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Outpatient Care Expansion Comes Under Scrutiny

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   February 01, 2012

This article appears in the January 2012 issue of HealthLeaders magazine.

In Southern California, the 223-bed Saint John's Health Center overlaps competitive space with hospitals more than twice its size. The hospital system decided there was one way to improve its competitive edge: improve its outpatient services.

The Santa Monica hospital in 2011 built a new ambulatory surgery center, ensured that its patients had easy access, and delivered flexible scheduling options. At the same time, it recruited physicians, some from the local competition, which included the 958-bed Cedars-Sinai Medical Center in Beverly Hills and the 520-bed Ronald Reagan UCLA Medical Center in Los Angeles, 13 miles away.

"Surgery centers will be on the radar more and more because of our efficiencies," says Kevin Streeter, director of Saint John's ASC. "When I hear people say there are too many surgery centers, I have to chuckle. There's always room for growth. It's a business, and it will keep moving."

Indeed, the drive to outpatient care has many hospital system leaders with their feet on the accelerators. These systems are developing more ambulatory surgery and imaging outpatient programs. "This has been the evolving trend; there are just a lot more modalities that can be provided in an outpatient setting," says LaVone Arthur, vice president of business development for the more than 1,000-licensed-bed Baylor Health Care System in Dallas.

Still, some leaders are considering evolving economic trends and the local demographics, and insisting that they may need to step back and consolidate their outpatient programs for cost savings. Even the most ardent proponents of outpatient care say its pace may slow down, depending on a local community's need for integrated care and the specific demand for multidisciplinary approaches.

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Steve Geidt, CEO of the 313-bed Saddleback Memorial Medical Center in San Clemente, CA, which is an 80-minute freeway drive from Saint John's, says the hospital is developing new imaging outpatient programs to meet the competition and improve patient access. "We're going to push everything we can to freestanding because they have a lower unit price," says Geidt, whose hospital system, MemorialCare Health System, purchased an imaging center from a physician group in 2010 to increase imaging capability for its patients, and increase its patient traffic in heavily competitive Orange County. Saddleback also has a location in Laguna Hills in Orange County.

But Geidt is not without some trepidation. As he looks ahead for outpatient centers, he asks, "Where do all the components fit in? That's our challenge. There's a lot of movement in the marketplace, a lot of the freestanding centers are looking and saying, 'This is a good time for a sale or a merger.' But the business model won't sustain a whole lot of freestanding centers. Ultimately, we are going to have a great deal more consolidation."

"Like most systems, we evaluate where the right place is to put the service," Edward Karlovich, CFO of the hospital and community services division for UPMC, says of outpatient planning. "You have to balance that with the economic realities of the world we all live in. You will see situations where we have created outpatient imaging facilities or surgery centers tied to our hospitals. And then, in other geographic areas, we have not done the same thing. Anybody who's looking at this as one broad strategy to apply will find it very difficult."

Those demographic forces are certainly different for each locale. While Saddlebrook is tentatively moving forward with some plans, Saint John's believes it had no choice but to jump into the outpatient arena in a competitive market.

In addition to the lower cost of providing services associated with outpatient facilities, they also can provide convenient access for patients. Traffic and parking were among the factors that Saint John's considered for its multispecialty, outpatient surgery center, which was designed for easy access for patients for same-day surgery with various specialties such as ophthalmology, podiatry, general surgery, and gynecology.

"The inevitable march of medicine means migrating toward outpatient as we get better at what we are doing now," says Howard Davis, MD, chief medical officer for Saint John's. He acknowledges that the pace of growth may slow down in some outpatient procedures, but he adds, "The health system has to be more than a hospital and look beyond its four walls."

Indeed, outpatient care is a dominant part of the healthcare landscape, the result, in part, of Medicare payment "differentials" that favor hospital-based programs, as opposed to physician-owned freestanding centers, according to the Medicare Payment Advisory Commission report to Congress on Medicare payment policies, issued in March 2011. Under Medicare's calculations, "the combined fees for visits of hospital-based practices are often more than 50% more than rates paid to freestanding practices," MedPAC states. Physician-run freestanding centers "may reorganize as hospital outpatient centers in part to recover higher reimbursements."

MedPAC reports continued growth of outpatient centers owned by hospitals. From 2004 to 2009, the volume of Medicare outpatient services for fee-for-service beneficiaries increased 23%. In 2009, patient visits to higher-paid outpatient-based practices owned by hospitals grew by 9%, while visits to lower-paid freestanding centers owned by physicians grew by less than 1%.

Saint John's outpatient plans certainly reflect the nationwide outpatient growth pattern. Mark Payares, PT, DPT CSCS, a physical therapist and program manager, was hired in 2011 to initiate an outpatient physical therapy and wellness program, which had been dormant at the hospital since 2000. The hospital leadership believed it needed to make a significant effort in that area to compete, and the wellness center will be on the hospital campus, Payares says.

