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The Keckley Report

Does a Hospital’s Ownership Matter?

By September 11, 2018March 1st, 2023One Comment

In Asheville, NC, the hot topic is the pending acquisition of not-for-profit Mission Health System by HCA Healthcare, the nation’s biggest investor-owned health system now celebrating its 50th anniversary. The $1.5 billion deal caught locals by surprise, sparking wide-ranging speculation about what it might mean for healthcare in Western North Carolina.

I spend holidays and long weekends in Asheville. I enjoy its craft breweries, mountains, challenging golf and peacefulness. So, the announcement was particularly intriguing to me. After all, Mission is among the most profitable systems in the country (Truven Health) and the 6th largest in the state. It enjoys a near-monopoly in the market and had embarked on $500 million capital upgrades in three of its seven hospital facilities.

In the official statement announcing the deal March 21, the Mission Health Board said its decision to be acquired by HCA Healthcare came after months of deliberation about the future for their 133 year-old organization. They concluded that going it alone was not their best option, considered joining other multi-hospital systems and ultimately decided that being acquired by HCA Healthcare was their best bet based on their scale and capabilities.

Proceeds from the sale will be used to create the Dogwood Health Trust which will “enable significant investments, encourage partnerships and facilitate coordination with others to analyze, understand and address core social determinants of health and well-being for the people and communities of Western North Carolina.”(www.missionhealthforward.com)

Consolidation among hospitals is a recurring theme in healthcare. Two in three hospitals is now part of a multi-hospital system. A study by PwC’s Health Research Institute estimates that 93% of most metropolitan hospital markets will be highly concentrated by 2019 (Herfindahl-Hirschman Index above 2500). Studies also show short-term efficiency gains are 1.5% on average (National Bureau of Economic Research), and higher costs for purchasers as hospitals gain leverage over insurers.

Therefore, Mission’s decision to become part of a larger organization is not surprising to industry watchers. What caught many off-guard, however, including many in the community, is the Board’s decision to sell to an investor-owned hospital management company.

Background

Of the 4,840 community hospitals in the U.S., 1,035 (21.4%) are owned by private investors (AHA). That’s up from 16% 10 years ago. There are none in Hawaii, Minnesota, New York, or Vermont, where states disallow for-profit hospital ownership. By contrast, they account for 51% of Florida’s hospitals, 50% of Nevada’s, 44% of New Mexico’s and 43% of Tennessee’s.

The traditional distinctions between for-profit ownership and not-for-profit have centered on their tax status: for-profit hospitals pay taxes on their profits as well as property taxes, and not-for-profits are obligated to provide community benefits in lieu of paying taxes. In most markets where the two compete, challenges to the accounting for both is routine.

Opinions for and against hospital ownership by an investor-owned hospital management company have been newsworthy for 50 years in the U.S. health system. An outspoken critic was the New England Journal of Medicine’s Editor (1977-1991) Arnold Bud Relman who railed against the “medical industrial complex” that put profit before patients.

Proponents, like the Federation of American Hospitals (www.fah.org), which lobbies on behalf of investor-owned interests, counter that their hospitals pay taxes that fund community services and hospitals that communities might otherwise be unable to afford.

And the public thinks all hospitals—regardless of ownership—charge too much: 71% blame hospitals for rising health costs, just behind drug companies (Kaiser Family Foundation poll, August 2018). So, the pending acquisition of Mission Health by HCA Healthcare has put a spotlight on the role investor-owned hospital management companies play in our system.

The Facts are These

Public trust in not-for-profit hospitals (82%) is higher than their trust in for-profit hospitals (61%). But both have been slipping in recent years. (Harris, Gallup).

A hospital’s profitability has more to do with its location and operating culture than its ownership status: A Moody’s analysis of profitability at 160 not-for-profit and public hospital systems found median operating cash-flow margins, a key measure of profitability, dropped to 8.1% in 2017 from 9.5% in 2016. Higher expenses attributed to high labor and supply costs, and lower reimbursement from commercial and government payers outpaced revenue growth for the second consecutive year. An analysis of hospital profits published in Health Affairs (May, 2016) found seven of the 10 most profitable hospitals/health systems in the country were not-for-profits.

