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Wall Street and 1 he For-Profit Hospital Management Companies Richard B. Siegrist, dr. Ten years ago it would have been difficult to find a Wall Street analyst who seriously followed the for-profit hospital management compa- nies,* much less one who would recommend that a client purchase the stock of any of these companies. Today the situation is drastically different. Approximately 25 security analysts spend half their time following the investor-owned hospital chains and would not hesitate to recommend the purchase of stock in these companies to almost any of their clients. in addition to these so-called sell side analysts, hundreds of portfolio managers, investment analysts, and retail stockbrokers keep in close touch with the performance of the for-profit hospital companies. This paper will explore why the investment community's interest in the for-profit hospital companies has burgeoned and will address some basic questions about the hospital management industry: 1. Where does Wall Street obtain its information about the for- profit hospital companies? How does it use this information to evaluate them? * Although conventionally referred to as "hospital management companies," it is these firms' ownership of hospitals that is of most relevance to this paper. However, the conven- tional "management" term will be used throughout. 35

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36 RICHARD B. SIEGRIST, JR. 2. How important is stock price to the management of the for-profit hospital chains? 3. Why have the hospital management companies been so success- ful? 4. What differences exist among the companies in this industry? 5. How are the hospital management companies able to acquire other hospitals and hospital chains? What difficulties do they face in doing so? 6. How are the companies able to turn distressed hospitals into profitable ones? 7. What is the future outlook for the hospital management indus- try? This paper is based on conversations with about 10 Wall Street sell side analysts, supplemented with written reports prepared by the an- alysts, company annual reports, and information gained from research for earlier projects.) For most of the matters discussed here, there was a general consensus among the analysts, and the discussion is so presented. Instances where the analysts disagreed are noted. The hospital management industry is dominated by five large com- panies: Hospital Corporation of America (HCA), Humana, American Medical International (AMI), National Medical Enterprises (NME), and Lifemark. Together they own approximately 6 percent of the acute care beds in the United States and represent about half of the beds owned by all for-profit hospitals.2 Their growth in only the last five TABLE 1 Size of the Five Largest Hospital Management Companies Net Revenue (millions) 1981 Acute Care Beds Owneda 1976 1981 1976 HCA $2,064 $ 456 28,049 11,196 Humana 1,343 261 16,431 8,370 AMI 914 272 9,898 5,702 NME 892 116 4,717 2,068 Lifemark 273 71 3,725 1,573 TOTAL $5,486 $1,186 62,820 28,909 aIncludes international beds owned but excludes all beds managed under management contracts. SOURCE: Company 1981 annual reports and 10K reports filed with the Securities and Exchange Commission.

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Wall Street and the Hospital Companies 37 years has been tremendous. Table ~ presents the net revenues and number of beds owned for these five companies in 1981 compared with 1976. Analysts' Sources of Information The investment community can be divided into four major groups of decision makers:3 1. Sell side analysts who specialize by industry and follow the com- panies in that industry very closely. Approximately 25 sell side an- alysts follow the for-profit hospital management companies. These analysts usually follow hospital supply and/or drug companies as well. 2. Buy side analysts or institutional investors. This group includes portfolio managers and security analysts for pension funds, banks, insurance companies, mutual funds, etc. There are approximately lO,OOO such institutional investors. 3. Registered representatives or account executives at brokerage firms. There are about 35,000 retail stockbrokers. 4. Individual investors (i.e., the public). The sell side analysts are a primary source of information and rec- ommendations concerning the hospital management companies for the rest of the investment community. Because of the analysts' key role and their perspective on the industry, this paper focuses on their relationship with and evaluation of the hospital management com- pan~es. The sell side analysts use a variety of written and oral sources ot information in performing their analyses of investor-owned hospital chains. The most important written sources of information are pub- lications from the companies themselves, industry periodicals, and government statistics. As publicly held corporations, the hospital management companies must prepare annual reports (reports to shareholders that contain audited financial statements and other fi- nancial and nonfinancial information); TOKs (reports filed annually with the Securities and Exchange Commission (SEC), which contain audited financial statements and descriptions of company business and property); and lOQs (interim quarterly reports filed with the SEC that contain unaudited financial information). Most companies sup- plement this required information with fact sheets, data books, and other publications that provide additional financial, operational, and strategic information.

