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When ~vestor-Owned
Co~porabons Buy Hospitals:
Some Issues and Concerns
Jessica Townsend
When an investor-owned hospital chain buys a hospital it means many
different things to many different people. To an administrator it may
mean loss of a job. To a radiologist it may mean new equipment. To
a county official it may mean the lifting of a financial burden from
the county tax revenues, and to some patients it may mean a new and
better-run hospital or fear of loss of access to services. But whatever
the implications, for-profit corporate chains are buying hospitals from
other chains, from proprietors that owned a single hospital, from coun-
ties, and from nonprofit corporations. Investor-owned colorations also
contract to provide management services for nonprofit hospitals. These
managed hospitals are often prime candidates for purchase at a later
date.
The purchase of hospitals, particularly of nonprofit hospitals, by
investor-owned hospital chains has raised questions that touch on
ethics, law, research, medical education, costs, productivity, and more
generally on how the public interest is being served. Over the past
decade analysts have started to study some of the effects of such hos-
pital purchases. But little information is now available about how
such changes in ownership may be viewed by the various affected
parties, whose attitude toward the change may in turn affect any
number of factors, including both the purchase negotiations them-
seIves and the policies under which the hospital will operate. This
paper reports on an exploratory effort to learn more about the attitudes
51
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52
JESSICA TOWNSEND
and concerns of a range of interested people and the reactions of the
purchasing corporations how they responded to the concerns ex-
pressed and to what extent various interested parties were able to
affect corporate actions.
Although time and resources did not permit a large-scale, system-
atic study, this exploration was undertaken to develop some prelim-
inary information about the range of views of people who have been
directly involved in recent sales of hospitals to investor-owned chains.
For this study, we identified the hospitals that were listed in the
1980 American Hospital Association Guicle as being nonprofit or gov-
ernmentally owned (city or county) and that were listed in the 1981
Guide as investor-owned. By cross-checking these 28 hospitals with
the list in the directory of the Federation of American Hospitals (the
trade association of the investor-owned hospitals) we were able to
identify hospitals that had been purchased by one of the major inves-
tor-owned chains in 1981. One hospital bought by each of four com-
panies was selected. Although our ability to obtain data on geographic
diversity was limited by the fact that virtually all the hospitals iden-
tified were in sun-belt states, the selected hospitals were in four dif-
ferent states. The final selection of hospitals was influenced by the
availability of key individuals during August 1982 when the inter-
views took place.
In each case the author attempted to contact, by telephone, the local
health systems agency, a local newspaper, relevant public interest
groups, the medical society or hospital association, one or two phy-
sicians (preferably the chief of staff or medical director), the admin-
istrator on the job before the purchase, a member of the hospital board,
and county officials. In most cases we were successful in obtaining
four to six interviews. (See the appendix to this paper for a list of the
types of persons interviewed in each case.) In these informal inter-
views information was sought about the general background and rea-
sons for the sale; the anxieties or concerns, if any, of the person being
interviewed and whether (and how) these concerns had been addressed
by the corporation or others; and what concerns they heard from others
involved in the change.
We also examined one case in which a proposal for corporate take-
over of a hospital did not go through. We included this case for the
contrasts it provided with the cases in which the purchase was con-
cluded.
It seems likely that the telephone interviews elicited only part of
the picture. Although people were asked about their individual con-
cerns, their responses were usually couched in somewhat global or
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When Investor-Owned Corporations Buy Hospitals
public interest terms. A lot was heard about maintaining the quality
of care, ensuring care for needy people, and attracting new physicians
to underserved areas, but the respondents said nothing about how a
change to corporate ownership affected them financially, why a pol-
itician was especially concerned about pleasing a specific constituency,
or what the passing of control to a corporation really meant to the
persons who yielded control. In short, we suspect that although we
heard some genuine concerns, there may have been other concerns of
a more personal nature that were not mentioned. The respondents
were, after all, talking on the telephone to a stranger.
Clearly, a sample of five cases is so small as to preclude generalizing
to all corporate purchases of hospitals. But even among the sample
cases there were patterns of agreement on the topics that concerned
people in similar positions. For example, hospital employees were
always concerned about job tenure and benefits packages. However,
in each case, the local situation produced its own set of concerns-
e.g., about a deteriorating plant in need of replacement or, in the case
of county hospitals, care for medically indigent people.
53
The Five Cases
County Hospital A
County Hospital A, a 270-bed general hospital in a small town 22
miles from the state capital and major medical centers, applied for a
certificate of need (CON) in 1977 to replace its obsolete plant. Ever
since, county officials had been involved in negotiations to raise the
necessary capital for construction. Two attempts to issue general ob-
ligation bonds for a new hospital were rejected in a county-wide ref-
erendum. After the failure of the second referendum the local chamber
of commerce studied the available alternatives and concluded that
total replacement was required to bring the hospital up to date and
that selling to an investor-owner was the best available option. The
hospital board, hospital medical staff, and the county council all con-
curred with the decision.