"We have been without an outpatient therapy department since the earthquake in the early 2000s," he says. "The hospital shut it down. The only physical services until earlier this year was inpatient. Outpatient therapy can be profitable. It adds to the continuity of care, especially for areas like total joint or chronic pain."

Payares says he is constantly aware of the competition: He lives near the orthopedic center in Santa Monica.

Failure and success
When the JPS Health Network bought a new 30-bed inpatient hospital in Arlington, TX, in 2005, health system officials believed the boutique facility would meet the community's needs for years to come.

The idea of the JPS Diagnostic and Surgery Hospital in Arlington was to attract more insured patients to the hospital, which had focused on low-income patients. Within a few years, it was clear that plan was not working. The hospital administration didn't need a calculator to pinpoint its fiscal problem: The average daily census for the facility's 30 inpatient beds stood at one.

"For the patients we sought to serve in that area, there was not much of an inpatient need," says Chris Dougherty, senior vice president for community health for JPS Health Network, which includes 537-licensed-bed John Peter Smith Hospital in Fort Worth, TX, and dozens of outpatient sites in the county.

"Not only did we have one patient in the daily census, but we also tried to keep an emergency department staffed with physicians, and the price was high," Dougherty says. "We decided we would be much better served and it would be much less expensive for us if we converted it to an ambulatory surgical center.  In the 1980s and 1990s, these boutique hospitals worked for some and still work for some. But it wasn't a good match for us. It was really an outpatient center that was needed here."

In an unusual move, as far as Texas health officials saw it, JPS asked in 2010 to downgrade its facility from a general hospital to an outpatient facility. "They didn't see it before," Dougherty says. "But there will be more to come, I'm sure." Making the change to outpatient saved the hospital about $1.6 million each year, according to Dougherty. "For a tax-assisted hospital system, that was vitally important."

JPS Health Network is aligning some of its outpatient programs with primary care practices "because we want to start transforming our care to patient-centered medical homes as building blocks for ACOs," says Dougherty. "We have several primary care sites right now, four of them within Arlington. We are going to consolidate them into one site and combine that with an outpatient pharmacy. In that way, we bring savings and have economies of scale. We can save $1.1 million just by doing that."

"It is an incredible opportunity for us for more primary care visits for prenatal care and the right diagnostics for lifestyle enhancement," he adds. "We want to build medical homes as quickly and as substantially as we can to provide comprehensive care."

Consolidating outpatient services
Despite the push for outpatient care, there is some hesitation. Hospitals need to step back and consolidate some of their outpatient programs to make way for cost-savings reflecting needs of the local demographic area, according to David Bronson, MD, president of the Cleveland Clinic Regional Hospitals.

The 4,400-licensed-bed Cleveland Clinic has a main campus, eight community hospitals, and 18 family health centers in Northeast Ohio among its facilities. In 2011, Cleveland Clinic closed the 211-bed Huron Hospital in East Cleveland, citing dwindling volumes of patients. The health system's action outraged many in the community.

Bronson says the health system had little choice but to change its policies regarding Huron Hospital. He noted competition from nearby academic medical centers and that the population that Huron served had steadily decreased from 40,000 to 17,000 over three decades.

"It's really related to changes in population and the changes and shift toward ambulatory care," Bronson says of the Huron move. "There will be continued pressure to prevent utilization of hospitals by being more aggressive in having ambulatory services." Huron Hospital was replaced with a new outpatient Huron Community Health Center, which focuses on chronic disease and wellness services particularly suited for that community, Bronson says.

Bronson says Cleveland Clinic weighs its outpatient planning carefully. For example, as part of the shift toward an increased need for outpatient care, the health system is currently undertaking a consolidation of its adult inpatient psychiatric services from five hospitals to two hospitals, while simultaneously maintaining several outpatient psychiatric locations. "It's easier to staff from a physician standpoint and manage it better."

Without the need for round-the-clock coverage, outpatient settings offer more flexibility for physicians, increased access to private practices, and improved management because of a smaller setting, Bronson says.

There may be a shortfall in reaching expectations for hospitals that plan for outpatient facilities. "One of the risks you have is overcapacity on the ambulatory side in the long run," Bronson adds. "There's probably more imaging available in this country and equipment than we are going to need in the long run. You can't put a da Vinci in every operating room every time. That would not be necessary in a controlled economic environment."

Still, there are considerable benefits. "We've shifted a lot of work to outpatient facilities where patients prefer to be treated; we've mastered gallbladder and plastic surgery and even mastered partial knee replacement on an outpatient basis. It's less costly, and it's a way of trimming costs off the healthcare system," Bronson says. "And there will be continued pressure to prevent utilization of hospitals by being more aggressive in having ambulatory services."