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38 RICHARD B. SIEGRIST, dR. Perhaps more valuable to the analysts than written sources of data are personal contacts, which enable analysts to obtain the most up- to-date information and to focus on topics about which they want more detailed information. The analysts obtain information orally from company officers, other industry analysts, health care experts, and federal and state government officials. Contact with legislators and their staffs in Washington has become even more critical in recent years, because of the increased scrutiny the hospital sector has been receiving and the expectation that the regulatory environment may change substantially. The sell side analysts maintain close relationships with the for- profit hospital management companies that they follow. An analyst typically would be in contact with each of the major companies at least once a month. The contact person at a company is generally a high-level officer, such as the chief executive officer, vice-president of finance, or vice-president for investor relations. The fact that such high-level corporate officials personally deal with the analysts is a measure of their importance to the companies. The analysts generally report that the hospital management in- dustry is much more open and willing to provide information than many other industries. The analysts rate the companies very highly in providing useful written information and being accessible for ques- tions. Although they perceive some slight differences among the five major companies in the quality of information and accessibility of management, the analysts believe that all of the major for-profit hos- pital management companies are very responsive to their needs. The openness of these companies may stem from the newness of their industry and their desire to increase investor recognition of the in- dustry and interest in the companies' stocks. This openness appears to have contributed to the industry's success. The sell side analysts as a group do not spend much time following the not-for-profit hospital chains. Aside from the fact that these sys- tems do not sell stock, the analysts do not see them as a serious threat to the for-profit chains and thus not a group to be followed regularly. In addition, the analysts cite the dearth of information available from the not-for-profit systems and their general lack of accessibility, es- pecially in comparison with the for-profit companies, as reasons why they do not pay much attention to the not-for-profit hospital systems. Financial Analyses of Companies The sell side analysts use a variety of different techniques in evalu- ating the hospital management companies: general industry evalu-

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Wall Street and the Hospital Companies 39 ation, financial statement analysis, operational analysis, assessment of the quality of management, and stock price evaluation. The analysis of the hospital management companies can be different from the anal- ysis of companies in other industries. Traditional rules of thumb (e.g., regarding debt/equity ratios) or financial relationships often do not apply to the hospital management industry. An analysis of the overall situation of the hospital industry entails an examination of changing demographics, general economic condi- tions, business attitudes toward health care costs, and government regulation both on the national and state levels. This broad industry examination is supplemented with detailed financial statement anal- ysis of the hospital management companies. Consistency and pre- dictability are the key factors in analyses, according to the analysts. The detailed examination of a company would include analysis of the balance sheet (with particular focus on financial leverage, i.e., degree of reliance on debt to finance total assets), the income state- ment (with emphasis on earnings growth, operating margin, and re- turn on equity), and cash flow. An evaluation of operational con- siderations is another central part of the review. Facility location, the mix of sources of payers and rates paid for services, and case mix and intensity of services are important operational factors in an evalua- tion. The analysts also place considerable emphasis on the quality of management. They look for management depth, ability to adapt quickly to change, an innovative outlook, and a well-planned strategy. A final tool used by the analysts is stock price analysis. The analysts look to a stock's price/earnings ratio, price movement over time (tech- nical analysis), dividend yield, and degree of institutional ownership in formulating recommendations as to whether the stock appears to be a good buy. The degree of institutional investment indicates the confidence that institutional investors have in the stock on the basis of their own assessments. The Importance of Stock Prices to the Companies The security analysts are not the only ones concerned about stock prices. Top officers of the hospital management companies place con- siderable emphasis on the price of their company's stock. There are several reasons for this concern. First, the stock price may be an important factor in making acquisitions. A high price in relation to earnings (i.e., a high price/earnings ratio) may permit a company to use its stock as a cheap source of capital to buy another hospital or a hospital chain. For instance, HCA was able to purchase Hospital Af-

