Effect of Physician Ownership of Specialty Hospitals and Ambulatory Surgery Centers on Frequency of Use of Outpatient Orthopedic Surgery

Jean M. Mitchell, PhD

Arch Surg. 2010;145(8):732-738. doi:10.1001/archsurg.2010.149
Background  Physician-owned specialty hospitals and ambulatorysurgery centers have become commonplace in many markets throughoutthe United States. Little is known about whether the financialincentives linked to ownership affect frequency of outpatientsurgery.
Objective  To evaluate if financial incentives linked tophysician ownership influence frequency of outpatient orthopedicsurgical procedures.
Design and Setting  We analyzed 5 years of claims datafrom a large private insurer in Idaho to compare frequency byorthopedic surgeon owners and nonowners of surgical proceduresthat could be performed in either ambulatory surgery centersor hospital outpatient surgery departments.
Main Outcome Measure  Frequency of use, calculated as numberof patients treated with the specific diagnoses who receivedthe surgical procedure of interest divided by the number ofpatients with such diagnoses treated by each physician.
Results  Age- and sex-adjusted odds ratios indicate thatthe likelihood of having carpal tunnel repair was 54% to 129%higher for patients of surgeon owners compared with surgeonnonowners. For rotator cuff repair, the adjusted odds ratiosof having surgery were 33% to 100% higher for patients treatedby physician owners. The age- and sex-adjusted probability ofarthroscopic surgery was 27% to 78% higher for patients of surgeonowners compared with surgeon nonowners.
Conclusion  The consistent finding of higher use ratesby physician owners across time clearly suggests that financialincentives linked to ownership of either specialty hospitalsor ambulatory surgery centers influence physicians' practicepatterns.

Under existing federal law, it is illegal for physicians torefer Medicare and Medicaid patients to designated health careentities in which the physician has an ownership interest. Abouthalf the states have enacted similar prohibitions that applyto privately insured persons.1 The federal law and most stateself-referral bans do not apply to "whole" hospitals and ambulatorysurgery centers (ASCs).1-2 The whole-hospital exception wasbased on the presumption that because general hospitals offera wide array of services, any referrals made by an individualphysician investor would produce little personal economic gain.1 The ASCs (freestanding facilities that provide surgical proceduresthat do not require an overnight stay) were exempt from theself-referral prohibitions because they were viewed as an extensionof the physician's practice. In fact, the federal safe-harborguidelines require that physician owners of multispecialty ASCsperform at least one-third of their outpatient surgical proceduresat the facility in which they have a financial stake. This safe-harborguideline does not apply to single-specialty ASCs.3
The exceptions to federal and state self-referral prohibitionsare one factor that has fostered the growth of specialty hospitalsand ASCs that involve referring physician investors.1-4 Theseso-called limited-service facilities have grown most rapidlyin states with less stringent regulatory environments. Specialtyhospitals have become increasingly common in about a dozen statesthat do not regulate the development of new hospitals or expansionsof existing facilities.2, 4-5 In contrast, the growth of ASCshas been more widespread because many state certificate-of-needlaws have provisions that exempt ASCs.2-3 Other factors thathave contributed to the growth of both types of facilities includephysicians' desires to have greater involvement in managementdecisions, uninterrupted operating room schedules, and the potentialto improve efficiency and quality that may result from specialization.Moreover, physician owners share in any profits that resultfrom facility fees and ancillary procedures performed at theASC or specialty hospital. Thus, ownership provides an avenuefor physicians to supplement the income they generate from theprovision of direct patient care.2, 4-5 Although proponentstout the advantages physician-owned facilities provide (ie,more efficient management and scheduling of patients), criticsmaintain that ownership of specialty hospitals or ASCs representsan inherent conflict of interest for referring physician investors.2, 4-7 As owners, physicians have financial incentives to referless-sick patients and those with good insurance to their ownhospital or ASC. These financial incentives may result in increasedutilization of profitable procedures and services, some of whichmay not be medically necessary. Because increased utilizationis the driving force behind escalating health insurance premiums,such trends are likely to result in greater numbers of uninsuredand underinsured persons. Such practices also may weaken theability of competing general hospitals to provide safety netservices.2, 6-7
Nearly all prior research on physician-owned specialty hospitalsis based on site visits and/or market-level analyses of Medicareinpatient claims.4-11 Existing evidence based on inpatient proceduresprovides an incomplete picture because inpatient proceduresaccount for only 20% of the services rendered at physician-ownedspine, orthopedic, or surgical facilities.4 Although ASCs aregeographically distributed throughout the United States, researchdocumenting their effects on use of outpatient surgery is limited.12-19 Previous research provides limited insight about whetherpatients who are treated by physician owners of ASCs or specialtyhospitals are more likely to undergo outpatient surgical procedurescompared with patients with the same clinical conditions whoseek care from physician nonowners. To my knowledge, only 1study to date has examined whether physician ownership of specialtyhospitals influences the frequency of use of inpatient and outpatientsurgery, but the analysis was restricted to workers' compensationcases that involved back or spine injuries.20 The present studyaddresses this significant gap in knowledge. I analyzed claimsdata from a large private insurer in Idaho to compare frequency(referral rates) by physician owners and physician nonownersof specific outpatient orthopedic surgical procedures that couldbe performed in either ASCs or hospital outpatient surgery departments.

