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OCR for page 250
For-Profit Enterprise in Health Care. 1986.
National Academy Press, Washington, D.C.
Trends In the Grown of the Major Investor-Owned
Hospital Companies
Elizabeth W. Hoy and Bradford H. Gray
Some of the most basic facts about the growth
of the investor-owned hospital companies have
never been documented, although they have
often been topics of conjecture and specula-
tion. To what extent have these companies
grown through the construction versus the ac-
quisition of facilities? Does the previous own-
ership of acquired hospitals suggest that the
investor-owned sector is replacing the public
or not-for-profit sectors? To what extent have
these companies closed hospitals? How similar
are the major companies in such growth pat-
terns?
To provide at least a partial answer to such
questions, we have examined the growth of six
of the largest investor-owned hospital chains,
which owned 58 percent of the 890 such hos-
pitals as of September 30, 1984 (as shown in
the 1985 directory of the Federation of Amer-
ican Hospitals [FAH]~. These companies are
the Hospital Corporation of America (HCA)
which owns 200 hospitals; American Medical
International (AMI) with 115 hospitals; Hu-
mana, Inc., with 87 hospitals; National Med-
ical Enterprises (NME) with 47 hospitals;
Charter Medical Corporation (Charter) with
41 hospitals; and Republic Health Care Cor-
poration (Republic), with 24 hospitals. A1-
though several of these companies own
psychiatric hospitals, the analysis presented in
this paper is confined to 540 domestic hospitals
that the American Hospital Association (AMA)
classifies as "short-term, general, and other
special hospitals." Included are all such hos-
pitals that were constructed, bought, leased,
sold, merged, or closed between the inception
of each company and the time of their 1984
filings with the Securities and Exchange Com-
mission (SEC).~
Our primary sources of information about
these hospitals were the companies' annual re-
ports and filings with the SEC, especially their
250
10-K reports.2 These reports, which must be
filed annually by all publicly traded compa-
nies, are comprehensive statements that de-
scribe principal products and markets, the
location and character of principal properties,
a summary of the events of the previous fiscal
year, and financial statements. Other sources
of information were the AHA annual Guide to
the Health Care Field and the FAH annual
Directory of Investor-Owned Hospitals. The
few questions about hospitals' histories that
could not be answered from these published
sources were taken to the companies them-
seIves, which provided answers and in several
cases checked our other data.
SOURCES OF GROWTH
As Table 1 shows, acquisitions through pur-
chases (68 percent of growth) and leases (12
percent of growth) have far outdistanced con-
struction (20 percent) as a source of the growth
of the six companies. Companies varied widely
in sources of growth with HCA, Humana, and
Charter having originally constructed more than
25 percent of their hospitals, while none of
Republic's and only 4 percent of AMI's hos-
pitals were built by those companies. These
differences are undoubtedly partly a matter of
strategy, although Republic's relative youth may
also be a factor. Most of the companies studied
did not construct hospitals in their first few
years of operation.
The data on new hospital construction do
not fully measure the construction activities of
these companies. Table 2 shows three types
of such activities -- new construction, replace-
ment of existing facilities, and addition of beds
to existing facilities.
Part of the increase in these six companies'
bed capacity came from capital improvements
to facilities they had previously constructed or
OCR for page 251
GROWTH OF INVESTOR-OWNED COMPANIES
251
TABLE 1 Sources of Growth of Short-Term General and Other Special Hospitals by Six
Selected Corporations, All Hospitals Acquired Through 1984
Activity All Six HCAa HumanaAMI NME Republic Charter
Total hospitals
acquired 540 202 124114 50 31 19
Constructed (%) 20 27 264 12 0 26
Purchased (%) 68 62 5688 80 76 58
Leased (%) 12 11 188 8 24 16
aHCA data are through 1983.
acquired. Renovations and expansions oc-
curred in 23 percent of facilities owned by
these companies. The beds added through These
activities account for 7 percent of the total
number of beds owned by the six companies.
