Black Eyes Aside, Health Firms’ Prognosis Good

The financial question, Doctor, is why the hospital management industry looks so healthy in the stock market when its leading company is under criminal investigation, blue-ribbon commissions at national and state levels are examining abuses in managed care, and labor unions are having increasing success signing up physicians and nurses.

On top of that, the federal government, under the new balanced-budget law, begins cutting Medicare reimbursements to hospitals next year. The effect could be devastating to hospitals, which count on Medicare payments for half or more of their revenues.

Politically, hospital management companies, and their health maintenance organization subsidiaries, are as popular as skunks at a garden party. Columbia/HCA Healthcare Corp. is being investigated by the Justice Department for alleged fraud in billing Medicare and health-care violations. Three middle managers have been indicted.

Industry sources predict that Columbia will end up paying a $1-billion fine and having to sell hospitals and its home-health-care division. The $20-billion-revenue company will shrink to a smaller, humbler organization, analysts say. Columbia stock has fallen 28% since May.

In punishing Columbia, the government intends to send a message to other health-care companies: Don’t be too aggressive in pursuit of profit.

Yet the stocks of other major hospital management companies, such as Health Management Associates, Oxford Health Plans, PacifiCare Health Systems, Tenet Healthcare and Wellpoint Health Network, are selling at relatively high prices, and the companies are expanding their businesses by acquiring hospitals around the country.

Why should that be? Because the underlying forces driving the restructuring of hospitals and every other facet of the $1.1-trillion U.S. health-care economy have not changed.

The pressure from all buyers of health care--governments, corporations, individuals--to control costs is inexorable. The reckoning is that economies can be achieved in the $350 billion spent annually on hospital care by consolidating the roughly 6,000 U.S. hospitals.

The process of reining in costs involves transfer of risk. The federal government, for example, makes “prospective payments”--it estimates what treatment for an illness or a patient will cost and pays that amount. If a hospital’s costs are higher than the payment, too bad. Thus the trend to larger hospital organizations with the resources to control costs. We are seeing the industrialization of medicine--the transformation of a fragmented activity of doctors and local hospitals, with leading citizens on the boards of directors, into an economically exacting business.

And a growth business at that, with an aging population using more medical services all the time. That’s why the stock market gives high prices to hospital management companies, which can acquire smaller hospitals, achieve economies of scale and afford the investments in computer equipment needed to process government forms and billing, not to mention the diagnostic charts of modern medicine.

But the medical industry, dealing in matters of personal health, cannot be run by the same criteria as an industry producing a cheaper, faster automobile.

In that respect, the executives who ran Columbia/HCA were not very smart. They achieved rapid profit growth by subjecting doctors to time-and-motion studies and by cutting back on nursing care, affecting the very people who have critical contact with patients.

Patients are also voters, so Columbia has reaped a political backlash and become a recruiting poster for national labor unions, which are launching organizing drives among physicians and nurses.

With some success. Two weeks ago, the Union of American Physicians & Dentists, a 5,000-member group, joined the American Federation of State, County and Municipal Employees (AFSCME), a national union of 1.3 million members, with clout in state houses, city halls and the U.S. Congress.

AFSCME won a hard-fought election to represent 2,600 nurses at Sharp Hospital in San Diego at the beginning of this year and is now negotiating a contract.

In Tucson, a two-thirds majority of the 140 physicians at the Thomas-Davis Medical Centers voted to join AFSCME this year.

The Service Employees International Union, or SEIU, a 1.1-million-member organization that represents many low-paid hospital workers, now has 77,000 nurses and more than 10,000 doctors in its ranks.

The issues drawing medical professionals into these and other labor unions involve not wages but working conditions. Doctors as employees of health maintenance organizations resent being told to see a patient every 7.5 minutes, says Dr. Robert Weinmann, a neurologist who heads the Oakland-based Union of American Physicians.

“We don’t believe the way to better health care is to have fewer nurses on the floor,” says Andrew Stein, head of the SEIU.

“The growth of managed care is downgrading doctors and nurses. It has frightened and enraged the patients, even as it has pleased the stock market,” says Gerald McEntee, AFSCME president.

Unions thus are aligning themselves with government and with medical professionals as protectors of patient care. And that’s a potent combination, virtually ensuring that industrialized medicine will be a tightly regulated and possibly unionized industry.

Normally the specter of limited profit potential in a regulated industry would turn off investors. Yet hospital stocks sell at premiums.

And executives within the industry say privately that unions may not be a bad idea.

“Unions could organize the work force and take some of the public heat that now gets directed at managements,” says a hospital company official.

What’s going on? Again, the forces driving the growth of the medical industry are too strong to be deterred.

“The demand for health care and the technologies being invented every day to treat illness and run medical facilities are all expanding this business,” says analyst Eugene Melnitchenko of Principal Financial Securities, a Dallas-based investment firm.

As if to punctuate his thought, it was announced Friday that Medic Computer Systems Inc., a 5-year-old Raleigh, N.C., developer of software for patient records, will be sold to a British company, Misys, for $923 million.

The financial point: Amid all the turmoil of health care’s restructuring, there is enormous opportunity--for business, medical professionals and investors.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Salaries on the Mend

The median incomes of physicians rose in 1995--latest year for which the American Medical Association has statistics--after falling in 1994. But 39% of doctors are now lower earning salaried employees of health management organization, as opposed to self-employed practitioners, reflecting a growing trend.

*--*

Median income % change from 1994 All physicians $160,000 6.7%

*--*

***

*--*

Specialty Median income % change from 1994 General/Family practice 124,000 12.7% Internal medicine 150,000 0.0 Surgery 225,000 2.7 Pediatrics 129,000 17.3 Obstetrics/Gynecology 200,000 9.9 Radiology 230,000 4.5 Psychiatry 124,000 3.3 Anesthesiology 203,000 1.5 Pathology 185,000 21.7 Other 170,000 13.3

*--*

***

*--*

Employment status Median income Self-employed 199,000 Employee 136,000 Independent contractor 155,000

*--*

Source: AMA Socioeconometric Monitoring System