Cover Image

PAPERBACK
$136.25



View/Hide Left Panel
Click for next page ( 27


The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 26
Changes in die Ownership, Control, and ConEguradon of Heady Care Services Elements of change have been filtering through the ownership and configuration of health care organizations over the past two decades. Although the emergence of inves- tor-owned hospital chains has been an im- portant part of this change, there also has been substantial growth in multi-institu- tional arrangements among not-for-profit hospitals and a surge of investor ownership and multi-institutional arrangements among most kinds of health care organizations- psychiatric hospitals, nursing homes, health maintenance organizations, home health agencies, and various types of ambulatory care centers. Distinctions between organizational types have begun to break down. Hybrid orga- nizations have evolved that combine for-profit and not-for-profit components. Hospitals and multihospital systems have moved into other types of health services (primary care cen- ters; ambulatory surgery, diagnostic, and re- habilitation centers; nursing homes; and home health services). Hospital companies, like health maintenance organizations, have begun to combine an insurance Sanction with the provision of services. Many of these developments such as Me emergence en cl growth of investor-owned hospital companies-were spurred by the rather sudden availability of money that ac- companied the general rise of third-party payments and the specific passage of the 26 Medicare and Medicaid legislation in 1965. Federal dollars also were the driving force behind the expansion of, and for-profit in- terest in, the nursing home field (primarily funded by Medicaid) and hemodialysis (fimded by Medicare's End-Stage Renal Disease Program). Some developments also were shaped by the bias toward hospital care that long characterized third-party payment programs and, more recently, by efforts to provide incentives for less-expensive forms of care, such as ambulatory surgery. The organizational configuration of the health care system has also been deeply affected by the fundamental changes in the sources of fi- nancial capital for health care, in particular the substitution of debt and equity capital from private investors for capital from gov- ernment and philanthropy, as described in Chapter 3. As hospitals have become more dependent on borrowing, the greater bor- rowing power of multi-institutional systems has spurred the development of such sys- tems. The need to gain access to lower-cost capital also generated alliances of not-for- profit systems and independent hospitals that are hybrids of not-for-profit and for-profit. The alliances raise equity capital, guarantee debt, and seek economies of scale. Some organizational developments were stimulated by regulatory programs that squeezed only part of the system. For ex- ample, after the government required that

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE hospitals obtain approval for expansions or for acquisition of costly technology, inves- tors took the opportunity to initiate services, such as computed tomographic (CT) scan- ning, outside of hospitals, where the regu- lations did not apply. The growth of multi-institutional systems, which widen the pool of administrative and managerial expertise on which indiviclual in- stitutions can draw, was undoubtedly stim- ulated in part by the difficulties of individual institutions in coping with an increasingly complex regulatory and reimbursement en- vironment. Over developments, such as a recent wave of hospital expansion into nursing homes, and home and psychiatric care, can be at- tributed to the changed economic incentives resulting from Medicare's shift from cost- based reimbursement to a fixed, per-case payment. Many other changes have resulted from developments in the private sector- particularly the efforts of employers to re- duce the cost of their health benefit pro- grams through devices ranging from employee cost-sharing to contractual ar- rangements with Tow-bidding providers. The remainder of this chapter describes the organizational changes that have be- come a pervasive trend in health care. The growth of for-profit enterprise and of multi- institutional arrangements among different types of health care providers is examined, as well as some of the trends that are blur- ring the distinctions between types of health care organizations. Much of the movement described is toward larger organizations that provide an increasingly broad range of ser- v~ces. Many of the numbers reported in this 27 HOSPITALS For-profit hospitals and multi-institu tional health care organizations, the latter usually religious or governmental, have Tong been in existence. What is new are the rise of investor-owned hospital companies that own dozens of hospitals and the proliferation of multi-institutional arrangements among not-for-profit hospitals. Compared with in dependent hospitals, these systems are bet ter able to fill capital needs, to engage in political maneuvenng, and to maintain a body of managerial and specialized sta$expertise. As summarized by one observer, multi-in stitutional organizations are the result of strategies "designed to provide sufficient strength to cope with Me environment, to acquire scarce and valued resources, to al Tow organizational stability, to achieve or ganizational purposes, to enable growth and/ or survival, and to enhance the organiza tion's competitive market position" (Zuck erman, 1983~. Incus, multihospital systems have been created and developed on both the for-profit side-where the large com panies have gained much attention and among not-for-profit organizations. Investor-Owned Hospital Systems For-profit hospitals are not new. Indeed, in the early l900s more than half of the hos pitals in the United States were proprietary. However, the proprietary share shrank thereafter (Steinwaid and Neuhauser, 1970), and since 1970 the for-profit proportion has remained relatively stable at around 13 per cent. The makeup of that 13 percent share, however, has been anything but stable, as chapter should be regarded only as general independent proprietaries have become less indications of trends, because the rate of common and companies owning and man change is so rapid, definitions of what is aging chains of hospitals and other health being counted are not always precise (be- care institutions have grown rapidly. Most cause of new and changing organizational ^~ ' ' forms), and the only available data are often from trade associations and sources. v ~ , ot today s largest companies were founded as recently as the last 20 years. Table 2.1 shows steady growth in the

