Chains’ Role Debated : Hospitals for Profit: What Price Care?

The public relations firm for Victory Memorial Hospital had done its job well: Banners were stretched across the amphitheater, balloons filled the air and buttons pinned to pinstriped lapels proclaimed “Victory Is Ours.”

With that recent pep rally, the frightened community hospital in Waukegan, Ill., began a campaign to keep Humana Inc., a for-profit hospital corporation, from building a new, $40-million teaching hospital nearby.

Time was when a rich, out-of-town firm’s pledge to pour a few million dollars into the local economy and deliver the latest in medical technology would have triggered a friendlier demonstration.

But times have changed.

Some Hospitals Threatened

America’s nonprofit community hospitals today are threatened by rising costs, growing numbers of empty beds, ledgers filled with red ink and increasingly penny-conscious government spending.

But hospital chains dedicated to making a profit see glowing opportunity in that gloomy picture. They control 10% of the country’s 1.4-million hospital beds and are expanding rapidly for a number of reasons.

The chains have ready cash from a decade or more of profits on hospital operations: They are experienced hospital managers, they can keep costs low with centralized buying in large volume, they often get by with a smaller staff than other hospitals, and, except in emergencies, they do not take patients who cannot pay.

In addition, they are aided by changes in Medicare reimbursement rules that reward those hospitals that keep their costs low. Those community hospitals that grew fat under the old Medicare reimbursement system are among those eager to bail out of the business now that the rules have changed.

Changing American Medicine

The entry of these hospital chains devoted to profit is changing the face of American medicine, and the implications for health care in this new, competitive market are many and varied.

On the positive side, profit-making companies pump money into quality medical technology and research, pay for new teaching facilities, set up regional networks of hospitals to reduce duplication of services and turn money-losing community hospitals into tax-paying, private successes.

But concern about the bottom line also has had negative side effects. Among those cited by critics are these:

--Significant numbers of people are denied non-emergency treatment in for-profit hospitals because they cannot pay. They are being sent to a now-dwindling number of public hospitals, putting financial pressure on those facilities.

--A two-tier system of medical care is being created, under which poor patients and insured patients go to different hospitals and may receive different levels of care.

--Nonprofit hospitals are being forced to act like profit-motivated hospitals to remain competitive--sometimes adopting heavy-handed bill collection techniques, limiting charity care and dropping unprofitable services.

‘Marketplace’ Health Care

Such concerns are fueling a debate about the long-term medical and social implications of a “marketplace” environment for heath care.

Do for-profit hospitals have an obligation to provide charity care? No, say the for-profit chains. They argue that care for the poor is a responsibility of the government and of those hospitals supported by tax dollars.

“We don’t expect Safeway or A&P; to give away free food for anybody who can’t afford food,” argued R. Bruce Andrews, executive vice president of American Medical International, a for-profit hospital chain in Beverly Hills.

But others believe that approach to hospital management will have disastrous consequences for the 35 million uninsured Americans who are too young for Medicare and not poor enough to qualify for Medicaid.

Question of Basic Values

“We’re saying health care will be there if you can buy it,” said Rep. Henry A. Waxman (D-Los Angeles), chairman of the House subcommittee on health. “That is turning our back on a basic value of this nation: that no person ought to go without health care.”

In Tennessee, a hospital owned by Hospital Corp. of America threatened to stop radiology treatments for Joe Allen Bennett, a 49-year-old pauper dying of lung cancer, unless he came up with $500. Not until threatened with a lawsuit by a legal-aid lawyer did the hospital relent, the attorney said. Bennett died a few days later.

The hospital business is a humanitarian venture, said Peaches Blank, director of the Hospital Alliance of Tennessee, a group of not-for-profit hospitals formed two years ago. “While I’m all for free enterprise, health care is a little bit different.”

Profit-oriented hospital firms have rushed into the industry in the last two years through a door opened by a change in the reimbursement system under Medicare, which pays for nearly half of the medical care in this country.

Under the old system, physicians and hospitals were reimbursed according to their costs. But, under the new system, Medicare reimburses hospitals at fixed rates. So those able to keep their costs low make more money, while those with high costs--whether because of poor management or large expenditures for charity care--find themselves in trouble.

Administrators Worried

That reimbursement plan, along with declining admissions and the scarcity of capital to invest in new technology, worries hospital administrators and counties that own hospitals.

Robert Blendon, of the Robert Wood Johnson Foundation in Princeton, N.J., predicts that, by 1995, falling hospital admissions will create the equivalent of 1,000 empty community hospitals in the United States.

In that environment, counties and hospital boards find the prospect of selling their beleaguered community hospitals to chains a painless and even lucrative solution to economic problems. Even though the profit-making chains must pay taxes, a burden the not-for-profits do not have to bear, they believe that they can succeed where others have failed.

