Sanford Health muscling into Rapid City with purchase of hospital

Sanford Health is diving into the Rapid City health market in a big way, buying a luxury physician-owned hospital that has some of the highest quality-of-care metrics in the country.

The move to acquire Black Hills Surgical Hospital will also come with its biggest asset — its doctors, who currently own 46 percent of the hospital, Sanford President and CEO Bill Gassen confirmed in an interview with The Dakota Scout. Gassen praised them for their skill in medicine and for being talented business people who have built a “wonderful” business model.

“The ability to be able to partner with them is really what makes this so attractive and makes them the partner we want to be doing this with,” Gassen said. “If this were just acquiring an asset out there, we wouldn’t be interested in that.”

The other 54 percent of the hospital is owned by Medical Facilities Corp. — a company based in Canada that has ownership interests in three other U.S. specialty hospitals, including the Sioux Falls Specialty Hospital, where it is a 51 percent owner. Sanford is also buying out MFC’s share in the Black Hills facility.

Gassen said the expansion makes sense for Sanford, which is headquartered in South Dakota. Gassen, who grew up in Rapid City, noted that Sanford already had a presence in the Black Hills. Sanford doctors have performed outreach there for three decades and now provide lab services and elderly care through its Good Samaritan Society long-term care facilities.

But the acquisition of Black Hills Surgical Hospital is a major escalation in the state’s second-largest market, where the health care industry is dominated by Monument Health, the state’s third-largest health system. Sanford is also acquiring the Black Hills Orthopedic & Spine Center, a physician group that has offices in Rapid City and Gillette, Wyoming. The group has clinics in West River and North Dakota.

“It’s always been a market we’ve wanted to continue to invest in and to continue to grow in,” Gassen said. “But we need to make sure we can find the right partner to be able to do that with. Really, that’s where we are today. We had the privileged opportunity to come together with incredibly talented physicians at the Black Hills Orthopedic & Spine Center and the Black Hills Surgical Hospital.”

Dr. Larry Teuber, a Rapid City neurosurgeon who founded MFC with Dr. Don Schellpfeffer, a Sioux Falls anesthesiologist, said the acquisition in Rapid City makes strategic sense for Sanford.

“Sanford clearly wants to have a beachhead in Rapid City, and this will get them a facility with surgeons that is firing on all cylinders and distributing around $22 million per year,” Teuber told The Scout. Teuber is also the founder of Black Hills Surgical Hospital.

Gassen confirmed to The Scout that the acquisition was only a start, and that the health system would look for other opportunities to expand in West River.The acquisition price was not available at press time.

The acquisitions mark yet another victory for Sanford over the physician-owned hospital industry, a war the Sioux Falls-based health system has waged for decades.

Sanford’s former president and CEO, Kelby Krabbenhoft, and a top lieutenant, Cindy Morrison, fought for years in Washington, D.C., against physician-owned hospitals, including those owned by Teuber and Schellpfeffer. They argued the facilities siphoned patients with private health insurance for some of the most lucrative medical procedures for hospitals to perform, including orthopedics, spine procedures, and cardiac care.

Once a physician-owned hospital opened in a market, the private-pay patients went there, leaving nonprofit hospitals with a higher percentage of patients on insurance programs with lower reimbursements.

But physician-owned hospitals argued they offered higher quality care, better staff and hospital settings that were in many instances akin to nice hotels. They also scoffed at traditional hospital administrators who failed to understand the value of competition.

Sanford eventually won a major battle in the war: The 2010 overhaul of the nation’s health care industry in the Affordable Care Act included a ban on new physician-owned hospitals. Existing ones were allowed to continue operating, but physician owners were also prohibited from increasing their ownership stakes. There were also restrictions on increasing the percentage of overnight rooms and operating rooms, Teuber said.

Black Hills Surgical Hospital began operating as a licensed specialty hospital in 1997. The facility has 11 operating rooms and 26 overnight rooms. The hospital also has two urgent care centers in Rapid City and one in Gillette. The majority of its revenue, according to MFC, comes from orthopedic and neurosurgery procedures.

“BHSH prides itself on its hotel-like ambiance,” MFC’s website reads. “Its modern building, state-of-the-art equipment, five-star food, and superior service enable BHSH to meet and exceed the needs of patients and surgeons. The facility is conveniently located with access to both public and private transportation.”

This story was originally published on TheDakotaScout.com.

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