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40 RICHARD B. SIEGRIST, JR. filiates International (HAl), the second-largest hospital chain, by is- suing $225 million of common stock for a third of the acquisition price, representing a 12 percent increase in its shares for outstanding stock. At the time, HCA shares were selling for 24 times 1980 earnings.4 If the multiple were lower due to a Tower stock price, HCA would have had to issue more shares, further diluting its equity, and may not have been able to make the purchase. Second, top officials of the companies own a significant number of shares. Their individual wealth is thus directly affected by stock price. A drop of several points could mean hundreds of thousands of dollars. Table 2 below indicates the extent of management's stock ownership in the five major companies. Third, the top management at many of the companies receive stock options and bonuses that are tied to the performance of the stock. Finally, the desire of top management to retain the investment com- munity's interest in the company magnifies its concern over the level of the stock price. Top management's interest in stock price can manifest itself in several different ways, often varying by company. All the companies are concerned about showing steady earnings per share growth be- cause of the favorable impact this tends to have on price. The com- panies, however, differ somewhat in their time frame for stock price. HCA appears more interested in short-term stock price than does Humana, where management controls much more of the stock and may have a longer-term orientation toward price. A company's dividend policy also can affect its stock price. In gen- eral, the hospital management companies have Tow dividend payouts in comparison with other industries. However, there are differences in dividend policy within the hospital management industry. For ex- TABLE 2 Percentage of Common Stock Ownership by Top Management (including directors), 1981 HCA Humana AMI NME Lifemark 5 22 4 9 4 SOURCE: Company prospectuses and proxy state- ments.

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Wall Street and the Hospital Companies TABLE 3 Stock Price Trends Among the Hospital Management Companies, 1977-1981 41 Year-End Stock Price (after adjustment for general inflation) 1981 1977 Multiple of 1981 Price to 1976 HCA $ 33.02 $ 13.12 2.5 Humana 31.50 4.88 6.5 AMI 24.83 7.00 3.6 NME 25.73 6.88 3.7 Lifemark 28.00 8.07 3.5 Dow Jones industrial average 875.00 831.77 1.05 (unadjusted for inflation) SOURCE: 1981 company annual reports. ample, AMI had a much higher dividend payout at 27 percent of 1981 earnings than HCA at 15 percent of earnings.5 Finally, the willingness of management to dilute the equity of the company by issuing more common stock varies considerably. Humana is less willing than the other companies to issue common stock because of management's reluctance to dilute its sizable interest (22 percent ownership of the stock) in the company. The hospital companies' stocks have performed phenomenally well over the last decade. Table 3 shows the magnitude of the rise in stock prices between 1977 and 1981 for the five major companies' after adjustment for general inflation. Reasons for Success of the Hospital Management Companies The sell side analysts cite four primary reasons for the remarkable success of the hospital management companies: access to capital, a favorable environment, economies of scale, and quality of manage- ment. The most commonly stated reason for success is the for-profit chains' access to capital, especially in comparison with the nonprofit hospital sector. The investor-owned firms can use a variety of financial in- struments that are either not legally available to nonprofit hospitals or require a strong financial position to qualify for. The most obvious capital source that is available only to for-profit companies is equity, i.e., the issuance of shares of stock. Although equity has played a role in the growth of these companies, debt has been much more important.

