• Hillcrest begins development program to operate 15 ambulatory surgery centers by end of 2020
  • Provides funding, surgeons buy investment shares into practice
  • Outpatient services projected to explode over next decade as payers, employers and patients seek lower costs

Hillcrest Capital Partners LLP, a Royal Oak-based health care development and management company that plans to develop and operate more than a dozen outpatient surgery centers with physician investors over the next 18 months, wants to capitalize on the fact that Michigan has fewer outpatient surgery centers than most states its size.

With Medicare and private payers like Blue Cross Blue Shield of Michigan providing incentives for more surgery and other services to be performed in lower-cost outpatient centers, Hillcrest hopes to get ahead of the change curve.

Founded in 2015, Hillcrest has grown to a company with a little more than $2.5 million in revenue in 2018, said Abe Baydoun, owner and co-founder. Hillcrest’s goal is to develop and operate 15 surgery centers with physicians by the end of 2020.

So far, Hillcrest manages one surgery center in Flint, the Charter Endoscopy Center, that it is converting into a multi-specialty facility. It has three additional surgery centers planned in Rochester Hills, Royal Oak and Dearborn, Baydoun said.

Ricardo Borrego, M.D., Hillcrest’s co-founder and manager, said Hillcrest is offering surgeons and related specialties a variety of investment opportunities.

“We bring them turnkey operations. We cover expenses, overhead and equipment,” said Borrego, a practicing anesthesiologist. “We hire staff, do the accounting and manage it. They buy shares. It is the only out-of-pocket costs they have. We guarantee return of investment of $20 million to $30 million per project.”

Borrego said Hillcrest estimates each surgery center will cost approximately $14 million to purchase, convert or build.

“We are looking for spine, orthopedic, pain management and cardiovascular” specialists, Borrego said. “These are synergistic specialties that work well to have their own surgery center.”

Spine surgeons historically have conducted more surgeries in hospitals. But the last several years with microinvasive, laminectomies (a surgical operation to remove the back of one or more vertebrae) and small spinal disk surgeries where no blood transfusion is needed, more outpatient surgeries are being done in ambulatory centers, Borrego said.

“We offer a one-stop shop. We get doctors together, we put up all the money, and they buy shares and are investors in the centers,” he said.

The traditional model doctors have used to open an independent surgery center is raise capital through a bank or on their own to build or buy a center. There are also more than a dozen large corporate ambulatory surgery chains, including American Surgery Centers, Surgical Care Affiliates and United Surgical Partners, which is owned by Tenet Healthcare Corp., the parent company of Detroit Medical Center.

When surgeons seek to build on their own, Borrego said, “at the outset they are in a hole. Hillcrest offers the ability to carry out a dream without putting up the money. We will get our money back in the end. We want them to thrive and succeed.”

Baydoun, who originally is from Michigan, said he previously worked in Dallas where we worked for a similar company called Pinecrest Capital Partners. Pinecrest developed 48 surgery centers in Texas using the same investment strategy.

“We have access to capital through investors and our own resources,” Baydoun said. “We have already put money aside for our needs.”

But because the certificate of need process in Michigan is cumbersome and sometimes difficult, Baydoun said the company first will identify existing surgery centers and develop them first.

For example, two existing centers are expected to open this summer under the Hillcrest model, Baydoun said. They are the Spine and Joint Institute of Michigan, 5140 Coolidge Highway, Royal Oak; and the Insight Surgical Institute of Michigan, 5850 Mercury Drive, Dearborn.

Borrego said conflict sometimes arises when surgeons at hospitals decided to open up their own surgery. “The hospital sees spine surgeons involved, and it will cause a rift among them. They can become involved in the financing, which eliminates a risk from them. But surgeons are finding they no longer need to depend on the hospital for inpatient care or services.”

Surgeon partnerships

Some health systems, however, are seeing the handwriting on the wall. Instead of watching their surgeons take their inpatient business to other outpatient surgery settings, a growing number of hospitals are partnering with surgeons.

Beaumont Health, an eight-hospital system based in Southfield, is developing a plan to build an outpatient surgery center on its Royal Oak campus in a partnership with Michigan Orthopaedic Surgeons PLLC, a 44-surgeon group based in Southfield. MOS is composed primarily of surgeons who practice at Beaumont Hospital in Royal Oak and Troy.