A committee composed of members of the chamber of commerce and
representatives of the hospital administrative and medical stabs was
formed to review bids received from six investor-owned corporations.
Three finalists were chosen, and the committee undertook a thorough
investigation of the hospitals owned by these corporations. The com-
mittee, at the county council's expense, visited numerous sites where
the corporations owned hospitals similar to County Hospital A; talked
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54
JESSICA TOWNSEND
to local elected officials, community representatives, and medical staff;
and reviewed hospital records. Committee members unanimously agreed
that the corporation that offered the best financial proposal also scored
best in meeting community and medical interests at the hospitals it
already owned. Detailed negotiations were begun with that company.
During this period of decision and investigation, numerous concerns
arose, including some opposition from senior citizens' groups and pol-
iticians. Opposition to the sale of the hospital was quieted by discus-
sion with the groups and people involved, and the concerns of others
(such as the hospital staff) were addressed during negotiations.
The major concerns and the way they were handled were as follows:
1. Care for the medically indigent the proceeds from the sale of
the hospital were placed in an escrow account, with the income to be
used to reimburse the hospital at 90 percent of charges for people
certified as medically indigent according to criteria developed by the
county council.
2. Construction of a replacement hospital the corporation agreed
to build a replacement facility within three years.
3. Hospital employees the corporate benefit package was gener-
ally satisfactory. The county agreed to fund accrued sick leave that
would have been lost in the change-over. Continued employment was
guaranteed by the corporation for a specified time.
4. Control of the hospital although the corporation assumed ul-
timate control, an advisory board was set up with representatives
from the community, hospital medical and administrative staffs, and
the corporation.
5. Continuation of ambulance service the corporation agreed to
buy and operate the existing ambulance service.
6. Costs it was recognized that costs of receiving care would in-
crease, but the existence of other medical centers 20-30 miles away
was thought to exercise a competitive restraint ensuring that cost
increases would not be excessive.
7. Quality of care the concern for maintaining quality of care was
significantly lessened by the committee's investigation of other hos-
pitals owned by the purchasing corporation.
It is notable that the medical staff of the hospital, with only one
exception, voted for the sale. The area suffered from a shortage of
physicians, and it was impossible to attract them to the old hospital.
One year after the sale there were more than 10 new physicians
practicing in the community. The chief of staff commented that the
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When Investor-Owned Corporations Buy Hospitals
55
hospital plant was in great need of replacement and that the old
administration was terrible and would not have made needed im-
provements: "I've been grinning ever since ~ heard of the sale. The
patients are taken care of. The corporation makes its profit—that's
what America is made of."
County Hospital B
County Hospital B is a 200-bed general hospital in a small town in a
rural area about ~ hour's drive from a major metropolitan area that
has a number of large medical centers.- The town's population is served
by a large multispecialty clinic that provides 130,000 patient visits a
year from 36 physicians who staff the hospital and by two family
practice clinics. The hospital receives referrals from a 9-county rural
area, which includes some counties federally designated as medically
underserved, and has an affiliation with a large medical school where
local physicians teach and whose students and residents rotate through
the hospital. County Hospital B. built in 1952 with Hill-Burton funds,
was owned by the county.
When sale of the hospital was contemplated, it was rapidly becoming
obsolete. An infusion of capital was needed to meet life safety codes,
maintain accreditation, and purchase equipment needed to attract
more physicians to the area.
The hospital board appointed 15 task forces to investigate the op-
erations of the hospital and community health care needs. After a
year of study the task forces reported on the deficiencies in the hospital
and noted that approximately $75 per day was being added to the
hospital bills of insured or self-paying patients because 65 percent of
admissions either were not reimbursed or were reimbursed at less
than full cost.
A broad-based community committee was formed to study alter-
natives, including issuing tax or revenue bonds to raise funds for
renovation, affiliating with a nonprofit hospital system, and selling
to an investor-owned hospital corporation. Each alternative was stud-
ied for its ability to meet a set of concerns that included obtaining
adequate capital, ensuring charity care, maintaining local control, not
adding to taxpayer costs, and providing high-quality care. The com-
mittee recommended to the county commissioners, the hospital staff,
and the hospital board that only the option of sale to an investor-
owned corporation would produce enough funds and affect enough
change to remedy the deficiencies of the system.
A number of investor-owned corporations submitted bids local peo-
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56 JESSICA TOWNSEND
ple describe the situation as a "seller's market" and addressed the
set of concerns developed by the committee. The committee visited
corporate headquarters and hospitals controlled by the companies.
Before negotiations were concluded, local opposition began to coalesce
around the issues of cost, control, and care of indigents. A citizens'
group—Save Our Hospital tried to have the issue put to a county-
wide referendum, and some politicians supported the movement against
corporate purchase. The local newspaper came out in favor of the
purchase and set up an action-line phone number to respond to ques-
tions. As the proposed purchase became more controversial, medical
and county leaders, businessmen, and city fathers united behind a
public information campaign designed to reassure the people that local
concerns were understood and to prevent misconceptions from devel-
oping. Although this campaign apparently reduced public concern,
more important in concluding negotiations was the fact that a majority
of the county commissioners were in favor of a sale.
