Issue: July 2012
July 03, 2012
10 min read

Orthopedic specialty hospitals promise better care, but may face ethical dilemmas

Issue: July 2012
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Although orthopedic specialty hospitals offer patients focused care, these centers have come under fire for potential conflicts of interest regarding physician ownership and lack of emergency care.

“From an economic standpoint, specialty hospitals have some advantages,” Neil Badlani, MD, MBA, of Rush University Medical Center, told Orthopedics Today. “They are smaller and they have a lesser hierarchy, this generally leads to more focused and consistent management goals and alignment of managers and providers. Some reports have shown that increase in specialization leads to a decrease in cost for admission, which means that their high volume leads to decreased cost per unit. Despite the fact that the theory would lend us to think that they are more efficient and more profitable, the actual data does not confirm that.”

Proponents of orthopedic physician-owned specialty hospitals tout their focused approach to care as more efficient and say that the centers offer patients a higher quality of care.

The patient-centered focus of these centers allow them to do a “better job of meeting higher expectations of more informed patients and consumers with knowledge gained from the Internet and direct-to-consumer marketing,” Badlani said. Because these hospitals specialize only in orthopedics, they stand to have more skilled nurses, doctors, anesthesiologists and other health care employees, he said. Badlani cited a study by Cram and colleagues, who found that specialty hospitals have a lower rate of complications than general hospitals for joint arthroplasty.

Neil Badlani 

Neil Badlani, MD, MBA, said that specialty hospitals may do a better job of meeting higher patient expectations, but noted that centers have come under fire for their referral practices.

Image: Badlani N

Jason Hwang, MD, MBA, equates orthopedic specialty hospitals with what Regina A. Herzlinger, PhD, of Harvard Business School calls “focused factories” that churn products out more efficiently because they focus on doing one thing well. Hwang is executive director of health care at Innosight Institute and co-author of the book, The Innovator’s Prescription, which describes ways the health care industry can decrease costs while maintaining quality.

“This notion that we have expected [general hospitals] to be all things to all people has required each hospital to hire at least one of each specialist and one of each piece of equipment. That places an extreme cost burden on every single community hospital in the country to have that amount of equipment infrastructure and personnel,” Hwang said in an interview with Orthopedics Today.

As “focused factories,” he noted that orthopedic hospitals may reduce errors caused by the “handoff and transfers between all of the different pieces of equipment” that are found in community hospitals.

“If there is something that we can produce consistently and at the lowest cost possible in an efficient process-based manner, we should be doing that and carving that out of the general hospital’s purview,” Hwang said. “For some things, like orthopedic procedures, it is a nice fit because it falls into the same category as cataract surgery where most of the surgeries, by and large, can be standardized. They look the same from patient to patient, and you can do it repeatedly with consistent success.”

Jason Hwang 

Jason Hwang

Badlani calls specialty hospitals a kind of disruptive innovation or “something that initially meets the needs of a certain subset of customers.”

“Over time, this smaller, lower cost, cheaper alternative becomes more efficient and more profitable, and the technology becomes better and eventually can do things [in] a cheaper, more efficient way than the established competitors,” Badlani said. “This process is happening throughout health care and is leading to the decentralization of health care.”

Orthopedists who own specialty centers have more control over their schedules and have the ability to align incentives with managers or other owners. They may also earn more because they can focus on profitable cases and conditions, Badlani said.

“Even though they may not provide as much uncompensated care as some general and community hospitals, the amount they pay to society in taxes in some studies is shown to be more than the value of uncompensated care provided by community hospitals,” he said, citing information from a 2005 U.S. Health & Human Services Report.


However, according to Badlani, compensation is an area where many orthopedic owners of specialty hospitals may run into trouble. Opponents of physician-owned specialty hospitals cite the potential for higher referral rates. Badlani cited a 2005 Medicare Payment Advisory Commission (MedPAC) report to Congress that found specialty hospital costs totaled 20% to 30% more than those of general hospitals. In addition, a study by Carey and colleagues found orthopedic specialty hospital costs are 40% higher than minimum feasible costs compared to general hospitals, which operate at 20% to 30% higher than minimum feasible costs.

Badlani contends that specialty hospitals incur such costs because they have reduced capacities, newer equipment and specialized staff that is compensated for their higher skill level.

In their summary of four case studies, the American Hospital Association noted that referrals to orthopedic specialty hospitals dramatically increase ancillary services. Orthopedics Today’s Business of Orthopedics Section Editor Jack M. Bert, MD, disagrees. He cited a 2005 article by G. William Woods, MD, and colleagues that studied whether there was an increase in the surgical volume or rate for a group of 10 orthopedic surgeons after the opening of a specialty hospital in which they had a financial interest. Bert told Orthopedics Today, “The number of surgeries did not increase overall; they just became concentrated at their specialty hospital location.”

He added, “When you look at the number of referrals doctors make, they are all transferred to one location, so it appears referrals increase, when in actuality, it is probably the same as before, except it is now going to physician-owned ancillary services, which in this case is orthopedic specialty hospitals.”

