Filling A Laser Surgery Niche

January 28, 1994|By Patricia Meisol | Patricia Meisol,Staff Writer

BETHESDA -- After a year of hearing doctors say they would perform surgery in their offices if only they could justify purchasing the equipment, Paul R. Herchman figured out a way to let them have their cake and eat it, too.

The former medical equipment salesman purchased smaller versions of the high-tech equipment he sold to hospitals, and began taking them around to doctors' offices as needed, billing insurance companies directly for their use. Today his company, Medical Alliance Inc. of Dallas, is trying to make lasers as commonplace in a doctor's office as Xerox made copying machines.

The idea has drawn both praise and criticism from doctors. But after almost five years, it is catching on. More than 1,000 laser procedures a month using Medical Alliance's equipment are performed in office buildings in 11 markets nationwide. The company has 20 mobile laser surgery units, used mostly for minor gynecological procedures -- mainly to vaporize pre-cancerous or diseased cells uncovered in PAP smears -- and more than a dozen other laser units dedicated to other uses.

In an environment where insurance companies are increasingly requiring treatment outside hospitals, the privately held company is poised for growth. Medical Alliance may be the only firm to offer its portable equipment in a package designed to meet medical care requirements of managed health care plans, said Mr. Herchman, 37. Though still in the red, the company reported revenues in 1993 of $4 million and expects that to double to at least $8 million this year.

"The thing we have spent the past four years doing is developing the structure to become a preferred provider," Mr. Herchman said. "I have no technology that is proprietary, but I know what is required for us to pass" the requirements of managed care companies, he said. These include maintenance and $ 1/8 replacement of equipment and following standard procedures each time technicians set up the machine in a doctor's office.

It has contracts with 70 companies. They include Maryland's largest health maintenance organization, M.D. IPA, and a competitor, HealthPlus. In addition, the company expects to sign an agreement with CFS Health Group Inc., the holding company for CareFirst, FreeState and other HMOs owned by Blue Cross and Blue Shield of Maryland. The firm entered the Washington, D.C., market in 1991, and does 50 procedures a month there. With the new HMO contract, Medical Alliance hopes office-based procedures will become commonplace in Baltimore and surrounding areas as well.

Medical Alliance markets itself to doctors who want convenience and volume and to insurance companies that want lower costs. Its main competitor is hospitals, where the same procedures are performed at much higher cost -- $1,500 to $3,000 compared with the in-office cost of $500.

Doctors couldn't justify buying the equipment on their own. It costs between $25,000 and $75,000, plus $5,000 a year to service.

"I would have to perform 30 to 40 procedures a year for 10 years to justify it," said Dr. Lewis R. Townsend, a Bethesda obstetrician and gynecologist who was one of the earliest in Maryland to sign up with Medical Alliance. Nor could he afford to keep the equipment current, he said.

Dr. Townsend began performing laser surgery at Columbia Hospital for Women and Sibley Hospital after finishing his residency in 1985. When Medical Alliance approached him four years later with the same equipment for his office, he said, "I jumped on this right away."

In addition to being convenient for him, it's convenient and cheaper for the patient. A company technician delivers and sets up the equipment as needed, which can be as often as every two weeks. A patient treated in the office might save $800 of her share of the bill compared with hospital treatment.

Probably 70 percent of all vaporization cases can be done in the office, Dr. Townsend said. The difficulty is in gaining experience to know whether a certain case would require stitches or a certain patient would be unmanageable without some anesthesia, he said.

"You have to know your limits," Dr. Townsend said. "These new techniques have a learning curve for the equipment and for the practitioner, and some never get it."

Because of that, many doctors prefer the backup available in a hospital. Increasingly, however, they are not being given a choice. Even Dr. Townsend, who likes using the equipment, is concerned that insurance companies are directing doctors to use it across the board and refuse to pay if the procedure is done in a hospital or an outpatient center.

"Insurance companies are forcing us to do this, and they are not nice about it," Dr. Townsend said, adding that he is resentful of what he sees as a growing acceptance of insurance companies practicing medicine without a license and hospitals credentialing doctors by the cost of the treatments they give.

The learning curve coupled with physician reluctance to use the portable lasers got in the way of Medical Alliance's ambitious drive for market share, and it has yet to finish a year in the black. This year it has concentrated on expansion in existing markets and earned a profit in six of the nine months ended Sept. 30, although it won't report a profit for 1993. It does expect to pull into the black this year.

The company is driven by technology as well as by procedure, Mr. Herchman said. Right now, it is adding equipment for optional surgical procedures that doctors could use at a lower cost than outright purchase.

One such is a laser that removes tattoos, pigments and skin lesions. Mr. Herchman said 10 percent of the population has tattoos. Another is a laser to treat snoring.

"With changes in health care, it is not a bad idea to diversify into procedures that are elective," he said.

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