The major concerns and the way they were addressed were as fol-
lows:
l. Indigent care the corporation purchased the nonstructural as-
sets of the hospital. Half of the proceeds of the sale were transferred
to a nonprofit foundation set up by the county commissioners. The
corpus of the capital was to be maintained in perpetuity with the
earnings used to pay for charity care and the other community health
needs. The foundation can also tap other nonprofit sources of financ-
ing.
2. Upgrading the hospital--- the corporation agreed to upgrade the
hospital to ensure accreditation and to start constructing a new hos-
pital. Until construction is completed, the corporation will lease the
old hospital. The old building will remain under county ownership
and will be used for community services after completion of the new
hospital.
3. Hospital employees' tenure and benefits six months' tenure for
all employees (except the administrator, who had antagonized some
of the medical staff was guaranteed. The corporate benefit package
was acceptable to employees.
4. Control the corporation was responsive to a desire to maintain
local control as far as possible. The membership of the new advisory
board is almost identical to the old board, and operating policies rest
with them except for overall budget approval, which rests with the
corporation.
5. Costs the corporation agreed to maintain charges at a level
commensurate with those of similar hospitals in the area.
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When Investor-Owned Corporations Buy Hospitals
Doctors Hospital
57
Doctors Hospital is a 165-bed general hospital in a metropolitan area
of 1.2 million people. The city is served by 15 hospitals that have a
total of more than 5,000 beds and is considered by the local Health
Systems Agency to have an excess number of hospital beds. Only two
hospitals have outpatient departments Doctors Hospital is not one
of them—with care for medically indigent people provided by a charity
hospital system. The area is described as highly competitive for med-
. . .
ca1 services.
Doctors Hospital, which is affiliated with two local nursing schools
but no medical school, was a financially healthy, nonprofit institution
owned by six doctors who thought that the future of small hospitals
was uncertain, particularly in light of increasing costs and the de-
mands of government regulation. The owners, who had been ap-
proached over the years by a number of investor-owned corporations,
had no negative feelings about for-profit ownership because other
hospitals in the area seemed to be providing quality care under inves-
tor ownership. However, the owners did not enter negotiations until
1980.
The sale seems to have been concluded with a minimum of fuss and
concern, in large part because the purchasing company had a good
reputation from its operation of other local hospitals. The hospital
administrator and admitting physicians observed that the corporation
"doesn't want to make all their hospitals conform to a corporate mold,"
that it maintains past board policies and allows the new community
advisory boards a wide area of discretion, and that it preserves the
quality of care and "does not wring out the last penny of profit."
The hospital administrator and medical director acted as the prin-
cipal channels of communication between the corporation and hospital
staff. Their knowledge of the corporate operations and verbal assur-
ances from the buyer helped to quiet anxiety expressed by the hospital
staff at a series of meetings.
The benefits expected from corporate ownership include improved
management and financial reporting systems, access to corporate pur-
chasing expertise and discounts, and new equipment.
Osteopathic Hospital
Osteopathic Hospital, with 81 beds, is located in a resort area 15 miles
from another osteopathic hospital and in an area considered by the
local health planning agency to have a surplus of hospital beds. It
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JESSICA TOWNSEND
was a family operation that had been handed down from father to son.
The physician-owner had obtained a CON to add beds despite oppo-
sition from the local health planning agency. (Some say the CON was
obtained to make the hospital attractive to purchasers.)
The sale of Osteopathic Hospital took place so rapidly and quietly
that the local newspaper and Health Systems Agency knew nothing
about it until it was completed. The administrator said that negoti-
ations took about two months, during which he talked to stab of the
operations division of the purchasing company in a general way about
maintaining the quality of care. A physician, who shortly after the
sale became chief of staff, said: "No one knew it was being bought.
The buyers didn't even inspect it during the daytime."
The speed and secrecy of the sale left little time for most people to
be concerned about its impact before the fact. However, after the sale
numerous concerns were expressed. The former chief of staff felt "be-
trayed" by an owner who said he would never sell the hospital. He
contends that the staff have been reduced, some having been cross-
trained to do two jobs. Good nurses have left because they saw their
patient loads increasing, he said, and equipment that broke down was
not repaired, roofs were leaking and not being repaired, prices were
increased, and decisions were made at the corporate headquarters.
This doctor said he will no longer admit patients to Osteopathic Hos-
pital a decision facilitated by a recent change in policy by other local
hospitals, which now accept admissions from osteopathic doctors. It
is reported that other medical staff also have decreased their admis-
sions to Osteopathic Hospital and that the new administration is
"bending over backwards to get doctors with private paying patients."
The previous owner tried to convince doctors that the purchase was
in their best interest, and the corporate regional director has spent
time with department heads and other staff to reassure them about
continuity of tenure and quality of care, but with less than total suc-
cess. The medical staff had waited for years for a renovation and
expansion program. In spite of assurances by the company that con-
struction will start, some are still skeptical and waiting to see bricks
and mortar.
