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OCR for page 26
Changes in die Ownership,
Control, and ConEguradon of
Heady Care Services
Elements of change have been filtering
through the ownership and configuration of
health care organizations over the past two
decades. Although the emergence of inves-
tor-owned hospital chains has been an im-
portant part of this change, there also has
been substantial growth in multi-institu-
tional arrangements among not-for-profit
hospitals and a surge of investor ownership
and multi-institutional arrangements among
most kinds of health care organizations-
psychiatric hospitals, nursing homes, health
maintenance organizations, home health
agencies, and various types of ambulatory
care centers.
Distinctions between organizational types
have begun to break down. Hybrid orga-
nizations have evolved that combine for-profit
and not-for-profit components. Hospitals and
multihospital systems have moved into other
types of health services (primary care cen-
ters; ambulatory surgery, diagnostic, and re-
habilitation centers; nursing homes; and
home health services). Hospital companies,
like health maintenance organizations, have
begun to combine an insurance Sanction with
the provision of services.
Many of these developments such as Me
emergence en cl growth of investor-owned
hospital companies-were spurred by the
rather sudden availability of money that ac-
companied the general rise of third-party
payments and the specific passage of the
26
Medicare and Medicaid legislation in 1965.
Federal dollars also were the driving force
behind the expansion of, and for-profit in-
terest in, the nursing home field (primarily
funded by Medicaid) and hemodialysis
(fimded by Medicare's End-Stage Renal
Disease Program). Some developments also
were shaped by the bias toward hospital care
that long characterized third-party payment
programs and, more recently, by efforts to
provide incentives for less-expensive forms
of care, such as ambulatory surgery. The
organizational configuration of the health care
system has also been deeply affected by the
fundamental changes in the sources of fi-
nancial capital for health care, in particular
the substitution of debt and equity capital
from private investors for capital from gov-
ernment and philanthropy, as described in
Chapter 3. As hospitals have become more
dependent on borrowing, the greater bor-
rowing power of multi-institutional systems
has spurred the development of such sys-
tems. The need to gain access to lower-cost
capital also generated alliances of not-for-
profit systems and independent hospitals that
are hybrids of not-for-profit and for-profit.
The alliances raise equity capital, guarantee
debt, and seek economies of scale.
Some organizational developments were
stimulated by regulatory programs that
squeezed only part of the system. For ex-
ample, after the government required that
OCR for page 27
OWNERSHIP CHANGES IN HEALTH CARE
hospitals obtain approval for expansions or
for acquisition of costly technology, inves-
tors took the opportunity to initiate services,
such as computed tomographic (CT) scan-
ning, outside of hospitals, where the regu-
lations did not apply.
The growth of multi-institutional systems,
which widen the pool of administrative and
managerial expertise on which indiviclual in-
stitutions can draw, was undoubtedly stim-
ulated in part by the difficulties of individual
institutions in coping with an increasingly
complex regulatory and reimbursement en-
vironment.
Over developments, such as a recent wave
of hospital expansion into nursing homes,
and home and psychiatric care, can be at-
tributed to the changed economic incentives
resulting from Medicare's shift from cost-
based reimbursement to a fixed, per-case
payment. Many other changes have resulted
from developments in the private sector-
particularly the efforts of employers to re-
duce the cost of their health benefit pro-
grams through devices ranging from
employee cost-sharing to contractual ar-
rangements with Tow-bidding providers.
The remainder of this chapter describes
the organizational changes that have be-
come a pervasive trend in health care. The
growth of for-profit enterprise and of multi-
institutional arrangements among different
types of health care providers is examined,
as well as some of the trends that are blur-
ring the distinctions between types of health
care organizations. Much of the movement
described is toward larger organizations that
provide an increasingly broad range of ser-
v~ces.
Many of the numbers reported in this
27
HOSPITALS
For-profit hospitals and multi-institu
tional health care organizations, the latter
usually religious or governmental, have Tong
been in existence. What is new are the rise
of investor-owned hospital companies that
own dozens of hospitals and the proliferation
of multi-institutional arrangements among
not-for-profit hospitals. Compared with in
dependent hospitals, these systems are bet
ter able to fill capital needs, to engage in
political maneuvenng, and to maintain a body
of managerial and specialized sta$expertise.
As summarized by one observer, multi-in
stitutional organizations are the result of
strategies "designed to provide sufficient
strength to cope with Me environment, to
acquire scarce and valued resources, to al
Tow organizational stability, to achieve or
ganizational purposes, to enable growth and/
or survival, and to enhance the organiza
tion's competitive market position" (Zuck
erman, 1983~. Incus, multihospital systems
have been created and developed on both
the for-profit side-where the large com
panies have gained much attention and
among not-for-profit organizations.
Investor-Owned Hospital Systems
For-profit hospitals are not new. Indeed,
in the early l900s more than half of the hos
pitals in the United States were proprietary.
However, the proprietary share shrank
thereafter (Steinwaid and Neuhauser, 1970),
and since 1970 the for-profit proportion has
remained relatively stable at around 13 per
cent. The makeup of that 13 percent share,
however, has been anything but stable, as
chapter should be regarded only as general independent proprietaries have become less
indications of trends, because the rate of common and companies owning and man
change is so rapid, definitions of what is aging chains of hospitals and other health
being counted are not always precise (be- care institutions have grown rapidly. Most
cause of new and changing organizational ^~ ' '
forms), and the only available data are often
from trade associations and sources.
v ~ ,
ot today s largest companies were founded
as recently as the last 20 years.
Table 2.1 shows steady growth in the
OCR for page 28
28
FOR-PROFIT ENTERPRI SE IN HEALTH caRE
TABLE 2.1 Investor-OwnecT Hospitals and Beds: Number and
Percentage of U.S. Nonfederal Short-Term General and Other
Special Hospitals, 197~1984
-
Investor-Owned Percent of U.S. Investor-Owned Percent of U.S.
HospitalsaHospit~sb Bedsa Bedsb
19753786.3 51,230 5.3
19763966.6 54,744 5.7
19774207.0 58,337 5.9
19784377.4 61,499 6.2
19794647.8 66,039 6.7
19803319.0 74,012 7.5
19815809.9 79,002 7.8
198268211.6 90,328 8.9
198376713.1 99,958 9.8
1984878NA 113,122 NA
aCommunity, psychiatric' and specialty hospitals owned by corporations that
own or manage three or more hospitals.
bNonfederal short-term general and other special hospitals.
SOURCES: Calculated from data from: Federation of American Hospitals:
Directory of Investor-Owned Hospitals and Management Companies, 1975; Sta-
bstical Profile ofthe Investor-Owned Hospital Industry, 1979 and 1980; Statistical
Profile of the Investor-Owned Industry, 1983; 1965 Directory, Investor-Owned
Hospitals and Hospital Management Companies. American Hospital Association,
Hospital Statistics, 1984 edition.
number of investor-owned hospitals and in
the proportion of the nation's hospitals and
becis represented by investor-owned cor-
porations.~ Since 1975, investor-owners have
added 500 hospitals and nearly 62,000 beds,
more than doubling their holdings of hos-
pitals and becls. In addition, 354 hospitals
were managed by investor-owned compa-
nies in 1984 (Federation of American Hos-
pitals, 19841. Conversely, the number of
independent for-profit hospitals declined
between 1975 and 1984 at almost the same
rate as the number of investor-owned hos-
pitals grew. Independent for-profit hospitals
numbered 682 in 1975 and 303 in 1984 (Fed-
eration of American Hospitals, 1980 and
1984~. This reduction is accounted for in part
by closures and in part by purchase by inves-
tor-owned systems.