Hwang cites a faulty payment system for the increase in referrals to specialty hospitals.

“The root problem has been the fee-for-service model where we are paid per procedure,” he said. “In that environment, yes, I would be concerned about physician self-referral and tendency to refer at a greater frequency if you have an ownership stake. The fee-for-service arrangement encourages you to basically provide greater intensity.”


The payment model needs to change from fee-for-service to value-based bundled payments distributed through capitation or global payments, Hwang said. If referring physicians and surgeons were paid a fixed amount “from preop to postop, there would be less tendency to provide a high number of procedures because that would hurt your bottom line,” he said.

“Somebody that is paid in that way should be referring [patients] to surgery only when [they] need it,” Hwang said. “In that instance, physician ownership does not hurt. In fact, it may be seen as a helpful indicator of good care because the physician has taken interest in trying to create a facility that provides the most cost-effective care possible.”

Politicians have attempted to resolve the compensation dilemma through changes to the Stark Law. In the past, a hospital exception of the Stark Law allowed physician referral of Medicare patients to physician-owned specialty hospitals if the physician had an ownership interest in the whole hospital as opposed to a subdivision of the hospital, according to Kathleen Carey, PhD, MAT, professor of health policy and management at Boston University School of Public Health. She said, “The whole hospital exception was dismantled by the Affordable Care Act, which is now coming up for a second look, so it is not clear what the future of these hospitals is going to be.”

Kathleen Carey 

Kathleen Carey

Scott Becker, partner at McGuire Woods in Chicago told Orthopedics Today that physicians may still refer patients with private insurance to their specialty hospitals, but must pay fair market value for their shares. Orthopedists cannot be paid more or less shares or other special payments based on their volume of referrals and must disclose ownership to their patients, he said.

David M. Glaser, JD, of Fredrikson & Byron P.A. and Orthopedics Today Editorial Board member, recommends orthopedists disclose their financial interests as part of their marketing.

“I am dealing with a facility right now. It is on their face sheet,” Glaser said. “[It says], ‘Some of our physicians own this hospital, and if you need surgery, it may be possible for you to have surgery there.’”

Moratorium on new construction

Some surgeons note that specialty hospitals may harm general or community hospitals through direct competition.

“Specialty hospitals can affect local community hospitals by drawing a higher percentage of profitable procedures and patients away from general hospitals,” Scott D. Boden, MD, Spine Section Editor for Orthopedics Today, said.

The 2005 MedPAC report to Congress found 1% to 2% of patients admitted to specialty hospitals have Medicaid compared to 15% at general hospitals, according to Badlani. Most specialty hospitals also lack emergency rooms, Badlani said, which provide most of the uncompensated care.

But MedPAC found no evidence that specialty hospitals are putting general hospitals out of business, according to Carey. In addition, Badlani noted that MedPAC’s report to Congress said that competition from specialty hospitals allowed general hospitals to improve their services and became more efficient.

Scott D. Boden 

Scott D. Boden

The Patient Protection and Affordable Care Act placed a moratorium on new construction of specialty hospitals, according to Badlani. The deadline for new construction was December 2010, but existing specialty hospitals may continue operating with limitations on expansion.

Badlani said “obliterating” specialty hospitals will not solve the problem, but rather, the way they operate must be modified.

Peter Cram, MD, MBA, of the University of Iowa Carver College of Medicine, believes non-physician owned specialty hospitals may be the answer.

“The potential for sort of gaming the system by physician owners is a reasonable concern,” Cram told Orthopedics Today. “If we strip away the physician ownership, it removes at least one of the potential financial conflicts.”

Hwang and Cram agree that payment to physician owners of specialty hospitals needs to change.

“Moratoria on physician ownership as well as complete prohibition of things through Stark Law are too heavy-handed and attack the wrong problem,” Hwang said. “The problem is not physician ownership. The problem is the payment model that turns physician ownership into a bad thing.”

Emergency care

Hwang and Carey also share concerns that no emergency backup exists should something go wrong with a patient having surgery at an orthopedic specialty hospital, which may not have emergency rooms and staff.

“If something goes wrong, [patients] cannot move down the hall to a different department or have a different kind of specialist come in quickly,” Carey said. “There was a surgical specialty (not orthopedic specialty) hospital near West Abilene, Texas. A patient in his mid-40s treated there developed serious breathing problems following spine surgery. Those hospitals generally do not have emergency departments. [The specialty hospital] called 911 and had the patient taken to a full-service hospital, where he died.”

Carey said it may be more appropriate for some patients to be treated at general hospitals.