Data Source
Using data from state records and the insurer, I identifiedthe freestanding ASCs, specialty hospitals, and full-servicecommunity hospitals located in Idaho. I compiled a databasecontaining the incorporation date, location, ownership, andcontact information for each facility. Nearly all of the growthin ASC availability had occurred since the mid-1990s. I alsocontacted each facility to obtain additional information onthe types of surgical procedures performed, the number of operatingrooms, and more details on physician investors for those facilitieswith incomplete ownership records. With further assistance fromstate documents on corporate filings and detailed physicianrecords from the insurer, I was able to identify the physicianowners of each ASC and specialty hospital in Idaho. I was alsoable to identify the date each physician-owned facility becameoperational, thus enabling us to accurately classify each physicianby ownership status for each year.
The frequency-of-use comparisons are based on analyses of medicalclaims data for the years 2003 through 2007 from the large privateinsurer. The claims contain detailed information on each patientencounter, including the physician who performed the service,location, type of claim (professional or facility), and taxidentification number; patient characteristics such as age,sex, and diagnoses; and details regarding the types of servicesreceived and type of coverage: deductible, copayments, amountbilled, and amount reimbursed. In 2003, the insurer providedhealth insurance coverage (indemnity and preferred providerorganization plans) for approximately 228 000 individuals.By 2007 it had covered an estimated 326 000 individuals,so the insurer's market share was about 40%.
I restricted the analysis to procedures performed at facilitieslocated in Idaho. Services performed by out-of-state physicianswere excluded because they account for a small share of allclaims and do not directly compete with in-state physicians.The insurer uses a fee schedule to determine the amount it willpay for each procedure. Although the deductibles vary acrossplan types, the insurer pays 80% of the allowed fee for outpatientsurgery and the patient is responsible for the remaining 20%.This cost-sharing arrangement applies to both the professionalfee paid to the surgeon and the facility fee paid to the hospitalor ASC. No enrollee was required to obtain plan approval beforeundergoing outpatient surgery. Individuals with Medicare supplementalcoverage and those enrolled in Medicare health maintenance organizationswere excluded from the analysis, but about 2% of patients wereenrolled in a preferred provider organization Medicare Advantageplan.
Calculating Frequency of Use For Specific Surgical Procedures
I constructed frequency-of-use indicators for common outpatientsurgical procedures performed by orthopedic surgeons: carpaltunnel repair, rotator cuff repair, and arthroscopic surgeryof the knee. I developed the following algorithm to constructthese indicators.
Step 1
I identified for both orthopedic surgeon owners and nonownersthe most commonly reported diagnoses associated with each surgicalprocedure of interest (Table 1).