Purchase or lease of formerly indepen-
dent for-profit hospitals has been a source
of growth for investor-owned systems. The
six largest companies, which in 1984 owned
58 percent of investor-owned hospitals, have
bought or leased 436 acute care hospitals
(80 percent of the short-term hospitals they
have owned) since their inception.2 Ofthese
436, 33 percent were formerly for-profit in-
dependent hospitals and 45 percent were
for-profit chain-owned. The remaining 20
percent were not-for-profit or public hos-
pitals, the majority of which were bought in
the 1980s. Construction of new hospitals ac-
counted for 20 percent of the growth of the
six companies' short-term hospital holdings
(Hoy and Gray, 1986~.
Not-for-profit Hospital Systems
The formation of not-for-profit hospital
systems predates that of investor-owned sys-
tems. Such "systems," defined broadly to
include affiliation or mutual support, have
existed for more than 50 years, beginning
mostly among hospitals of religious organi-
zations (Keenan, 1981). Some historical data
OCR for page 29
OWNERSHIP CHANGES IN HEALTH CARE
on today's not-for-profit systems are avail-
able from an American Hospital Association
survey of systems in existence in 1980 (Table
2.2~. Religious systems were predominant
among systems that existed in 1940. By the
1980s, secular systems represented close to
40 percent of the 981 hospitals owned, leased,
or sponsored by not-for-profit systems. An
additional 215 hospitals were managed by
not-for-profit systems in 1983.
COMPARISONS OF INVESTOR-OWNED
AND NOT-FOR-PROFIT SYSTEMS
Since the inception in the 1960s of inves-
tor-owned hospital systems, their rate of
growth has exceeded that of not-for-profit
systems. By 1983, the total number of hos-
pitals owned by investor-owned corpora-
tions still fell somewhat short of the number
owned by not-for-profit systems, and the
number of beds in investor-owned systems
was substantially less than half the number
in not-for-profit systems (see Table 2.31. This
difference results in part from the small av-
erage size of investor-owned hospitals. The
investor-owned systems differed from the
far more numerous not-for-profit systems in
29
other ways. The investor-owned systems
were, on average, substantially larger than
the not-for-profit systems in terms of owned
hospitals or beds. Hospital Corporation of
America, the largest investor-owned sys-
tem, owned or leased 178 and managed 167
hospitals in 1984. It vastly exceeded the size
of the largest not-for-profit system, Adven-
tist Health Systems, with 60 owned or leased
and 15 managed hospitals (Modern Health-
care, 1985b). (Two much larger organiza-
tions of not-for-profit hospitals-Voluntary
Hospitals of America and American Health-
care Systems are not generally classified
as multihospital systems because they are
owned by their member hospitals, rather
than vice versa.) And nearly 70 percent of
investor-owned hospitals were operated
(owned, leased, or managed) by the four
largest companies, while the four largest not-
for-profit systems operated only 15 percent
of not-for-profit system hospitals Johnson,
1985~. High concentration in a few large or-
ganizations characterizes the investor-owned
sector much more than the not-for-profit
sector.
Investor-owned systems have shown
clearer location preferences than have not
T~BLE 2.2 Number of Hospitals =d Bedsa in Reli~ous and
Secular Not-for-profit Multihospital Systems, 194~1983
Religious Secular Total
Hospitals Beds
Hospitals Beds
Hospitals Beds
1940 183 NA 35 NA 218 NA
1950 211 NA 50 NA 261 NA
1960 242 NA 89 NA 331 NA
1970 283 NA 189 NA 472 NA
1980 600 153,000 364 85,000 964 238,000
1983 598 157,000 383 85,000 981 242,000
NOTE: 194~1970 data are from responses to a special 1980 survey of multi-
hospital systems. 1980 and 1983 data are from current surveys. 1980 and 1983
data are published as 1981 and 1985 data, respectively, in the original source,
but pertain to the years shown in Me table (Elwor~ Taylor, American Hospital
Association, Chicago, Illinois, personal communication, 1985).
aLeased, owned, and sponsored.
SOURCE: American Hospital Association, Data Book on Multihospital Systems
198(}1981; Data Book on Multihospital Systems, 198~1985.
OCR for page 30
30
FOR-PROFIT ENTERPRISE IN HEALTH CARE
TABLE 2.3 Comparative Information About Not-for-profit and
Investor-Owned Systems, 1983
Investor-Owned Not-for-pro~t
Systemsa Systemsb
Number of systems
Number of hospitals in systems
Number of beds in systems
Average number of beds per hospital
Average number of hospitals per system
Average number of beds per system
41
767
100,000
130
18.7
2,439
212
981
242,000
247
4.6
1,141
a Systems that own or manage three or more hospitals Data pertain to owned
facilities.
bSystems that own, lease, sponsor, and manage. An additional seven systems
only manage. Data pertain to owned, leased, and sponsored facilities.
SOURCES: American Hospital Association, Data Book on Multihospital Sys-
tems, 198~1985; Federation of American Hospitals, calculated from data from
Statistical Profile of the Investor-Owned Hospital Industry, 1983.
for-profit systems. The hospitals they own
are concentrated in the "sun belt" states; 46
percent of all investor-owned hospitals were
located in Texas, California, and Florida in
1984 (Federation of American EIospitals,
19841. Table 2.4 shows what this preference
has meant in terms of investor ownership of
hospitals in individual states. In no state clo
investor-owned hospitals represent more than
50 percent of all nonfederal short-term gen-
eral and other special hospitals, but they
have more than 30 percent of such hospitals
in seven states.
The investor-owned market share has
grown most rapidly in states with the great-
est increases in per capita income and pop-
ulation, with widespread insurance coverage,
and where for-profit hospitals already had a
relatively large market share of beds. As-
suming that income and insurance coverage
are associated with demand for hospital ser-
vices, investor-owners have exhibited stan-
dard market behavior by seeking to establish
themselves in areas of growing demand
(Mullner and Hadley, 1984~. Investor-owned
hospitals are also more likely than are not-
for-profit systems to be located in suburban
areas and less likely to be in rate-setting
states. Investor-owners often selected areas
in which Blue Cross pays hospital charges
(Watt et al., 1986~. Given the greater geo-
graphic selectivity of investor-owned sys-
tems, it is not surprising that not-for-profit
systems more closely approximated the na-
tional distribution of hospitals among re-
gions than dicl investor-owned systems in
1983 (Table 2.5~.
Investor-owned hospital systems have also
shown selectivity in the size of the hospitals
they acquired or constructed. As Table 2.6
shows, they own few of the nation's smallest
hospitals, which are frequently rural, and
few of the largest, most complex hospitals,
which generally are teaching hospitals, al-
though there are signs of change in the latter
area (see Chapter 71.
Psychiatric Hospitals
Half of all psychiatric hospitals (297 of 586)
were government-owned in 1983 (American
Hospital Association, 1984), but in the pri-
vate sector, investor ownership has become
a major presence. In micl-1985 the records
of the National Association of Private Psy-
chiatric Hospitals (NAPPH) indicated that
52 percent of the 224 member hospitals were
affiliated with investor-owned systems, 19
OCR for page 31
OWNERSHIP CHANGES IN HEALTH CARE
TABLE 2.4 Investor-Owned Hospitals as a Percentage of
Nonfederal Short-Term General and Other Special Hospitals
by Statea
State Percentage State Percentage
Alabama
Alaska
Anzona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
T . .