The six companies completely replaced 11 per-
cent of their facilities with newly constructed
buildings. Beds added in the process account
for 2 percent of current bed capacity (7,983
beds).
The magnitude of expansion/replacement
activities varied widely among the six com-
panies. At the high end, 11 percent of the bed
capacity of the HCA derives from capital ex-
penditures at facilities already owned; 50 per-
cent of their hospitals were affected. At the
other end, 3 percent of AMI's beds derive from
capital expenditures at facilities they owned
and 21 percent of hospitals were affected. Re-
public Health Corporation did not expand or
replace any hospitals during the period ex-
amined. (See Table 1.)
Growth Trends Over Tane
Table 3 displays growth trends data for the
six companies. Clearly, construction ac-
counted for a much larger share of these com-
panies' growth during the 1970s than either
before or after. However, the percentage de-
cline in share of growth via construction (from
27 percent between 1975 and 1979 to 11 per-
cent between 1980 and 1984) resulted pri-
marily from a surge in acquisition activity, not
to a substantial slowing of construction.
Through 1969, only 49 hospitals were owned
by these six companies. Beginning around 1970,
the three companies that are the largest today
began a period of rapid expansion. Between
1970 and 1972, HCA added 27 hospitals, 13
of which were constructed. Humana added 36
hospitals, 4 of which were constructed. AMI
added 31 hospitals; one of these was con-
structed and 21 were acquired in a merger
with Chanco in 1972, more than doubling the
size of the company. Charter and NME ex-
hibited much slower growth in short-term
general hospitals during this period. This
probably reflects the greater diversification of
these two companies while they were entering
the general hospital market.
During the mid-1970s, HCA and Humana
both began constructing more of their new
hospitals. Twenty-seven of the 50 hospitals
added to HCA between 1973 and 1979 were
constructed by the company. All but two of
the 23 hospitals added by Humana between
1973 and 1977 were constructed. AMI did not
grow during this period, having previously
made the acquisition of the Chanco hospitals
that had more than doubled the company.
In the late 1970s and early 1980s, growth
through the acquisition of over investor-owned
chains by the larger ones became particularly
notable. HCA acquired three smaller chains
(i.e., General Care Corporation, General
Health Services, Inc., and Hospital Affiliates
International, Inc. tHAI]) in 1980 and 1981.
These 48 hospitals represented 60 percent of
their growth in those 2 years. Humana ac-
quired 39 hospitals through its merger with
American Medicorp in 1978, almost doubling
their capacity. AMI continued its strategy of
growth primarily through the acquisition of
chains, by acquiring Hyatt (eight hospitals) and
BrooLwood Health Services (11 hospitals) in
1981 and 1982, respectively, and in 1984, AMI
acquired Lifemark's 27 hospitals through a cor-
porate merger.
OCR for page 252
OCR for page 253
GROWTH OF INVESTOR-OWNED COMPANIES
TABLE 3 Growth in Four Time Periods of Short-Term
General and Other Special Hospitals by Six
Investor-Owned Corporationsa
Total All Before
Activity Years 1969
1970-
1974
1975-
1979
1980
l984b
Total hospitals
acquired 540 49 131 111 249
Constructed (%) 20 4 35 27 11
Purchased (%) 68 90 58 56 75
Leased (%) 12 6 7 17 14
aHCA, Humana, AMI, NME, Republic, and Charter.
bHCA data are through 1983.
