HOSPITAL PRIVILEGES

Principles of doctor ownership in surgical centers: Conflict of interest?

Surgical Centers can either be entirely doctor-owned or part owned by doctors. Part ownership is more common. In
most part ownership arrangements, the doctors own 49 percent and the parent corporation owns the other 51%. In
this article I will concentrate on facilities where doctors are part owners in the facility. There are certain ingredients
necessary for the development of a center. First, there needs to be the right combination of specialists to bring
cases to the center. These specialists usually include orthopedic surgeons, hand surgeons, general surgeons,
podiatrists, plastic surgeons, ENT specialists, gynecologists, ophthalmologists, pain management specialists and
gastroenterologists. Generally a leader emerges from within this group and contacts a surgical center development
corporation. There are many such corporations in existence. In the usual situation, the corporation will develop the
center after it has a commitment from the group of surgeons. The center sometimes will have a feasibility study to
ensure that it will be profitable, based on the number of cases done and the operating overhead. The center is often
set up as a limited partnership, L.P. in which the doctors buy shares or units out of the 49% available. A typical share
might cost between $5,000.00 and 12,500.00. The General Partner is the parent corporation and owns the other
shares. As Limited Partners, the purchasers of the units (doctors) are not personally liable for the obligations of the
partnership.  The liability of the limited partners is limited to their original investments.  This makes the investment for
the doctors almost risk free.  They have the ability to invest in a multimillion-dollar facility and reap benefits for a very
minimal contribution.  After the partnership has realized a profit, available cash flow is distributed.  The cash flow is
distributed generally 1% to each holder of one unit and the remainder to a general partner.  Provisions are made for
reserves and contingencies.  The cash flow is determined by the net operating income. This amount can approach
up to 12,000,000.00 per year or more in some larger centers. Doctors can expect to receive up to 30,000.00 per
year on an initial investment of 12,500.00, yielding a 300% profit in the first year. This is essentially passive income,
meaning that as long as the center remains profitable, they earn their dividends. They do not have to do any extra
work in order to earn this money.
  
The second ingredient is doctors unsatisfied with their current circumstances. Doctor’s income has been declining
for at least the past 12 years. Reimbursements have gone down. Yes, doctors are making less and less money, or
are they? What has happened is that doctors are working harder to sustain the level of income that they are used to.
This means longer hours in the office, seeing more patients and less time with patients. Coupled with increasing
overhead, namely employee salaries, rent or mortgage payments and catastrophically rising malpractice premiums,
doctors are looking at lower operating revenues and higher costs. Our society is so litiginous now, certainly
encouraged by the malpractice attorneys, that doctors are being held to higher and higher standards with less and
less time. More and more doctors are having feelings of futility because they can no longer control their medical
practices. They have less free time and almost no free time to spend with their families. They become captives of
their practices which many are trying to maintain, but unsuccessfully. A survey by Merritt-Hawkins and the California
Medical Association shows that 30-40% of physicians over 50 plan to do something other than medicine in the next
three to five years.


The third ingredient is when doctors compare (covet) surgical centers with hospitals. Surgical centers have positive,
patient friendly environments. They can do cases at lower costs than hospitals. There are no emergencies so
elective cases are not bumped. There is faster turnover time in between surgical cases so they can do more cases
in a shorter amount of time. Sometimes they are granted two rooms so they can work with a physician assistant and
jump back and forth between the two rooms so they can do even more cases. They can operate on whom they
choose, namely patients with higher paying insurance plans or cash paying patients. They can turn away higher risk
patients and lower reimbursing insurance plans such as medicaid. They are under no obligation to do any charity
work. Surgeons are learning that hospital facility fees are two to four times the physician’s fees for the same
operation. The surgeons want to capture some of this “lost income.”

When these three ingredients are combined, the final result of this recipe is the doctor-owned surgical center.
Doctors see the surgical center as their (at least temporary) solution to a health care system that has turned against
them. It brings them some autonomy, ease of scheduling and more control of their time. Did I say it brings them easy
income also? Patients usually go to the facilities that their doctors recommend, so it is easy for the doctors to bring
business to their new enterprises. It is unusual to find a patient that asks a doctor how many shares he owns in a
surgical center and how much income per year he makes from that center. It might make  interesting conversation if
they did.