A hospital’s quality—outcomes, errors—are the results of clinical policies and procedures unique to each organization, regardless of ownership status. Analyses of publicly reported quality measures have not shown causal relationship between a hospital’s ownership and its outcomes. Likewise, accounts of false claims, over-utilization et al have not shown a correlation.

A hospital’s charity care is more a function of the organization’s operating philosophy and financial policies than its ownership status:  A 2006 study by the Congressional Budget Office found the average share of operating expenses that went to uncompensated care was 4.7% at nonprofit hospitals, 4.2% at for-profit hospitals and 13% at government hospitals. The study also found wide variation in the level of uncompensated care provided by individual hospitals—whether for-profit or nonprofit. A study of 43 hospitals that converted to for-profit found there were not statistically significant differences in prices, the levels of uncompensated care provided or the provision of unprofitable services like trauma care, burn care and substance abuse treatment. But some individual hospitals did see major changes. Within three years of conversion, seven of the 43 hospitals had increased their level of uncompensated care by more than 40%, and 10 had reduced it by more than 40%.

But there are differences. Studies show:

  • Investor-owned hospitals add, eliminate or re-locate the clinical services they offer more frequently than not-for-profits. Studies indicate profitability considerations are their primary reasons.

  • Investor-owned hospitals spend more on marketing than not-for-profits.

  • Investor-owned hospitals are more inclined to weigh financial results more heavily in senior management compensation agreements and use stock options as key components.

  • Investor-owned hospitals are governed by corporate boards whose directors are elected by the company’s shareholders and are compensated. By contrast, not-for-profit systems are governed by appointed boards: some are local, some are national, some are compensated, most are not.

  • The culture, operating philosophy, capabilities, profitability, scale, access to capital and financial discipline and clinical effectiveness of investor-owned hospital management companies vary widely. There are significant differences in how HCA Healthcare, Tenet, Community Health Systems, Prime, LifePoint and others operate.

The discussion about the pending acquisition of Mission Health by HCA Healthcare is timely not because it will result in the conversion of a not-for-profit into a for-profit. It is relevant because it calls attention to trends every hospital board must address:

Sensitivity to hospital prices and costs are gaining attention and eroding confidence. The wide variability of hospital prices that are unrelated to underlying costs are vulnerabilities. Price transparency tools that enable comparisons of prices and underlying costs are getting traction from private investors and employers. A report released last week by PhRMA, the drug industry’s main lobbying group, found hospitals mark up prescription drugs by an average of almost 500%. An NORC survey also released last week found 57% of U.S. adults had been surprised by a medical bill that they thought would be covered by insurance, and 82% of these blamed hospitals. 

The hospital’s core business of inpatient care is shrinking.  Between now and 2025, inpatient admissions will decrease 25% to as low as 78/1000 and average length of stay will shrink 7-10% in tandem. In the same period, emergency room visits will increase 9%, outpatient visits will increase 13% and physician supply will increase 12%. Capital deployment to community-based, in-home, preventive and primary care services is the highest priority for most community hospitals wishing to survive. Many have made bets elsewhere.

Non-traditional competitors are gaining ground. The likely approval of mega-deals involving CVS-Aetna and Cigna-Express Scripts and influence of the Amazon, Berkshire Hathaway and JPMorgan Chase health venture on employer purchasing means hospitals will face new types of competition. Independently-funded urgent care clinics, freestanding emergency rooms, micro-hospitals, alternative health providers, retail clinics and a wide array of wellness offerings will challenge hospitals for market share.