Suburban County Hospital
Suburban County Hospital is a county-owned and -operated facility
that, according to county council staff members, is mired in layers of
bureaucracy and suffering from bad administration. Recently the county
executive sought to lease the hospital to an investor-owned hospital
chain a plan that failed, in large part because of community concerns
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When Investor-Owned Corporations Buy Hospitals
59
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JESSICA TOWNSEND
current situation. Physicians reported having had undue problems
getting contracts through the bureaucracies; the hospital was included
in county hiring freezes, consequently nursing shortages developed;
the hospital used the county's computer system but had low priority,
so billing was slow, resulting in frequent cash flow problems; obsolete
equipment was not replaced; and purchasing went through the county
system where specified items were sometimes changed. Physicians
also were pleased that they would be represented on the proposed
advisory board, whereas they had no policy role under the county
ownership.
The leasing idea was finally abandoned, although an alternative
scheme under which a nonprofit corporation would be established to
run the hospital continued to be considered. Although many details
of the arrangement are similar to the proposed lease to the for-profit
company, the new scheme seems to have more community support, in
part because local control is retained and in part because it is viewed
as a community response to a community problem. The physicians
and the county medical society support the new plan for the same
reason they supported the former proposal: Any change has to be for
the better.
Major Issues
Although many of the concerns expressed about a corporate takeover
of hospitals were amorphous or ill defined (Will it be run as a business
or a hospital? We really wonder what the corporate style will be.),
concerns about several more specific topics arose in almost every case.
These issues will be discussed below together with the ways the issues
were resolved and the positions of the people who expressed concern
about each issue.
Control
Every time a hospital chain buys a hospital there is a change in the
locus of control from a community board, county authority, or phy-
sician group to the corporation. Questions about the effects of the
increasing penetration of the profit-making hospital chains into the
control of health care facilities are being heard with increasing fre-
quency.
The research for this paper sought to better understand who cared
about the transfer of control when a hospital was purchased, what the
nature oftheir concern was, and what was done to diffuse any anxieties
that were expressed.
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When Investor-Owned Corporations Buy Hospitals
61
Although the hospitals studied were all nonprofit, they exhibited
several different types of ownership and control before the purchase.
One hospital owned by a nonprofit corporation was described to us as
owned by the doctor and his family. Although this hospital had a 14-
person board composed of physicians and community representatives,
such as businessmen, bankers, and dentists, it was said that the hos-
pital was very much a one-man business with the reins firmly held
by the "owner." Another hospital was owned by a public facility au-
thority but was leased to a group of physicians who, in effect, owned
the hospital. Its governing board was composed of the five leasing
physicians and the hospital administrator. In other cases, county au-
thorities owned and operated hospitals, and boards of trustees were
structured to include representatives from various sectors of the com-
munity and from health care providers.
In every case, after the purchase a new advisory board was created
that typically included representation from physicians, the corpora-
tion, and the community. If the hospital was previously owned by the
county, the county council retained the right to appoint the community
representatives.
Numerous people said that the Revolution of ultimate control of
their hospital to the corporation had been a matter for concern. How-
ever, the nature of the expressed concerns varied, often with the po-
sition of the speaker. County council members or county commissioners
expressed concerns about the loss of local control; physicians who had
previously had representation on a board of trustees were concerned
that their input into decisions might be diminished; community groups
that became involved in the hospital purchase issue were interested
in the effect on the overall mission of the hospital an issue similar
to the loss of local control but dealing more particularly with the range
of services offered to specific elements in the population. In the case
of Osteopathic Hospital, the doctors were worried about a change in
mission; they were anxious to preserve the hospital for osteopathic
.
met .lclne.
In one case, physicians expressed pleasure in the change. This was
at a county hospital where the physicians believed that under the old
administration they had not had enough voice on the board. With
physicians representing one-third of the membership of the new ad-
visory board, there is a feeling that their position has improved.
Enthusiasm about the change was the exception rather than the
rule. More often, medical staff were concerned that decision making
at the corporate level might diminish the impact of physicians on
policies. However, after one year of for-prof~t ownership at the hos-
pitals studied, most physicians appeared content with their relation-
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JESSICA TOWNSEND
ship with the company, perhaps, because as one administrator com-
mented, the company viewed the physician as much as the patient as
the client. In only one of the four hospitals that were sold were the
physicians upset by the change of control, saying that decisions are
now made at corporate headquarters with the new administration
functioning as "puppets." In that hospital physicians reportedly had
not been able to organize to put pressure on the company, and the
advisory board was said to lack influence.
Generally, the responsibilities of the new hospital advisory boards
were said by those interviewed to be ill defined, but, because the new
corporate owners were seen as trustworthy, most people felt that over-
all policy would emanate from the board and that the experience to
date had been satisfactory. In two cases the board submits a budget
to the corporation, and in each case the first budget had been approved.