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42 RICHARD B. SIEGRIST, JR. The investor-owned companies have been able to use a variety of debt instruments, including domestic bank loans, Eurodollar financing, commercial paper, convertible debt, subordinated debentures, and in- dustrial revenue bonds as well as traditional mortgage financing. The effective use of debt financing or leverage has been central to the rapid growth of these companies. The hospital management in- dustry is one of the most highly leveraged industries in the United States, with debt ranging from 60 to SS percent of the capital structure of these companies, compared with the typical industrial company with 50 percent debt.6 Without this access to funds the companies would not have been able to purchase additional hospitals as quickly or construct new hospitals as readily. Convincing the investment and financial communities that high levels of debt are reasonable for the hospital industry has been a long, difficult struggle for the hospital management companies. The com- panies have argued that they can readily sustain such high leverage because of the predictability of their revenues. This predictability results from the steady demand for hospital services, the fact that the Medicare and Medicaid programs represent a virtual governmental guarantee of half their revenue, and the companies' ability to pass on increases of expenses through the cost-based reimbursement mecha- nism. It appears that the hospital management companies have con- vinced the analysts and investors; there has been a substantial increase in institutional ownership of the stock of these companies, and HCA, the largest company, has been the most highly leveraged "A"-rated industrial corporation in the country, as determined by both Moody's and Standard and Poor's credit rating services.7 The speed with which the investor-owned hospital firms have been able to mobilize funds has allowed them to capitalize on opportunities for growth and quickly arrange acquisitions. This ability has resulted from securing substantial bank lines of credit, borrowing funds in advance of need to have cash immediately available, and borrowing on the short term and later converting the debt to long term. The investor-owned companies' ready access to funds is not enjoyed by not- for-profit hospitals, which usually borrow for specific projects and ex- perience delays before obtaining use of the funds. The hospital management companies have benefited substantially from a favorable economic and regulatory environment. The investor- owned companies are heavily concentrated in the South and West, areas that have experienced significant population and economic growth in recent years. Of the beds owned by the five largest investor-owned firms, 73 percent are located in the South (especially Florida, Texas, Tennessee, and Kentucky) and 22 percent are located in the West

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Wall Street and the Hospital Companies 43 (primarily California).8 The growth of these areas has provided the companies with a steadily increasing patient base and has made them essentially recession-proof. The South also is a region with little regulation of health care, providing a favorable environment for the hospital management com- panies to grow and prosper. The primary regulatory too] that affects the companies, certificate of need (CON) legislation, has worked to their advantage. CON has protected hospitals in many areas by mak- ing the entry of competitors difficult. By acquiring a hospital in a single hospital community, a company can secure a virtual monopoly in that market. Finally, the access to capital problems faced by the not-for-profit hospitals, coupled with rising costs, has provided the for- profit chains with an attractive source of candidates for acquisition. The analysts also point to several other factors in the success of the management companies. The companies' hospitals are generally lo- cated in areas with a favorable payer mix, i.e., with relatively few Medicaid patients and a relatively high percentage of charge-based patients in relation to cost-based Medicare patients. Even with regard to the latter, for-profit companies have an advantage over the not-for- profit hospitals because the for-profit companies are reimbursed by Medicare for costs plus a return on equity. The companies also have been able to price aggressively and increase the intensity of care (and, thus, increase revenues) by purchasing sophisticated equipment and introducing new services. They have readily been able to pass on the increased costs of care (including interest expense) through the cost- based reimbursement mechanism and through higher charges, mak- ing them effectively immune to damage from inflation. The benefits of economies of scale is another frequently cited reason for the success of the hospital management companies. The hospital sector has been one of the last remaining cottage industries, with each hospital operating independently. The hospital management compa- nies have linked hospitals together to obtain economies of scale in financing, operations, and management systems. The combined earn- ings power and cash flow of the hospitals owned by the hospital man- agement companies allow access to sources of financing that are not available to individual hospitals. Economies of scale in operations are also available to the hospital systems in the form of national pur- chasing contracts, shared equipment and services, and specialized de- sign and construction assistance. The hospital chains can also attain economies of scale in systems development and usage through central services such as accounting, data processing, risk management, and internal consulting. The final factor cited by analysts to explain the success of the hos-