Republic was founded in 1981 by four for-
mer executives of HAI and has grown to the
fifth largest investor owner of general hospitals
by purchasing two-thirds of its hospitals from
other investor-owned chains. They purchased
16 hospitals from HCA in 1983, 8 of which
were former HAI hospitals. Then in 1984, they
acquired Health Resources (three hospitals),
two hospitals from Humana, and one general
hospital (along with several psychiatric or sub-
stance abuse hospitals) with their acquisition
of Horizon Health-the owner of Raleigh Hills
substance abuse hospitals.
lYPES OF HOSPITALS ACQUIRED
Previous Ownership
Table 4 shows that these six companies have
grown prunarily Trough the acquisition of other
hospital chains (45 percent of all hospitals ac-
quired) and independent proprietary hospitals
(33 percent of all hospitals acquired). (This fig-
ure has been adjusted to compensate for the
22 hospitals that changed hands in transactions
among the six companies.) Twelve percent of
the acquired hospitals were previously under
private not-for-profit ownership (mostly vol-
untary rather than religious), and 10 percent
were previously owned by state and local gov-
ernments.
Previous ownership also shows definite trends
when examined over time (Table 51. Initially,
most hospitals acquired were small indepen
253
dent proprietary hospitals. Not-for-profit and
governmental hospitals did not assume a sig-
nificant portion of acquisitions until the most
recent period examined" 1980-1984.
It is often difficult to determine the original
ownership of hospitals that were acquired by
these six companies from other proprietary
chains. The most complete data we have come
from the set of hospitals acquired by HCA
through General Care Corporation, General
Health Services, Inc., and HAI. These hos-
pitals were almost exclusively either indepen-
dent proprietary hospitals before they were
acquired by any chain or they were con-
structed by a chain. This pattern appears to
hold for the other companies studied, although
we were unable to assemble complete data.
Once acquired by a hospital chain, a hospital
can go through a series of changes of ownership
as a result of the merger and acquisition ac-
tivity among hospital chains. Perhaps the most
vivid example are two California hospitals,
Community Hospital of Sacramento and Lau-
rel Grove Hospital, that went through the fol-
lowing changes. Both were physician-owned
proprietary hospitals until their acquisition by
Beverly Enterprises in the early 1970s. They
were sold by Beverly to AID, Inc., a subsidiary
of the Insurance Company of Norm America
(INA) in the mid-1970s. After INA acquired
HAI, the AID hospitals were moved into the
HAI division, which was sold to HCA in 1981.
In 1983 the two hospitals were among eight
that HCA sold to Republic, their present owner.
OCR for page 254
254
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OCR for page 255
GROWTH OF INVESTOR-OWNED COMPANIES
TABLE 5 Trends in Previous Ownership of Short-Term
General and Other Special Hospitals Acquired by Six
Investor-Owned Companiesa
Ownership at Before 1970- 1975- 1980
Acquisition Total 1969 1974 1979 1984b
Investor-owned chain 194 0
Investor-owned
independent
Voluntary not-for
profit
146 45
24
48
51
16
119
37
41 1 7 5 28
Religious not-for
profit 12 0 2 3 7
State and local
government 43 1 5 7 30
Total 436 47 86 82 221
.
aHCA, Humana, AMI, NME, Republic, and Charter.
bHCA data are through 1983.
Size of New Hospitals
Data on the size of hospitals constructed,
purchased, and leased are displayed in Table
6. For the six companies, the average size of
the hospitals constructed (153 beds) was slightly
larger than the size of hospitals purchased
(though not smaller than leased hospitals). For
all three modes of acquisition, the size peaked
in the period 1975-1979.
Geographic Patterns
In 1969, the six investor-owned chains owned
hospitals in only 10 states with 75 percent of
them concentrated in California, Texas, Ala-
bama, and Tennessee. By 1984, they owned
hospitals in 35 states, with 74 percent of their
hospitals in seven states (the four listed and
255
Florida, Louisiana, and Georgia). Clearly the
areas of greatest grown and concentration have
remained in He South and Southwest. Since
1969, there has been a gradual spread into the
Midwest and the Rocky Mountain area, but
the six chains acquired no hospitals in several
New England and Mid-Atlantic states.