One respondent commented that: "We know that when a corporation
invests they are going to call the shots we gave it [control] up when
we sold." But others commented that the advisory board directs the
hospital much as the old board of trustees did.
However, despite the high level of expressed trust, in most cases
the original owners had negotiated with the corporation to write into
the sale contract some assurance of continuity of the hospital's mis-
sion. For example, one county hospital secured an agreement that the
hospital would not become a specialty facility and that it would main-
tain such services such as obstetrics and emergency care.
In sum, although loss of local control was initially a concern and
most people understood that loss of autonomy was inevitable, a year
after the sale it was generally felt that the company could be trusted
to be responsive to the advisory boards' recommendations and that
there would be no insurmountable problems.
dote Security and Benefits
In all cases administrators expressed anxiety both about their per-
sonal job security and about the tenure of all hospital staff. Benefit
packages were mentioned as being high on the list of staff concerns.
These cases suggest that job security for the top administrator is a
well-founded concern. In three of the four hospitals that were sold,
the corporations installed a new administrator. In one case, however,
this was at the request of the old board of trustees, which asked that
the company install one of their top administrators; everyone we talked
to was delighted with the outcome. The former administrator, who
had lost the support of the board and medical staff as well as that of
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When Investor-Owned Corporations Buy Hospitals
63
community groups who viewed the hospital as being badly adminis-
tered, was subsequently hired by the corporation.
A change in personnel at the top level of administration was ap-
parently accepted by most people as part of doing business with cor-
porations, because in all cases the seller negotiated with the buyer,
as a condition of purchase, to get a certain amount of security for the
remainder of the hospital staff. In each case there was an agreement
that all staff would be retained for a certain period of time, ranging
from a week to a year; thereafter, staff would be judged on competence.
One hospital negotiated an assurance that any stab judged to be re-
dundant would be offered training for another job in the hospital.
In all but one case everyone we spoke to expressed satisfaction that
the sale had resulted in only a low level of staff turnover. "The cor-
poration needs us, and we have good people" was one comment. The
exception was Osteopathic Hospital, where the chief of staff expressed
deep dissatisfaction with the way things had been handled. He con-
tended that the number of staff fired was higher than he expected;
that people who did not "fit the corporate pattern" were let go; that
morale was low, despite efforts by the corporate regional director to
assure the staff that all capable employees would be retained; and
that the best nurses had left, partly because they were overworked
and partly because they felt insecure about their jobs.
Benefit packages, although they had been a matter of concern before
the sale, turned out to present no problems. Hospital administrators
examined the company's benefits in detail and in general found them
satisfactory- better than the existing package in some aspects, not
as good in others.
Plant and Equipment
A need to replace the hospital plant was the prime reason for the sale
of the two county hospitals, and a guarantee that this would be ini-
tiated promptly was made a condition of purchase in both cases. The
county authorities had looked into other methods of achieving the
same result and, despite an initial reluctance, decided that sale to a
corporation was the most practical option. The ability of corporate
enterprise to make capital expenditures was described as a crucial
part of the decision to allow the hospitals to be absorbed into the
investor-owned sector.
Many of the physicians interviewed expressed an interest in en-
suring that obsolete equipment would be replaced and that state-of-
the-art technology would be introduced. However, as far as we could
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JESSICA TOWNSEND
determine, no specific promises were made to supply particular equip-
ment at the request of physicians. However, in a more general way,
physicians felt that the companies would do whatever was necessary.
This confidence stemmed both from the notion that the particular
company was a good one and that running a hospital in a competitive
environment requires attention to the condition of equipment it is
part of good management practice. As one physician said: "The fear
is that corporations always look to the bottom line, so my fear was
that cost-effectiveness decisions would override other concerns, and
some equipment is needed even if it isn't cost effective. But corpora-
tions know that they are in a competitive market and have to do
quality care."
As it turned out, the physicians' confidence appears to have been
well founded in these cases. Several physicians observed that during
the first year of corporate operations new equipment had been bought.
In one case the entire radiology department had been reequipped and
an application for a CON for a CAT scanner has been submitted to
the health systems agency.
The corporate purchase of one rural hospital was cited as instru-
mental in attracting more than 10 physicians to an area reportedly
in need of medical manpower. The promises of a new hospital building
within 2 years and the partial renovation of the existing plant were
sufficient to attract several specialists, including a cardiologist and
neurosurgeon. Today the hospital has new, well-equipped departments
to serve these specialists.
In only one case, Osteopathic Hospital, did the purchaser reportedly
fail to implement its verbal assurances about renovation and new
equipment. Some of those interviewed thought that the corporation
might be having financial problems.
In general, if the need for a large expansion or replacement project
is a major reason for a sale, as is often the case, the seller may want
to require an explicit contractual obligation to perform from the buyer.
Physicians who might have been expected to seek formal assurances
that equipment would be purchased seem not to have felt a need to
do so because they trusted market forces to influence corporate man-
agement and because they trusted the company to maintain quality.