“It is important that [orthopedists] make decisions on where to refer a patient based not on whether they have ownership interest in the hospital,” she said. “It is more appropriate, in some cases, for them to go to a full-service hospital. [Decisions] should be made based on clinical need and not on how the physician might make more money.” – by Renee Blisard Buddle

  • American Hospital Association, McManis Consulting. The impact of physician-owned limited-service hospitals: A summary of four case studies. February 16, 2005.
  • Cram P, Vaughan-Sarrazin MS, Wolf B, Katz JN, et al. A comparison of total hip and knee replacement in specialty and general hospitals. J Bone Joint Surg Am. 2007; 89(8):1675-1684.
  • Hertzlinger RE. Market-driven health care: Who wins, who loses in the transformation of America’s largest service industry. Perseus Books Group. 1997. New York, NY.
  • McClellan MB. Testimony: Statement by Mark B. McClellan, MD, PhD, Administrator, Centers for Medicare & Medicaid Services, Department of Health and Human Services on Specialty Hospitals: Assessing their role in the delivery of quality health care before The House Committee on Energy and Commerce. May 12, 2005.
  • MedPAC. Report to the Congress: Issues in a modernized Medicare program. June 2005.
  • Woods WG, O’Connor DP, Pierce P. Orthopedic surgeons do not increase surgical volume after investing in a specialty hospital. J Bone Joint Surg Am. 2005;87(6):1185-1190.
For more information:
  • Neil Badlani, MD, MBA, can be reached at the Department of Orthopaedic Surgery, Rush University Medical Center, 1611 W. Harrison St., Ste. 300, Chicago, IL 60612; email:
  • Scott Becker can be reached at McGuire Woods, 77 W. Wacker Dr., Ste. 400, Chicago, IL 60601; email:
  • Jack M. Bert, MD, can be reached at the University of Minnesota School of Medicine, Cartilage Restoration Center of Minnesota, Minnesota Bone & Joint Specialists, Ltd., 9325 Upland Lane North, Suite 205, Maple Grove, MN 55369; email:
  • Scott D. Boden, MD, can be reached at Emory Health Care, 59 Executive Park South, Ste. 3000, Atlanta, GA 30329; email:
  • Kathleen Carey, PhD, MAT, can be reached at Boston University School of Public Health, BUSPH, 715 Albany St., Talbot Bldg., Boston, MA 02118; email:
  • Peter Cram, MD, MBA, can be reached at the Division of General Internal Medicine, University of Iowa Carver College of Medicine, 481 Newton Rd., 200 Medicine Administration Building, Iowa City, IA 52242; email:
  • David M. Glaser, JD, can be reached at Fredrikson & Byron P.A., 200 S. Sixth St., Ste. 4000, Minneapolis, MN 55402; email:
  • Jason Hwang, MD, MBA, can be reached at Innosight Institute Inc., 100 W. El Camino Real, #74B, Mountain View, CA 94040; email:
  • Badlani, Becker, Bert, Boden, Carey, Cram, Glaser and Hwang have no relevant financial disclosures.


What role, if any, should orthopedic specialty hospitals play in health care?


They make sense

B. Sonny Bal, MD, JD, MBA 

B. Sonny Bal

Specialty orthopedic hospitals make perfect sense from a business, legal and ethical view. The literature is clear that high-volume arthroplasty surgeons and hospitals, for example, have fewer complications, better outcomes and lower costs. If so, why should the profession accept the reality that most arthroplasty operations are performed by relatively low-volume surgeons and hospitals? Beyond orthopedic hospitals, it is possible to foresee specialty arthroplasty hospitals that focus on efficiency, standardization and leveraging of the best and highest volume surgeons to drive better outcomes and profitability. Cost pressures, regulatory burdens and the increasing volume of joint replacements may compel that such operations are done only in highly specialized institutions that focus on and excel at one specific procedure.

B. Sonny Bal, MD, JD, MBA, is Associate Professor of Orthopedic Surgery, Joint Replacement of the Hip and Knee, Department of Orthopaedic Surgery at University of Missouri School of Medicine and an Editorial Board Member for Orthopedics Today.
Disclosure: Bal has no relevant financial disclosures.



Specialty hospitals have pros and cons

Lisa Cannada 

Lisa K. Cannada

Orthopedic specialty hospitals represent an opportunity to provide specialty care to patients, but the patients must fit the criteria. Unfortunately, one of the criteria for these specialty-owned hospitals is patients with insurance. Thus, this type of hospital represents a “boutique” setting for the patient.

The controversy surrounding this subject is understandable, but close examination of the issue realizes there are pros and cons. With existing regulations, there is non-payment to hospitals for complications related to procedures. If a specialty hospital has a well-trained team in place, then there can be economic benefit with decreased complications and more efficient (thus, decreased costs) systems. However, the bigger question that looms is the ownership of these hospitals. The rules are in place to protect the consumer (patient), and one hopes the physician can be objective in referrals to the hospital and transparent with the relationship which may exist. To provide better care is a common theme and understandable, but to provide care to only those that can pay due to the stakes and interests of all involved remains the dilemma.

Lisa K. Cannada, MD, is Associate Professor, Department of Orthopaedic Surgery at Saint Louis University and an Editorial Board Member for Orthopedics Today.
Disclosure: Cannada has no relevant financial disclosures.