“Focused Factories”: Specialty Hospitals and Ambulatory Surgical Centers - Better Service, Repetition Makes Excellence --- or --- Just Further Splitting the Pie & Adding Cost?
By D. S. Kandilakis, DC

The US healthcare system in the past has already established a trend for several specialty hospital care services, usually integrated in the hospitals network or hospital itself. Traditionally, these specialty services were children’s services, ear, eye and rehabilitative, physical therapy services, specialty stroke clinics or “mini” hospitals, usually wings of hospitals, or ground level outpatient centers dedicated to specific conditions. The huge wave of “baby boomers” coming into the healthcare system, over-burdened state Medicaid and federal Medicare healthcare system coupled with the continued need to develop more efficient ways for healthcare service organizations to render quality, yet cost-effective, even profitable care has led entrepreneurs in healthcare to develop and expand on another healthcare model, “Focused Factories”.

The idea of a “Focused Factory” in healthcare.

The term “Focused Factories” can be defined as both Specialty Medical Facilities (SMF) and Ambulatory Surgical Centers (ASC). ASC’s are much less complex to establish, less costly, and are not generally subject to stringent certificate of need (CON) guidelines. They primarily compete now with hospital outpatient surgery centers. Their numbers have doubled the past decade to 3,371 Medicare-certified ASC’s, closely totaling the 3,859 hospital outpatient surgery centers. The “focus” is to treat a specific, limited number of conditions in a high-volume, extremely repetitious and cost-effective, profitable manner while maintaining high patient satisfaction and very, very good, above average patient medical outcomes and reimbursement for medical services. It is interesting to note that franchised food service organizations and franchises and the auto industry are the true current refined derivatives of the model of “factory production”. Develop an extremely efficient process, be dedicated to continually improve on the process, be able to duplicate the process in many locations, closely monitor the interactive aspects of the organization, contain cost, make a profit. So in essence these facilities are focused “disease management” centers, specializing in surgical procedure related interventions.

Among many, three main influences to the impetus to build specialty hospitals are “the relatively high profit margins of these select procedures, specialists’ desire to increase control over the care environment and increase their (physicians’) income.”, as per the Center for Studying Health System Change. There are many in healthcare that think they will out-compete traditional hospitals. I am in agreement, and so is Regina E. Herzlinger, Ph.D, Harvard’s Professor Business Administration Chair. She sees the trend to be baby boomer needs driven. Her idea takes focused factories a step further, she relates that a ”true” focused factory will deliver services wherever consumers need it, in their home, in a mall, neighborhood pharmacy, community center, shopping mall, hospital or specialist hospital. This example may be more appropriate for managing hypertension or diabetes than surgical interventions for laproscopic surgical procedures that make up most of the SMF and ASC repertoire of surgical services for cardiovascular and orthopedic diseases. In fact The Center for Studying Health System Change (HSC) had site visit findings in 1996-1997 with hospital executives across the nation who reported that surgical admissions were much more lucrative than medical admissions and among the procedures, orthopedic and cardiovascular the most profitable.

Integration versus going your own way

Traditional hospital are costly. Not just a little. They turn a profit by profiting well from specialty procedures and programs that are well reimbursed by payors and these allow the hospital to carry the cost of services that are either break-even or just plain put them in the red, such as ER’s, burn units, trauma centers and generous community education programs and renal dialysis centers.

Of late, between 1990 and 2003, there has been over 90 specialty facilities, built or under construction nationally, with seventy percent partially physician owned with the median ownership if 2% per individual physician. There appears to be less SMH’s appearing where there is a dominant hospital network present, mostly because of more stringent certificate of need regulation, not true for ASC’s, which are more prevalent.

The current trend is in the rendering of specialty services in the cardiovascular and orthopedic disease markets. The sheer increasing number of individuals presenting with both arthritic and cardiovascular conditions justify these specialties as chosen “focused factories”. The synergy of advances in technology, market forces (cost of goods), changes in the physicians practices themselves, increased regulation, paperwork and quality assurance oversight and public policy changes have allowed physicians to consider joint ventures and partnership with large facilities like hospitals and large disease management corporations.

Traditional hospital networks have tried to compete by increasing their own vertical and horizontal integration of healthcare facilities and services. Good “vertical” integration, for example, would involve a specific delineated protocol for transferring patients from large hospital centers to smaller community hospitals, skilled nursing facilities, outpatient specialty clinics, as the medical need changed, therefore keeping their costs under control while maintaining patients within their own network, as they would own all of these affiliated facilities. Efficient “horizontal” integration would involve numerous hospital centers networked together to share resources and possibly specialize in specific diseases, as for example a “diabetes” disease center at one facility but focus on cardiac surgeries in another, thus reducing duplication or equipment and specialized labor costs. Horizontal integration has been in the industry for years in the form of group purchasing of goods by hospital networks, but the creation of specialty centers within hospital networks is more recent. The problem with this setup is that it involves taking patients usually far away from their neighborhoods, so there are access issues, especially for those patients with ambulatory difficulty, and they often happen to be diabetic, cardiovascular or orthopedic surgical patients.

Efficient disease management by its very nature involves close monitoring. Just as the individual must be in touch with his healthcare status on a daily basis, so must a medical oversight team. So for a “focused factory” to be in the most efficient setting it would have to be relatively small (indeed they are, ASC’s have usually 2 to 4 operating rooms) and be located in many communities. Would it not be easier if all of the healthcare teams’ focus was on your specific diseases and your could access these services right in your community? Of course………….enter the justification and need for ASC’s and SMF’s.