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44 RICHARD B. SIEGRIST, JR. pital management companies is the quality of their management. As evidence of this quality, some analysts point to the foresight shown by the founders of these companies in entering the industry at an opportune time; in making attractive acquisitions; and in effectively overcoming difficult obstacles concerning credibility (profiting from sickness), financing (high leverage), and management depth. As fur- ther indicators of the continued quality and adaptability of manage- ment, they cite the companies' movement over time from an entre- preneurial orientation to a more professional management style with- out losing an innovative focus, their successful efforts to attract highly respected businessmen to their boards (with HCA as the prime ex- ample), and their ability to control their environment and plan for the future effectively. Some analysts, however, are not convinced of the importance of management in explaining the past success of the hospital manage- ment companies. They fee} that the highly favorable regulatory and economic situation that has existed in the industry could enable al- most anyone to be successful. They refer to the fact that all the com- panies have performed extremely well as evidence of the failure-proof nature of the industry up until the present time. These analysts be- lieve that although important differences in management ability exist among the companies the differences have not yet had a significant impact on relative performance. Differences Among Companies The analysts believe that the hospital management industry is more homogeneous than most other industries. However, they see among the companies some important differences that promise to become more crucial in the future. These differences relate to company image, financial policies, management style, operating philosophy, and stra- tegic focus. HCA, by far the largest company, is viewed as the most conservative and image conscious of the hospital management firms. It has made a concerted effort to win over the investment community by bringing in as chief executive officer Donald MacNaughton (the former chair- man of Prudential Insurance), who is well respected by the investment and financial communities, and by attracting internationally known businessmen to its board of directors. HCA's board includes John deButts (former chairman of AT&T), Frank Carey (chairman of IBM), Owen Butler (chairman of Procter & Gamble), and Irving Shapiro (former chairman of DuPont).9 HCA also has endeavored to assume the role

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Wall Street and the Hospital Companies 45 of spokesman for the hospital management industry. In addition, HCA is distinguished by its decentralized operating philosophy and result- ing emphasis on local hospital autonomy. The company is heavily involved in both owning and managing hospitals. Humana is the most distinctively different of the companies. It is well known for its centralized operating philosophy, tight financial controls (i.e., strict measurement of revenue and expense perfor- mance), high leverage (although HCA is presently more leveraged due to its acquisition of Hospital Affiliates International) and ag- gressive management. Its clear focus is on the ownership of hospitals; it does not manage any hospitals under management contract. Hu- mana also is hesitant to dilute its equity by issuing stock. Some view Humana as the most forward-Iooking and innovative of the companies and accordingly in the best position to respond quickly to economic changes and new opportunities. NME's distinctive feature is its broad-based diversification. It is the only major hospital management company to own nursing homes and also has diversified into medical products and equipment distribution, construction services, purchasing services, and telephone answering devices.~ NME (along with AMI) is heavily concentrated in Califor- nia, compared with the southern region focus of the other companies. In addition, NME is the most financially conservative of the compa- nies, having the lowest leverage. AM! has more international interests than the other companies. It has developed a significant presence in the United Kingdom and other European nations. AMI is also known for the "unbundled" services that it sells to other hospitals. These services include laboratory, di- etary and pharmaceutical services, respiratory therapy, mobile CAT scanners, and alcoholism recovery centers as well as the typical man- agement services offered by most of the companies. Lifemark is appreciably smaller than the other hospital chains and has only recently been recognized as one of the major hospital man- agement companies. I~ifemark is especially strong in Texas, where it has grown rapidly. Lifemark also owns alcoholism recovery centers and dental labs. Acquisitions Frequent acquisition of individual hospitals and, more recently, of other hospital chains has been a hallmark of the major hospital man- agement companies. Securing attractive acquisitions has not always been easy for the companies. They have had to overcome the negative