,oulslana
Maine
Maryland
Massachusetts
Michigan
~ ,. . . .
lvllSSlSslppl
Missouri
Montana
29
11
12
16
31
10
2
13
8
44
29
6
5
10
3
23
31
7
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
to
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota 4
r ~
ennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
12 Wyoming
2
50
3
10
o
18
o
1
9
13
4
5
o
21
38
32
20
o
31
11
aInvestor~wned is defined as owned by a corporation that owns or manages
three or more hospitals; includes psychiatric and other speciality hospitals
SOURCES: Calculated from data from American Hospital Association (1984~;
Federation of American Hospitals (1984~.
percent were independent for-profit hos-
pitals, and the remainder were not-for-profit
facilities (Robert L. Thomas, National As-
sociation of Private Psychiatric Hospitals,
Washington, D. C., personal communica-
tion, 19851.3
The grouch of investor-owned psychiatric
hospital systems shows both similarities to
and differences from the growth of investor-
ownedhospital systems. Similarities include
rapid growth, a high degree of concentration
in a few companies, absorption of some mul-
tihospital systems by other multihospital
systems, and a decrease in the independent
for-profit sector. Differences include a far
31
greater market penetration by investor-
owned systems and the absence of a signif-
icant market presence of not-for-profit sys-
tems. (Not-for-profit hospital systems have
exhibited only a small interest in the psy-
chiatric hospital market, an estimated eight
systems owning a total of nine psychiatric
hospitals (Fackelman, 1985a).) During the
late 1960s nearly half of all private psychi-
atric hospitals were for-profit and for the
most part were independently owned by in-
dividuals or small groups of psychiatrists.
Today, chain ownership is more prevalent
than individual ownership among the for-
profits (Levenson, in press).
OCR for page 32
32
FOR-PROFIT ENTERPRISE IN HEALTH CARE
TABLE 2.5 Regional Distribution of System-Owned Community Hospitals and Beds,
Investor-Owned, Not-for-profit, and AD U.S. Hospitals, 1983
Hospitals Beds
NFP Total NFP Total
Region I-OSystems U. S. I-OSystems U. S.
New England 0.5%2.8% 5.3% 0.3%2.7% 5.9%
Middle Atlantic 1.49.2 11.4 1.410.4 18.4
South A`danUc 25.511.4 14.6 30.611.5 16.2
E-N Central 2.319.6 15.5 2.425.7 18.3
E-S Central 17.35.3 8.0 15.25.0 6.9
W-N Central 2.516.4 13.0 2.513.4 9.3
W-S Central 25.79.4 14.0 24.810.5 10.5
Mountain 4.410.9 6.1 4.77.6 3.9
Pacific 20.415.0 12.1 18.113.2 10.6
Total 100.0100.0 100.0 100.0100.0 100.0
SOURCE: Compiled Dom data provided by Peter Kralovec, Hospital Data Center, American Hospital Asso-
ciation, Chicago, Ill., 1985.
TABLE 2. 6 Distribution of System-Owned
Community Hospitals by Size and Type of
Ownership, 1983
I-O
Chain
Beds (N = 515)
NFP
Chain
(N = 1,100)
6- 240.6%
25- 997.2
50- 9929.3
100-19941.2
200-29915.5
300-3993.9
400~991.9
500+0.4
Total100.0
SOURCE: Compiled from data provided by Peter
Kralovec, Hospital Data Center, American Hospital
Association, Chicago, Ill., 1985.
has emerged in large part through the ac-
quisition of the smaller chains by larger
chains.4
All
Hospitals NURSING HOMES
(N = 5,783)
2.5%
12.4
18.3
23.6
16.3
10.6
7.6
8.7
100.0
3.9
17.0
24.5
23.9
12.5
7.6
4.7
5.9
100.0
The concentration of ownership within the
investor-owned sector is indicated by four
corporations owning 66 percent of the inves-
tor-owned, NAPPH-affiliated psychiatric
hospitals in 1985. Three of the four are pri-
mariTy hospital chains-Hospital Corpora-
tion of America, National Medical Enter-
prises, and Charter Medical. The fourth is
Community Psychiatric Centers, which owns
no acute care hospitals. This concentration
For-profit ownership has Tong been pre-
dominant among nursing homes.5 Before the
1930s, people in need of long-term care out-
side their homes were admitted to private
charitable homes. Demographic changes, the
availability of binding Trough the Social Se-
curity Act of 1935, subsequent amendments
to the act, and the enactment of Medicaid
and Medicare stimulated the growth in
nursing homes. The number of facilities in-
creased from 1,200 in 1939 to nearly 15,000
in 1969, while the United States population
increased approximately 50 percent. Much
of the growth in nursing homes was in the
proprietary sector, which by 1969 had 64.5
percent of nursing home beds (U.S. Na-
tional Center for Health Statistics, 19841.
During the 1970s the growth in the total
number of nursing homes slowed, but the
proprietary sector share continued to in-
crease. By 1980, 81 percent of the 17,700
nursing homes and 69 percent of the 1.5
million beds were proprietary.
OCR for page 33
OWNERSlIIP CHANGES IN HEALTH CARE
Information about the market share of
investor-owned nursing homes is made up
of approximations. One estimate suggests
that between 1979 and 1982 the major inves-
tor-owned chains increased their control
(owned, leased, and managed) of nursing
home beds by 50 percent to more than
200,000 beds, representing roughly 17 per-
cent of all nursing home beds.
In the investor-owned sector, ownership
is concentrated in relatively few corpora-
tions. In 1984 the largest system, Beverly
Enterprises, operated 950 homes. The three
largest systems (Beverly Enterprises, Hill
haven- a subsidiary of National Medical
Enterprises, and ARA Living Centers) to-
gether operated approximately 1,500 homes
comprising about 70 percent of the investor-
owned nursing homes identified by Modern
Healthcare (Punch, 19851.
Multi-institutional system growth among
not-for-profit nursing homes has lagged sub-
stantiaDy behind the investor-owned sector.
Investor-owned nursing home systems op-
erated six times as many nursing home beds
as were operated by not-for-profit systems
in 1984.
Multihospital systems are rapidly increas-
ing their nursing home operations; in 1984
they operated 365 freestanding nursing
homes (an increase of 17 percent over a year
earlier), of which 127 were operated by
investor-owned systems (Punch, 1985~.
HEALTH MAINTENANCE
ORGANIZATIONS
Health maintenance organizations (HMOs)
were the first of what is a growing and more
varied type of organization that combines
the provision of health services with an in-
surance function. An HMO plan provides
comprehensive health care for a set monthly
premium paid to the plan; thus, the plan's
income for each member's care is fixed re-
gardIess of utilization, and the plan is the
risk carrier.6 An HMO can take many forms.
The two basic types are the group model,
33
in which the plan hires or contracts with a
limited number of physicians to provide care
at a central location, and the individual prac-
tice mode! in which the plan contracts with
physicians who operate out of their offices.
In some plans physicians receive a bonus or
share in the profits derived from controlling
expenses.
The first HMO dates back to 1929 when
the Ross-Loos Health Plan was organized to
provide care for the employees of the Los
Angeles water department. During the 1930s
and 1940s the precursors of HMOs were
established Kaiser Permanente, Group
Health Cooperative of Puget Sound, Group
Health Association of Washington, and the
Health Insurance Plan of Greater New York.
But it was not until the 1970s that the HMO
concept became widely known and adopted.
The federal government stimulated HMO
growth with passage of The Health Main-
tenance Organization Act of 1973, which re-
quired employers to offer local qualified
HMOs as an insurance option and provided
grants and loans to HMOs to cover devel-
opment and initial operating deficits. In 1981
these fiends were terminated, but federal
encouragement of HMOs has continued
through promotional efforts to generate pri-
vate investment.