Strength in a market
Health systems focusing on outpatient centers are trying to develop strength in their own market and working toward integrating with physician practices, specializing in certain areas. "That has been the market trend," says Brett Hickman, a partner in the health enterprise practice of PricewaterhouseCoopers, the global professional services firm.

"I would say in the upcoming year we're going to see more acute care organizations focusing on developing an ambulatory care access model," says Hickman. "Health systems are adding spokes to the hub of their main campuses. A lot of organizations are trying to differentiate themselves in four or five areas and are working diligently to bend the cost curve. Whether it's in cardiac care, diabetes, orthopedics, or cancer, there is a focus on the integrated care model to get costs under control."

When UPMC closed the inpatient services at 149-bed South Side Hospital in 2009 and enhanced outpatient services, hospital leadership believed it didn't have much choice. One of the major areas of concern was a "significant population decline in our region," says Karlovich, describing a situation similar to Cleveland Clinic's predicament with Huron Hospital. "It then becomes a challenge to keep all these facilities operating. The community might be getting smaller around the local facility," he says. UPMC has more than 20 hospitals and more than 4,500-licensed beds in its system.

The hospital system consolidated South Side with UPMC Mercy, which has 535 beds, and reopened as UPMC Mercy South Side Outpatient Center in 2009. UPMC South Side and UPMC Mercy are less than two miles apart. UPMC purchased South Side Hospital in 1996.

It was important to not only consolidate services with Mercy and South Side, but also to retain a surgical presence in the community, Karlovich says. Already, the system had a "very robust sports medicine and orthopedics program" located near the South Side area. "It was an operating decision to keep those functions going," he adds.

Karlovich says it's important for hospital systems, as they evaluate outpatient growth or whether to consolidate programs, "to rate the economies of scale."

"What I mean by that is," Karlovich adds, "is if you have physicians who are doing both inpatient and outpatient services on a general population, they may not be able to do it in two places and instead should focus energies on one place. In theory, if you have an MRI in your hospital, and then you have that in an outpatient setting, all of a sudden, then your volume is pulled away to outpatient—aren't you in fact creating an increased cost structure?"

For outpatient centers to succeed, "you really have to have a very narrow focus, and as long as you do that, you can be very successful," Karlovich says. That's important because "what might look like a solid economic opportunity today, maybe five years from today may not be as solid an economic opportunity. It would be very difficult to say there is one 'broad strategy' in this environment. Each of the outpatient strategies is tied to an area and the geographic needs and competitive marketplace in which they operate.

"It's a very nebulous time in which we are operating," he says. "I think you are going to see people feel their way through the process."

Managing and partnership
For a while, officials of the Baylor Health Care System had been running outpatient programs themselves, but with increased specialization, Baylor has increasingly turned to partnerships to manage outpatient operations.

"The healthcare market is a competitive one, and especially in large urban areas, while we see large growth possibilities in Dallas, so do other systems in the city," says LaVone Arthur, Baylor's vice president of business development. "Opportunities present themselves in different parts of the city. Suddenly, there is an access area where people didn't have convenient healthcare, so you try to get into that market."

A significant partner for Baylor has been United Surgical Partners International, based in Dallas. USPI has ownership interest or operates 190 surgical facilities, with 133 jointly owned with not-for-profit health systems such as Baylor. Baylor has more than 30 joint venture partnerships with USPI and other program managers in ambulatory care settings.

"We were looking for a partner that had an expertise in that modality of care. We look at these relationships with a focused factory concept to harness that expertise that allows us to focus on the acute care that is our greatest expertise," Arthur says. "What they bring to the table is intellectual capital, partnerships, and management expertise," she says of Baylor's various partners "With an outpatient service, you know that there are existing buildings that can be converted to provide outpatient care, so there's a lot of flexibility from a capital standpoint for how you can do it," Arthur says.

In planning for outpatient facilities, James Cavanagh, vice president and CIO of the 610-licensed, 570-staffed-bed St. Joseph's Healthcare System of Paterson, NJ, says hospitals don't have many choices. "There seem to be two approaches to dealing with the notion that business is moving away from the hospital to outpatient settings. One is to ignore that; the other is to be a part of that activity and capture some of the revenue," says Cavanagh.

At St. Joseph's, hospital officials are examining various management approaches to running outpatient facilities, Cavanagh says. "We are looking at partnerships with physicians, or bringing in joint ventures or partnership with outpatient services. This is one of our approaches with imaging centers and a cardiology practice. We are looking at doing ambulatory surgery outpatient in the future. The partnerships are all different. In some cases, there's a management structure with our own service line, or we may outsource management.

"I think it's just the nature of the business that people will peel off the more profitable business and take them to outside settings," he adds. "I think from a hospital's perspective, if you aren't going to be part of that, you are just going to lose revenue, and it's harder and harder for hospitals to survive that way."

This article appears in the January 2012 issue of HealthLeaders magazine.

Joe Cantlupe is a senior editor with HealthLeaders Media Online.

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