Why Wall Street hates health care services but doesn’t know it.

In a news article titled HealthSouth Scandal Doesn’t Slow Former Chief the New York Times’ Milt Freudenheim profiles former Healthsouth CEO Richard Scrushy.  Healthsouth was in may ways a corollary of Columbia/HCA and Medpartners.  Whereas Columbia was hospitals and MedPartners was physician clinics, Healthsouth owns home health services and out-patient surgicenters. Like the other two it over-expanded and over-promised to Wall Street.  The problem with for-profit health care in Wall Street terms is that these are all low-margin businesses, which are dependent on labor, and can produce little "same-store" growth without poaching business from competitors down the street.  High growth businesses that Wall Street loves have high margins and produce high productivity gains to maintain them.

None of these companies fundamentally changed the way medical care was delivered by introducing huge productivity gains. Even in the early days of Medpartners when they bought multi-specialty groups like Mullikin Medical Centers in Los Angeles, the promise of new ways of delivering care more cost-effectively under capitation ended up passing the improved margins onto payers and health plans. Then when "medical trend" went back up in the mid-1990s the capitated groups were left holding the bag.  Medpartners (of which Scrushy was also briefly Chairman) ended up going into bankruptcy, although the company reemerged as the now successful PBM CaremarkRx.

Given that Wall Street likes high margins and perpetual growth, yet creating high margins in medical care delivery is difficult, these for-profit companies are left with three options.
1) Buy competitors rapidly and mask flat "same-store" growth with overall revenue growth until the music stops and there’s no-one left to buy. (Medpartners, Columbia/HCA).
2) Increase margins and revenue by sticking it to payers (especially Medicare) and hope they don’t notice. Problem is they will eventually. (Columbia/HCA, Tenet)
3) Lie about it.  Claim to be making massive profits, even if it’s not true, until the FBI wakes up. (Healthsouth, Enron — OK, OK I know they weren’t a healthcare company but it’s the same principle)

There is of course the fourth option, that of admitting you are a low margin player like a utility company, and accepting the low valuation Wall Street gives you. But that’s not really much fun, is it?

As for Scrushy at Healthsouth, he’s clearly still having lots of fun going powerboating and jetting around in his new plane.  He’s also claiming that he knew nothing about what the 12 of his lackeys who’ve already plead guilty to fraud were doing. That sounds similar to Ken Lay’s claims about his innocence to what was going on at Enron.  Who knows? They may end up sharing the same cell at Club Fed.

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  1. Matt, seriously brother, we are one….Been there done that including selective inside MMC insights, and strategic misfires at the proprietary nd not for profit (hospital system) majors as they foolishly pursued their own insurance product strategy (vs. portfolio building via payor neutrality) while some tried to emulate ‘de facto’ staff model HMOs overlaid onto voluntary medical staffs!

    This is the best explanation in as few as words as possible of the ponzi schemes known then as PPMC’s (physician practice management companies), which are no doubt re-emerging during the 2.0 run on Wall Street albeit under the guise of consolidation anticipated as a result of PPACA and the provisioning for ACOs if not the more vanilla appeal of ‘accountable care’ per se or their medical home equivalents.

    An excellent piece of institutional memory few seem to recollect.

    What is it that definition of ‘insanity’ we hear in certain circles?, i.e, ‘doing the same thing over and over again, yet expecting different results’?

    Write on!