The Relationship Between Contract
Management and Acquisition
HCA was the only company that provided
enough information in their 10-K reports to
track the relationship between management
contracts and subsequent purchase of hospi-
tals. Since becoming a public corporation
through 1983, HCA managed a total of 220
hospitals in 39 states. Of these, 33 contracts
were terminated, presumably at the end of the
TABLE 6 Average Number of Beds per Acquired Hospitals,
Six Investor-Owned Companies,a Through 1984
l
Before
Hospital Type Total 1969
1970-
1974
1975- 1980
1979 1984b
All acquired hospitals 142 128 118 171 144
Constructed hospitals 153 44 152 180 131
Purchased hospitals 136 134 102 153 145
Leased hospitals 156 84 77 212 152
aHCA, Humana, AMI, NME, Republic, and Charter.
bHCA data are through 1983.
OCR for page 256
256
contract life. Seventeen managed hospitals were
acquired by HCA during the course of the
contract, and one was acquired after the con-
tract had terminated. These represent 8 per-
cent of HCA's total acquisitions. Seven of the
18 hospitals acquired were replaced by com-
pany-built hospitals during the term of the
contract and were recorded as constructed
hospitals in our data. At the end of our data
collection period, HCA managed 169 hospitals
in 38 states. Contract management is clearly
a separate line of business rather than a vehicle
for acquisition.
DIVESTITURES
An oft-stated concern about the for-profit
ownership of hospitals by for-profit entities is
that such owners might be too willing to close
a hospital that was not satisfying profitability
goals. Although some studies (Sloan et al., 1986;
Mullner et al., 1982) have shown that for-profit
hospitals are disproportionately represented
among hospitals that close, little data on clo-
sure activity of investor-owne~ for-profit hos-
pitals have heretofore been available. For this
reason, we also compiled data on divestitures
by the six largest investor-owned hospital com-
panies.
For the SLY companies combined, there were
a total of 87 divestitures during the period
studied-75 sales and 12 closures (Table 7~.
This is a total of 16 percent of all hospitals
acquired during this period. The percentage
of hospitals divested varies by company, with
Humana having the highest percentage of total
divestitures (31 percent of the hospitals they
FOR-PROFIT ENTERTRISE IN HEALTH CARE
bought or constructed) and NME having a low
6 percent. Republic has not divested any hos-
pitals, but this may be a factor of the relatively
young age of the company. For the first years
ofthese companies' existence, there were very
few divestitures (Table 8~.
Only 2 percent of all the hospitals acquired
by the six companies during the period studied
were subsequently closed. In several of these
cases, the closure was associated with, and
compensated by, the addition of new beds at
another area hospital owned by the same com-
pany; one was converted to a psychiatric hos-
pital. None of the hospitals that were closed
appeared to be the only hospital in a com-
munity. AMI exhibited the highest absolute
number of closures (six). NME and Republic
did not close a hospital.
Table 9 shows the number of years between
the time of acquisition and the time of dives-
titure for the 87 hospitals that were closed or
sold by these three companies through 1984.
Divestitures appear to fall into several pat-
tems. Sometimes computes acquire chains and
Men divest themselves relatively quickly of
hospitals that do not fit well with the company.
Of the hospitals divested Trough sale or clo-
sure, 45 percent took place within 3 years of
the year of acquisition. Another cluster of hos-
pital divestitures appears around 5 to 6 years
after acquisition. One can speculate that these
were hospitals that did not meet the acquiring
companies' expectations regarding profitabil-
ity. A third group of hospitals have been di-
vested after 10 years or more of ownership.
One can speculate that these are hospitals that
have outlived their investment potential (i.e.,
TA;BLE 7 Divestitures of Short-Term General and Other Special Hospitals by Six
Companies, Through 1984
Activity Total HCAa Humana AMI NME Republic Charter
Total hospitals divested 87 26 39 14 3 0 5
Number sold 75 23 38 8 3 0 3
Number closed 10 3 1 6 0 0 2
Percent divested as
percentage of total
hospitals acquiredb 16 13 31 12 6 0 26
aHCA data are through 1983.
bAs shown in Table 1.