Charges for Care
Physicians, county officials, and consumer groups mentioned that the
cost of hospital care was a concern, but often this concern was couched
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When Investor-Owned Corporations Buy Hospitals
65
more in terms of the general rise in hospital costs than in an expec-
tation that company ownership would result in excessive increases in
charges. In only one of the four completed purchases did anyone in-
terviewed mention that this was a matter discussed with the hospital
buyer. Although it never was explicitly stated, there often seemed to
be a feeling that the cost of care was not a topic on which the seller
could negotiate and that this was one area of control that would inev-
itably be lost because, after all, the hospital was being sold to a profit-
making business. Several themes that ran through the interviews
were related to cost e.g., that the company had been carefully looked
at by the seller and was deemed to act responsibly and that hospitals
function in a competitive environment and cannot price themselves
out of the market if they want to survive.
After approximately one year of corporate ownership there seemed
to be general acceptance of the increases in charges that had occurred.
Even in a hospital where a 30 percent increase had reportedly taken
place, people commented that there is no way of knowing if this was
a greater increase than would have taken place under the old own-
ership. Because our investigations did not reveal how prepurchase
charges compared with other local or national averages, the magni-
tude of change that would be needed to bring or keep each hospital
in line with others cannot be determined.
A case in which cost negotiations came to light was the proposed
leasing of Suburban County Hospital to a hospital management com-
pany. Suburban County Hospital is located in a state that has an
active hospital rate review commission. The commission gave the com-
pany assurances that it would not lower the rates for 5 years even if
the company significantly reduced costs; some county council members
thought this was unfortunate because they wanted protection against
increases not decreases. A representative of the local medical society
suggested that the corporation would have no need to increase charges
because the hospital had been so badly run by the county that oper-
ating costs could be substantially reduced by making some obvious
and simple improvements in management. And it is from improved
management that several of those interviewed about other cases hoped
to see some impact on costs. The former administrator of one hospital,
which in the year before it was bought had for the first time run a
small deficit, said that savings from corporate purchases of supplies
and equipment alone would be sufficient to put the hospital back in
the black.
In sum, although charges for care are often a concern, they are
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JESSICA TOWNSEND
frequently left to the company in the expectation that competitive
forces, good management, and corporate integrity will restrain the
rate of increase.
Quality of Care
Almost everyone, and particularly physicians and administrators,
mentioned the importance of maintaining or improving the quality of
patient care, and there seemed to be little fear that the corporate
purchaser would undermine quality. Quality of care depends on so
many factors, such as the quality of staff and equipment, the speed
with which laboratory tests are completed, and the number of spe-
cialized services available, that it is difficult to discuss or negotiate
about quality in general as an issue. However, many of the factors
that contribute to quality care can be controlled or influenced by the
corporation. The maintenance of plant, supplies, and equipment was
not thought to present problems, and the general belief seemed to be
that if those factors are well taken care of good physicians would be
attracted to the hospital. Two other parts of the quality equation
nursing care and hospital staffing were not included in the nego-
tiations in these cases, except in the context of job security for existing
employees. The expressed reason for the lack of anxiety about quality
was, once again, that the sellers believed that their investigations of
hospitals owned by the prospective buyer indicated that quality would
be maintained. On the other hand, in the case in which such an in-
vestigation had not taken place Osteopathic Hospital a doctor com-
mented that: "It's still a low-class hospital the good staff have gone
to other hospitals. ~ just saw costs going up and care going down, and
am not putting patients in there anymore." If others follow that
course of action, as we were told is happening, Osteopathic Hospital
may soon be in trouble. So, where there are competing hospitals, as
many of our respondents indicated, there are incentives for the com-
pany to maintain or improve the quality of care.
Admission Policies
One of the most frequently made charges against the commerciali-
zation of the hospital industry is the practice of cream-skimming-
seeking profitable patients and excluding patients who are poor and
uninsured or who have complex illnesses. However, this issue was
never brought up spontaneously by any of the people interviewed.
When asked directly whether they had been concerned that the pur-
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When Investor-Owned Corporations Buy Hospitals
67
chasing company might change admissions policies, the reply was
always negative. This appears to be the result of a belief that the
company would not interfere in the practice of medicine or that the
physicians' influence would discourage the corporation from institut-
ing policies of selective admissions.
County hospitals that had provided care to the medically indigent,
and that had carried a significant amount of bad debt, went through
complex negotations to ensure that poor people would continue to
receive care. Three county hospitals were examined, two where the
sale was completed and one where it was denied by the county council.
In each case indigent care was the major issue for both the public and
the county authorities; the failure of negotiations in one case occurred
in part because many people felt that despite detailed arrangements
written into the contract the provisions for enforcement were inade-
quate. In the cases of the two county hospital sales that took place,
only the issue of replacing the hospital itself took precedence over the
issue of indigent care. No doubt the concern was fueled by the active
concerns of citizens' groups, but everyone from the hospital admin-
istrator to the county officials, from the newspaper editors to the
physicians, said that indigent care was at the top, or close to the top,
of their list of concerns.