Table 2.7 shows the growth of HMOs from
1970 to 1985 and the recent acceleration in
growth, but does not indicate some impor-
tant changes that occurred within the HMO
sector. Until about 10 years ago for-profit
HMOs were a rarity (Hospitals, 1984~. By
1985 there were 136 for-profit plans with
almost 3 million enrollees representing
roughly 35 percent of all HMO plans and
close to 26 percent of enrollees (InterStudy,
19851. Some of the for-profit plans con-
verted from not-for-profit status; others were
established as for-profits.
In 1983 the first stock of a publicly traded
HMO company was issued. The first to go
public was U.S. Health Care Systems, for-
merly not-for-profit, which raised $25 mil-
lion in stock offerings. Another former not
OCR for page 34
34
TABLE 2.7 Growth of Health Mainte-
nance Organizations, Number of Plans
and Enrollees, 1970-1985
Enrollees
Plans (millions)
June
January 1970
1972
1974
1976
1978
1980
1982
1984
1985
26
39
142
175
198
236
265
306
393
2.9
3.5
5.3
6.0
7.3
9.1
10.8
15.1
18.9
SOURCES: Office of Health Maintenance Organi-
zations, U.S. Department of Heals and Human Ser-
vices, Rochrille, Md.; InterStudy, National HMO
Census, 1982, 1984, 1985, Excelsior, Minn.
FOR-PROFIT ENTERPRISE IN HEALTH CARE
Investment analysts expect the move to-
ward more and larger multistate HMO firms
to continue, using terms such as "land rush
mentality" to descnbe publicly traded HMO
firms' efforts to manage, acquire, or start
new plans.8 Projections of continued rapid
growth in HMO enrollment are common-
place and recognize the potential impor-
tance of changes that open up the Medicare
market to HMOs, which the trade associa-
tions anticipate will bring an estimated 20
percent of elderly people into lIMOs (Group
Health Association of America, 1984~.
Most observers agree that HMOs be they
independent physicians' associations or
closed-group models have become an ac-
cepted way of delivering health care at a
savings. The need to gain access to capital
to tap the expanding HMO market has led
some HMOs to change to for-profit status,
in addition to those that started that way.
As Iglehart (1984) points out, signs that for-
profit organizations will become more im-
portant in the HMO arena already exist. So
too are signs that a shake-out of weak com-
petitors will take place in locales where in-
tense competition has developed among
multiple HMOs.
for-profit, Maxicare Health Plans, raised $16
million on the stock market, and Health
America raised $20 million (Washington Re
port on Medicine and Health, 1984a). HMO
stock issues received favorable reports from
Wall Street analysts, quickly followed by ea
ger reception from the buying public. By
1984, seven HMO corporations had entered
the stock market; all but two were multistate
organizations.
Multistate organizations are networks of HOME CARE
HMO plans linked by ownership or man
agement operating in two or more states.
There were six such organizations in 1978.
In 1983, 14 multistate organizations owned
or managed 81 plans that enrolled 7.1 mil
lion people 52 percent of all HMO en
rolIment.7 The largest by far was not-for
profit Kaiser Foundation Health Plan, Inc.,
with 4.4 rniDion enrollees. For-profit CIGNA
with 663,000 enrollees and PruCare with
338,000 enrollees were ranked second and
third; both are owned by insurance com
panies. Fourth- and fi:Gch-ranked Medicare
Health Plans, Tnc., and United Healthcare
Corporation have publicly traded stock, as
have three other national firms (Baker et al.,
19841.
Home care services comprise a broad and
increasing range of services provided by
several different types of personnelaDiliated
with thousands of home health agencies.
Types of care include skilled nursing, oc-
cupational speech and physical therapy,
meals, homemaker services, respiratory
therapy, and intravenous therapy. Employ-
ees include nurses, home health aides,
homemakers, and specialists in specific
therapies. The organizations that employ
these personnel and supply these services
are varied. For some, home care is the only
line of business. Others combine temporary
staffing (nurse and clerical) with home care.
Some are affiliated with pharmaceutical
manufacturers, some with nursing homes,
-
. . . .
~,
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OWNERSHIP CHANGES IN HEALTH CARE
TABLE 2.8 Medicare-Certified Participat-
ing Home Health Agencies, 1978 to 1984
1978 1980
1982 1984
Visiting Nurse
Association
Government
Hospital-based
Proprietary
Private nonprofit
Other
Total
502515
1,2721,260
316359
145186
NA484
488119
2,7232,923
517525
1,2111,226
507894
6281,569
619756
157277
3,6395,247
SOURCE: Health Care Financing Administration,
Health Standards and Quality Bureau, Office of Survey
and Certification, Baltimore, Md.
some with hospitals, and some with large
national hospital corporations.
Because of the fragmented and diverse
nature of the home care market, no reliable
source of aggregate data is available. Med-
icare assembles data covering agencies li-
censed as Medicare providers, but these data
undoubtedly understate the number of home
care providers.
The dynamic grown in the number of
these Medicare-cer~fied agencies (almost
doubling between 1978 and 1984) and the
growth of the for-profit sector are particu-
larly striking trends (Table 2.81. Much ofthis
growth predated the likely increased de-
mand for home care that Medicare's pro-
spective payment methods for hospitalized
patients will encourage. The striking in-
crease in for-profit agencies (from 186 to 628)
between 1980 and 1982 was caused by a
change in Medicare reimbursement le~is-
lation. Before the Omnibus Reconciliation
Act of 1980, for-profits could not get certi-
fication in states not having a home health
agency licensure law. The removal of this
restriction opened up more than 20 states
to for-profit home health agencies (Frost and
Sullivan, Inc., 1982~.
Medicare expenditures on home health
care reached $2 billion in 1984. Using a
broacler definition that would include du-
rable equipment and consumables, a private
35
market research firm estimated the home
health market to be $4. 9 billion, growing to
$9.4 billion by 1990 (Modern HeaZthcare,
1985a).
There are many new providers in the home
health care field, apart from the growing
number of independent for-profit opera-
tions. For instance, major medical supply
companies such as Abbott Laboratories and
Baxter Traveno! Laboratories are offering
home care services in conjunction with their
new, high-technology home care products.
The nursing home subsidiary of National
Medical Enterprises provided home care in
21 locations in 1984, and Beverly Enter-
prises, a large nursing home chain, had 134
home care units in 1984. Hospital Corpo-
ration of America and American Medical
International both entered the home care field
in 1984 (Kuntz, 1984; Fackelman, 1985b).
The degree of ownership concentration is
difficult to estimate. Knowledgeable ob-
servers list such investor-owned companies
as Upjohn Health Care Services, Personnel
Pool of America, Beverly Enterprises, and
Quality Care, Inc., as the largest home care
providers. The only multihospital system
listed among leading providers of home health
care in 1984 was National Medical Enter-
prises' National Medical Home Care Inc.
(Fackelman, 1985b).
NEW TYPES OF PROVIDERS
For-profit organizations have been prom-
inent in the newer settings for health care,
such as freestanding ambulatory surgery
centers and freestanding primary care cen-
ters. Both types were started by entrepre-
neurial physicians to compete with hospitals
and physicians. Now such ambulatory facil-
ities are increasingly being created by, or
coming under the control of, hospitals and
multihospital systems, both investor-owned
and not-for-profit.
Ambulatory surgery sometimes called
one-day surgery, same-day surgery, or in-
out surgery-consists of surgical procedures
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36
TABLE 2.9 Number of Freestanding
Surgery Centers and Surgical
Operations, 1970~1990
Number of
Centers
Number of
Operations
1970
1975
1980
1985a
1990a
3
41
128
428
832
6,700
20,000
33,300
743,400
1,932,700
aEshmated.