OCR for page 26
28 FOR-PROFIT ENTERPRI SE IN HEALTH caRE TABLE 2.1 Investor-OwnecT Hospitals and Beds: Number and Percentage of U.S. Nonfederal Short-Term General and Other Special Hospitals, 197~1984 - Investor-Owned Percent of U.S. Investor-Owned Percent of U.S. HospitalsaHospit~sb Bedsa Bedsb 19753786.3 51,230 5.3 19763966.6 54,744 5.7 19774207.0 58,337 5.9 19784377.4 61,499 6.2 19794647.8 66,039 6.7 19803319.0 74,012 7.5 19815809.9 79,002 7.8 198268211.6 90,328 8.9 198376713.1 99,958 9.8 1984878NA 113,122 NA aCommunity, psychiatric' and specialty hospitals owned by corporations that own or manage three or more hospitals. bNonfederal short-term general and other special hospitals. SOURCES: Calculated from data from: Federation of American Hospitals: Directory of Investor-Owned Hospitals and Management Companies, 1975; Sta- bstical Profile ofthe Investor-Owned Hospital Industry, 1979 and 1980; Statistical Profile of the Investor-Owned Industry, 1983; 1965 Directory, Investor-Owned Hospitals and Hospital Management Companies. American Hospital Association, Hospital Statistics, 1984 edition. number of investor-owned hospitals and in the proportion of the nation's hospitals and becis represented by investor-owned cor- porations.~ Since 1975, investor-owners have added 500 hospitals and nearly 62,000 beds, more than doubling their holdings of hos- pitals and becls. In addition, 354 hospitals were managed by investor-owned compa- nies in 1984 (Federation of American Hos- pitals, 19841. Conversely, the number of independent for-profit hospitals declined between 1975 and 1984 at almost the same rate as the number of investor-owned hos- pitals grew. Independent for-profit hospitals numbered 682 in 1975 and 303 in 1984 (Fed- eration of American Hospitals, 1980 and 1984~. This reduction is accounted for in part by closures and in part by purchase by inves- tor-owned systems. Purchase or lease of formerly indepen- dent for-profit hospitals has been a source of growth for investor-owned systems. The six largest companies, which in 1984 owned 58 percent of investor-owned hospitals, have bought or leased 436 acute care hospitals (80 percent of the short-term hospitals they have owned) since their inception.2 Ofthese 436, 33 percent were formerly for-profit in- dependent hospitals and 45 percent were for-profit chain-owned. The remaining 20 percent were not-for-profit or public hos- pitals, the majority of which were bought in the 1980s. Construction of new hospitals ac- counted for 20 percent of the growth of the six companies' short-term hospital holdings (Hoy and Gray, 1986~. Not-for-profit Hospital Systems The formation of not-for-profit hospital systems predates that of investor-owned sys- tems. Such "systems," defined broadly to include affiliation or mutual support, have existed for more than 50 years, beginning mostly among hospitals of religious organi- zations (Keenan, 1981). Some historical data

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE on today's not-for-profit systems are avail- able from an American Hospital Association survey of systems in existence in 1980 (Table 2.2~. Religious systems were predominant among systems that existed in 1940. By the 1980s, secular systems represented close to 40 percent of the 981 hospitals owned, leased, or sponsored by not-for-profit systems. An additional 215 hospitals were managed by not-for-profit systems in 1983. COMPARISONS OF INVESTOR-OWNED AND NOT-FOR-PROFIT SYSTEMS Since the inception in the 1960s of inves- tor-owned hospital systems, their rate of growth has exceeded that of not-for-profit systems. By 1983, the total number of hos- pitals owned by investor-owned corpora- tions still fell somewhat short of the number owned by not-for-profit systems, and the number of beds in investor-owned systems was substantially less than half the number in not-for-profit systems (see Table 2.31. This difference results in part from the small av- erage size of investor-owned hospitals. The investor-owned systems differed from the far more numerous not-for-profit systems in 29 other ways. The investor-owned systems were, on average, substantially larger than the not-for-profit systems in terms of owned hospitals or beds. Hospital Corporation of America, the largest investor-owned sys- tem, owned or leased 178 and managed 167 hospitals in 1984. It vastly exceeded the size of the largest not-for-profit system, Adven- tist Health Systems, with 60 owned or leased and 15 managed hospitals (Modern Health- care, 1985b). (Two much larger organiza- tions of not-for-profit hospitals-Voluntary Hospitals of America and American Health- care Systems are not generally classified as multihospital systems because they are owned by their member hospitals, rather than vice versa.) And nearly 70 percent of investor-owned hospitals were operated (owned, leased, or managed) by the four largest companies, while the four largest not- for-profit systems operated only 15 percent of not-for-profit system hospitals Johnson, 1985~. High concentration in a few large or- ganizations characterizes the investor-owned sector much more than the not-for-profit sector. Investor-owned systems have shown clearer location preferences than have not T~BLE 2.2 Number of Hospitals =d Bedsa in Reli~ous and Secular Not-for-profit Multihospital Systems, 194~1983 Religious Secular Total Hospitals Beds Hospitals Beds Hospitals Beds 1940 183 NA 35 NA 218 NA 1950 211 NA 50 NA 261 NA 1960 242 NA 89 NA 331 NA 1970 283 NA 189 NA 472 NA 1980 600 153,000 364 85,000 964 238,000 1983 598 157,000 383 85,000 981 242,000 NOTE: 194~1970 data are from responses to a special 1980 survey of multi- hospital systems. 1980 and 1983 data are from current surveys. 1980 and 1983 data are published as 1981 and 1985 data, respectively, in the original source, but pertain to the years shown in Me table (Elwor~ Taylor, American Hospital Association, Chicago, Illinois, personal communication, 1985). aLeased, owned, and sponsored. SOURCE: American Hospital Association, Data Book on Multihospital Systems 198(}1981; Data Book on Multihospital Systems, 198~1985.