For one thing, they have the money to pump into new technology, new construction and remodeling of aging hospital facilities.

Profitable Operations

Nashville-based Hospital Corp. of America, the largest profit-making chain, owns or manages 425 hospitals and collected $4.2 billion in revenue last year, $297 million of it profit. It signed agreements to acquire 25 hospitals last year and spent $500 million on construction. This year, it expects to spend an additional $500 million on construction and up to $1 billion on acquisitions.

The other three major chains--Humana Inc. in Louisville, Ky., American Medical International in Beverly Hills and National Medical Enterprises in Los Angeles--have also been successfully snapping up hospitals and making money on them.

Humana owns 90 hospitals in 24 states and earned $193 million in profit last year on revenue of $2.6 billion. AMI, which owns 100 hospitals in the United States, collected $2.4 billion in revenue last year and made $155 million in profit. NME owns or manages 110 hospitals and posted revenue last year of $2.5 billion with profit of $127 million.

When a chain purchases a hospital, a trust fund is often established as part of the deal to pay for charity care, and there are usually a few dollars left over for city or county coffers.

In Charlestown, Ind., HCA bought the community hospital a few weeks ago for $15 million. After paying off the hospital’s debts, the city still had $5 million, which the mayor says will be used to upgrade the water system and generally “put our city back into shape.”

Teaching hospitals are also attractive to for-profit companies. While those hospitals may not need quick cash, increasing numbers of them worry that their surpluses in the future will not be large enough to allow them to remain on the leading edge of medical technology.

George Washington University Medical Center has solicited offers to buy or run that venerable institution in the nation’s capital. Although the hospital is doing well financially now, “looking two, three, four, five years ahead, it will not be possible for this hospital--or most hospitals--to generate internally enough capital for their needs,” Philip Birnbaum, dean of administrative affairs for the medical center, said.

$100-Million Cost

In Los Angeles, USC has agreed to let NME build a for-profit academic hospital and medical complex near the Los Angeles County-USC Medical Center. The new hospital, which NME estimates would cost about $100 million, still must be approved by the state health planning agency.

USC’s medical school dean, Allen W. Mathies, said the new hospital would broaden students’ experience by exposing them to “patients whose approach to illness, from a cultural and sociologic perspective, is different” from the poor and uneducated who are treated at the county facility.

Some Oppose Hospital

Some doubt that the new hospital is needed. They fear that the complex, which would include a hotel, an ambulatory clinic and a “psychiatric pavilion,” would draw business away from community hospitals that can ill-afford any more losses.

But John C. Bedrosian, senior executive vice president of NME, said an analysis by his company indicates that the area’s population has too few advanced-care, referral-type facilities. The new complex, along with current USC facilities, would be “the most significant medical center in all of Southern California, if not the western United States,” he said.

The question of whether a new hospital is needed also bothers officials in Lake County, north of Chicago, where Humana seeks state approval to build a teaching hospital for the Chicago Medical School. The administrator of Victory Memorial, which staged the rally to persuade health planners to turn down the Humana application, said a new teaching facility would increase medical costs in the area and could force at least one hospital to close.

Academic hospitals are especially attractive to the for-profit chains because of the prestige they bring to the company and because they provide a “flagship,” or referral center for the chains’ smaller hospitals in the region.

‘Uncertain Courtship’

Worried administrators of academic hospitals gathered in Phoenix recently to discuss “the uncertain courtship” between investor-owned hospital companies and teaching hospitals. Chief among their concerns was the ability to protect their teaching mission in an environment designed to produce a return for investors.

When AMI began courting St. Joseph Hospital in Omaha, the reaction of hospital officials was typical. “There was incredulity at first and, after some thought, concern,” said Richard L. O’Brien, dean of the Creighton University Medical School, which is affiliated with St. Joseph.

Today, the new owner has continued the hospital’s tradition of caring for the ailing poor--and has begun to heal the hospital’s ailing ledger as well.

Problems Arise

Nevertheless, problems have arisen elsewhere.

In Georgia’s Habersham County last summer, a grand jury looked into the operations of the county hospital, which had come under HCA management. It found several examples of hospital behavior that may have been discouraging patients from seeking medical treatment there. In one case, a business office staff member at the hospital visited a woman who was about to deliver her baby to ask whether she could pay her account.

Most for-profit hospitals accept emergency cases without regard for the patient’s ability to pay, but once the patient’s condition is stabilized, he is sent to a public hospital, no matter how many empty beds the for-profit hospital may have.

“We do not, on the elective side, accept people who don’t pay,” Wendell Cherry, co-founder and president of Humana, said. Those accepted in an emergency are stabilized “and moved to a tax-supported institution where taxes can take care of that patient.”

But critics say patients are often moved too soon. An analysis of the medical records of 103 patients transferred from private hospitals to Highland General Hospital in Oakland, Calif., found recently that the condition of one-third of the patients was jeopardized, said Dr. David U. Himmelstein, who directed the Harvard study.