SOURCE: Compiled from data in Henderson
(1985:148).
performed without an overnight stay in a
hospital. Freestanding ambulatory surgery
centers have, on average, three operating
rooms and perfo~ nearly 2,000 surgical
procedures annually most often gyneco-
logical surgery (Henderson, 1985). Hospi-
tals also are heavily involved in ambulatory
surgery. In 1983 nearly 90 percent of com-
munity hospitals had outpatient depart-
ments equipped for such procedures
(Demkovich, 19831.
Several factors have stimulated the growth
of ambulatory surgery: technological ad-
vances such as fast-acting anesthetics and
new surgical methods, cost containment
concerns, the expansion of insurance cov-
erage for outpatient surgery, and the pref-
erences of consumers. The first such center
opened in 1967, but failed because of lack
of physician and reimbursement support.
Three years later three centers opened.
Growth was slow through the mid-1970s,
but by 1980, 128 ambulatory surgery cen-
ters were counted nationally. A private mar-
ket research firm estimates that 114 new
freestanding surgery centers will become
operational in 1985, for a total of 428 such
facilities (see Table 2.9) (Henderson, 1985~.
More than 90 percent offreestanding sur-
gery centers are for-profit enterprises, even
when operated by not-for-profit hospitals
(Bernard Kerschner, President, Freestand-
ing Ambulatory Surgery Association, Dal
FOR-PROFIT ENTERPRISE IN HEALTH CARE
las, Texas, personal communication, 1985).
Freestanding surgery centers affiliated with
hospitals (which excludes outpatient surgery
programs operated on the hospital campus)
constitute 7 percent of all freestanding sur-
gery centers (Henderson, 1985); indepen-
dently owned (nonchain) surgery centers
make up 65 percent. Some formerly inde-
pendent surgery centers have been ac-
quired by corporations, and today, through
construction and acquisition, corporations
owning more than one center hold 28 per-
cent of all freestanding surgery centers. The
corporate sector, with 150 surgery centers
open or under development, is composed
of 10 firms (Henderson, 19851. More than
one-third of corporate centers are owned by
one company Medical Care International,
which was formed in 1984 by the merger of
Medical 21 and Surgicare Inc. Medical Care
International's 56 centers performed 13 per-
cent of all surgeries in freestanding centers
during 1984.
Future growth of freestanding surgery
centers is uncertain. Although a private
market research firm predicts double the
number of such centers over the next five
years (Henderson,.1985), aggressive com-
petition by hospitals is a limiting factor, and
freestanding surgery centers without hos-
pital affiliation could decrease as hospitals
develop their own centers and buy existing
centers.
-
Freestanding Primary Care Centers
Freestanding"primary care" (or "urgent
care") centers have proliferated during the
last decade. Urgent care centers generally
operate as a private physician's office (in terms
of licensure) and provide 12 or more hours
of service per day, 365 days a year.9 Ap-
pointments are not needed, waiting times
are short, charges are usually lower than
hospital emergency room charges, and the
centers often are located in shopping malls
or high-population areas.
The earliest centers were generally owned
OCR for page 37
OWNERSHIP CHANGES IN HEALTH CARE
TABLE 2.10 Growth of Freestanding
Urgent Care Centers, 1982-1990
Year
Number of Centers
1982
1983
1984
1985a
199Oa
600
1,200
2,300
3,000
5,500
aEstimated.
SOURCE: National Association for Ambulatory
Care (1985).
by physicians. Today they are increasingly
owned wholly or in part by hospitals or hos-
pital chains, and they now typically style
themselves as urgent care or primary care
centers rather than emergency centers, their
original appellation. The name change is in
part a response to the criticism that patients
in need of emergency care, such as victims
of major trauma or patients suffering heart
attacks, would inappropriately seek care in
"emergency" centers, which generally are
not equipped or staffed to handle such cases,
rather than in hospitals. In part the change
in name is to emphasize the type of care
they do provide treatment for minor med-
ical problems and injuries, immunizations,
and preemployment physicals. The centers
once were staffed by emergency and family-
practice physicians, but today specialty phy-
sicians such as pediatricians and orthoped-
ists are also employed, and the range of
services has been expanded to encompass
many primary care activities.
The first freestanding"emergicenter"
opened in 1973. Growth has been rapid (see
Table 2.10~. By mid-1985, 2,600 centers were
operational and another 400 were expected
to be functional by the end ofthe year. How-
ever, the short period of extraordinary
grown, when the numbers doubled each
year, may be over. Trade sources expect
that the number of urgent care centers will
increase by fewer than 100 percent between
1985 and 1990 (National Association for Am-
bulatory Care, 19851.
37
The growth of this new practice form has
its roots in several causes. Initially, entre-
preneurially inclined physicians identified a
service that was attractive to consumers from
a standpoint of cost and convenience. The
growing physician surplus has made tradi-
tional solo practice more risky and difficult
and salaried positions in organized settings
more attractive. Hospitals (and hospital
companies) became involved in the opera-
tion of urgent care centers either as a com-
petitive response or to secure a flow of
patients into the hospital.
The ownership of the urgent care centers
that exist today has been the subject of con-
flicting estimates. One study found that
physicians own 73 percent of centers, hos-
pitals own 7 percent, and corporations that
are controlled by neither hospitals nor phy-
sicians own the rest; another estimate puts
hospital ownership or affiliation of urgent
care centers at 25 percent (Washington Re-
port on Medicine and Health, 1984b). A sur-
vey of almost 4,000 nonfederal physicians in
1983 found that half who provided care at
urgent care centers said He center was owned
by a not-for-profit hospital (American Med-
ical Association, 1983~. Of the 455 centers
that responded to a National Association for
Ambulatory Care (1985) survey, almost 40
percent were physician-owned and 42 per-
cent were nonphysician corporations. The
latter group was identified as a growing group,
and a change from the physician-owned, for-
profit centers that were characteristic of the
early years.
There are also reports of for-profit chain
ownership. Modern Healthcare identified
44 chains (excluding multihospital systems)
that operated a total of 260 freestanding ur-
gent or primary care centers in 1984. These
chains were generally small; only eight chains
operated 10 or more centers. The largest
chain, Doctor's Officenters, with 51 centers,
was acquired by Humana at the end of 1984.
Humana already operated centers under the
MedFirst name and, with a total of 144 cen-
ters, is the largest operator of Deestanding
OCR for page 38
38
urgent or primary care centers in the coun-
try (Wallace, 1985~. Thus, this rapidly grow-
ing health care sector remains highly
Dagmented in terms of ownership, and for-
profit status is likely to remain dominant
because even the centers operated by not-
for-profit hospitals are after for-profit enter-
prises.
Other Services
For-profit ownership is prominent among
freestanding dialysis centers. It is now nearly
two decades since dialysis emerged from its
experimental state and more than a decade
since the Medicare program started to pay
for it. Although a market for dialysis services
existed before the introduction of Medicare
coverage in 1972 (National Medical Care,
the oldest for-profit dialysis provider, was
formed in 1968), it was small.
With the advent of Medicare coverage the
dialysis market began its rapid expansion.
