility more attractive to equity and non-equity physicians that want to maximize their productivity. Additional OR capacity allows you to attract more physicians, provided you bought facilities that had sufficient pre-moratorium allowed ownership. We needed to see at least 30% to 40% pre-moratorium as the floor for us to get involved, provided you then could improve the earnings power of the assets, which we did.
MIKE RUSSELL: The Affordable Care Act dealt a very severe blow to all hospitals around the country and significantly impacted patient care. We focused on increasing throughput to continue to see more patients while staying within the CMS guidelines. First, we got very efficient from a staffing standpoint. We probably see more patients per hour in the radiology, pain, or surgical suites than do your normal hospitals. We were already faster, but I think we improved over time. Second, we were able to reallocate licensed beds and interchange our procedure rooms and operating rooms to accommodate more patients. And third, we are considering converting an existing hospital outpatient department into a free-standing ASC.
It’s always been frustrating to me that we do cost significantly less to the government payers for any specified case, and since our costs are lower, we get paid less. There are less downstream costs because we have a lower infection rate, and we get patients out of the hospital quicker. The problem is the government won’t even acknowledge it.
Our costs are significantly lower than most every facility in our area and probably around the country. So, for total joints and spine, specifically, I think that we have a unique opportunity to do bundles with commercial payers, and do very well with that.
AMBER MCGRAW WALSH: We commonly see a lot of POHs adding an ASC. They are not restricted from adding an ASC.
It’s separately licensed from the hospital and it bills under its own number as an ASC at ASC rates, but it’s part of the overall POH partnership of physicians. It allows the partnership to then have this additional outpatient facility that is integrated, and their physician ownership aligns towards that ASC when they become really busy at the hospital. POHs are starting to consider employment. We’ve seen it in surgeons. You’ve got a surgeon who is either coming out of fellowship or is employed by another local hospital. So, he doesn’t have a practice or his own patient base, and he simply wants to work, but he no longer wants to work for the large acute care hospital in town. And this is one way in which a POH is governed by exactly the same rules as a not-for-profit or investor-owned hospital when it comes to employing physicians. If the POH can deal with the operational and financial dynamics, then certainly they can legally structure employment of surgeons and bill and collect in the same way that another hospital would do in their state
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