Arrangements for financing care for medically indigent people in-
volved setting up a fund with a portion of the proceeds from the sale
and using the interest to pay for hospital care. Thus, the county would
continue to pay for the care of the indigent. Negotiations with the
corporation involved obtaining a guarantee that medically indigent
people would not be denied admission to the hospital. In one case the
county developed criteria to define indigence, and in another the pur-
chaser agreed that the county would have to pay only 90 percent of
customary charges for the care of the indigent.
Providing care for the population traditionally served by the county
hospital was a requirement set forth by the county authorities, in
most cases before detailed negotiations began, and did not become a
matter for dispute in the cases in which a sale took place.
Buy-Back Provision
One further issue peculiar to the county hospitals was that the sales
contracts included buy-back provisions if, after a specified period of
time, the county was dissatisfied with the company's operation of the
hospital. The details of the financial arrangements Mitered among
the county hospitals examined, but for the two sales that went through
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JESSICA TOWNSEND
they seemed satisfactory to the county authorities and interested cit-
izens. In the case of the county hospital for which the corporate leasing
arrangement could not be completed, both county council members
and the leader of a citizens' coalition cited the buy-back arrangement
as an unsatisfactory feature of the lease, which contributed to the
failure of the proposal.
Although it may not be essential for a corporation to agree to buy-
back arrangements, it appears important in reducing a seller's ner-
vousness about the sale. Several people interviewed mentioned the
topic spontaneously in the interviews.
The Process
Time and again interviewees said that, although other companies
might act differently, they felt sure that the corporation purchasing
their hospital would act with integrity. We heard this with reference
to admission policies, staff policies, local autonomy, plant and equip-
ment, and in general about behaving like a responsible health care
provider rather than a profit-maximizing entity. We heard it from
board members, county council members, administrators, and phy-
sicians. In some cases this belief was based on the fact that, before
detailed negotiations with a company began, the sellers had looked
closely at the corporate operations and at hospitals it owned. In other
cases criteria were established that a purchaser would have to meet
before being seriously considered. The result.was that, in the hospitals
that were sold, those involved felt that they were dealing with a known
entity and they liked what they knew; adversarial relationships did
not develop. Furthermore, it is possible that, because of this initial
trust, topics that could have become issues did not and, thus, were
not mentioned to us as being concerns. For example, when physicians
and administrators did not mention physician contracts (such as are
often arranged with radiologists and pathologists) as an area of con-
cern, the interviewer asked about it. Most often the response was that
the corporation was aware of existing contracts and obligations and
that there had been no fears that a suitable arrangement would not
be made. One wonders whether such a relaxed attitude would have
been possible in the absence of trust.
In the one case where the sale was concluded without consultation
with hospital staff and physicians and without an investigation of the
company by representatives of the interested groups, the result was
strikingly different. Various people commented that corporate man-
agement showed little concern for their problems, that staff morale
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When Investor-Owned Corporations Buy Hospitals
was low, and that a general feeling of insecurity was current. In this
hospital concern was expressed about admission policies and about
the nature of a for-profit enterprise.
Other elements in the process of changing to ownership by a for-
profit chain also may have been important. In some cases an impres-
sive and time-consuming process was undertaken whereby committees
were assembled to identify and analyze the alternatives to corporate
takeover and to identify the major areas of public and internal hospital
concern. The result was that a clear and public decision had been
made that corporate ownership was the best available option and that
the company selected would be responsive to public concerns. Here
again the contrast with two places that omitted these steps—Osteo-
pathic Hospital and Suburban County Hospital is striking. In the
case of Suburban County Hospital, it is particularly tempting to con-
clude that if the decision-making process had been more public—if
the county council had been involved along with the county executive
in selecting the corporation the outcome might have been different.
Only after the council was presented with the leasing proposal did its
staff initiate the type of investigation of the corporation that in other
cases preceded the negotiations. They looked at other county hospitals
owned by the company and did not like what they saw; one council
staff person stated that the findings of the investigation were "the
killers." With greater political sensitivity and greater public involve-
ment" in other words, greater attention to process a corporate leas-
ing arrangement under similar terms possibly would have been
acceptable.
69
Conclusions
The outstanding impression gained from these cases and from con-
versations with people who had varied interests in them was that the
takeover of these hospitals by for-profit chains often generated only
low levels of anxiety. There were, of course, exceptions, but these
appeared to be as much or more a matter of clumsy political maneu-
vering and lack of openness with the people involved than a matter
of substantive concern that the company could not answer.
There were a few differences among the hospitals on which issues
were important. For county hospitals the issues of indigent care, buy-
back provisions, and cost generated considerable activity both by local
politicians and by consumers who formed groups to make their posi-
tions public. In contrast to the sales of physician-owned (or controlled)
nonprofit hospitals, a great deal of public discussion surrounded the
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JESSICA TOWNSEND
sale of county facilities, with local newspapers, politicians, and com-
munity leaders becoming involved in disputes and with the purchase
becoming a political issue. Participation in discussions of the takeover
of the physician-owned facilities appears to have been confined to those
directly involved with the hospital owners, board, administration,
staff, and physicians.
