The Business of Health Care

The Coming Boom for Hospital Chains – and Bust for Non-Profits

For more than a year, I have immersed myself in the history of for-profit hospital chains and their associated enterprises. My goal is to produce an account of the for-profit sector that will be a valuable resource to all parties involved in the serious health care policy-making that must surely take place in coming years.

Along the way, I have begun to understand the pressures that will soon make for-profit provider chains an even greater force than they already are – and will lead to an existential crisis in the non-profit hospital sector.

Hospitals wield immense influence in every city and county in the U.S. They are always among the largest employers in town. They touch the lives of all in the community as the sites of all births, most deaths and many health events in between.

Even the smallest hospital, in the smallest town, is worth tens of millions of dollars. Thus, for example, buyers in 2010 paid $28 million for a 124-bed facility in Marion, South Carolina (population 7,000), and $86 million for a 108-bed hospital in Ottumwa, Iowa (population 25,000). And at the upper end of the scale, another buyer acquired the 2,000-bed Detroit Medical Center for $1.5 billion.

Those buyers were for-profit hospital chains, and the sellers were non-profit operators. Some of the factors motivating such transactions have been around since the advent of the for-profit chain era in the 1960s – including inadequate access to capital for charities and local governments that needed to upgrade their hospitals, competitive pressure from deep-pocketed for-profits, and crises arising from poor management and governance. Although not-for-profit hospitals have long been coping with those issues and have often chosen to solve their problems by selling out to the for-profit chains, eighty percent of American hospitals are still non-profits, with about a third of those being government-owned. Those proportions are about to change dramatically.

Private, not-for-profit hospitals are exempt from paying federal income tax, most state sales taxes, and local property taxes. City and county hospitals normally rely on heavy government subsidies. Historically, the rationale for these special benefits has been that charity and government hospitals had a mission to care for the poor – and, in recent decades, for the huge number of patients lacking health insurance.

The Affordable Care Act is designed to expand insurance coverage greatly. The past week has seen fevered speculation about how the Supreme Court may rule on Obamacare’s constitutionality, and a ruling that does away with the law’s provision for near-universal health coverage would slow the pace of takeovers by for-profits of non-profits. But the deals would continue. Moreover, powerful corporate interests have become invested in a future in which most Americans will have health insurance. The bottom line: No matter how things shake out in the Supreme Court and the 2012 election, the rationale for tax exemptions and government subsidies to non-profit hospitals will keep diminishing.

Already, federal and state regulations compel for-profit hospitals to offer considerable amounts of uncompensated care, so the moral high ground has been slipping under the non-profit and governmental hospitals for some time. The pressure to put those hospitals on an even footing with the for-profit players will be inexorable. Of course, after enjoying their tax exemptions and subsidies for decades, the beneficiaries will resist any effort to take away their perks – and we’re talking about beloved civic institutions in many cases, often bearing a name that begins with “saint.”

But governments are starved for revenue at all levels these days. Cities will no longer be able to afford to forego collecting property taxes on some of the most valuable real estate in town. States won’t be able to keep watching a massive stream of commerce go untaxed; Illinois Governor Pat Quinn is already taking a hard line on repealing the exemptions of non-profit hospitals that don’t provide enough charity care. The federal government, desperate to reduce the deficit, will not be able to justify continuing to let more than half the nation’s hospitals take in their share of the healthcare dollar without paying taxes on it. (Senator Grassley, of course, has had the non-profits in his sights for quite some time .)

University medical centers will probably get a pass because of their educational mission, but many other non-profits are headed for a huge fight involving all levels of government. Government-owned hospitals will wage their own battle to maintain their municipal funding and status as local leaders question whether they still have a purpose.

As governments ramp up the pressure on non-profits, leaders of smaller, freestanding hospitals will increasingly be inclined to throw in the towel and sell out to one of the for-profit chains. Their governing boards, so often filled with local gentry who know little about the hospital business, may not feel able to carry on the sustained political struggle that state hospital associations will urge upon them.

Furthermore, the sale of a non-profit frequently gives local elites a new and much more fun public asset to play with: a charitable foundation, created from the proceeds of the sale, that can dole out largess across the community for years to come. Generally, the board of the new foundation will end up including many of the same people who decided to sell the hospital.

Put yourself in the shoes of a trustee in a non-profit hospital that has been one of the main economic forces in a given small city or rural area for generations. On top of all the other complexities and uncertainties that go with the job of governing a hospital in the 21st century, you’re up against unwelcome attention from the feds, the state, the municipality, or all three. Here come one or more of the for-profit chains, flush with cash from the stock market or private equity, ready to give you the ultimate cover within your community for an act that might otherwise leave you ostracized.

Do you and your fellow board members soldier on, trying to cope with change and challenges in an industry you perhaps only dimly understand? Or do you go on, take the money and run – a foundation?

E. Thomas Wood is a journalist and historian in Nashville who has covered the healthcare industry since the late 1980s. For his upcoming history of for-profit healthcare provision , he has interviewed many key industry figures and plans to interview more soon. He welcomes contacts from anyone with a story to offer about the investor-owned hospital business: tom [at] .