Welcome to the new Outpatient Surgery website! Check out our login FAQs.
My Turn
The Problem I Have with Specialty Hospitals
James Unland
Publish Date: October 10, 2007

Proponents of physician-owned specialty hospitals tout better quality of care and greater efficiency, claiming that specialty hospitals provide free-market competition to community hospitals. Unfortunately, community hospitals don't operate under anything close to a free-market system.

Building a better omelet
If I opened a restaurant that only offered omelets, I could make the highest-quality omelets, and do it very efficiently. Likewise, hospitals focusing on a narrow service category that are insulated from requirements to fully treat all comers can offer excellent care more efficiently than a general hospital.

The GAO report last October noted that when revenue and costs from all lines of business are included, the average specialty hospital's margin is more than double (6.4 percent to 3.1 percent) that of the average community hospital's. That's no surprise. Physicians with the market advantage of essentially being able to choose their patients ought to make higher returns on invested capital than facilities that must treat all comers and provide costly services that the specialty centers don't.

Draining the pool
When I started researching community hospitals, I spoke with many investment bankers and hospital credit gatekeepers, including top hospital rating agencies and bond insurers. All expressed concern about the trending dilution of community hospitals' market share and the commensurate revenue dilution in favor of physicians.

Meanwhile, several thousand community hospitals' physical assets age at a disturbing rate. In 2002, the Healthcare Finance Forum documented the rise in the average age of hospitals' plant and equipment, expressing concern that hospitals may lack adequate access to operating capital as the needs of the Baby Boomer generation intensify.

Far from free
The paradox of hospital valuation and creditworthiness is that the facilities require tens of millions of dollars of invested capital to remain up-to-date and reasonably competitive, yet they're nearly worthless as physical assets. All hospital value, creditworthiness and capital access stem from positive net cash flow and its reasonable predictability. When the revenues and net cash flow decline or predictability becomes erratic, creditors tighten or deny access to capital - such as when a surgical hospital comes along to lift out a highly profitable service category.

The bottom line: Community hospitals are in peril while remaining the major care provider in thousands of communities and the provider of last resort for millions of Americans.

DID YOU SEE THIS?