Special report: For-profit crrep hospital ownership balance
Investor-owned hospital chains add market share, along with a growing number of ventures with not-for-profit counterparts
Most administrators at investor-owned hospitals would say they can’t imagine a time when their facilities will outnumber their not-for-profit counterparts, but the gap has been steadily shrinking.
“Not-for-profits are kind of the fabric of healthcare in the United States, and they, like investor-owned hospitals, are part of the future of healthcare,” says Peter Lawson, executive vice president of development for Health Management Associates, a 56-hospital for-profit chain based in Naples, Fla.
The number of investor-owned hospitals has continued to grow in recent years, just the opposite of the trend for not-for-profit and government-run hospitals. And leadership at the investor-owned chains say there’s a reason for that. They contend that the forprofit models, which supposedly better stress cost containment and a more shrewd approach to expansion, can produce better results financially and even clinically.
For-profit hospitals also are typically better equipped to cope with dwindling Medicare and Medicaid reimbursement, says Megan Neuburger, senior director for New York-based Fitch Ratings. And the chains also can better absorb debt, she says, which is important as healthcare moves to new models of reimbursement such as bundled payments and accountable care that might require providers to operate with more leverage.
Still, it’s important to keep in mind that not-for-profit hospitals continue to dominate the healthcare landscape, accounting for 80% of the overall market. And there will always be a sizable contingent of Americans that resists the entire notion of for-profit medicine, with critics saying investor-owned chains can be more beholden to their shareholders than to their communities.
Growth numbers in the for-profit sector certainly don’t jump off the page. They’ve risen at somewhat of a tortoise’s pace, according to overall hospital statistics, with gains inching along at about 1% annually during the past five years. For-profits now account for more than 20% of the nation’s hospitals, according to the latest numbers from the American Hospital Association. Nongovernmental, not-for-profit hospitals have held steady at about 58%, while the share of governmentowned facilities has dipped slightly to about 21% (See chart, p. 29).
“The growth is a reflection of demand at investor-owned health systems to either build new hospitals from scratch or to acquire partners with not- for- profits,” Lawson says.
Lawson and other administrators also frequently cite another key advantage in the forprofit sector—greater access to capital through the equities market and other resources that can help achieve improved clinical outcomes. As Lawson says, the bond market in recent years has made it more difficult for the not-for-profits to borrow money, giving investor-owned hospitals an edge.
That access has helped sustain growth and financial viability despite challenges resulting from a struggling economy, which promises to be even more important given upcoming changes from the Patient Protection and
Affordable Care Act of 2010.
“The biggest impact of the ACA is going to come in 2014 when we see the individual insurance mandate along with Medicaid expansion take effect,” Neuburger says. Hospitals, physicians and other healthcare providers continue to express concern about low Medicaid reimbursement rates given the large influx of patients expected under the reform law.
Of course the future look of the Affordable Care Act is an unknown, given the legal challenges now in the hands of the U.S. Supreme Court justices and pending the outcome of the November elections. Changes could spell upheaval no matter what a healthcare system’s ownership status might be.
Dan Moen, president and CEO of LHP Hospital Group, Plano, Texas, calls the Affordable Care Act a key driver of expansion, as systems are now seeing how some key provisions of the law have already begun to unfold.
“Many hospitals didn’t do anything in regard to changing their ownership until they figured out what healthcare reform was going to look like,” Moen says.
An affiliation with an academic hospital is a boost to the forprofit company from a branding and marketing standpoint while also bringing benefits for the teaching hospital, she says.
Health Management Associates in 2010 closed a similar transaction, acquiring 60% ownership of three rural hospitals from Shands Healthcare, Gainesville, Fla. HMA’S growth model includes a full merger, where a hospital would totally fall under the system’s control, or the option of allowing the hospital’s local board to retain control, Lawson says. Under either option, the hospital becomes a forprofit entity.
“In the past you’d just sell or have to merge,” Lawson says. “And that may not register well with a local not-for-profit with a system board that wants to keep the culture and local autonomy in place.”
LHP also has a similar policy, in which control of the hospital can remain local and, like the partnership with Hackensack, the hospital can stay not-for-profit.
“Our model is really pretty unique in that we don’t buy hospitals,” Moen says. “We invest in hospitals, we share the ownership; we share governance with them. It’s a very different model … having a local partner helps make good decisions.”
Capella Healthcare, a 13-hospital forprofit chain based in Franklin, Tenn., also has tested different partnership models, most recently in December when it entered into an agreement with a Tennessee division of Ascension Health that gave the nation’s largest Catholic healthcare provider a stake in five of Capella’s hospitals.