In most of the cases, the transfer was made because the patient was not insured or could not pay, not because Highland General offered services unavailable at the other hospitals, Himmelstein said.

‘A Societal Problem’

Providing for the poor “is a societal problem, and this government and this Administration simply chooses to ignore it,” NME’s Bedrosian said. “We can’t resolve the problem by expecting the industry to take care of it.”

But Alexander H. Williams, of the Church Charity Foundation in Hempstead, N.Y., said that all hospitals have an equal stake in seeing that the poor receive care. “We need to spread indigent care among more providers,” he said.

The bill collection efforts of for-profit hospitals are cited by critics as one of the subtle ways that those facilities let the poor know that they are not welcome. David M. Santos, a legal services attorney, is representing eight indigents being sued by HCA’s Fairview Park Hospital in Dublin, Ga., for not paying their bills.

Such suits against persons who do not have the means to pay their bills and signs at the hospital “telling you (that) you’ve got to pay your own way” are ways of discouraging the poor from entering the hospital even in an emergency, Santos said.

Last year, a 19-year-old, uninsured woman was injured in a head-on collision with a tractor-trailer truck in Tennessee. She was rushed to a hospital emergency room in a small town in central Tennessee but was kept waiting several hours before being admitted.

Her attorney, Hal Hardin, of Nashville, discovered later that the hospital had been checking with the Highway Patrol to determine whether the truck had been at fault in the accident. Satisfied that the truck’s insurance company would probably pay the woman’s bill, the hospital admitted her. She threatened suit later, and the case was settled out of court.

Who Cares for the Poor?

If the for-profit hospitals are not taking care of the poor, who is?

When a county sells its hospital to a for-profit chain, public hospitals nearby feel the pressure--more indigent patients come through their doors.

Johnson City Medical Center, a 365-bed, nonprofit hospital surrounded by chain-owned facilities in northeast Tennessee, is one of the state’s top 10 providers of charity health care. It receives $10,000 from the county for indigent care annually, against a bill that amounted to $2.5 million last year.

Like most hospitals, Johnson City must “cost-shift,” or raise prices for the paying patients to offset the losses incurred by providing charity care. If the prices get too high, the paying patients go elsewhere.

Gene Clark, the hospital administrator, complains that his facility has become a dumping ground for patients whose insurance has run out at one of several nearby for-profit hospitals.

“They want the paying patient, and, of course, I want the paying patient,” Clark said. “They’re content to let us handle the charity load, but that’s got to stop. You need to take them all like we do if you’re going to be in the hospital business.”

North Carolina Legislation

North Carolina recently passed legislation requiring any firm purchasing a public hospital in the state to maintain indigent care. Other states will probably follow suit.

But the notion that anyone can walk into any hospital and receive care--regardless of their ability to pay--seems gone forever.

“The health industry is undergoing changes, as has the financial industry and the airline industry,” Rowland D. Wussow, a vice president of HCA, said. “It’s just one of those dinosaurs that is changing. The coal is turning to a different color now. That’s just life. It’s part of dynamic America.”

Sen. Dave Durenberger (R-Minn.), chairman of a Senate subcommittee on health, believes that, in the long run, everyone “will get better care for less money. If you’ve got that level of competition in health care, quality is always the driving force.”

But, under a system fueled by the profit motive, Rep. Waxman said, “it is inevitable that you will have two classes of health care: one for the poor and one for the rich.”

Competition also has given hospitals the incentive to eliminate certain services, especially those such as maternity and infant care that cater to large numbers of persons unable to pay for hospital care.

A Harvard study of psychiatric hospitals found last fall that public and private not-for-profit hospitals were four to five times more likely than for-profit hospitals to offer services not covered by insurance, such as suicide prevention counseling and emergency psychiatric care.

End of Community Hospital?

Blendon, of the Robert Wood Johnson Foundation, predicted that “we’ll likely see the end of the full-service community hospital.”

The distinction between for-profit hospitals and not-for-profit hospitals may be beginning to blur. One reason, Harvard Medical School Dean Daniel C. Tosteson said, is that “it seems that to compete with them, you have to become quite a bit like them.”

An American Hospital Assn. survey found last year that 15% of the hospitals answering a questionnaire said they had adopted explicit limits to charity care, that 84% had increased their billing and collection efforts and that 10% had reduced staffing or their hours of operation to cut costs.

The new competitive market is encouraging all hospitals to “act like businessmen concerned primarily with profit margins,” Dr. Arnold Relman, editor of the New England Journal of Medicine, said. When that happens, he said in a recent editorial, “more and more patients will be denied access to urgently needed care simply because they can’t pay for it.”

Times Researcher Wendy Leopold assisted in the preparation of this article.