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] .

12 replies »

  1. One of our local healthcare systems is so well off it doesn’t need any assistance from the local government. I’m not sure how well off other non-profit hospital systems are in other parts of the country but ours is doing just fine…

  2. Why shouldn’t “non-profit” hospitals provide uncompensated care in exchange for tax relief? In California, many so-called non-profit chains act like for profit hospitals — CEOs and other executives get paid millions of dollars per year (amounting to thousands of dollars per hour), and as stated in several comments above, buy out other hospitals to corner market share and then close the hospitals in poorer areas and re-build in areas where patients tend to have private insurance, shifting the burden of uncompensated care to already over-burdened public hospitals and tax payers.

  3. This sounds like such a wonderful opportinity. Please let me know how it went. Thank You, Eric

  4. I think that privately funded, investor-backed, for-profit facilities will not feel any sort of effect; why would they?

    As to answer your question, ” 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?” I think that it truly does depend on a number of factors; but should I ever be on a board, I would find every way to soldier through, accept the changes and run my facility like I had originally intended even with the understanding that there will be little to no profit margin.

  5. I appreciate all the cogent comments here, several of which point to new lines of inquiry I need to pursue.

    As to how for-profits choose what market areas to serve, it’s worth noting that Vanguard bought Detroit’s public hospital and committed to more or less rebuilding it — not that this is a typical deal, but there are clearly circumstances in which hospital cos can envision making money in depressed areas.

    When HCA spun out HealthTrust in 1987, many in the healthcare commentariat said the new company was doomed to fail because it was saddled with so many small hospitals in poor, rural settings. Clayton McWhorter showed that it was possible to turn that collection of “dog” hospitals into a thriving chain.

  6. 340B drug acquisition pricing allows not for profits a margin on Rx unavailable to to for profit brethren. Not just for drugs dispensed in the hospital walls, but downstream fills as well. Just a small counterpoint to the author’s conclusions about the demise of the non profit.

  7. where have for profit hospitals avoided low income areas? Which is not the same thing as building in suburbs when you factor in that is where population growth is. Detroit, Cleveland, and most poor metro areas are losing populaiton. Why would you add a hospital to a declining market?

    Poverty is usually concentrated in older parts of town, it is also much harder to buy a block of land, remediate it, and build a hospital in downtown cleveland then on virgin land in a new part of town.

    Your hospital also doesn’t need to be located in the hood to serve the hood. Mountain View hospital in Las Vegas was built on the “rich” side of I95 but that is still where most of the people go from the east side of the freeway.

  8. I agree with Mr. Carol for profit hospitals usually are able to succeed because they do avoid low income area that house a lot of Medicaid patients

  9. There are surprisingly few economies of scale inherent in the hospital business as most of the costs are for labor and benefits. Whether hospitals directly employ doctors or not, every hospital in a given region probably pays roughly the same “going rate” for nurses, techs, information systems people, laundry and food service people and other needed staff.

    The for profit hospitals achieve success by avoiding low income areas with lots of uninsured and Medicaid patients. To the extent that they have local market power, especially in less populated areas, they can negotiate favorable reimbursement rates with private insurers. They try to emphasize profitable surgical procedures, cancer treatments and high margin outpatient services. Typically, Medicaid patients account for 10% of revenue or a bit more at most and uncompensated care is well controlled. Medicare might account for 30% of revenue for a big chain like HCA. They treat more than their share of patients with good commercial insurance coverage. While the for profit hospitals can probably manage a hospital from a staffing standpoint somewhat more efficiently than a non-profit and its access to capital might be better, those advantages are likely offset by the non-profits’ tax exempt status. In the end, a favorable patient mix, a good case mix and a good payer mix go a long way. Non-profits outside of teaching hospitals with those characteristics will probably be able to sustain their business model for a long time especially if they are already part of large systems.

  10. All hospitals are in store for a huge reduction in revenue, will money stay in hospitals when they have flat or negative returns? Investors follow big name CEOs who follow big dollars. When the dollars are gone so will be the CEOs and investors.

  11. The big difference this time though is that a bunch of municipalities and states really are desperate for additional sources of revenue, face a very difficult if not impossible task to raise taxes in most situations, and especially on the local level can’t count on a property boom anytime in the near future to save them.

  12. The more things change, the more the stay the same?

    A compelling POV, yet, may I remind the author and readers that Sanford C. Bernstein analyst, Kenneth Abramowitz on the then predicted imminent demise of the non-profit hospital sector and the rollup of overmatched community hospital CEOs and their ‘hick’ boards by the likes of HCA, NME, AMI and their mutated successors, opined:

    “It’s the corporatization of health care. And what’s wrong with that? Corporations produce hotel rooms and toothpaste and automobiles, and the country does fine. You still have to produce a service and monitor and improve it, for a finite price.”

    Ref: ‘Healing Process — A special report.; While Congress Remains Silent, Health Care Transforms Itself’, December 19,1994

    These observation were made post failure of ‘Hilary Care’ aka ‘The American Health Security Act’, although in direct reference to the then rapid growth of the Wall Street fueled for profit HMO industry via acquisition and IPA expansion into ‘mainstream medicine’, though Bernstein had earlier predicted the demise of the non profit hospital sector for very similar reasons.

    p.s. it didn’t happen.

    Yes this is a battle now revisited with a similar (yet aggravated) set of market and fiscal conditions. Albeit it this time not restricted to health wonk and industry leadership or payor voice engagement circles. This time our ‘house of cards’ sick-care [non] system is at risk of imploding and tanking the entire US economy if not the Federal budget.

    Lets face it, non-profit hospitals, clever 990 filings notwithstanding, are really ‘tax exempt’ vs. non-profit enterprises, and need to play minimally under some re-negotiated terms.

    We shall see. Nice piece anyway. Timely and well reasoned.