Table 1. Diagnoses Used to Construct Treatment Episodes

Step 2
For each orthopedic surgeon owner and nonowner, I identifiedall office visits of patients with these diagnoses that occurredwithin the 90-day period that preceded the surgical procedureof interest.
Step 3
For each orthopedic surgeon owner and nonowner, I identifiedall patients with these diagnoses who had office visits butdid not undergo the surgical procedure of interest.
Step 4
I constructed frequency-of-use indicators; that is, the percentageof patients who received the surgical procedure of interest.The numerator is the number of patients who received the surgicalprocedure of interest performed by orthopedic surgeon owners(or nonowners) in each given year. The denominator is the sumof (1) patients who had an office visit with the designateddiagnoses followed by the surgical procedure, (2) patients whohad an office visit with the designated diagnoses but no surgery,and (3) patients who had no office visit with an orthopedicsurgeon owner or nonowner but who underwent the surgical procedurefor the designated diagnoses (these cases were infrequent butwere included to obtain accurate counts of the number of proceduresperformed).
In calculating the frequency-of-use indicators, I addressedpotential concerns to obtain accurate rates of use. First, toensure that the orthopedic surgeons performed the proceduresof interest on a regular basis, I eliminated cases associatedwith orthopedic surgeons who did not perform a minimum numberof the surgical procedures of interest in a given year. Theminimum was 5 for carpal tunnel repair, 1 for rotator cuff repair,and 5 for arthroscopic surgery of the knee. Although I droppedonly a handful of physicians from each group, I also conductedsensitivity analyses by including these low-volume physicians.Second, I identified overlap cases, in which the office visitwith the orthopedic surgeon owner or nonowner occurred in Novemberor December but the surgery was performed in the following year.Each overlap case was assigned to the year the surgery was performed,but it was excluded from the denominator for the preceding yearwhen the office visit occurred. Third, I excluded cases withpatients who had an initial office visit with an orthopedicsurgeon owner or nonowner during the fourth quarter of 2007(October-December) but did not subsequently undergo surgeryin 2007. These exclusions were made to allow for the possibilitythat these patients may have had surgery in 2008. Their inclusionin the denominator would be a source of potential bias in calculatingfrequency of use. Finally, I conducted sensitivity analysesusing 60- and 120-day windows.
I stratified the frequency-of-use rates for each surgical procedureby ownership status and year. The null hypothesis assumes thatthere were no differences in the frequency of surgery performedby physician owners vs nonowners during a given year. I evaluatedthe null hypothesis for each surgical procedure by year (2003-2007)using a 2-tailed test of differences between proportions (P < .001).Statistically significant year-specific differences are highlightedin yellow on the figures (Figures 1, 2, and 3), depicting thecomparisons. I also estimated a series of logistic regressionmodels to predict the probability that a patient underwent thesurgical procedure of interest in a given year, while controllingfor physician ownership, age, and sex.

Figure 1. Percentage of patients who underwent carpal tunnel repair, by physician ownership status. Highlighted numbers indicate that the year-specific differences in frequency of use between owners and nonowners were statistically significant at P < .001.

Figure 2. Percentage of patients who underwent rotator cuff repair, by physician ownership status. Highlighted numbers indicate that the year-specific differences in frequency of use between owners and nonowners were statistically significant at P < .001.

Figure 3. Percentage of patients who underwent arthroscopic surgery of the knee, by physician ownership status. Highlighted numbers indicate that the year-specific differences in frequency of use between owners and nonowners were statistically significant at P < .001.


The health care marketplace in Idaho has undergone a dramatictransformation since 1995. Although the number of communityhospitals remained stable at 37, 4 specialty hospitals ownedsolely by referring physicians entered the Idaho market. In1995, 8 ASCs were located in Idaho and all but 1 were ownedby referring physicians. By 2005, there was a 5-fold increasein the number of ASCs. Idaho currently has 42 ASCs, 39 of whichare owned entirely by referring physicians. Physician-ownedlimited-service facilities account for 25% to 47% of the operatingroom capacity in the 6 regions of the state. About 25% of bothowners and nonowners were practicing in the Boise area. Theremainder in both groups, however, were geographically distributedthroughout Idaho. Moreover, Idaho has no medical school andonly 1 family practice residency program, so surgical proceduresperformed by nonowners are not concentrated in teaching institutions.
Table 2 reports the number of patients treated by orthopedicsurgeon owners and nonowners through office visits and/or surgeryby year and procedure type. The mean ages of men and women whounderwent surgery performed by owners and nonowners were similarfor carpal tunnel repair (48-56 years). For owner and nonownerphysicians, women represented 65% to 73% of patients who hadcarpal tunnel repair. The age range of patients who underwentrotator cuff repair was similar for owners and nonowners; menwere aged 53 to 58 years and women were aged 54 to 58 years.Between 36% and 50% of patients who had rotator cuff repairperformed by nonowners were women, whereas women accounted for40% to 46% of such procedures performed by physician owners.For patients who had arthroscopic surgery of the knee, thosetreated by owners were somewhat younger (aged 38-45 years formen and aged 41-45 years for women) than those treated by nonowners(aged 42-47 years for men and aged 45-50 years for women). Approximately48% to 52% of patients who had arthroscopic surgery performedby nonowner physicians were women, compared with 44% to 46%for knee surgery performed by owners.