OCR for page 26
30 FOR-PROFIT ENTERPRISE IN HEALTH CARE TABLE 2.3 Comparative Information About Not-for-profit and Investor-Owned Systems, 1983 Investor-Owned Not-for-pro~t Systemsa Systemsb Number of systems Number of hospitals in systems Number of beds in systems Average number of beds per hospital Average number of hospitals per system Average number of beds per system 41 767 100,000 130 18.7 2,439 212 981 242,000 247 4.6 1,141 a Systems that own or manage three or more hospitals Data pertain to owned facilities. bSystems that own, lease, sponsor, and manage. An additional seven systems only manage. Data pertain to owned, leased, and sponsored facilities. SOURCES: American Hospital Association, Data Book on Multihospital Sys- tems, 198~1985; Federation of American Hospitals, calculated from data from Statistical Profile of the Investor-Owned Hospital Industry, 1983. for-profit systems. The hospitals they own are concentrated in the "sun belt" states; 46 percent of all investor-owned hospitals were located in Texas, California, and Florida in 1984 (Federation of American EIospitals, 19841. Table 2.4 shows what this preference has meant in terms of investor ownership of hospitals in individual states. In no state clo investor-owned hospitals represent more than 50 percent of all nonfederal short-term gen- eral and other special hospitals, but they have more than 30 percent of such hospitals in seven states. The investor-owned market share has grown most rapidly in states with the great- est increases in per capita income and pop- ulation, with widespread insurance coverage, and where for-profit hospitals already had a relatively large market share of beds. As- suming that income and insurance coverage are associated with demand for hospital ser- vices, investor-owners have exhibited stan- dard market behavior by seeking to establish themselves in areas of growing demand (Mullner and Hadley, 1984~. Investor-owned hospitals are also more likely than are not- for-profit systems to be located in suburban areas and less likely to be in rate-setting states. Investor-owners often selected areas in which Blue Cross pays hospital charges (Watt et al., 1986~. Given the greater geo- graphic selectivity of investor-owned sys- tems, it is not surprising that not-for-profit systems more closely approximated the na- tional distribution of hospitals among re- gions than dicl investor-owned systems in 1983 (Table 2.5~. Investor-owned hospital systems have also shown selectivity in the size of the hospitals they acquired or constructed. As Table 2.6 shows, they own few of the nation's smallest hospitals, which are frequently rural, and few of the largest, most complex hospitals, which generally are teaching hospitals, al- though there are signs of change in the latter area (see Chapter 71. Psychiatric Hospitals Half of all psychiatric hospitals (297 of 586) were government-owned in 1983 (American Hospital Association, 1984), but in the pri- vate sector, investor ownership has become a major presence. In micl-1985 the records of the National Association of Private Psy- chiatric Hospitals (NAPPH) indicated that 52 percent of the 224 member hospitals were affiliated with investor-owned systems, 19

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE TABLE 2.4 Investor-Owned Hospitals as a Percentage of Nonfederal Short-Term General and Other Special Hospitals by Statea State Percentage State Percentage Alabama Alaska Anzona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky T . . ,oulslana Maine Maryland Massachusetts Michigan ~ ,. . . . lvllSSlSslppl Missouri Montana 29 11 12 16 31 10 2 13 8 44 29 6 5 10 3 23 31 7 Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota to Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota 4 r ~ ennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin 12 Wyoming 2 50 3 10 o 18 o 1 9 13 4 5 o 21 38 32 20 o 31 11 aInvestor~wned is defined as owned by a corporation that owns or manages three or more hospitals; includes psychiatric and other speciality hospitals SOURCES: Calculated from data from American Hospital Association (1984~; Federation of American Hospitals (1984~. percent were independent for-profit hos- pitals, and the remainder were not-for-profit facilities (Robert L. Thomas, National As- sociation of Private Psychiatric Hospitals, Washington, D. C., personal communica- tion, 19851.3 The grouch of investor-owned psychiatric hospital systems shows both similarities to and differences from the growth of investor- ownedhospital systems. Similarities include rapid growth, a high degree of concentration in a few companies, absorption of some mul- tihospital systems by other multihospital systems, and a decrease in the independent for-profit sector. Differences include a far 31 greater market penetration by investor- owned systems and the absence of a signif- icant market presence of not-for-profit sys- tems. (Not-for-profit hospital systems have exhibited only a small interest in the psy- chiatric hospital market, an estimated eight systems owning a total of nine psychiatric hospitals (Fackelman, 1985a).) During the late 1960s nearly half of all private psychi- atric hospitals were for-profit and for the most part were independently owned by in- dividuals or small groups of psychiatrists. Today, chain ownership is more prevalent than individual ownership among the for- profits (Levenson, in press).

