The Orthopedic Hospital of Oklahoma, where the patient rooms look more like a Hilton's than a hospital's, is in a fight for its young life thanks to a pair of pending federal and state bills designed to legislate surgical hospitals (less affectionately known as cream skimmers and cherry pickers) into extinction.

The federal bill, a last-minute amendment to the Senate version of the Medicare prescription drug bill, could stop all physician investment in specialty hospitals. It would extend to specialty hospitals the so-called Stark rules that ban physicians' investment in medical facilities where they refer patients. If this amendment passes, physician-owned surgical hospitals will be no more. The 60 existing U.S. surgical hospitals and/or owners may be grandfathered, but that's neither set in stone nor conducive to long-term survival.

The state bill, spearheaded by the Oklahoma Hospital Association, would make it nearly impossible for physicians to operate surgical hospitals by levying a so-called trauma tax on 17 of the state's 160 ambulatory surgery centers and surgical hospitals that received state approval to construct their facilities after July 1, 1999. SB 620 would force these 17 facilities to pay an exorbitant penalty to the state's Uncompensated Care Fund if they fail to treat an unreasonably high number of government-insured (Medicare, Medicaid or uncompensated care) patients. Currently, 30 percent of these facilities' annual gross revenue must be comprised of government-insured patients. SB 620 would change the threshold to 30 percent of net patient revenue.

The effects would be dramatic. Under current law, a facility that did $10 million in surgical business and failed to meet the threshold would owe $100,000 to the Uncompensated Care Fund. Under the proposed law, such a facility would owe $760,000.

"Anywhere from 80 to 95 percent of our net income would go to pay this tax," says Wayne Allison, the administrator of Southwest Orthopedic Specialists and president of Oklahoma Providers Association for Quality Care (OPAQC), which has filed suit to repeal the trauma tax law by challenging its constitutionality. "This is a strong-arm tactic, a well-coordinated effort on the state and national levels to impede the proliferation of specialty hospitals and ASCs. This all points to hospitals' being clearly willing to exercise any and all methods to assure their continued business."

The federal bill could be devastating to surgical hospitals everywhere. State-specific bills such as the one in Oklahoma could be deadly. For the 20 physicians who raised $3 million in cash to open the 10-OR, 27-inpatient-bed Orthopedic Hospital of Oklahoma two years ago, a once-shimmering future has grown dim.

"I just think we're an easy target to point some fingers at," says Carolyn Dodson, the director of strategic development and governmental affairs at the Orthopedic Hospital of Oklahoma in Tulsa, a city with 600,000 people and five general hospitals. "We're in service lines that are very profitable, and general hospitals don't want to lose that business.

"We may not be forced to close, but that's of very little comfort right now. We will be stuck in limbo, and there will be no way we can grow," adds Ms. Dodson. "In healthcare, you have to increase your bed size to keep up. And you've got to have that infusion of capital to keep up with technology."

Boom, then bust?
As of March 2003, the number of specialty hospitals (surgical, women, cardiology) stood at 92, triple the 29 that existed in 1990 and accounting for 2 percent of the 4,816 short-term acute-care hospitals, according to the American Hospital Association. There are 60 surgical hospitals in operation today and another 50 in development, according to the American Surgical Hospital Association (ASHA). What's driving the specialty-hospital building boom? Three factors:

• Profitability. Certain procedures have relatively high reimbursements. Orthopedic procedures are among the most profitable.
• Management control. Physicians desire greater control over how they practice (hiring, staffing levels, scheduling and purchasing equipment).
• Lower professional fees. Specialists want to increase their income in the face of reduced reimbursement for professional services.

"The traditional hospital model is coming out with all kinds of accusations that we have to address because they're making us out to be the bad guys wearing the black hat," says Mike Lipomi, the president of ASHA and the administrator of the eight-OR, 23-bed Stanislaus Surgical Hospital in Modesto, Calif. "Show us the proof that surgical hospitals are bad, show us the evidence.

"I'm going to do 1,100 cases this month. This month. Hospitals can't like me because I'm the competition," adds Mr. Lipomi. "Look at the proliferation of surgery centers in this country. The hospital industry did the same thing: They beat up surgery centers for years."

The specialty-hospital building boom is unnerving general hospitals, which worry that the facilities will draw away profitable patients and undermine their ability to provide high-quality, low-cost specialty services and to cross-subsidize other basic services.

Hospitals have responded to the threat of specialty-hospital development in a variety of ways. Some general hospitals build their own specialty facility so they can maintain their revenue stream and retain the physicians who otherwise might leave to develop a competing freestanding hospital. A second response is to form joint ventures with local physicians to build a specialty hospital. A third response is to fight back by denying admitting privileges to physicians who have ownership interests in competing surgical facilities. A fourth response is to sponsor legislation that seals off new investors and facilities.

Hospitals argue that alternative-site facilities don't have to equip, staff or operate their own ER or ICU, but rather rely on the full-service hospital to accept their surgery patients who develop complications.

"One of the claims that they make is that we're putting them out of business. And it's just not true," says Mr. Lipomi.