There were also clear differences in the interests of the various
people with whom we talked, the interests being related to their po-
sition or relationship with the hospital. Although there were some
exceptions, the expressed concerns of the different groups were as
follows:
· Consumers for the county hospitals, consumers became inter-
ested in the issues of indigent care, local input into hospital policies,
and the financial deal, particularly buy-back provisions. There was
no organized expression of consumer interests when physician-owned
hospitals were bought. It was, however, noted that patients were aware
of the changed status of their hospitals, often because the purchasing
company mounted publicity campaigns. Physicians commented that
the concerns expressed by their patients were over the prospect of
increased charges. In general, the change was readily accepted.
· Board Members—Because the agreement of the hospital board
had been obtained before detailed negotiations for the sale proceeded,
there generally were few issues that concerned them by the time the
sale took place. The topics mentioned as being of interest included
quality of care and the status of the new advisory board.
· Administrators Although administrators generally were in-
volved in every aspect of negotiations from an early stage, two topics
emerged as the focus of their concerns: staff job security and benefit
packages. Maintaining the quality of patient care also was mentioned
as a more general concern.
· Physicians This group frequently expressed an interest in the
quality of plant and equipment, an interest most often spoken of in
terms of how the corporation could improve these conditions. Physi-
cians were also concerned about quality of care in general and about
ensuring that physicians' voices would be heard at the corporate level.
· Politicians This group became involved only when a county hos-
pital was being sold. Their areas of concern were similar to those of
consumer groups: indigent care, local control, and cost. They were also
concerned with the financial details of the sale, particularly how to
finance indigent care from the proceeds of the sale and how to conserve
capital for eventual possible buy-back.
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When Investor-Owned Corporations Buy Hospitals 71
Almost all people interviewed in connection with three of the five
cases were well pleased with their new situation. Two cases were
markedly different with considerable antagonism expressed. The dif-
ference between the two groups did not seem to be because of char-
acteristics of the purchasing corporation or of the hospital being bought
or of the people interviewed. To the extent we could understand it,
the difference appeared to be in the process by which the idea was
developed or by which the sale took place.
As mentioned in greater detail earlier, when the purchasing com-
pany had been investigated before the sale and the major concerns of
interested groups had been brought out in the open, most doubts were
dealt with before the takeover. Most people expressed an understand-
ing and acceptance of the idea that the company had to make money
off hospital operations. Few doubted that, because of certain external
constraints, the company would have an interest in maintaining the
quality of care and loyalty of staff. That is, if a hospital is to be
profitable, it must attract good physicians and their patients and it
must control costs. More positively, there were expectations that cor-
porate management would benefit the hospital both through econ-
omies of scale and the introduction of specialized management
techniques.
A number of people noted that during the year after the sale they
were delighted with the new administration and with the resources
that the corporation made available. These included sending man-
agement specialists to the hospital to deal with specific problem areas,
the advice given by the corporate central office in such areas as pur-
chasing, and the economies achieved through centralized buying. In
short, if the groundwork was well done, the companies in these cases
were not only accepted but were also warmly welcomed.
However, it must be kept in mind that each of these hospitals had
experienced corporate ownership for only a year or so. The longer-run
relationships between the corporate management and the medical
staff; the community; board members; and administrative, nursing,
and other staff could be not be explored. Equally, if not more impor-
tant, the impact of corporate ownership on such matters as cost, qual-
ity of care, and the long-term existence of the hospitals was not
investigated. These and other outcomes are of critical importance to
the health care system of each locality in which an investor-owned
hospital is active and to the nation's health care system as investor-
owned hospital chains continue their expansion into health care de-
livery systems.
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72
APPENDIX
JESSICA TOWNSEND
PRINCIPAL INTERVIEWS CONDUCTED FOR THIS PAPER
1. County Hospital A
Editor of local newspaper
Former health systems agency staff person
Admitting physician
Physician member of hospital board
County manager
Former administrator of hospital
2. County Hospital B
State Health Planning and Development Agency staff
members
Physician member of task force and committee involved
with negotiations of sale
Lawyer for foundation created to fund indigent care
Physician member of advisory board
Reporter on local newspaper
Banker
3. Doctors Hospital
Executive director State Health Planning and Deve!
opment Agency
Executive director of area hospital council
Administrator of hospital
Medical director of hospital
4. Osteopathic Hospital
Staff member of health systems agency
Editor of local newspaper
Former administrator of hospital
Present assistant administrator of hospital
Former chief of staff of hospital
5. Suburban County Hospital
Executive director of local medical society
Staff member of health systems agency
Member of the county council
Staff of councilman
Director of local citizens' coalition
Director of state rate review commission
Admitting physician at hospital
Representative terms from entire chapter:
jessica townsend