Medicare enrollment grew from 1S,000 in
1974 to 78,479 at the end of 1984. Medicare
expenditures for dialysis grew from $229
million in 1974 to $1.6 billion by 1984, and
the number of facilities providing dialysis
rose from 606 in 1973 to 1,290 at the end
of 1984 (Committee on Government Op-
erations, 1982; Health Care Financing Ad-
ministration, personal communication, 1985;
Gibson and McMullan, 19841. In 1973 only
11 percent (66 of 606) of all dialysis centers
were freestanding. The remainder were
hospital units or hospital satellites. As the
Medicare End-Stage Renal Disease Pro-
gram increased its enrollment, the major
growth in dialysis suppliers was in free-
stancling units. In 1984, 52 percent (668 of
1,290) of dialysis facilities were freestand-
ing, and 79 percent of freestanding units
were propne~ry. Overall, 42 percent of renal
facilities were proprietary in 1983 (com-
pared with 30 percent in 1980), almost all
of them freestanding centers (Table 2.11)
Modern Healthcare identified nine chains
that operated dialysis centers in 1984, of
FOR-PROFIT ENTERPRISE IN HEALTH CARE
which three were not-for-profit. The two
largest chains were for-profit: National Med-
ical Care Inc. (recently bought by W. R.
Grace, a large chemical and natural re-
sources conglomerated is overwhelmingly the
largest, with 178 centers treating 14,000 pa-
tients in 1984 nearly 18 percent of the
Medicare dialysis population. Second-ranked
Community Dialysis Centers, Inc., is a
wholly owned subsidiary of Community
Psychiatric Centers, with 47 centers. Third-
ranked was not-for-profit Dialysis Clinics Inc.,
with 27 centers. Most of the major chains
have shown substantial growth during the
past eight years, and with certificate-of-need
laws being relaxed in some states and the
number of dialysis patients expected to grow
by between 5 and 11 percent next year, di-
alysis is seen as a steady-growth field (Rich-
man, 1985~.
For-profit enterprises are also involved in
other new forms of care once provicled on
a not-for-profit basis. Cardiac rehabilitation,
physical rehabilitation, and diagnostic im-
aging are among the services that for-profit
organizations are finding new ways to de-
velop often in freestanding facilities. For-
profit examples include C. P. Rehab, which
owns cardiac rehabilitation centers; Rehab
Hospital Services; Vari-Care Inc., a nursing
home company that has established reha-
bilitation programs; and Diagnostic Centers
Inc., a subsidiary of Omnimedical, designed
to set up diagnostic radiology centers
throughout the United States. For-profit
companies are opening other new services
in new settings. There are no data concern-
ing the range or extent of this movement,
but it includes sports medicine, obesity cTin-
ics, executive heady services, and weliness
programs. Some of these services are pro-
vided on a freestanding for-profit basis, but
others are provided by not-for-profit and for-
profit hospitals, and some are being devel-
oped by for-profit and not-for-profit hospital
systems.
For-profit activity has also begun in two
somewhat surprising areas: hospice care and
OCR for page 39
OWNERSHIP CHANGES IN HEALTH CARE
39
TABLE 2.11 Number of Medicare-Certified End-Stage Renal Disease Providers by Type
of Ownership and Type of Facility, 1980-1984
980
1982
1984
Number Percent Number Percent Number Percent
-
A11 facilities 1,703 100.0 1,218 100.0 1,290 100.0
Proprietary 323 30.1 437 35.1 544 42.2
Hospital-based 23 2.1 14 1.8 15 1.2
Freestanding 300 28.0 423 33.3 529 41.0
Not-for-pro~t 750 69.9 781 64.9 746 57.8
Hospital-based 620 57.8 677 56.9 607 47.0
Freestanding 130 12.1 104 8.5 139 10.8
SOURCES: Gibson and McMullan (1984~; Health Care Financing Administration, personal communication,
1985.
birding centers. In 1984, Hospice Care, Inc.,
started with $5 million in capital from two
investment houses, announced plans to
manage 12-15 new hospices around the
country (Health Policy Week, 19841. In an-
other move that put a previously not-for-
profit service into the for-profit field, EIealth striations.
Resources Corporation, Inc., acquired a
consulting company that is developing birth-
ing centers as joint ventures with obstetri-
cians. Also, a for-profit hospital chain and a
number of venture capital companies have
attended workshops on birthing centers
(Lubic, 19841. Such interest could translate
into for-profit birthing centers.
VERTICAL INTEGRATION AND
DIVERSIFICATION
lye previous discussion suggests that hos-
pitals have increasingly become involved in
nonhospital activities. Movement to encom-
pass other levels of care is commonly called
vertical integration, because it entails care
that often precedes or follows hospitalization
(e.g., primary care; after-hospital care in the
patient's home, nursing home, and other
sites; and other services). Diversification re-
fers to selling of other services such as con-
tract management or the addition of
nonhealth businesses. Vertical integration
and diversification can protect organizations
from uncertain flows of inpatient revenues
by generating new revenue sources. Verti-
cal integration can help control the flow of
patients and dollars into hospitals, thereby
capturing patients, dollars, and growth op-
portunities that might be lost to competing
r . ~
providers or because ot reimbursement re
Vertical integration is increasing at the
multihospital system level, with corpora-
tions acquiring or developing divisions for
nonhospital functions. Vertical integration is
also occurring at the local level with inde-
pendent hospitals branching into nonhos-
pital activities. At the overlap between
financing and services delivery, systems and
independent hospitals are diversifying into
HMOs and preferred provider arrange-
ments.
These changes are responses to changes
in the health care environment. Individual
hospitals as well as members of multihos-
pital systems are wInerable to pressures that
are causing their occupancy rates to drop.
Cheaper, more convenient ambulatory ser-
vices are keeping some patients away. Pro-
spective payment is reducing the length of
stay. Cost-sharing insurance contracts are
causing patients to reduce Heir out-of-pocket
expenses by seeking lower-cost forms of care
and by cutting hospital stays. By expanding
into outpatient services, systems and hos-
pitals receive revenues that might otherwise
go elsewhere; they also create feeder ser
OCR for page 40
40
vices for their hospitals. By expanding into
after-hospital care (nursing homes, home
care, etc.), hospitals can discharge patients
as soon as is medically reasonable, thus min-
imizing the cost incurred under the hospital
DRG (diagnostic-related group) while the
patient continues to be revenue-producing
in the home care or nursing home setting.
By expanding into psychiatric care, hospitals
can serve patients for whom payment is gen-
erally not under prospectively set rates.
A 1981 study noted that vertical integra-
tion was more common in not-for-profit than
for-profit systems because of the former's
greater emphasis on providing comprehen-
sive services in a locality. Regarding di-
versification, the study noted that not-for-
profit had moved more into selling manage-
ment services while for-profits were more
into contracts for ancillary services (Derzon
et al., 19811.
The extent of vertical integration is not
well documented, but there is anecdotal ev-
idence that it is an increasing phenomenon
among systems and independent hospitals.
At the system level (for-profit and not-for-
profit), Mourn Hea7;thcare (1985b) identi-
fied the following in 1984:
· 27 multihospital systems operating one
or more psychiatric hospitals
· 98 multihospital systems operating one
or more nursing homes
· 27 multihospital systems operating one
or more lifecare centers
· 15 multihospit~ systems operating one
or more HMOs
· 1,322 freestanding facilities (surgery,
urgent care, diagnostic, weliness, rehab
centers, etc.) operated by multihospital sys-
tems.
The major for-profit multihospital cor-
porations remain, however, engaged mostly
in providing acute hospital care. Of the ma-
jor corporations, National Medical Enter-
prises is mostdiversified, deriving only about
half of its operating revenues from general
hospital and primary care services (National
FOR-PROFIT ENTERPRISE IN HEALTH CARE
Medical Enterprises, Inc., 1984~. At the other
end of the spectrum is the Hospital Cor-
poration of America, whose 360 owned and
managed general hospitals and 27 psychi-
atric hospitals provided 95 percent of its rev-
enues in 1984 (Hospital Corporation of
America, 1985), a picture that seems certain
to change.
