Wall Street Journal August 1999

By Mary Flood
Staff Reporter of The Wall Street Journal

WICHITA FALLS--Prompted by the merger of the city's only two hospitals, a group of doctors here have decided to go into the hospital business themselves.

The result is the 30-bed Kell West Regional Hospital. Unlike other physician-owned hospitals, which typically offer care in a single specialty, Kell West provides a wide range of surgical and emergency treatment, in direct competition with the big local facility, United Regional Health Care System.

The new hospital's selling point is service, for visitors and administrators alike: Patients get amenities such as frequent checkups from nurses and round-the-clock visiting hours, while doctors get access to a range of equipment and facilities.

"When the two big hospitals merged, it was like having only Wal-Mart," says Jerry Myers, chairman and chief of staff at Kell West - and also chief of surgery at United Regional. "But wouldn't it be better to have a Target and a Kmart, too?"

Health-care experts say Kell West, named for the thoroughfare on which it is located, is currently the only doctor-owned and controlled multispecialty hospital in Texas - but they predict it won't be the last. Decades ago, doctors started and owned some Texas hospitals, but experts say they gradually sold them all to large corporate interests. Now the wave of mergers that has reduced or eliminated competition - while enforcing cost-cutting - has created a plethora of doctors who are increasingly unhappy about losing power over treatment.

"It may seem a small step in Wichita Falls, but it's an important development," says Lou Goodman, chief executive officer of the Austin-based Texas Medical Association, a trade group. "It's from the grass roots up, and it's part of the backlash against medicine that takes the control away from physicians. And the environment most conducive to this is the small to medium-sized communities where competition has evaporated."

Some in the community have said this hurts patient care because it tends to skim off the best patients - the ones who can pay. And, some experts say, there could be bigger consequences down the road. "The big issue we may face down the line is if doctors going out on their own hurts or kills large hospitals, will taxpayers have to pick up the slack?" says Dianne Love, a University of Houston Clear Lake campus professor who teaches an MBA program for doctors.

But doctors at Kell West argue they were answering an urgent need. The seeds for the Kell West facility were planted three years ago, a year before the merger. Doctors began to complain they couldn't get the local hospitals - Wichita General, a charity hospital owned by the city and county, and Bethania, previously run by Catholic nuns from the Sisters of the Holy Family of Nazareth - to respond to a host of complaints, such as difficulty in scheduling operating rooms, less-than-stellar operating-room nurses and outdated equipment.

They also objected to hospital rules that excluded family from recovery rooms and intensive-care units, and to staffing limits that meant nurses were so overworked that they didn't have time to provide more personal care to patients.

The new hospital, in contrast, aims to provide "hotel-like service," Dr. Myers says. The doctor-owners train employees to smile more often and chat regularly with patients, and they require nurses to call patients during their first day back home to check on their progress. There are two staff members assigned just to update family members every 30 minutes during a loved one's surgery, and officials plan to add a concierge to help patients and their families with anything they need.

Such touches win praise from patients and their families. When 72-year-old Virginia Bousquet needed a mastectomy, her family insisted on Kell West - even though daughter Shirley Interial and her husband Adolph, work as nurses at United Regional: "The nursing care is great here. The atmosphere is happy," says Ms. Interial. "I want her here."

And, of course, the hospital offers plenty of doctor-friendly amenities as well. It has six operating rooms for neurosurgery, vascular surgery, plastic surgery and general surgery, and because Kell West grants hospital privileges to relatively few surgeons - primarily its 70 investor-physicians - there's rarely difficulty in scheduling OR time.

This was all part of Dr. Myers's vision when he started lining up partners three years ago for the project, buttonholing potential investors and lenders at Wichita Falls' only country club. The effort gained momentum after Wichita General and Bethania announced their plans to merge.