OCR for page 26
32 FOR-PROFIT ENTERPRISE IN HEALTH CARE TABLE 2.5 Regional Distribution of System-Owned Community Hospitals and Beds, Investor-Owned, Not-for-profit, and AD U.S. Hospitals, 1983 Hospitals Beds NFP Total NFP Total Region I-OSystems U. S. I-OSystems U. S. New England 0.5%2.8% 5.3% 0.3%2.7% 5.9% Middle Atlantic 1.49.2 11.4 1.410.4 18.4 South A`danUc 25.511.4 14.6 30.611.5 16.2 E-N Central 2.319.6 15.5 2.425.7 18.3 E-S Central 17.35.3 8.0 15.25.0 6.9 W-N Central 2.516.4 13.0 2.513.4 9.3 W-S Central 25.79.4 14.0 24.810.5 10.5 Mountain 4.410.9 6.1 4.77.6 3.9 Pacific 20.415.0 12.1 18.113.2 10.6 Total 100.0100.0 100.0 100.0100.0 100.0 SOURCE: Compiled Dom data provided by Peter Kralovec, Hospital Data Center, American Hospital Asso- ciation, Chicago, Ill., 1985. TABLE 2. 6 Distribution of System-Owned Community Hospitals by Size and Type of Ownership, 1983 I-O Chain Beds (N = 515) NFP Chain (N = 1,100) 6- 240.6% 25- 997.2 50- 9929.3 100-19941.2 200-29915.5 300-3993.9 400~991.9 500+0.4 Total100.0 SOURCE: Compiled from data provided by Peter Kralovec, Hospital Data Center, American Hospital Association, Chicago, Ill., 1985. has emerged in large part through the ac- quisition of the smaller chains by larger chains.4 All Hospitals NURSING HOMES (N = 5,783) 2.5% 12.4 18.3 23.6 16.3 10.6 7.6 8.7 100.0 3.9 17.0 24.5 23.9 12.5 7.6 4.7 5.9 100.0 The concentration of ownership within the investor-owned sector is indicated by four corporations owning 66 percent of the inves- tor-owned, NAPPH-affiliated psychiatric hospitals in 1985. Three of the four are pri- mariTy hospital chains-Hospital Corpora- tion of America, National Medical Enter- prises, and Charter Medical. The fourth is Community Psychiatric Centers, which owns no acute care hospitals. This concentration For-profit ownership has Tong been pre- dominant among nursing homes.5 Before the 1930s, people in need of long-term care out- side their homes were admitted to private charitable homes. Demographic changes, the availability of binding Trough the Social Se- curity Act of 1935, subsequent amendments to the act, and the enactment of Medicaid and Medicare stimulated the growth in nursing homes. The number of facilities in- creased from 1,200 in 1939 to nearly 15,000 in 1969, while the United States population increased approximately 50 percent. Much of the growth in nursing homes was in the proprietary sector, which by 1969 had 64.5 percent of nursing home beds (U.S. Na- tional Center for Health Statistics, 19841. During the 1970s the growth in the total number of nursing homes slowed, but the proprietary sector share continued to in- crease. By 1980, 81 percent of the 17,700 nursing homes and 69 percent of the 1.5 million beds were proprietary.

OCR for page 26
OWNERSlIIP CHANGES IN HEALTH CARE Information about the market share of investor-owned nursing homes is made up of approximations. One estimate suggests that between 1979 and 1982 the major inves- tor-owned chains increased their control (owned, leased, and managed) of nursing home beds by 50 percent to more than 200,000 beds, representing roughly 17 per- cent of all nursing home beds. In the investor-owned sector, ownership is concentrated in relatively few corpora- tions. In 1984 the largest system, Beverly Enterprises, operated 950 homes. The three largest systems (Beverly Enterprises, Hill haven- a subsidiary of National Medical Enterprises, and ARA Living Centers) to- gether operated approximately 1,500 homes comprising about 70 percent of the investor- owned nursing homes identified by Modern Healthcare (Punch, 19851. Multi-institutional system growth among not-for-profit nursing homes has lagged sub- stantiaDy behind the investor-owned sector. Investor-owned nursing home systems op- erated six times as many nursing home beds as were operated by not-for-profit systems in 1984. Multihospital systems are rapidly increas- ing their nursing home operations; in 1984 they operated 365 freestanding nursing homes (an increase of 17 percent over a year earlier), of which 127 were operated by investor-owned systems (Punch, 1985~. HEALTH MAINTENANCE ORGANIZATIONS Health maintenance organizations (HMOs) were the first of what is a growing and more varied type of organization that combines the provision of health services with an in- surance function. An HMO plan provides comprehensive health care for a set monthly premium paid to the plan; thus, the plan's income for each member's care is fixed re- gardIess of utilization, and the plan is the risk carrier.6 An HMO can take many forms. The two basic types are the group model, 33 in which the plan hires or contracts with a limited number of physicians to provide care at a central location, and the individual prac- tice mode! in which the plan contracts with physicians who operate out of their offices. In some plans physicians receive a bonus or share in the profits derived from controlling expenses. The first HMO dates back to 1929 when the Ross-Loos Health Plan was organized to provide care for the employees of the Los Angeles water department. During the 1930s and 1940s the precursors of HMOs were established Kaiser Permanente, Group Health Cooperative of Puget Sound, Group Health Association of Washington, and the Health Insurance Plan of Greater New York. But it was not until the 1970s that the HMO concept became widely known and adopted. The federal government stimulated HMO growth with passage of The Health Main- tenance Organization Act of 1973, which re- quired employers to offer local qualified HMOs as an insurance option and provided grants and loans to HMOs to cover devel- opment and initial operating deficits. In 1981 these fiends were terminated, but federal encouragement of HMOs has continued through promotional efforts to generate pri- vate investment. Table 2.7 shows the growth of HMOs from 1970 to 1985 and the recent acceleration in growth, but does not indicate some impor- tant changes that occurred within the HMO sector. Until about 10 years ago for-profit HMOs were a rarity (Hospitals, 1984~. By 1985 there were 136 for-profit plans with almost 3 million enrollees representing roughly 35 percent of all HMO plans and close to 26 percent of enrollees (InterStudy, 19851. Some of the for-profit plans con- verted from not-for-profit status; others were established as for-profits. In 1983 the first stock of a publicly traded HMO company was issued. The first to go public was U.S. Health Care Systems, for- merly not-for-profit, which raised $25 mil- lion in stock offerings. Another former not

