Flush with their success in the ambulatory surgery arena, surgeons are gearing up for round two. Driven by the profit motive and frustration with perceived hospital inefficiencies, surgeons across the country are starting surgical hospitals, facilities designed to handle both outpatient and profitable inpatient cases. Estimates are that between 30 and 50 are already in operation, with many more on the drawing board. By all accounts, most of the facilities have been remarkably successful so far. But before surgical hospitals can change the inpatient surgery landscape in the way ASCs did the outpatient surgery version, they'll have to overcome a very difficult roadblock: Savvy, intense and desperate opposition from community hospitals, who say surgical hospitals threaten their very existence. Here's an update.

Why surgeons are building surgical hospitals
"Until now, we've had essentially a two-tier system of healthcare delivery composed of ASCs and large tertiary hospitals " says Brett Brodnax, head of development for United Surgical Partners International, a Dallas-based company that specializes in surgical hospital development. "Although ASCs have served the healthcare delivery system well, they do have major limitations." Surgical hospitals, he says, serve as a much-needed middle tier and take the best of both models. Experts say they also benefit their surgeon investors by offering the following:

Financial rewards The revenue potential is much greater in surgical hospitals because of the number of cases that can be performed in these facilities. Consider that Medicare reimburses ASCs for about 2,500 procedures?-for hospitals, however, the number of procedures that can be reimbursed are virtually unlimited, according to Mike Lipomi, CEO of the Stanislaus Surgical Hospital, based in Modesto, Calif. Plus, he says that procedures are usually reimbursed at rates averaging 25 to 30 percent higher than at ASCs.