In the end, 70 area doctors put up between $5,000 and $60,000 each, for a total of $1.3 million toward the cost of the hospital. Each then had to sign personal guarantees to secure about $9 million in loans from three local banks to cover the construction and equipment costs for the 36,100 square-foot facility, which opened in January.

Kell West has 35 beds with state licenses for long-term stay and 15 beds for short stay and recovery, the six operating rooms, a laboratory, an imaging facility and an emergency room. Doctors already are planning a 16,200-square-foot addition, which will include a physical-therapy section, an obstetrics center and additional intensive-care beds.

It's too early to gauge how the hospital is faring financially. Expected revenue exceeded expenses for the first time in July, and if August and September meet forecasts, officials project that the hospital will show a nine-month operating profit of about $111,000.

The hospital's investors, most of whom practice at United Regional as well as Kell West, receive their usual payment for their services but aren't expected to get a return on their investment for at least two years. "We wouldn't be here if it wasn't primarily because we want physician input," says V. C. Saied, an anesthesiologist on the Kell West board. "I'm not saying one or two investors won't gripe if we go a few years without dividends, but most are in it for the long haul."

Whatever the financial picture at Kell West, the new hospital has had an impact on its competitor. Although a United Regional spokeswoman plays down the effect of Kell West on the older hospital's business, she blames the new facility for a decline in the share of paying patients at her hospital. She says United Regional has seen a 3% increase in patients who are considered high risk and whose charges will probably have to be written off as bad debt.

Moreover, Kell West's opening has coincided with hard times at 420-bed United Regional, which occupies two of the city's largest downtown buildings and is one of the area's largest employers, with 2,000 employees. The merger, completed in October 1997, was supposed to create savings but a heavy round of cuts in federal Medicare payments contributed to an operating loss in 1998. The hospital, a nonprofit run on behalf of a city/county board, posted another $5 million operating loss in the first six months of 1999, and officials project another $5 million loss for the second half of the year.

Although United Regional officials refrained from staffing cuts in the immediate wake of the merger, the hospital recently laid off about 35 people, switched jobs for another 35 and is closing some popular outreach programs, such as a mobile mammography unit. It has also asked doctors to cut patient stays where possible.

All this has added up to a morale problem and a constant supply of resumes flowing to Kell West. The local newspaper has featured stories raising questions about United Regional administration, and letter writers have lamented the merger and the loss of control by the nuns have [sic] and questioned the hospital's television advertising.

The recent Medicare cutbacks haven't been as painful at Kell West, in part because it relies less on Medicare patients than its larger competitor. Where United Regional has about 60% of its patients covered by Medicare, Kell West estimates that Medicare accounts for less than half of its business. Further, the new hospital had the advantage of starting operations after the Medicare cuts were in place, so officials could take the lower reimbursements into account.

United Regional executives refused to talk extensively about Kell West.

"We're not commenting on Kell West and whether its presence here is valid or not valid," says Karla Hall, vice president of communications. "There's no sense in getting in a shouting match."

However, she says, "Sure, the new hospital offers people another place to go. But they can't do everything. They can't do trauma and obstetrics and gynecology, for instance."

Local doctors who aren't in the investor group are critical of the new hospital Lawrence Lyford, president of an outpatient clinic group called Clinics of North Texas, complains Kell West raided other medical groups for nurses and other hospital staff. And he says some doctors object to Kell West's decision to restrict hospital privileges to members of the investor group, making it the first are hospital to restrict access.

"But the biggest concern is the damage it could do to the other hospital," Dr. Lyford says. "There's a concern that if they skim the cream and don't provide the more expensive facilities like [intensive care, cardiac care and obstetrics and gynecology] there could be problems at the bigger hospitals in the long run, both here and at other places where this happens around the country."

Dr. Myers says the restricted doctor access gives investors a first shot at the facility, but it may be changed in the future. He says Kell West is already planning to add some intensive-care beds and an obstetrical and gynecological center. And he says, especially in a town with only one player, he "doesn't see how a little competition and choice will hurt."