OCR for page 257
GROWTH OF INVESTOR-OWNED COMPANIES
TABLE 8 Divestitures ~ a Percentage of All Hospitals
Acquired by the Six Companies,a in Four Time Periods
Before 1970
Ac~ivity Total 1969 1974
1975- 1980
1979
l984b
Total hospitals
divested 87 04 27 56
Total hospitals
acquired 540 49131 111 249
Divestitures as
percentage of
acquisitions 16 04 24 22
aHCA, Humana, AMI, NME, Republic, and Charter.
bHCA data are through 1983.
Haney are reaching the end of their depreciable
life) and that their cash-flow value to the com-
pany may have declined.
CONCLUSIONS
Several major findings from this compilation
of information about the acquisition and di-
vestiture activities of the six largest investor-
owned hospital companies through 1984 are
worthy of note and commentary:
· Most growth has been through acquisi-
tion of existing facilities; only 20 percent (104
hospitals) of all hospitals owned or leased by
the companies during this period were origi-
nally constructed by the companies.
· Approximately 13 percent ofthe hospitals
purchased or leased by the companies were
subsequently replaced. Replacement and ren-
ovation activities added almost as many beds
to the system as did the construction of new
facilities.
257
~ Almost half ot the hospitals acquired by
these six companies were acquired in 1980 or
later, with acquisitions of and mergers with
other companies playing an important role.
However, projections of future growth based
on trends shown in this paper would be un-
warranted in light of changing economic cir-
cumstances brought about by Medicare and
private third-party payers.
· As has been widely assumed, most hos-
pitals acquired were previously under for-profit
ownership. However, 22 percent of purchased
hospitals were acquired from a not-for-profit
or governmental owner. Such sources in-
creased in prominence during the last period
studied (1980-19841. However, as noted above,
growth trends of the late 1970s and early 1980s
may not continue.
~ The size of hospitals purchased (and leased)
and constructed peaked in the penod 1975-
1979 before declining in the 1980-1984 period.
~ Although significant geographic dispersal
took place during the period studied, a high
TABLE 9 Length of Time Between Acquisition and Div~ctitl~r~ far R7 Hn~nitolc C^1A ^'
Closed by SLK Investor-Owned Hospital Companies,a 1970-1984
~Kiev-~- TV vet
Length of Time
Total
HCAb Humana AMI NME Republic Charter
-
1-3 yearsC 39 21 10 5 1 0 2
4-8 years 33 3 22 4 1 0 3
9 or more years 15 2 7 5 1 0 0
UTICA, Humana, AMI, NME, Republic, and Charter.
bHCA data are through 1983.
CBased on year of acquisition and sale, not on exact dates.
OCR for page 258
258
degree of geographic concentration still char-
acterizes these six companies, win almost 75
percent of Weir hospitals being located in seven
states.
· Acquisition by an investor-owned com-
pany can lead to subsequent changes in own-
ership. Sixteen percent of the hospitals built
or purchased by these six companies had un-
dergone a subsequent change in ownership.
At the extreme, two examples were presented
of hospitals Mat had changed hands five times
after their initial purchase from local physician
owners.
· Closure of a hospital after acquisition by
one of these companies has been rare. Only
12 of the 540 hospitals owned by these com-
panies during the period were closed, and sev-
eral of these closures were the result of the
replacement of two old facilities by one new
one.
· There are substantial variations ire the
growth and divestiture patterns of different
companies. Whether this is `due to broad strat-
egies or to ideosyncratic circumstances and
events has not been determined.
NOTES
Can exception was the HCA for which the most re-
cent data used was from its 1983 filings with the SEC.
Hospitals that these companies operated under man-
agement contracts were not included in the figures on
acquisitions and divestitures.