Once the facility is established and starts accepting cases, profitability may not be far behind. According to Alan Pierrot, MD, an orthopedic surgeon who developed the Fresno Surgery Center in Fresno, Calif. in 1984, surgical hospitals aren't as profitable on a margin basis as ambulatory surgery centers because the costs are greater. However, because these facilities in general perform more cases, they produce more in total profit. The experts with whom we spoke indicated that most surgical hospitals become profitable sometime in the first year of operation. Says Al Ferry, PhD, who is overseeing the development of a new surgical hospital in Hot Springs, Ark., for Medical Malls Inc., a Templeton-California based surgical hospital development company, "Stabilization comes in the fourth month of operations, and the facility starts to make a significant profit in the ninth month." Scott Becker, Esq., a healthcare lawyer who is the Legal Counsel for the newly-formed American Surgical Hospital Association, concurs: "When they're structured right, the hope is that these facilities will stop dipping into working capital and start to make a profit in the second six months of operations." John Marasco of Marasco and Associates, a company that has helped design more than 200 ambulatory surgery centers and six surgical hospitals, agrees: "If you have your ducks in a row, you should be profitable in the first year." Finally, surgeons have more opportunity to benefit from a profitable surgical hospital than from a comparably profitable ASC. This is because under the Stark II self-referral laws, surgeons cannot refer patients to, or obtain revenue from, certain ancillary services, or Designated Health Services, such as MRIs, mammography, or physical therapy services, that are offered in a surgery center that they own or invest in. However, if a surgeon owns a share of a surgical hospital that offers those services, they fall under a ?whole hospital exemption,' according to Mr. Becker. Under the exemption, they can share in the hospital's profits, even if those profits include revenue from Designated Health Services, and they can refer patients to those services without violating the law. Efficiency: Even though surgical hospitals are generally bigger and more complex than ASCs, they're still able to provide surgeons with the same kind of cost and time efficiencies that ASCs offer. They're able to do this in large part because even though they offer unlimited stays, they don't have to support the overhead of an intensive care unit or take emergency or trauma cases. They can also provide surgeons with block time to enable them to do more cases more efficiently. These two factors enable them to perform cases at a lower cost than at traditional hospitals?-from 10 to 35 percent less, according to some experts. Caring for generally healthy patients keeps the infection rate down as well; Fresno Surgery Center, for example, boasts a post-surgical wound infection rate of 0.05 percent (compared to a national average of 0.14 percent). Happy patients: Surgeons can be assured that their patients are getting top-flight perioperative care in surgical hospitals. Some surgical hospital patient rooms actually resemble luxury hotel rooms, complete with TVs, VCRs, and overnight accommodations for guests. Even the dreaded institutional-style food has been banished; at the Stanislaus Surgery Center a full-time professional chef prepares restaurant-quality meals that recently warranted a writeup in the food section of the local newspaper. How hospitals are fighting back But surgical hospitals do face a problem: Competition from acute-care hospitals, the facilities that have the most to lose. "For the most part, hospitals became comfortable with surgery centers, as long as they focused on ophthalmology and endoscopy cases," explains Mr. Becker. "But now, surgery centers are going after orthopedic cases, and surgical hospitals are going after inpatient orthopedic and neurosurgical cases. Hospitals view that as very negative." Hospital proponents say that it is the revenue from those highly-reimbursed surgical cases, as well as revenue from well-insured surgical patients, that enable traditional hospitals to offset the cost of providing services such as indigent care and emergency rooms. "Over time, the community hospital can find its revenue base being eroded, and its ability to do things for the community will diminish," says Richard Wade, the senior vice president for communications for the American Hospital Association. "The community has to be aware of that. Patients also need to ask themselves if a specialty hospital is going to be able to provide a full range of care, whatever their medical needs are. Are they equipped to deal with complications?" Although surgical hospital proponents like Dr. Ferry argue that the physicians and not the facilities are what is important ("Hospitals are like garages-they just contain the tools"), Mr. Wade disagrees. He concedes that community hospitals may be less equipped than specialty hospitals to cater to surgeons' needs and schedules, but he says that's not the point. "The community hospitals can't just listen to one group of physicians---they need to serve many staffs with many needs. They're there to serve patients, not the physicians." In the fight, hospitals have some powerful advantages: State law. All but 22 states require surgeons or other developers of healthcare facilities to prove that there is enough case volume and a need for additional beds to support a new facility, notes Mr. Marasco. This process, which is meant to prevent the proliferation of unnecessary facilities and prevent underutilization, can make it nearly impossible to build a surgical hospital in an area that is already served by a traditional hospital. Twenty-seven states require a facility to obtain a Certificate of Need (CON) before building; Wisconsin does not require a CON, but does impose an administrative review process, which Mr. Marasco says can be just as burdensome. In addition to CONs, states often have rigid requirements that make building a surgical hospital less practical. For instance, some states require hospitals to offer radiology, pharmacy, emergency services, labor and delivery services, and a fully equipped kitchen. It is sometimes possible to meet these requirements by providing a very basic service or contracting it out, says Harvey Billig, MD,.Chairman of the Board of Medical Malls, Inc. For example a surgical hospital could meet the radiology services requirement by simply having an MRI, CT, or C-arm on site, and he adds that "although some states do require a complete emergency department, in others, you just need a way to stabilize emergency patients and transport them to another facility. The pharmacy and dietary departments could also be very limited, or you could contract these services out." Hospitals may also be better equipped to negotiate payor contracts, even though surgical hospitals may offer a better deal on surgical services. In Fresno, for example, the area HMOs have chosen not to contract with the Fresno Surgery Center, according to Dr. Pierrot. "The hospitals are able to trade discounts and offer more services to get HMO contracts," he says. Most of the surgery center's business comes from PPO contracts, non-HMO Medicare, and workers' compensation cases. Everyone also acknowledges that hospitals are working harder to be more efficient, in part a result of being placed on a outpatient prospective payment system in August 2000. Many hospitals also have excellent access to capital, and some of them are using it. For example, the Community Medical Center-Fresno, which competes with the Fresno Surgery Center, is currently joint-venturing with area cardiologists to build a heart hospital. In some cases, hospitals are even joint-venturing with surgeons to build multispecialty surgical hospitals, says Pepper Hatch, co-founder of Nashville-based ReSurge Hospitals, a surgical hospital development company. His company is currently involved with building four surgical hospitals; three of them are joint ventures between community hospitals and groups of doctors. The community hospitals in these arrangements "see that surgical hospitals do provide a better care model," he says. Other hospitals are competing by expanding and improving their facilities to make their physicians and patients think twice about needing to go anywhere else. Take the 255-bed Los Robles Regional Medical Center in Thousand Oaks, Calif., where FSC Health has proposed to build a surgical hospital modeled on the Fresno facility. According to spokeswoman Kris Caraway-Bowman, Los Robles will break ground in 18 months on the first phase of a major expansion-?the first phase alone is projected to cost $120 million. The project will involve opening a new four-story wing that will house private patient rooms and new outpatient and admitting areas. Eventually, the hospital will have 360 private patient beds. Last year, Los Robles opened a brand-new emergency department, and it is currently building a new wing onto its ICU. "Our facility is committed to providing the best healthcare in our area," says Ms. Bowman. "We're here to be specialists in everything." She points out that over time, hospitals have become experts in negotiating the various regulatory, payor-related, and competitive issues thrown at them, and as a result, "we have learned to think differently and react differently and become proactive." Ms. Bowman is confident that Los Robles will survive and prosper even if the surgical hospital is built, and she questions surgical hospitals' resources. "A person seeking healthcare should