OCR for page 26
34 TABLE 2.7 Growth of Health Mainte- nance Organizations, Number of Plans and Enrollees, 1970-1985 Enrollees Plans (millions) June January 1970 1972 1974 1976 1978 1980 1982 1984 1985 26 39 142 175 198 236 265 306 393 2.9 3.5 5.3 6.0 7.3 9.1 10.8 15.1 18.9 SOURCES: Office of Health Maintenance Organi- zations, U.S. Department of Heals and Human Ser- vices, Rochrille, Md.; InterStudy, National HMO Census, 1982, 1984, 1985, Excelsior, Minn. FOR-PROFIT ENTERPRISE IN HEALTH CARE Investment analysts expect the move to- ward more and larger multistate HMO firms to continue, using terms such as "land rush mentality" to descnbe publicly traded HMO firms' efforts to manage, acquire, or start new plans.8 Projections of continued rapid growth in HMO enrollment are common- place and recognize the potential impor- tance of changes that open up the Medicare market to HMOs, which the trade associa- tions anticipate will bring an estimated 20 percent of elderly people into lIMOs (Group Health Association of America, 1984~. Most observers agree that HMOs be they independent physicians' associations or closed-group models have become an ac- cepted way of delivering health care at a savings. The need to gain access to capital to tap the expanding HMO market has led some HMOs to change to for-profit status, in addition to those that started that way. As Iglehart (1984) points out, signs that for- profit organizations will become more im- portant in the HMO arena already exist. So too are signs that a shake-out of weak com- petitors will take place in locales where in- tense competition has developed among multiple HMOs. for-profit, Maxicare Health Plans, raised $16 million on the stock market, and Health America raised $20 million (Washington Re port on Medicine and Health, 1984a). HMO stock issues received favorable reports from Wall Street analysts, quickly followed by ea ger reception from the buying public. By 1984, seven HMO corporations had entered the stock market; all but two were multistate organizations. Multistate organizations are networks of HOME CARE HMO plans linked by ownership or man agement operating in two or more states. There were six such organizations in 1978. In 1983, 14 multistate organizations owned or managed 81 plans that enrolled 7.1 mil lion people 52 percent of all HMO en rolIment.7 The largest by far was not-for profit Kaiser Foundation Health Plan, Inc., with 4.4 rniDion enrollees. For-profit CIGNA with 663,000 enrollees and PruCare with 338,000 enrollees were ranked second and third; both are owned by insurance com panies. Fourth- and fi:Gch-ranked Medicare Health Plans, Tnc., and United Healthcare Corporation have publicly traded stock, as have three other national firms (Baker et al., 19841. Home care services comprise a broad and increasing range of services provided by several different types of personnelaDiliated with thousands of home health agencies. Types of care include skilled nursing, oc- cupational speech and physical therapy, meals, homemaker services, respiratory therapy, and intravenous therapy. Employ- ees include nurses, home health aides, homemakers, and specialists in specific therapies. The organizations that employ these personnel and supply these services are varied. For some, home care is the only line of business. Others combine temporary staffing (nurse and clerical) with home care. Some are affiliated with pharmaceutical manufacturers, some with nursing homes, - . . . . ~,

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE TABLE 2.8 Medicare-Certified Participat- ing Home Health Agencies, 1978 to 1984 1978 1980 1982 1984 Visiting Nurse Association Government Hospital-based Proprietary Private nonprofit Other Total 502515 1,2721,260 316359 145186 NA484 488119 2,7232,923 517525 1,2111,226 507894 6281,569 619756 157277 3,6395,247 SOURCE: Health Care Financing Administration, Health Standards and Quality Bureau, Office of Survey and Certification, Baltimore, Md. some with hospitals, and some with large national hospital corporations. Because of the fragmented and diverse nature of the home care market, no reliable source of aggregate data is available. Med- icare assembles data covering agencies li- censed as Medicare providers, but these data undoubtedly understate the number of home care providers. The dynamic grown in the number of these Medicare-cer~fied agencies (almost doubling between 1978 and 1984) and the growth of the for-profit sector are particu- larly striking trends (Table 2.81. Much ofthis growth predated the likely increased de- mand for home care that Medicare's pro- spective payment methods for hospitalized patients will encourage. The striking in- crease in for-profit agencies (from 186 to 628) between 1980 and 1982 was caused by a change in Medicare reimbursement le~is- lation. Before the Omnibus Reconciliation Act of 1980, for-profits could not get certi- fication in states not having a home health agency licensure law. The removal of this restriction opened up more than 20 states to for-profit home health agencies (Frost and Sullivan, Inc., 1982~. Medicare expenditures on home health care reached $2 billion in 1984. Using a broacler definition that would include du- rable equipment and consumables, a private 35 market research firm estimated the home health market to be $4. 9 billion, growing to $9.4 billion by 1990 (Modern HeaZthcare, 1985a). There are many new providers in the home health care field, apart from the growing number of independent for-profit opera- tions. For instance, major medical supply companies such as Abbott Laboratories and Baxter Traveno! Laboratories are offering home care services in conjunction with their new, high-technology home care products. The nursing home subsidiary of National Medical Enterprises provided home care in 21 locations in 1984, and Beverly Enter- prises, a large nursing home chain, had 134 home care units in 1984. Hospital Corpo- ration of America and American Medical International both entered the home care field in 1984 (Kuntz, 1984; Fackelman, 1985b). The degree of ownership concentration is difficult to estimate. Knowledgeable ob- servers list such investor-owned companies as Upjohn Health Care Services, Personnel Pool of America, Beverly Enterprises, and Quality Care, Inc., as the largest home care providers. The only multihospital system listed among leading providers of home health care in 1984 was National Medical Enter- prises' National Medical Home Care Inc. (Fackelman, 1985b). NEW TYPES OF PROVIDERS For-profit organizations have been prom- inent in the newer settings for health care, such as freestanding ambulatory surgery centers and freestanding primary care cen- ters. Both types were started by entrepre- neurial physicians to compete with hospitals and physicians. Now such ambulatory facil- ities are increasingly being created by, or coming under the control of, hospitals and multihospital systems, both investor-owned and not-for-profit. Ambulatory surgery sometimes called one-day surgery, same-day surgery, or in- out surgery-consists of surgical procedures