Table 2. Number of Episodes Treated by Physician Owners and Nonowners

As shown in Figure 1, the frequency of carpal tunnel repairfor patients treated by owners was significantly higher thanthe rate for patients treated by nonowners (P < .001).In 2003, the frequency of use by owners was 33.1% compared with24.2% for nonowners, a difference of nearly 9 percentage points(P < .001). By 2007, this difference had widenedto 15.6 percentage points: 32.8% for owners vs 17.2% for nonowners.Age- and sex-adjusted odds ratios (Table 3) show that the oddsof having carpal tunnel repair were 54% to 129% higher for patientsof owners relative to nonowners (P < .001).

Table 3. Adjusted ORs Predicting the Probability of Undergoing the Surgical Procedure of Interest

Figure 2 depicts frequency-of-use comparisons for rotator cuffrepair. In 2003-2004, there were no differences in frequencyof use by ownership status. During the period 2005-2007, frequencyof rotator cuff repair for patients treated by owners was 4.6to 8.8 percentage points higher compared with nonowners (P < .001).Adjusted odds ratios (Table 3) indicate that the likelihoodof undergoing rotator cuff repair during the period 2005-2007was 33% to 100% higher for patients treated by owners comparedwith those treated by nonowners (P < .001).
Figure 3 presents comparisons for arthroscopic surgery of theknee. In 2003, differences between owners and nonowners werenot significant. This pattern changed in 2004, when the frequencyof use was 33.2% for owners compared with 24.5% for nonowners,a difference of close to 9 percentage points (P < .001).The difference widened further to nearly 13 percentage pointsin 2005 (P < .001). In 2006-2007, the differencesin frequency of use between owners and nonowners had narrowedsomewhat but remained statistically significant, at 7.8 and5.5 percentage points, respectively (P < .001).Adjusted odds ratios (Table 3) show that during the period 2004-2007,patients treated by owners were 27% to 78% more likely to undergoknee surgery compared with those treated by nonowners (P < .001).