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46 RICHARD B. SIEGRIST, JR. image of making a profit off the sick and of cream-skimming, the nervousness of the financial and investment communities about the high leverage of the companies, and the concern over the quality of care provided. The companies largely have been successful in count- ering these difficulties and have proven that they have the ability to make hospitals profitable. As a result, there is less reluctance among persons responsible for not-for-profit hospitals to having their hospi- tals purchased by one of the hospital systems. Individual hospitals even have begun approaching the hospital chains to solicit being ac- quired. Competition among the companies for acquisitions has become quite heated. Prices paid per bed have risen to well over $100,000, some- times approaching $250,000. The acquisition of other hospital chains has become more prevalent, having begun in 1978 when Humana doubled its size by means of the unfriendly takeover of American Medicorp (approximately $450 million for 39 hospitals with 7,838 beds).~3 Large acquisitions in the l980s have included HCA's purchase of Hospital Affiliates ($650 million for 55 owned hospitals with 8,207 beds and 102 managed hospitals), General Care Corporation ($78 mil- lion for ~ hospitals with 1,294 beds', and General Health Services ($96 million for 6 hospitals with 1,115 beds), and AMI's acquisition of Hyatt Medical Enterprises ($69 million for ~ owned hospitals with 907 beds and management contracts with 26 hospitals) and Brookwood Health Services ($156 million for 9 owned hospitals with 1,271 beds and management contracts with 5 others).~4 Success in the competition among the companies for acquisitions depends on two major factors: financial position (i.e., access to capital for making acquisitions) and reputation. A hospital management com- pany must have the financial ability to make an acquisition. This involves considerations of how leveraged a company can become, how much stock it can issue, and how much cash flow would be available to support the acquisition once it is completed. For example, HCA was the only hospital management company that had the financial ability to pay the $650 million required to purchase a hospital chain the size of Hospital Affiliates. Reputation as a factor in securing an acquisition can be of primary importance in some situations. All of the five major hospital chains seem to have good reputations regarding quality of care. Service ex- pertise is another aspect of reputation where the chains do not differ significantly. Management philosophy and compatibility, however, are components about which there is considerable variation among the firms' reputations. Humana has been burdened with an unfavor- able image as a result of its takeover of American Medicorp after

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Wall Street and the Hospital Companies 47 which Humana dismissed a large number of American Medicorp ex- ecutives and dismantled the company's management contract and nonhospital operations. Humana's Toss to AMI in 1981 of Brookwood Health Services after an intense bidding war has been attributed to this image. Commenting on Humana's unsuccessful attempt to ac- quire Brookwood, The New York Times, stated that: Humana, Inc. has a reputation for dismissing the management of companies it takes over. Humana takes no prisoners has become a widespread comment among industry competitors and analysts. It is that reputation that apparently disturbed Brookwood Health Services, Inc. For several weeks Brookwood has actively fought what it considers a hostile takeover bid from Humana, and en- couraged the entry of a white knight into the fray.~5 Humana's centralized operating philosophy and tight financial con- trols have also contributed to the hesitancy of hospitals to be acquired by the company. This contrasts with HCA's decentralized operating style that allows individual hospitals to have more autonomy, thus making HCA a more attractive suitor to potential acquisition can- didates. it is interesting that, although HCA phased out a large num- ber of Hospital Affiliates's executives following the acquisition, it managed to do so in a manner that did not tarnish its reputation. NME and AMI have also developed favorable reputations as merger partners. Making Hospitals Healthier Once having completed acquisitions, the hospital management com- panies have demonstrated a remarkable ability to rejuvenate dis- tressed hospitals and turn them into profitable operations. The analysts believe that several factors contribute to this success: economies of scale, financial sophistication, selection of services, marketing, and strategic planning. The economies of scale come from being able to eliminate a portion of the fixed costs at an individual hospital when it becomes part of the system. The companies offer an individual hospital a variety of central management services, such as purchasing, accounting, data processing, risk management, and design and construction. The com- panies are also able to cut other aspects of the hospital's administra- tive overhead and can often reduce the overall staffing of the hospital by as much as 20 to 30 percent. The companies provide an individual hospital with a financial so- phistication that was not previously available to it. This includes ready access to capital for renovation and improvements, the ability