OCR for page 26
36 TABLE 2.9 Number of Freestanding Surgery Centers and Surgical Operations, 1970~1990 Number of Centers Number of Operations 1970 1975 1980 1985a 1990a 3 41 128 428 832 6,700 20,000 33,300 743,400 1,932,700 aEshmated. SOURCE: Compiled from data in Henderson (1985:148). performed without an overnight stay in a hospital. Freestanding ambulatory surgery centers have, on average, three operating rooms and perfo~ nearly 2,000 surgical procedures annually most often gyneco- logical surgery (Henderson, 1985). Hospi- tals also are heavily involved in ambulatory surgery. In 1983 nearly 90 percent of com- munity hospitals had outpatient depart- ments equipped for such procedures (Demkovich, 19831. Several factors have stimulated the growth of ambulatory surgery: technological ad- vances such as fast-acting anesthetics and new surgical methods, cost containment concerns, the expansion of insurance cov- erage for outpatient surgery, and the pref- erences of consumers. The first such center opened in 1967, but failed because of lack of physician and reimbursement support. Three years later three centers opened. Growth was slow through the mid-1970s, but by 1980, 128 ambulatory surgery cen- ters were counted nationally. A private mar- ket research firm estimates that 114 new freestanding surgery centers will become operational in 1985, for a total of 428 such facilities (see Table 2.9) (Henderson, 1985~. More than 90 percent offreestanding sur- gery centers are for-profit enterprises, even when operated by not-for-profit hospitals (Bernard Kerschner, President, Freestand- ing Ambulatory Surgery Association, Dal FOR-PROFIT ENTERPRISE IN HEALTH CARE las, Texas, personal communication, 1985). Freestanding surgery centers affiliated with hospitals (which excludes outpatient surgery programs operated on the hospital campus) constitute 7 percent of all freestanding sur- gery centers (Henderson, 1985); indepen- dently owned (nonchain) surgery centers make up 65 percent. Some formerly inde- pendent surgery centers have been ac- quired by corporations, and today, through construction and acquisition, corporations owning more than one center hold 28 per- cent of all freestanding surgery centers. The corporate sector, with 150 surgery centers open or under development, is composed of 10 firms (Henderson, 19851. More than one-third of corporate centers are owned by one company Medical Care International, which was formed in 1984 by the merger of Medical 21 and Surgicare Inc. Medical Care International's 56 centers performed 13 per- cent of all surgeries in freestanding centers during 1984. Future growth of freestanding surgery centers is uncertain. Although a private market research firm predicts double the number of such centers over the next five years (Henderson,.1985), aggressive com- petition by hospitals is a limiting factor, and freestanding surgery centers without hos- pital affiliation could decrease as hospitals develop their own centers and buy existing centers. - Freestanding Primary Care Centers Freestanding"primary care" (or "urgent care") centers have proliferated during the last decade. Urgent care centers generally operate as a private physician's office (in terms of licensure) and provide 12 or more hours of service per day, 365 days a year.9 Ap- pointments are not needed, waiting times are short, charges are usually lower than hospital emergency room charges, and the centers often are located in shopping malls or high-population areas. The earliest centers were generally owned

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE TABLE 2.10 Growth of Freestanding Urgent Care Centers, 1982-1990 Year Number of Centers 1982 1983 1984 1985a 199Oa 600 1,200 2,300 3,000 5,500 aEstimated. SOURCE: National Association for Ambulatory Care (1985). by physicians. Today they are increasingly owned wholly or in part by hospitals or hos- pital chains, and they now typically style themselves as urgent care or primary care centers rather than emergency centers, their original appellation. The name change is in part a response to the criticism that patients in need of emergency care, such as victims of major trauma or patients suffering heart attacks, would inappropriately seek care in "emergency" centers, which generally are not equipped or staffed to handle such cases, rather than in hospitals. In part the change in name is to emphasize the type of care they do provide treatment for minor med- ical problems and injuries, immunizations, and preemployment physicals. The centers once were staffed by emergency and family- practice physicians, but today specialty phy- sicians such as pediatricians and orthoped- ists are also employed, and the range of services has been expanded to encompass many primary care activities. The first freestanding"emergicenter" opened in 1973. Growth has been rapid (see Table 2.10~. By mid-1985, 2,600 centers were operational and another 400 were expected to be functional by the end ofthe year. How- ever, the short period of extraordinary grown, when the numbers doubled each year, may be over. Trade sources expect that the number of urgent care centers will increase by fewer than 100 percent between 1985 and 1990 (National Association for Am- bulatory Care, 19851. 37 The growth of this new practice form has its roots in several causes. Initially, entre- preneurially inclined physicians identified a service that was attractive to consumers from a standpoint of cost and convenience. The growing physician surplus has made tradi- tional solo practice more risky and difficult and salaried positions in organized settings more attractive. Hospitals (and hospital companies) became involved in the opera- tion of urgent care centers either as a com- petitive response or to secure a flow of patients into the hospital. The ownership of the urgent care centers that exist today has been the subject of con- flicting estimates. One study found that physicians own 73 percent of centers, hos- pitals own 7 percent, and corporations that are controlled by neither hospitals nor phy- sicians own the rest; another estimate puts hospital ownership or affiliation of urgent care centers at 25 percent (Washington Re- port on Medicine and Health, 1984b). A sur- vey of almost 4,000 nonfederal physicians in 1983 found that half who provided care at urgent care centers said He center was owned by a not-for-profit hospital (American Med- ical Association, 1983~. Of the 455 centers that responded to a National Association for Ambulatory Care (1985) survey, almost 40 percent were physician-owned and 42 per- cent were nonphysician corporations. The latter group was identified as a growing group, and a change from the physician-owned, for- profit centers that were characteristic of the early years. There are also reports of for-profit chain ownership. Modern Healthcare identified 44 chains (excluding multihospital systems) that operated a total of 260 freestanding ur- gent or primary care centers in 1984. These chains were generally small; only eight chains operated 10 or more centers. The largest chain, Doctor's Officenters, with 51 centers, was acquired by Humana at the end of 1984. Humana already operated centers under the MedFirst name and, with a total of 144 cen- ters, is the largest operator of Deestanding