Since 2000, specialty hospitals and ASCs that involve referringphysician investors have grown rapidly in several markets throughoutthe country. Whereas the pros and cons of physician ownershipof limited-service facilities have been the subject of extensivedebate among advocates and critics, the most controversial issuerelates to the practice of physician self-referral.2, 6-7,21 Three recent studies based on Medicare inpatient claims foundthat when a physician-owned specialty hospital enters the market,there is subsequently an increase in the use of procedures ofinterest.5, 8-9 Other evidence indicates that specialty hospitalstreat primarily low-acuity cases within specific diagnosis relatedgroups as well as those with few comorbid conditions.4-5,10-11 Furthermore, relative to general hospitals, specialty facilitiestreat small percentages of Medicaid patients and negligiblenumbers of uninsured patients and are less likely to provideemergency care.4, 10 Prior research on ASCs is composed of casestudies,12-13 trend analyses documenting their growth,14 comparisonsof the patient mix treated in freestanding ASCs and hospitaloutpatient surgery departments,15-16 and comparisons of annualsurgical caseloads treated by owners vs nonowners.17-19 Existingevidence, therefore, provides limited insight into whether thefinancial incentives associated with ownership of specialtyhospitals or ASCs influence the frequency of use for outpatientsurgical procedures.
This study analyzed 5 years of claims data from a large privateinsurer in Idaho to provide new evidence on this issue. Theanalyses evaluated the relationship between physician ownershipand frequency of use for 3 common outpatient surgical procedures:carpal tunnel repair, rotator cuff repair, and arthroscopicsurgery of the knee. The health care marketplace in Idaho isan appropriate laboratory to investigate these issues for severalreasons. First, the state has almost equal numbers of physician-ownedASCs and competing general hospitals, along with 4 physician-ownedspecialty hospitals. Nearly all of these facilities were establishedbefore 2003, so the findings reflect a somewhat steady-statepicture of the effects of physician ownership on frequency ofuse of outpatient surgical procedures. Second, I was able toaccurately classify orthopedic surgeons as either owners ornonowners because the insurer requires physicians and facilitiesto report ownership and financial relationships. Finally, Idahois an attractive marketplace for specialty hospitals and ASCsto locate because it has no state certificate-of-need laws andfavorable reimbursement rates due to the absence of capitatedmanaged care plans.
With few exceptions during the 5-year period, frequency of usefor each of the orthopedic procedures examined was significantlyhigher for physician owners compared with physician nonowners.The age- and sex-adjusted probability of undergoing carpal tunnelrepair was 54% to 129% higher for owners compared with nonowners.The age- and sex-adjusted likelihood of rotator cuff repairwas 33% to 100% higher if the patient was treated by a physicianowner. Age- and sex-adjusted odds ratios indicate that the likelihoodof having arthroscopic surgery was 27% to 78% higher for patientsof owners compared with nonowners. Moreover, the results weresimilar when I altered the episode window to 60 or 120 days.The consistent finding of higher adjusted use rates by physicianowners across time clearly suggests that financial incentiveslinked to ownership of specialty hospitals or ASCs influencephysicians' practice patterns.
I also investigated factors other than financial incentivesthat might account for the higher referral rates that characterizeorthopedic surgeon owners. One consideration relates to thepatient mix. Patients treated by physician owners might be healthierand therefore more likely to tolerate surgery. Alternatively,they may have more severe orthopedic problems, implying thatsurgery is warranted. Although such issues about patient mixcannot be addressed with claims data, it is important to recognizethat information on physician ownership is generally not disclosedto patients. Considering the absence of full disclosure, thereis no reason why healthier patients or those with more severeorthopedic injuries should be predisposed to seek care fromphysician owners rather than physician nonowners. A second possibleexplanation is that patients of physician owners may be enrolledin health insurance plans that require less cost sharing, andas a consequence these patients may be more prone to consentto elective surgery. This explanation, however, cannot accountfor the differences in use rates that exist between owners andnonowners because a 20% cost-sharing rate is applied to boththe professional and facility payments for outpatient surgicalprocedures. A third possible explanation is patient preferences.Although I have no data on patient choice, I contend that thisconsideration would be dominated by financial incentives linkedto physician ownership. I conducted analyses to evaluate thehypothesis that physician owners work primarily in their ownfacility, whereas nonowners perform surgery in nonowner facilities.For arthroscopic surgery of the knee, I found that physicianowners perform 75% to 84% of these procedures in the ASC orspecialty hospital in which they have a financial stake. Thereverse characterizes the practice patterns of physician nonowners.Consistent with expectations, nonowners perform between 77%and 81% of these procedures in nonowner facilities. The otherprocedures showed similar patterns.
Although the results reported in this article provide new insightson how financial incentives affect physicians' practice patterns,the study has some limitations. First, the analyses are basedon claims records from a large private insurer in Idaho. Thus,one consideration is whether similar patterns would be evidentin other markets with a high concentration of physician-ownedspecialty hospitals and ASCs. Several studies have found higheruse rates for inpatient procedures in markets with establishedphysician-owned specialty hospitals,5, 8-9 so it seems likelythat analyses of outpatient surgical procedures would exhibithigher use rates as well. A related question is whether thefindings are applicable to patients with other types of generousinsurance. A recently published study comparing frequency ofuse of inpatient and outpatient procedures used to treat injuredworkers by physician owners and nonowners suggests that similarresults are evident among patients with other generous insurancecoverage.20 A third limitation is my inability to ascertainwhether the higher frequency-of-use rates that characterizephysician owners represent surgery that has little marginalbenefit to patients who receive it. A recent study by Kirkleyet al22 published in the New England Journal of Medicine suggeststhat this may be the case for at least 1 of the procedures examinedin our article: arthroscopic surgery of the knee. The authorsfound that arthroscopic surgery of the knee for the treatmentof osteoarthritis yielded no improvement in outcomes comparedwith patients who received only physical and medical therapy.These procedures are estimated to cost about $5000 per case,which is 2 to 3 times higher than a course of physical and medicaltherapy. If a substantial proportion of the increased frequencyof surgery by physician owners is performed in marginal cases,then a share of the greater expenditures associated with self-referralrepresent inefficient spending.
In conclusion, these findings documenting the effects of physicianself-referral on frequency of use of elective surgical proceduresperformed on well-insured individuals should be of concern tofederal and state legislators, third-party payers, employers,and patients. The increased utilization that characterizes physicianself-referral arrangements will continue to lead to higher healthinsurance premiums, which in turn is likely to result in moreuninsured and underinsured persons.
Correspondence: Jean M. Mitchell, PhD, Georgetown Public PolicyInstitute, Georgetown University, 3520 Prospect St NW, Room423, Washington, DC 20007 (mitchejm@georgetown.edu ).
Accepted for Publication: April 28, 2009.
Financial Disclosure: None reported.
Funding/Support: Research support was provided through an unrestrictededucational research contract between the Idaho Hospital Associationand Georgetown University.
Author Affiliation: Georgetown Public Policy Institute, Georgetown University, Washington, DC.


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