These facilities are designed and managed in a way to render surgical services so frequently, with constant repetition that improves accuracy, reduces medical error (reducing possibility of complication and re-hospitalization), improves patient comfort by being in their close community, decreasing overall cost in general by not requiring all the high end capital equipment of full-service traditional hospitals, this is what the proponents say. Critics of these “focused factories” argue that with the entrepreneurs in healthcare that led to the development of this model, and physician ownership, it would lead to “cherry picking” healthier patients for operative procedures, those that are less sick and therefore more profitable. This would in turn lead to the sicker individuals being admitted for surgical procedures at traditional community hospital centers. Hence the profit would stay in the SMF or ASC and the traditional community hospital would be left with the brunt of the lesser profitable patient cases.


Ethics and Policy

This scenario has raised a few eyebrows, and one study by Mark Chassin, in JAMA seems to support that as physicians become owners of healthcare facilities the probability of over-utilization goes up. Is it ethical? There are already federal laws in place to structure, limit and restrict certain types of self-referral for profit (Stark I & II). Do regulators have to step in to force the acceptance of Medicare, Medicaid and some percentage of gratuitous cases to allow an ASC or SMF to be permitted and built? Some regulators believe this is the only way to level the playing field for traditional medical centers, and to provide services where needed. I don’t believe it makes sense myself. Most SMF and ASC currently are now built in regions where there is no certificate of need (CON) legislation required for approval in place. So now there are questions of access to SMF and ASC facilities, so indeed access to care. Indeed, all patients are not welcome. Ethical or not when physicians and healthcare management companies team up, the result is a focus on profitability.

Some hospitals have responded by trying to deny the admitting privileges of physicians that have ownership in other facilities that compete with the hospital for services. Some courts have agreed with the hospital petitioners while the “jury is out” still yet on others. There is a lot a stake, as of 2003, cardiology services accounted for 25 percent of all hospital stays and 35 percent of all community hospitals’ revenue. If community hospitals cannot compete with their “Focused Factory” competition, then they will be forced to cut back on services or negotiate higher prices from payors.

Due to the rise of ASC’s and Specialty Hospitals, state and federal policy makers are considering a variety of legislative changes that will address issues raised about cost, quality and access. What is a known loophole in Stark self referral legislation is that it allows self-referral to “whole” hospitals without restrictions in which physicians have an ownership interest in, but places restrictions on other facilities (SHF’s and ASC’s). In an attempt to curtail the “cherry picking” of healthy patients the American Hospital Association and other organizations have proposed extending the law to specialty hospitals as well. Other legislative proposals include the requiring of the acceptance of Medicare, Medicaid and gratuitous patients; imposing the same patient safety standards and quality standards as traditional hospitals; requiring full service ER’s or have cooperative transfer protocols in place, revising Medicare reimbursement of selected procedures to reduce reimbursement; and revamping certificate of need laws to prevent specialty hospitals from gaining access to markets traditionally dominated by community “full-service” hospitals.


In either scenario, the bottom line is that research shows that higher volume is associated with better quality and leads to lower cost. Applying this to the “Focused Factory” model, it would sure seem that they are positioned to out-compete traditional hospital structures, due to their smaller less complex structure and inherent cost-saving, low capitalization approach and the fact that they have clear cut physician ownership, this leads to less administrative layering and oversight ….a highly motivating factor in both the quality of care and the desire for extreme efficiency.

My vote is for the continued development of the “Focused Factory” model.


References:

1. Casalino; Devers; Brewster (2003) “Focused Factories” Physician Owned Specialty Facitlities”, Health Affairs, 22, no. 6, pp. 56-67.
2. Aspen, Bruce, "Specialty Hospitals Are a Pain for Rivals," Chicago Tribune (Dec. 1, 2002).
3. Chassin,Mark R., et al., "The Urgent Need to Improve Health Care Quality," Journal of the American Medical Association,Vol. 280, No.11 (Sept. 16, 1998); Gray, Bradford, The Profit Motive and Patient Care: The Changing Accountability of Doctors and Hospitals, Cambridge,Mass.: Harvard University Press (1991).
4. Managed Care, May 1998, Herzlinger, Regina E., “Focused Factories will Provide Care”, “A Conversation with Regina E. Herzlinger.
5. Birkmeyer, John D., Andrea E. Siewers, Emily V. Finlayson et al., "Hospital Volume and Surgical Mortality in the United States," New England Journal of Medicine,Vol. 346, No. 15 (April 11, 2002).
6. Lynk,William J., and Carina S. Longley, "The Effect of Physician-Owned Surgicenters on Hospital Outpatient Surgery," Health Affairs, Vol. 21, No. 4 (July/August 2002).
7. Dobson, Al, "A Comparative Study of Patient Severity, Quality of Care and Community Impact at MedCath Heart Hospitals," The Lewin Group (September 2002) (Executive Summary posted on MedCath's Web site at: http://www.medcath.com/index.asp?INTR_%20ElementI%20D=corp_Study).
8. Winslow, Ron, "Fed-Up Cardiologists Invest in Own Hospital: They'll Regain Autonomy but Critics See a Grab for More Profitable Care," Wall Street Journal (June 22, 1999) cites a study by Health Care Report Cards Inc. of Lakewood, Colo., that suggests patients at a MedCath hospital in McAllen, Texas, are less severely ill.