OCR for page 26
38 urgent or primary care centers in the coun- try (Wallace, 1985~. Thus, this rapidly grow- ing health care sector remains highly Dagmented in terms of ownership, and for- profit status is likely to remain dominant because even the centers operated by not- for-profit hospitals are after for-profit enter- prises. Other Services For-profit ownership is prominent among freestanding dialysis centers. It is now nearly two decades since dialysis emerged from its experimental state and more than a decade since the Medicare program started to pay for it. Although a market for dialysis services existed before the introduction of Medicare coverage in 1972 (National Medical Care, the oldest for-profit dialysis provider, was formed in 1968), it was small. With the advent of Medicare coverage the dialysis market began its rapid expansion. Medicare enrollment grew from 1S,000 in 1974 to 78,479 at the end of 1984. Medicare expenditures for dialysis grew from $229 million in 1974 to $1.6 billion by 1984, and the number of facilities providing dialysis rose from 606 in 1973 to 1,290 at the end of 1984 (Committee on Government Op- erations, 1982; Health Care Financing Ad- ministration, personal communication, 1985; Gibson and McMullan, 19841. In 1973 only 11 percent (66 of 606) of all dialysis centers were freestanding. The remainder were hospital units or hospital satellites. As the Medicare End-Stage Renal Disease Pro- gram increased its enrollment, the major growth in dialysis suppliers was in free- stancling units. In 1984, 52 percent (668 of 1,290) of dialysis facilities were freestand- ing, and 79 percent of freestanding units were propne~ry. Overall, 42 percent of renal facilities were proprietary in 1983 (com- pared with 30 percent in 1980), almost all of them freestanding centers (Table 2.11) Modern Healthcare identified nine chains that operated dialysis centers in 1984, of FOR-PROFIT ENTERPRISE IN HEALTH CARE which three were not-for-profit. The two largest chains were for-profit: National Med- ical Care Inc. (recently bought by W. R. Grace, a large chemical and natural re- sources conglomerated is overwhelmingly the largest, with 178 centers treating 14,000 pa- tients in 1984 nearly 18 percent of the Medicare dialysis population. Second-ranked Community Dialysis Centers, Inc., is a wholly owned subsidiary of Community Psychiatric Centers, with 47 centers. Third- ranked was not-for-profit Dialysis Clinics Inc., with 27 centers. Most of the major chains have shown substantial growth during the past eight years, and with certificate-of-need laws being relaxed in some states and the number of dialysis patients expected to grow by between 5 and 11 percent next year, di- alysis is seen as a steady-growth field (Rich- man, 1985~. For-profit enterprises are also involved in other new forms of care once provicled on a not-for-profit basis. Cardiac rehabilitation, physical rehabilitation, and diagnostic im- aging are among the services that for-profit organizations are finding new ways to de- velop often in freestanding facilities. For- profit examples include C. P. Rehab, which owns cardiac rehabilitation centers; Rehab Hospital Services; Vari-Care Inc., a nursing home company that has established reha- bilitation programs; and Diagnostic Centers Inc., a subsidiary of Omnimedical, designed to set up diagnostic radiology centers throughout the United States. For-profit companies are opening other new services in new settings. There are no data concern- ing the range or extent of this movement, but it includes sports medicine, obesity cTin- ics, executive heady services, and weliness programs. Some of these services are pro- vided on a freestanding for-profit basis, but others are provided by not-for-profit and for- profit hospitals, and some are being devel- oped by for-profit and not-for-profit hospital systems. For-profit activity has also begun in two somewhat surprising areas: hospice care and