Beginning with the first year that each company
filed with the SEC and owned one or more hospitals,
the following information was compiled (and usually
obtained) about each hospital owned by each company:
· The name and location of the hospital
· Year acquired
· How acquired (i.e., constructed, purchased, or
leased)
· Type of previous ownership
· Whether the hospital was previously managed by
the company (if available)
· Initial licensed bed capacity upon acquisition
· Any additions to bed capacity and the year they
occurred
· If the hospital was replaced, when, and the num-
ber of beds in the replacement facility
· Current licensed bed capacity (1984 data)
· Any additions to ancillary capacity, and the year
they occurred
· If the hospital was divested, how and when
FOR-PROFIT ENTERPRISE IN HEALTH CARE
Growth derives from construction, purchase, and
lease. Constructed hospitals were recorded in the year
they began operating rather than the year construction
began. Hospitals constructed for other owners and then
leased by the corporation under a capitalized lease ar-
rangement were counted as constructed hospitals. Hos-
pitals acquired after construction had begun and
completed while owned by the corporation were counted
as constructed rather than acquired hospitals. Hospitals
that were constructed by others under agreements with
the corporation and then acquired upon completion
were categorized as either purchased or leased.
The 10-K reports must list properties that are leased,
but need not differentiate between capitalized and non-
capitalized leases. Both capitalized and noncapitalized
leases are included in our data under the category
"leased." However, the majority of leases by investor-
owned chains are capitalized leases; for example, 18 of
the ~ leases recorded by Humana are capitalized leases.
A capitalized lease, also known as a financing lease, is
a leasing agreement that is followed by the option to
purchase at a nominal price and is treated on the fi-
nancial statements as both the borrowing of funds and
the acquisition of an asset by the lessee (in this case,
the investor-owned chain). Both the liability and the
asset are recognized on the balance sheet. Expenses
consist of both the interest on the debt and the am-
ortization of the asset. The lessor treats the lease as
the sale of the asset in return for a series of future cash
receipts. An operating lease, or noncapitalized lease,
grants the lessee no rights to the asset and the rental
payments are accounted for as expenses of the period,
not a liability. The lessor retains rights to the property
and shows the rental payments as revenues.
Purchased hospitals include those acquired through
poolings of interest. When an investor-owned chain
acquires a hospital (or hospital chain) through a pooling
of interest, it exchanges previously unissued capital
stock for the stock of the hospital and accepts respon-
sibility to discharge tile liabilities of the acquired firm.
In accounting terminology, a pooling of interest com-
bines the two firms by adding together the book value
of the assets and equities of the two firms. When a
hospital is purchased, the transaction is accounted for
by adding the acquired company's assets, valued at the
price paid for them, to the acquiring company's assets.
Because the assets are put on the books at current,
rather than original cost, the depreciation expense (and
its associated cash flow) is higher and the reported net
income is generally lower under this method than un-
der the pooling-of-interest method. Acquisitions are
required to be accounted for as purchases unless all of
the criteria for a pooling are met.
For our purposes, poolings and purchases are both
included in the terminology "purchased." Since the
difference between a capitalized lease and a purchase
is only one of the timing of the expenditure, leases and
OCR for page 259
GROWTH OF INVESTOR-OWNED COMPANIES
purchases have been combined under the term "ac-
quisition" in some tables.
REFERENCES
Mullner, Ross M., Calvin S. Byre, Paul Levy, and
Joseph D. Kubal (1982) Closure among U.S. commu-
nity hospitals, 1976-1980. A descriptive and a predic
259
tive model. Medical Care 20July) 699-709.
Sloan, Frank A., Joseph Valvona, and Ross Mullner
(1986) Identifying the issues: A statistical profile. In
Frank A. Sloan, James F. Blumstein, and James M.
Pernn, eds., Uncompensated Hospital Care: Rights and
Responsibilities. Baltimore, Md.: The Johns Hopkins
University Press.
Representative terms from entire chapter:
six companies