The reality is this: most not-for-profit hospitals already do business with investor-owned interests. Investors in Intermountain’s NFP generic drug start-up, Cirvica Rx, include HCA Healthcare alongside Mayo, SSM, Trinity Health and other notable NFPs. Ascension announced the sale of Lourdes Health Network of Pasco, Washington, to Brentwood, Tennessee-based RCCH HealthCare Partners last week. The drug and device manufacturing, health insurance, information technology industries are primarily investor-owned; most physicians operate as taxable entities. Paying taxes is part of their cost for accessing capital for growth and sustainability. It’s a uniquely sensitive issue when brought to light as a high profile NFP hospital like Mission sells to an investor-owned system like HCA Healthcare.

My Take

The sale of Mission Health to HCA Healthcare, a for-profit health system, is not the issue. HCA Healthcare is highly regarded for its sustained growth, financial discipline and ethicality.

The issue is how effective and impactful the Dogwood Trust will be in deploying resources to social determinants of health in Western Carolina and its synergies with Mission Health’s conventional programs and services.

The issue is the vigilance of community leaders, local employers and insurers in pushing back against unwarranted price increases, cessation of clinical programs necessary to the community, and enhancing accessibility to needed services for populations unserved. Affordability and accessibility requires constant attention.

The issue is how the new Mission Health competes against likely entrants who see opportunities for new programs and services. The public believes competition is good: a well-organized, adequately funded multi-specialty medical group with attractive prices, service and reputation or carve-outs negotiated by employers could be disruptors.

Does a hospital’s ownership matter?

Yes, the differences are real, especially when comparing the cultures and operating policies and procedures that dictate how decisions are made, personnel are evaluated and compensated, and how capital is deployed.

There are bad actors among not-for-profit hospitals and investor-owned hospital management companies alike. It’s up to community leaders to watch closely.

Paul

P.S. Update on Theranos: In the wake of a high-profile scandal, the company will formally dissolve, according to its Tuesday email to shareholders. Theranos will seek to pay unsecured creditors its remaining cash in coming months, the email said. The move comes after federal prosecutors filed criminal charges against Theranos founder Elizabeth Holmes and the blood-testing company’s former No. 2 executive, alleging that they defrauded investors out of hundreds of millions of dollars and defrauded doctors and patients.

Investors in Theranos including the Waltons, heirs to Walmart Inc. founder Sam Walton; Atlanta’s Cox family; the family of Secretary of Education Betsy DeVos; and Rupert Murdoch, executive chairman of 21st Century Fox and of News Corp. stand to lose their $100 million investments as part of the $1 billion raised by the company. The company’s high profile board included Holmes, former Secretary of State Henry Kissinger, former Secretary of Defense Bill Perry, former Secretary of State George Shultz, former Senators Sam Nunn and Bill Frist, former Navy Admiral Gary Roughead, former Marine Corps General James Mattis, former CEOs Dick Kovacevich of Wells Fargo and Riley Bechtel of Bechtel and William Foege, an epidemiologist.

 

Additional Resources:

Sloan, Frank A. and Vraciu, Robert A. “Investor-Owned and Not-For-Profit Hospitals: Addressing Some Issues” Health Affairs Vol. 2, No. 1 (January 1983)

David Blumenthal, Joel Weissman “Selling Teaching Hospital To Investor-Owned Hospital Chains: Three Case Studies” Health Affairs. 2000;19(2) 

Bai, Ge and Anderson, Gerard “A More Detailed Understanding Of Factors Associated With Hospital Profitability” Health Affairs Vol. 35, No. 5 May, 2016

One Comment

  • Rob Tholemeier says:

    Not sure why people complain about drugs. They are only about 10% of the $3.4T we spend on healthcare in the USA. I am also trying to think of a situation where the cost of the drug is more than the alternative. I can’t come up with one.

    The way to deal with all healthcare prices, including drugs, is to fundamentally change the delivery system such that we focus on reducing the cost of delivery of care and not the amount of care given (I’m looking at you ACOs). If we did that we could save plenty of money to cover the relatively small expenditure for drugs via affordable insurance plans.