Academic Articles Hospitals Supply of Medical Services

Focused Factories

The popularity of specialty medical facilities (SMF) has increased over the years. The number of Medicare-certified ambulatory surgery centers (ASCs) has doubled to 3,371 during the past decade. A question remains: are these “Focused Factories” good for society?

In an article by Casalino, Devers and Brewster, (“Focused Factories…“) the authors try to answer this question.

What are SMFs?

At this point there are 2 types of SMFs: specialty hospitals and ambulatory surgical centers (ASCs).

  • Specialty hospitals – According to the Community Tracking Study, most specialty hospitals are either “heart hospitals” or hospitals specializing in orthopedic surgery. They are generally joint ventures between physicians and national specialty firms or local hospitals, but a few are wholly owned by either physicians or by local hospitals.
  • ASCs – Most ASCs are small and have four or fewer operating rooms. The most common services provided at ASCs are ophthalmology and gastroenterology.

Are they specialized medical facilities (SMFs) good for society?

Physicians who work at or own the SMFs claim that this type of care increases quality and reduces cost. Proponents of SMFs claim productivity increases due to specialization and the fact that there is less down time between procedures. Some hospitals say that these facilities engage in competition that is ‘unfair’, but if lowering cost and increasing quality is ‘unfair’ competition, mark me down as a fan of the unfair. The hospitals also argue that the SMFs are formed around the most profitable services and thus the hospital can not subsidize money-losing departments (e.g.: ERs, burn units, trauma centers). If the hospital is losing money on certain procedures, this does not mean that they should be making excess profits on other procedures, only that health plan compensation schedules should be altered.

The hospitals, however, are not all in the wrong. The SMFs have been accused of ‘cherry picking’ healthy patients. For instance, if physicians are reimbursed $5000 for a surgical procedure, the cost of preforming the surgery may be $2000 for a (relatively) healthier patient and $4000 for a relatively sicker patient due to increased likelihood of complications during surgery for the sicker patient. Thus, the hospital is shouldered with caring for the sicker patients and it may be more difficult for them to turn a profit. This solution to this is of course to make surgery payment in a risk-adjusted manner. In reality, risk adjustment is a delicate process which depends on many unobserved health variables so this solution may not be as easy to implement as it would seem in theory.

Another issue is whether SMFs create incentives for excess medical care. This is related to the problem of integrating the diagnostician of a problem and the treater of a problem (see 10 April 2007 post). If physicians own the SMFs, there may be an even larger incentive for them to recommend that their patients have invasive medical procedures since the physicians themselves often will profit not only from the labor compensation they will receive from preforming the procedure, but will receive additional income as return on capital from their investment in the SMF. Even physicians who do not treat patients and only diagnose them will have an incentive to recommend surgeries if they own a share of the SMF where the surgery would be preformed.

To counteract this problem, some politicians are considering bills which would “prohibit physicians from referring Medicare
and Medicaid patients to specialty hospitals in which the physicians have an investment.” While this is certainly a problem, the authors wise note that the negative aspect of these types of laws “…is that it would cause society to lose any advantages that might come from physician ownership and management of such facilities.”

So are SMFs good for society? At this stage it is difficult to say with certainty whether they are or not. Further investigation on this topic is certainly merited in the future. Any comments on your opinions regarding specialized medical facilities would be greatly appreciated.


  1. In the hospital world, on average some lines of business make a lot of money, some make a little, some are marginal, and some lose money. The most profitable lines of business are cardiac surgery, catheter-based therapeutic vascular procedures, and joint replacement surgery. Outpatient surgery is also profitable. It is entirely reasonable in our capitalist economy that entreprenurial ventures have tried to carve out these particular areas from general hospitals. Inpatient treatment of infections, congestive heart failure, and other common non-surgical, non-obstetrical conditions generally lose money. [These facts are the result of payer policy decisions to allow differing margins for different services. I do not know the basis of those decisions.] Nobody is proposing setting up specialty hospitals to enhance efficiency and quality in the care of such patients. General hospitals would naturally have difficulty surviving if their profitable lines of business were lost and only the marginal and loss-making lines remained unless greater margins were allowed for services currently underpaid relative to the services being lost.
    There is little or no need for the SMFs to manufacture business. The business is plentiful already and as the Boomers age promises to become more so. Finding sufficient physician practitioners is probably more of a problem at present.
    As for whether society benefits from physician ownership and management, that may be a reasonable argument only if physicians can provide more competent management than is generally available now. For smaller nonprofit community general hospitals, that bar is not set too high at the moment but the principle would apply to such hospitals as well, though it is seldom mentioned by the SMF enthusiasts.
    In most cases, businesses organized for the purpose generally supply SMF management to the physicians to the best of my knowledge.
    I have had a total of three terms on the boards of two small community general hospitals, so my prejudices are on display here.

Comments are closed.