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48 RICHARD B. SIEGRIST, JR. to maximize reimbursement and collect lost charges through proved financial systems, and the ability to budget realistically and compare performance with the other hospitals in the system. In addition, the acquired hospital becomes subject to the financial control and oper- ating discipline of the hospital system. The hospital management companies also act to improve the prof- itability of the mix of services at the hospital. This may entail em- phasizing the profitable services (e.g., surgical services as opposed to medical services, ancillary as opposed to routine services, simple as opposed to complicated operations, etc.), increasing the intensity of care with new services and technology, and adapting the services offered to be more consistent with the demographics of the hospital's market area. Effective marketing requires efforts directed at physicians, patients, and the community with the objective of improving the hospital's image and broadening its patient base. The hospital chains place con- siderable emphasis on attracting new physicians and taking good care of those with existing privileges, recognizing that they are true cus- tomers of the hospital. Reduced rent for office space, access to high- technology equipment, and guaranteed incomes are just some of the techniques that have been used to attract physicians. The companies are particularly interested in attracting physicians who handle a pre- ponderance of charge-based patients under the existing reimburse- ment system. The investor-owned companies also strive to improve the perception of the quality of care at the institution to increase patient and physician acceptance. The introduction of such amenities as color TVs, private baths, and special meals; an emphasis on clean- liness; and the attempt to reduce waiting time for emergency treat- ment, tests, operations, and the like are all efforts to improve conditions that are readily noticed by patients and physicians. Finally, the hospital chains bring strategic planning to the hospital. This permits the hospital to analyze demographic trends, respond more effectively to changes, identify its competitive strengths and weaknesses, and find or develop its appropriate niche in the market. Outlook for the Future What is the outlook for the hospital management companies? The sell side analysts generally agree that the future looks bright. They expect a continued consolidation of the hospital industry, which will provide the hospital chains with the chance for increased market penetration. The analysts also foresee an opportunity for the companies to improve

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Wall Street and the Hospital Companies 49 their profitability through operating leverage by raising the compar- atively low levels of occupancy in their existing hospitals. The inher- ent advantages of hospital chains or systems in obtaining capital, realizing economies of scale, and utilizing elective marketing are anticipated to become more pronounced in coming years. In addition, the quality of management is expected to assume greater importance as economic challenges increase. An industry shakeout may be in the offing, with the companies having the best management pulling clearly ahead of the others. The future also presents new opportunities for the hospital companies to become involved with al- ternative health care delivery systems (e.g., HMOs, primary care cen- ters, freestanding emergency rooms, surgery centers). The companies could stand to benefit greatly by playing a leading role in the devel- opment of these alternative systems. However, they also have much to lose. The new forms of health care promise a negative effect on existing hospital business and provide more competition for the for- profit hospital companies. There are several other factors that concern analysts in looking at the future of the hospital management companies. The future path of national and state health care regulation creates the most anxiety for the analysts. Whatever form regulation takes is expected to make it tougher for the hospital companies by forcing them to concentrate on cost control and possibly to subsidize the costs of other hospitals for teaching programs and for medical care for the poor. The analysts feel, however, that even with some form of strict prospective reim- bursement the hospital management companies will be in the best position to cope of anyone in the hospital sector. High interest rates, the aging population causing an increase in less profitable cost-based patients, and antitrust considerations (as evinced by the U.S. De- partment of Justice's concern about the HCA acquisition of HAl) are other factors of concern to the analysts, who caution against assuming that the for-profit companies can do no wrong. Despite these concerns the analysts remain generally convinced of the attractiveness of the hospital management industry and its future growth potential. References and Notes 1. The projects resulted in case studies on Humana and Hospital Corporation of America prepared by Richard Siegrist and issued by Harvard Business School Case Services. 2. Company 1981 Annual Reports and lOKs. 3. The Wall Street Transcript, March 9, 1981, pp. 26-27. 4. Hospital Corporation of America Prospectus, July 17, 1981. 5. Company 1981 Annual Reports.

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50 RICHARD B. SIEGRIST, JR. 6. Ibid. 7. Answers to Questions Often Asked About HCA, Hospital Corporation of America, 1982, p. 2. 8. Company 1981 lOKs. 9. Hospital Corporation of America 1981 Annual Report. 10. National Medical Enterprises 1981 Annual Report. 11. American Medical International 1981 Annual Report. 12. Lifemark 1981 Annual Report. 13. Humana 1981 Annual Report. 14. Company Annual Reports, lOKs, and Prospectuses. 15. The New York Times, April 17, 1981, p. D3.