The eight largest investor-owned hospital
corporations combined present an interest-
ing picture of vertical integration. In 1983
they owned and operated the following
(Federation of American Hospitals, Hospital
Management Company Facilities by Line of
Business, unpublished data, 19841:
426 acute care hospitals
102 psychiatric hospitals
234 hospital management contracts
163 medical office buildings
89 ambulatory care centers
34 substance abuse/alcohol centers
272 long-term-care units
38 home health agencies
62 dialysis centers
32 clinics
103 pharmacies
3 radiology units
2 medical laboratories
1 freestanding diagnostic center.
Although some investor-owned corpora-
lions have had a degree of apparent vertical
integration at the system level for some time,
this has not necessarily affected patient flow
into and out of their local hospitals. Patient
flow is affected not merely by ownership of
nonhospital services but also by close phys-
ical location and coordination of services.
There are indications, however, that some
investor-owned corporations are moving to-
ward closer integration of services, a de-
velopment that fixed-payment systems
encourage. For example, National Medical
Enterprises has initiated the building of
medical "campuses," with many compo-
nents of a continuum of care located to-
gether (Washington Report on Medicine and
Health, 1983~. Humana's MedFirst urgent
OCR for page 41
OWNERSHIP CHANGES IN HEALTH CARE
care centers, originally built away from Hu-
mana hospitals, are now being constructed
within their hospital service areas to act as
feeders for inpatient care. HCA is building
psychiatric "pavilions" on their own hospital
grounds.
Among not-for-profit hospitals and sys-
tems, some vertical integration and diver-
sification efforts have been facilitated by
membership in alliances such as American
Healthcare Systems and Voluntary Hospi-
tals of America. The latter has developed a
design for ambulatory surgery centers to re-
duce construction and operating costs for its
members and has created VHA Health Ven-
tures-to help members vertically inte-
grate, and Voluntary Health Enterprises-
to give members engaged in diversification
activities access to equity markets (Volun-
tary Hospitals of America, undated).
Hospital systems are also increasingly in-
tegrating provider and financing functions
(by means of HMOs, preferred provider ar-
rangements, or other insurance vehicles) in
the hope of generating revenues and of cap-
turing patient populations for their hospi-
tals. Humana led the investor~wned industry
with its HumanaCare Plus program, under
which Humana assumes the actuarial risk
for emIoyees' health benefit plans, guaran-
teeing employers a fixed health care pre-
mium cost for one year and limited increases
of no more than the increase in the Con-
sumer Price Index for Free years. Patients
can choose their physicians, but are penal-
ized for use of non-Humane hospitals by
heavy out-of-pocket expenses. Similar or re-
lated developments can be seen at the other
major investor-owned hospital chains Trough
the development of preferred provider ar-
rangements, acquisition of HMOs, purchase
of insurance companies, and so forth (Mod-
em Heatthcare, 1985c; Hospital Corpora-
tion of America, 19841. Such activities are
not confined to the investor-owned sector.
For example, the Health Central Corpora-
tion owns an insurance company, St. Joseph
Health System has purchased an HMO, and
41
Adventist Health System North is conduct-
ing a joint venture with a for-profit HMO
(Washington Report on Medicine and Health,
19851.
The assumption of risk by hospitals and
hospital chains is of major potential impor-
tance because of the departures from the
traditional incentives under which hospitals
operate and because of the increases it en-
tails in the size and scope of health care
organizations.
FOR-PROFIT/NOT-FOR-PROFIT
HYBRIDS
The discussion thus far has been couched
in terms of not-for-profit as contrasted with
for-profit organizations. Although this is an
important distinction, the lines between the
two types of organizations cross at numerous
points, and at the crossover points new types
of hybrid organizations are emerging. For
He purposes of this section they are grouped
into management contract arrangements,
hybrids that emerge from corporate restruc-
turing, alliances formed to help indepen-
dent voluntary hospitals reap the benefits of
multi-institutional arrangements, and joint
ventures. The hybrids are often examples of
diversification.
.
In general, the new, complex hybrid or-
ganizations are designed to bring to one sec-
tor some of the advantages of the other.
Hybridization may become increasingly im-
portant as competitive pressures grow and
access to resources such as capital and per-
sonne! become crucial to maintaining or in-
creasing market share.
The most familiar of these crossover points
occurs in contract management. According
to Modern Heatthcare, 76 multihospital sys-
tems had contracts to manage 537 hospitals
in 1984. Investor-owned systems managed
137 not-for-profit hospitals, but not-for-profit
systems managed only 1 for-profit hospital.
Public hospitals managed under contract
numbered 288, of which 53 percent were
under investor-owned management Uohn
OCR for page 42
42
son, 1985~. Contract management of inde-
pendent hospitals by systems brings the
management concepts, skills, and systems
of the multi-institutional sector to troubled
hospitals, while more or less preserving the
goals and autonomy of the employing hos-
pital.
A closer linkage of for-profit and not-for-
profit forms is seen in the establishment of
for-profit subsidiaries by not-for-profit hos-
pital corporations. The mechanism usually
used to accomplish this is corporate restruc-
turing, described as "the conversion of a
not-for-profit hospital operating corporation
into a multiple-corporation system or a net-
work of related corporations for strategic
purposes" (Bryant, 1981~. Corporate re-
structuring involves the unbundling of ser-
vices into separate organizations under an
umbrella parent organization. Not-for-profit
corporations can create for-profit companies
under the not-for-profit umbrella. Corpo-
rate restructuring has been used for a num-
ber of reasons. One frequently cited reason
is to enable hospitals to diversify into both
health and nonhealth areas, thus increasing
revenue flows. Another is to gain access to
equity markets. Hospitals have built parking
lots and physician offices, sold services to
physicians and other hospitals, and invested
in housing for the elderly, supermarkets,
and many other activities.
There are no data available on the number
of not-for-profit hospital corporations with
for-profit subsidiaries, but examples are le-
gion. One is Roanoke Memorial Hospital
Association, which operates for-profit sub-
sidiaries that include a collection agency, a
long-term-care center, an air ambulance
service, and widely dispersed real estate op-
erations (Kidwell, 1983~. Another is not-for-
profit Lutheran General Hospital in Illinois,
which runs for-profit Parkside Medical Ser-
vices Corporation, a consulting and man-
agement company that also owns or manages
freestanding alcohol treatment centers and
performs numerous other Unctions (La-
Violette, 1983~.
FOR-PROFIT ENTERPRISE IN HEALTH CARE
Multi-institutional systems can also be hy-
brids. Not-for-profit Intermountain Health
Care Inc. operates five for-profit subsidi-
aries that include insurance, shared ser-
vices, and professional services businesses.
One subsidiary, Golden Valley Care Unit,
takes the notion of hybridization a step be-
yond the creation of for-profit subsidiaries
into joint for-profit, not-for-profit owner-
ship. This subsidiary is a "behavioral med-
icine hospital" owned jointly with CompCare,
a major investor-owned company (Gray,
1985~. Intermountain also has a joint ven-
ture with the Hospital CoIporation of Amer-
ica for operation (and ultimate replacement)
of two hospitals in one community.
Memorial Care Systems in Texas, a multi-
institutional not-for-profit system, has been
described as "a labyrinth of companies." It
controls a not-for-profit subsidiary that acts
as the parent's investment arm. This sub-
sidiary formed for-profit Health Ventures,
offering shares to physicians who are mem-
hers of Memorial Health Net Providers, an-
other subsidiary of Memorial Care Systems.