So what does all this mean? In many cases surgical centers duplicate services already offered by hospitals. Surgical
centers operate at a profit margin on average 12%, while hospitals operate at about a 2% profit margin. One could
argue that hospitals operate inefficiently so they deserve less money, or one could say that doctors bring higher
paying patients to surgical centers increasing their profit margins.

Doctor-owned surgical centers could be a symptom of a sick health care system in our country, a system where
doctors turn to methods other than direct medical care to generate income.

I do believe the doctors deserve a high income.  They undergo anywhere from 11 to 15 years of training including
college before they can even earn an income.  Many start out in private practice with enormous debt for schooling
which they need to pay off.  They accept huge responsibilities and liabilities. Medicine is one of the most highly
regulated and controlled professions in the country.  They frequently sacrifice time with their families, after-hours
time and time late into the night to take care of patients.  Other professions with similar hours and responsibilities
would include the firefighters and police officers who like doctors don’t have necessarily day time jobs, but frequently
work 24 hours per day.  These professions are responsible for the welfare of the populace, as doctors are. Due to
declining reimbursements from insurance companies, increasing overhead and radically increasing malpractice
insurance premiums, doctors are struggling to maintain income that they believe they deserve.  The way in which
salaries are determined in our country is partly on supply and demand but is also much more complex than this.  
There probably are many people in this country that feel they’re not earning their fair share, including sports figures
or CEO’s making millions of dollars per year or teachers making 30,000 per year.  What is a fair share? What is
more important to ensure the viability of our society? Ultimately what the fair share is will be determined by the
culture of our country .



Suppose that police officers were allowed to buy-in to their police station and share in the profits.  Do you think they
might be more inclined to issue more tickets and to collect more fines if there was a financial incentive? With doctors
essentially being public servants as police officers are, doctor ownership in surgical centers is no different from
police ownership in police stations.

What is my solution? Twenty-one years in the military, active and reserve has taught me that it is OK to complain  
about something but you better have an answer to the problem for your commanding officer.  With that mind, one
solution would be to require all medical centers, including surgical centers to be nonprofit, but still allow doctors to
control and manage them.  This would satisfy  the doctors’ complaints about hospitals being too slow and outdated
however the conflict of interest would vanish because the doctors would not be receiving income for bringing cases
there.  The doctors would have all the conveniences of their own center but would not receive any financial
compensation.  Extra income could be used for charitable work such as for the uninsured or the under-insured.  With
43 million people in this country being uninsured that would present a tremendous burden for all of us to carry,
including the doctors who would be donating their income from the surgical centers toward his cause.  But does the
number of uninsured people in our country represent yet another symptom of a sick health care system, one that is
nonfunctional.  One could ask if it correct to continue to support such a system that isn’t really working properly. Is it
like applying a band-aid to a laceration, just covering it up, but not fixing the underlying problem? Another solution
would be a follow the guidelines of PNHP,
pnhp.org. Physicians for a National Health Program proposal for a single
payer national health care system.  If you are interested in looking at this solution, you can go to PNHP at
pnhp.org.  

The final solution is up to you, the readers, the consumers, the voters and ultimately the people that decide their
own destinies.  We live in a free society where opinions can be heard and to make a difference you need to make
yours heard.   

Dr. Hopkins is a retired orthopedic surgeon formerly practicing in Park City, Utah. He is the author of Hospital
Privileges, a fast paced action thriller fiction novel portraying doctors’ struggle to survive in a health care system that
has turned against them. Please visit his web site at
hospitalprivileges.net for more information about this or other
related topics or to contact the author via e mail.

Mark Hopkins, M.D.
Board-Certified Orthopedic Surgeon
3252 American Saddler Drive
Park City, Utah 84060

 

Articles in the news on surgical centers