Dan Slipkovich, Capella’s co-founder and CEO, says that even though a deal might sound attractive, it doesn’t always mean it should be consummated. The additional resources available to for-profits allow them to be choosy in searching for an ideal partnership. This way, officials can vet a deal more thoroughly to help determine if the cultures of the two organizations would mesh well.
“Healthcare is not Mcdonald’s, and you just can’t plop down here and make everything the same across the country, for a variety of reasons,” Slipkovich says. “The general population is different.”
Such due diligence is likely to bring
He also says investor-owned hospitals are more attractive acquisition partners to freestanding, not-for-profit hospitals. As accountable care organizations become more prevalent, he says investor-owned systems give independent facilities a chance to join a financially healthy, geographically diverse network, which provides a good fit in the ACO model.
LHP is a privately held, for-profit company specializing in joint ventures with notfor-profit facilities. One such deal involved not-for-profit 696-bed Hackensack (N.J.) University Medical Center, with both parties forming a joint venture, Montclair (N.J.) Health System.
“It’s an opportunity to stay true to their mission,” says Robert Garrett, president and CEO at Hackensack. “It brings the best of both worlds, it keeps not-for-profit traditions and missions and culture, but it also brings out the best for-profit access to capital and the ability to fund the daily operations of community hospitals, and that’s one of the things we had in Hackensack. That model was attractive.”
Hackensack retains its not-for-profit sta- tus working with LHP. Just last week, Montclair Health filed a certificate-of-need request with the state to acquire 245-bed Mountainside Hospital, also in Montclair.
Such partnerships also will drive the forprofit market share, Moen says, adding that LHP, which started this year with two hospitals, plans to continue expansion, with the ideal pace adding three to five hospitals annually.
Teaching hospitals such as Hackensack can be particularly appealing for investorowned systems, Neuburger says. She cited last year’s deal that brought together Duke University Health System, Durham, N.C., and for-profit, 51-hospital Lifepoint Hospitals of Brentwood, Tenn., to form Duke Life- In an exclusive interview, Dan Moen, CEO of for-profit LHP Hospital Group, Plano, Texas, talks with Modern Healthcare reporter Ashok Selvam. He discusses what he considers the strengths of the for-profit sector and explains the partnerships his company pursues with not-for-profit hospitals. To listen to the interview, visit modernhealthcare.com/podcasts.
rewards, operationally and financially.
“For really good hospitals, it’s how do we align more broadly?” Slipkovich says. “It’s going to evolve over time; fee-for-service medicine is going to shift to bundling … whatever you’re going to call it, I think it’s going to evolve. I don’t know if you’re going look straight up at the current ACO model.”
“Evolution” is a term that is repeated frequently in the discussion of healthcare delivery. Neuburger uses the word to describe how the changing reimbursement systems will affect growth. And it’s also the way Dr. Michael Russell II, president of the Physician Hospitals of America, describes changes he has witnessed in the market. The Washington-based trade group represents forprofit, doctor-owned institutions.
“I don’t think it’s surprising,” Russell says of the growth in investor-owned hospitals. “I believe that many of the very large, older institutions are in a situation where they have a model that is, quite frankly, outdated, and what you find is the smaller, investor-owned facilities are able to meet the future needs in a much more efficient and quality-driven way.”
Russell says he believes more physicianowned hospitals are needed to give patients choice and to give doctors more control over delivery of healthcare. He contends an increase in such facilities would lower the costs of healthcare by offering more competition in local markets.
Russell also says more pressure needs to be put on officials in Washington to lift regulations, specifically Section 6001 of the Affordable Care Act, which prohibits new physician-owned hospitals and limits the size and physician-ownership percentage of existing facilities.
“When you don’t have competition in healthcare, quality goes down, expenses go up; plain and simple,” Russell says.
But not all parties place a premium on that competition. Officials of the Federation of American Hospitals, another trade group that represents for-profit hospitals, have said that on many issues they are in agreement with their not-for-profit counterparts and are calling for increased cooperation and collaboration. Evidence of that appears in the flurry of creative partnerships bringing forprofit and not-for-profit hospitals together.
HMA’S Lawson has worked in the forprofit and not-for-profit sectors during his 30-year career and can attest to the changes: “It used to be a distinction, but not so much anymore,” he says.
The two sectors have always shared at least one common goal, Lawson says: delivering the best possible care to their patients.
“As long as you have a good cultural fit in a market where you can collaborate both clinically and operationally, I see some great opportunities to improve clinical outcomes and market share for both,” Lawson says.
Health Management Associates, a for-profit chain based in Naples, Fla., last year acquired seven hospitals from Mercy Health Partners-tennessee. One of those facilities, left, is now named Turkey Creek Medical Center, in Knoxville, Tenn.