Holders of Health Ventures preferred stock
can convert to common stock if He company
goes public, as intended. Other activities of
Memorial Care Systems' subsidiaries in-
clude third-party claims administration, a
real estate company, and developing and
managing surgery and urgent care centers
(Tatge, 1984a). These for-profit/not-for-profit
hybrids permit diversification to control lo-
cal markets, to achieve new revenue sources
outside of core inpatient care activities, and
to raise capital. The effect on institutional
behavior has received little study.
Another example of a hybrid is designed
to bring to independent not-for-profit hos-
pitals some of the advantages of member-
ship in a multihospital system without
sacrificing institutional autonomy. Volun-
tary Hospitals of America Inc. (VHA) is a
for-profit company whose member share-
hoIclers include more than 70 large not-for-
profit hospitals and medical centers. VHA's
companies and subsidiaries (all for-profit)
OCR for page 43
OWNERSHIP CHANGES IN HEALTH CARE
provide members and affiliates with man
agement services, and access to capital, and
engage in their own entrepreneurial activ
ities. The complex structure of VHA in
cludes VHA Management Services (a
subsidiary that developed VHA Regional
Healthcare Partnerships), which sells ser
vices to members and affiliates. Voluntary
Health Enterprises (VHE) is a holding com
pany created by VHA and a New York fi
nancial services company. VHE privately sold
$11 million in common stock to finance a
number of activities, including a VHE sub
sidiary that offers consulting and equity in
vestment in ambulatory surgery centers.
Behavioral Medical Care is a joint venture
of VHE with Comprehensive Care Corpo
ration which operates alcohol treatment
centers and provides related consulting and
staffing services. American Health Capital,
Inc., formed in conjunction with the MeHon
Bank, is a subsidiary of VHA that, with itsSeveral major shifts are taking place si
subsidiaries, helps members meet capitalmultaneously in the ownership, control, and
needs and offers real estate developmentconfiguration of health care organizations.
and a syndication. Other services availableInitiation of some of these changes took place
from VHA include physician recruitment andin for-profit organizations; others in not-for
a telecommunications network (Tatge, 1984b;profit. Some changes were direct responses
Voluntary Hospitals of America, undated).to government actions; some were stimu
In short, VHA offers member hospitals alated by other factors.
wide array of services that members of multi-From the many organizational responses
institutional systems often receive from theirto the change in environment, some general
home office management.
A total of 31 not-for-profit multihospital
systems have become shareholders in a sim
ilar sort of alliance, American Healthcare
Systems (AHS). AHS is a for-profit corpo
ration with divisions for centralized pur
chasing and shared services, the development
of new businesses, and access to capital
through multihospital bond issues and stock
offerings. AHS describes its purpose as "to
improve the competitive and economic po-concentration varies among different types
sition of our shareholders." To do that, itof providers, but in most cases the largest
says, "we treat the business of health carechains are for-profit.
like a business. We run lean, we manage
tough and we retain control of community
health at the local level" (American EIealth
care Systems, undated).
43
One further example of emerging hybrids
is joint ventures between for-profit and not-
for-profit entities. For example, a for-profit
surgery center chain, Medical Care Inter-
national, is engaged in a joint venture with
Mission Services Corp. (operated by the
Daughters of Charity, St. Vincent de Paul)
to clevelop and construct freestanding arn-
bulatory surgery centers.
A 1984 American Hospital Association
survey of hospitals regarding 10 types of jolt
ventures found that 12 percent of hospitals
had such ventures. The most frequently re-
ported type was for preferred provider or-
ganizations. Hospitals in large cities were
most likely to engage in joint ventures, sug-
gesting that competition plays an important
role (Morrisey and Brooks, 19851.
CONCLUSIONS
trends can be identified. First, there is a
tendency toward consolidation of health care
providers into larger organizations. This is
seen in the emergence of the large investor-
owned and the smaller not-for-profit multi-
institutional organizations, and it is seen in
the emergence of chains of varying size in
almost every provider field, from primary
care centers to nursing homes, and from
dialysis centers to HMOs. The decree of
A second trend is the development of new
services or traditional services in new set-
tings, often led by entrepreneurial physi-
cians. (Issues of control and conDict of interest
OCR for page 44
~4
of physician involvement in for-profit en-
terprise are examined in Chapters 8 and 9.)
A subsequent stage of development of these
seances occurred as hospitals entered new
fields to protect their own interests and to
ensure a flow of patients and revenues into
their facilities.
lhe spread of hospital control to nonhos-
pital activities exemplifies a third trend-
vertical integration and diversification of
hospitals and multihospital organizations.
This, like the combining of insurance and
provider functions, has occurred as hospitals
have recognized that inpatient care services
have become a less-reliable revenue source,
with prospective payment reducing occu-
pancy rates, competition cutting pnces, and
outpatient services drawing patients away
from inpatient services.
Finally, a pervasive trend is the increas-
ing for-profit presence in almost all forms of
health care. In some, such as nursing homes
and Freestanding surgery centers, for-profits
are the dominant form. In others, such as
dialysis and home care, for-profit is a very
substantial presence. An adjunct to the pro-
liferation offor-profit activity is the creation
of not-for-profit/for-profit hybrids, which
bring to the not-for-profit form the advan-
tages of the for-profit form (particularly ac-
cess to equity capital) and which may be
regarded as the not-for-profit way of circum-
venting some of the disadvantages of the
not-for-profit status.
NOTES
The number of investor-owned hospitals as re-
ported by the Federation of American Hospitals (the
trade association of investor-owned hospitals) exceeds
the number reported by the American Hospital As-
sociation. Each organization collects its own data, and
the reasons for the discrepancies are not known.
2The six companies are Hospital Corporation of
America, Humana, American Medical International,
National Medical Enterprises, Republic Health Cor-
poration, and Charter Medical.
31he membership of the rational Association of Pri-
vate Psychiatric Hospitals excludes hospitals whose main
business Is substance abuse, hospitals that are not ac
FOR-PROFIT ENTERPRISE IN HEALTH CARE
credited by the loins Committee on Accreditation of
Hospitals UCAH), and hospitals whose patients are not
admitted by a physician.
4Hospital Corporation of America acquired the ma-
jority of its psychiatric hospitals through the purchase
of Hospital Affiliates International in 1981. National
Medical Enterprises acquired almost all of its psychi-
atric hospitals when it bought Psychiatric Institutes of
America in 1982 (Levenson, 1983~.
51he following discussion of nursing homes is de-
rived from Hawes and Phillips (1986~.
6Several new organizational florins that combine pro-
vider and insurance functions are proliferating. Hos-
pitals are providing or purchasing insurance capability,
and preferred provider organizations are bringing to-
gether purchasers (employers and insurers) with sellers
Hospitals and doctors) in negotiated arrangements where
the price of care for groups is agreed upon. The key
elements of these organizations include a contract be-
tween payers and providers and the need for utilization
control to gain control of expenses.
7Blue Cross/Blue Shield HMOs are excluded from
the count of national firms because they do not operate
as a centralized system. In 1983 these HMOs ac-
counted for 11 percent of all HMO enrollees and 20
percent of all plaits.
Multistate HMO firms enable employers active in
more than one state to contract with a single, central-
ized HMO entity an important advantage in a sector
in which the vast majority of contracts are employer-
related. Other advantages of the multistate network
firm include possible economies of scale and access to
the lower-cost capital available to larger organizations.
sin some states there are moves to bring primary
care centers under certificate-of-need review and to
develop licensing standards. Three states require li-
censure of He centers if the name or advertising claims
to provide emergency care. Five states are expanding
certificate-of-need programs to include primary care
centers.
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Representative terms from entire chapter:
surgery centers
