Surgeons Look Beyond Hospital Walls for Profits By JACQUELINE FOX Staff Reporter Dr. Scott A. Baden, an orthopedic surgeon, has been relatively happy with the 20-year working relationship he’s had with Sherman Oaks Hospital. But there are challenges: much of the surgical equipment at the hospital, he said, is outdated; operating rooms are often overbooked, making it difficult to maintain profitable patient turnover rates; and rising health care costs continue to take a bite out of salary and benefit packages for hospital staff in general. So when an opportunity came along a little more than a year ago to join about 20 other doctors to own and operate their own outpatient surgery center in Encino, Baden didn’t hesitate. He is one of many doctors in the Valley and elsewhere who have opted to supplement their incomes over the last few years by buying into doctor-owned and operated outpatient surgery centers. Baden and others say this kind of co-op practice provides him and his colleagues with an opportunity to perform outpatient surgery in new facilities with up-to-date equipment and take more control over their schedules. It also offers a way for doctors to boost their incomes since payments for services and aftercare go directly to the businesses they own, not a hospital, and, because the equipment is newer and more efficient, they can perform more surgeries in less time. “The reason we all want to work here and be a part of this is because the equipment is state of the art, the patient turnover is better, we can make more money, and it’s a beautiful environment,” said Baden. Today he is a senior orthopedic surgeon at Nations Surgery Centers, one of three outpatient clinics in the Thousand Oaks-based Nations Capital Group network specializing in orthopedic surgery. Baden declined to discuss financial details or the difference that owning part of the center has made for him so far. He remains on staff at Sherman Oaks Hospital and spends one day a week at the center where patients are either referred to him by other doctors or, in many cases, by Baden himself. State conflict-of-interest laws bar doctors from referring their patients to most businesses they own because of the potential for impropriety. For example, doctors can’t own and operate their own laboratories, because they risk the perception they would be motivated to order unnecessary lab tests. However, the laws do not apply to outpatient surgery centers. With that in mind, the cooperative concept where the large infrastructure start-up costs can be shared, said Baden, is one that he and many of his colleagues have tried to convince hospitals to get in on for years. But historically, hospitals, which typically have outpatient surgery centers on-site, have been reluctant to run them as partnerships with medical staff members because they would have to share revenues and administrative oversight. And, traditionally, doctors and administrators have not made the best of business partners, just by virtue of the different interests they represent within the industry. The doctors at Nations collectively own 40 percent of the business, according to Larry Sherman, president and CEO of Nations Capital, who owns the remaining 60 percent. “We suggested this 10 years ago,” said Baden. “We said, why not partner with us? They wouldn’t do it. They just weren’t interested.” But things are changing. Now threatened with competition, hospitals are starting to grapple with the fact that not only have they been losing patients and business to independent outpatient centers, they’ve been losing them to members of their own surgical teams. “This has always been the bane of our existence because (these co-run centers) are taking patients out of the hospitals,” said Jim Lott, executive vice president of the Health Care Association of Southern California. “Doctors have found a loophole in the law to do this and it’s draining the hospitals of income. So, many hospitals are saying, ‘Let’s partner up and do something on our own,”‘ Lott said. Here in the San Fernando Valley, Encino-Tarzana Regional Medical Center has received state approval to build a $3 million, 7,500-square-foot outpatient surgery center inside its Encino campus, which will be owned jointly by the hospital and staff surgeons. The center, which will specialize in orthopedic, obstetrics, neurology and general surgery, is expected to open by spring 2003. According to Ron Yukelson, Encino-Tarzana’s associate administrator for business development, the hospital has had plans in place to set up a jointly-run center for several years, but until 1999, state laws wouldn’t allow hospitals to run separate businesses unless they were located offsite. “We had plans to either invest in or purchase an ambulatory surgery center that we would co-run with doctors on staff even before Nation’s Capital was in business,” said Yukelson. “When we listened to our physicians, and they said, ‘Look, we know we’d rather maximize our income by going into another joint-venture,’ we were already strategizing about different ways to do this. And because we knew about the pending (changes in the law), we decided to wait for clearance to build the center right here inside the hospital.” Sherman Oaks Hospital also has plans to build its own outpatient surgery center, according to Baden. But he said he now has no interest in sharing a business with the hospital when he can do it with colleagues just as successfully. “If you think about it, we’ve really been partnering with the hospitals for decades already,” said Baden. “We’ve been there, done that.” While the revenue for doctors who buy into these jointly run centers can be lucrative, recent changes in California’s Workers’ Compensation laws could make it more difficult, according to Lott. Outpatient centers, he said, have typically derived a large percentage of their revenue from workers’ comp cases because doctors can base fees on service to those patients, instead of a fee schedule negotiated by HMO’s or insurance companies. Hospitals have always had to use fee schedules for all patients, including workers’ compensation cases. But recent legislation now requires outpatient surgery centers to use fee schedules for workers’ comp patients too, although the law likely won’t take effect for about a year. “Basically, many of these outpatient surgery centers have capitalized on a rather liberal reimbursement policy for workers’ comp cases,” said Lott. “That’s what’s been driving these physicians to go into business for themselves.” Lott estimated that the changes in workers’ comp law could result in a 50- to 60-percent reduction in reimbursements from patients and their medical providers. “The gold mine has always been workers’ comp,” said Lott. “But I would think physicians won’t be as motivated to set up separate businesses like these if they aren’t going to get much out of them.” Baden declined to say what percentage of his patients were workers’ comp cases. But he downplayed the changes saying, “We have a good mix of patients here, so it’s not really that big of an issue for us.” Sherman of Nations Capital declined to reveal revenues for the Encino facility, up and running since October 2000, but he said “these centers have the potential to generate $100 million a year in gross revenue.” Nations also owns another center in Anaheim and is planning a third in Ontario next year.