Paul Fortin, M.D., MOS president, told Crain’s in a Dec. 9 article that Michigan payers, insurers and hospitals are behind in the movement to outpatient surgery, and MOS is trying to prepare for an explosion he believes will occur in Southeast Michigan in the coming years. MOS now does the bulk of its outpatient surgery at UnaSource Surgery Center in Troy, where it has a 40 percent ownership interest in the five-operating-room center.

Carolyn Wilson, R.N., Beaumont’s COO, also told Crain’s that Beaumont’s strategy is to move more into outpatient orthopedics and build out a network of 30 urgent-care centers in metro Detroit in a joint venture with Atlanta-based WellStreet Urgent Care.

Beaumont also recently completed construction of a $5.5 million, 10,000-square-foot outpatient orthopedic center on the campus of Beaumont Hospital in Taylor. Services in the 12-room facility include examinations, imaging, access to specialists, and treatment plans for injuries. Patients will continue to receive surgery in the hospital’s operating rooms.

Over the past several years, Medicare and some private payers such as Blue Cross Blue Shield of Michigan have been testing bundled services payment programs for total joint replacements in outpatient settings. “This is a huge market for hospitals to lose and they are setting up partnerships with surgeons on their medical staffs,” Borrego said.

While Beaumont or Hillcrest are not currently involved, MOS and Troy-based Triarq Health are two physician organizations participating in a prepaid, or bundled, hip and knee replacement program offered by the Michigan Blues. The Blues’ program and a similar one sponsored by Priority Health are designed to lower costs by encouraging outpatient surgeries.

CON barriers in Michigan

One barrier to ambulatory surgery center development historically has been Michigan’s stringent certificate-of-need laws that have limited surgery center approvals to about an average of five or six per year over the past several years.

“You need to show a particular area has a need for health care services,” Borrego said. “The only way to get it is by allowing surgeons to pledge those cases (in the CON application), where they can show they have enough cases to open an ambulatory surgery center.”

Borrego said Hillcrest is in contact with a number of surgeons in Southeast Michigan that are “able to pledge their cases” in planned CON applications.

As a result, CON approvals for surgery centers have increased dramatically during the past 18 months.

From 2015 to 2017, the number of approved CON applications for surgery centers has averaged about five, said Beth Nagle, division director with the Michigan Department of Health and Human Services.

However, in fiscal year 2018 that ended last Sept. 30, nine surgery centers were approved, Nagle said. A Crain’s analysis of fiscal 2019 from Oct. 1 through February showed an additional five surgery centers have been approved with three more pending.

“We don’t know why there has been an increase. There have been no changes in the standards,” Nagle said.

But Borrego said Hillcrest is banking on the belief there is a growing need for surgery centers based on patient and health insurer demands.

Michigan has about 110 Medicare-certified ambulatory surgery centers, ranking 17th nationally, lower than any Midwest state other than 80 in Wisconsin, 72 in Minnesota and 24 in Iowa, according to the American Ambulatory Surgery Center Association.

Neighboring Ohio has 181 and Indiana has 124. The top outpatient surgery states are California with 794, Florida with 426 and Texas with 391.

Andrew Gwinnell, president of the Michigan Ambulatory Surgery Association, said ambulatory surgery center growth in Michigan is related to more procedures being authorized by Medicare, Medicaid and private payers, especially total joint replacements.

“We expect there will be growth in Michigan for a variety of reasons. … We are seeing more hospital partnerships now with orthopedic and spine surgeons,” said Gwinnell, administrator of Truvista Surgery Center, a physician-owned center in Troy that opened in 2007. “Hospitals are more protective of these services and want to work closely with surgeons.”

But Gwinnell said neighboring Ohio has many more surgery centers than Michigan, partially due to Michigan’s CON law, but also because payer financial incentives are a little behind in Michigan compared with other states.

“As more procedures are authorized to be done in ambulatory surgery settings, there will be more opportunities to build because surgeons will be able to show more need” to the CON Commission, Gwinnell said.