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE 39 TABLE 2.11 Number of Medicare-Certified End-Stage Renal Disease Providers by Type of Ownership and Type of Facility, 1980-1984 980 1982 1984 Number Percent Number Percent Number Percent - A11 facilities 1,703 100.0 1,218 100.0 1,290 100.0 Proprietary 323 30.1 437 35.1 544 42.2 Hospital-based 23 2.1 14 1.8 15 1.2 Freestanding 300 28.0 423 33.3 529 41.0 Not-for-pro~t 750 69.9 781 64.9 746 57.8 Hospital-based 620 57.8 677 56.9 607 47.0 Freestanding 130 12.1 104 8.5 139 10.8 SOURCES: Gibson and McMullan (1984~; Health Care Financing Administration, personal communication, 1985. birding centers. In 1984, Hospice Care, Inc., started with $5 million in capital from two investment houses, announced plans to manage 12-15 new hospices around the country (Health Policy Week, 19841. In an- other move that put a previously not-for- profit service into the for-profit field, EIealth striations. Resources Corporation, Inc., acquired a consulting company that is developing birth- ing centers as joint ventures with obstetri- cians. Also, a for-profit hospital chain and a number of venture capital companies have attended workshops on birthing centers (Lubic, 19841. Such interest could translate into for-profit birthing centers. VERTICAL INTEGRATION AND DIVERSIFICATION lye previous discussion suggests that hos- pitals have increasingly become involved in nonhospital activities. Movement to encom- pass other levels of care is commonly called vertical integration, because it entails care that often precedes or follows hospitalization (e.g., primary care; after-hospital care in the patient's home, nursing home, and other sites; and other services). Diversification re- fers to selling of other services such as con- tract management or the addition of nonhealth businesses. Vertical integration and diversification can protect organizations from uncertain flows of inpatient revenues by generating new revenue sources. Verti- cal integration can help control the flow of patients and dollars into hospitals, thereby capturing patients, dollars, and growth op- portunities that might be lost to competing r . ~ providers or because ot reimbursement re Vertical integration is increasing at the multihospital system level, with corpora- tions acquiring or developing divisions for nonhospital functions. Vertical integration is also occurring at the local level with inde- pendent hospitals branching into nonhos- pital activities. At the overlap between financing and services delivery, systems and independent hospitals are diversifying into HMOs and preferred provider arrange- ments. These changes are responses to changes in the health care environment. Individual hospitals as well as members of multihos- pital systems are wInerable to pressures that are causing their occupancy rates to drop. Cheaper, more convenient ambulatory ser- vices are keeping some patients away. Pro- spective payment is reducing the length of stay. Cost-sharing insurance contracts are causing patients to reduce Heir out-of-pocket expenses by seeking lower-cost forms of care and by cutting hospital stays. By expanding into outpatient services, systems and hos- pitals receive revenues that might otherwise go elsewhere; they also create feeder ser

OCR for page 26
40 vices for their hospitals. By expanding into after-hospital care (nursing homes, home care, etc.), hospitals can discharge patients as soon as is medically reasonable, thus min- imizing the cost incurred under the hospital DRG (diagnostic-related group) while the patient continues to be revenue-producing in the home care or nursing home setting. By expanding into psychiatric care, hospitals can serve patients for whom payment is gen- erally not under prospectively set rates. A 1981 study noted that vertical integra- tion was more common in not-for-profit than for-profit systems because of the former's greater emphasis on providing comprehen- sive services in a locality. Regarding di- versification, the study noted that not-for- profit had moved more into selling manage- ment services while for-profits were more into contracts for ancillary services (Derzon et al., 19811. The extent of vertical integration is not well documented, but there is anecdotal ev- idence that it is an increasing phenomenon among systems and independent hospitals. At the system level (for-profit and not-for- profit), Mourn Hea7;thcare (1985b) identi- fied the following in 1984: 27 multihospital systems operating one or more psychiatric hospitals 98 multihospital systems operating one or more nursing homes 27 multihospital systems operating one or more lifecare centers 15 multihospit~ systems operating one or more HMOs 1,322 freestanding facilities (surgery, urgent care, diagnostic, weliness, rehab centers, etc.) operated by multihospital sys- tems. The major for-profit multihospital cor- porations remain, however, engaged mostly in providing acute hospital care. Of the ma- jor corporations, National Medical Enter- prises is mostdiversified, deriving only about half of its operating revenues from general hospital and primary care services (National FOR-PROFIT ENTERPRISE IN HEALTH CARE Medical Enterprises, Inc., 1984~. At the other end of the spectrum is the Hospital Cor- poration of America, whose 360 owned and managed general hospitals and 27 psychi- atric hospitals provided 95 percent of its rev- enues in 1984 (Hospital Corporation of America, 1985), a picture that seems certain to change. The eight largest investor-owned hospital corporations combined present an interest- ing picture of vertical integration. In 1983 they owned and operated the following (Federation of American Hospitals, Hospital Management Company Facilities by Line of Business, unpublished data, 19841: 426 acute care hospitals 102 psychiatric hospitals 234 hospital management contracts 163 medical office buildings 89 ambulatory care centers 34 substance abuse/alcohol centers 272 long-term-care units 38 home health agencies 62 dialysis centers 32 clinics 103 pharmacies 3 radiology units 2 medical laboratories 1 freestanding diagnostic center. Although some investor-owned corpora- lions have had a degree of apparent vertical integration at the system level for some time, this has not necessarily affected patient flow into and out of their local hospitals. Patient flow is affected not merely by ownership of nonhospital services but also by close phys- ical location and coordination of services. There are indications, however, that some investor-owned corporations are moving to- ward closer integration of services, a de- velopment that fixed-payment systems encourage. For example, National Medical Enterprises has initiated the building of medical "campuses," with many compo- nents of a continuum of care located to- gether (Washington Report on Medicine and Health, 1983~. Humana's MedFirst urgent

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE care centers, originally built away from Hu- mana hospitals, are now being constructed within their hospital service areas to act as feeders for inpatient care. HCA is building psychiatric "pavilions" on their own hospital grounds. Among not-for-profit hospitals and sys- tems, some vertical integration and diver- sification efforts have been facilitated by membership in alliances such as American Healthcare Systems and Voluntary Hospi- tals of America. The latter has developed a design for ambulatory surgery centers to re- duce construction and operating costs for its members and has created VHA Health Ven- tures-to help members vertically inte- grate, and Voluntary Health Enterprises- to give members engaged in diversification activities access to equity markets (Volun- tary Hospitals of America, undated). Hospital systems are also increasingly in- tegrating provider and financing functions (by means of HMOs, preferred provider ar- rangements, or other insurance vehicles) in the hope of generating revenues and of cap- turing patient populations for their hospi- tals. Humana led the investor~wned industry with its HumanaCare Plus program, under which Humana assumes the actuarial risk for emIoyees' health benefit plans, guaran- teeing employers a fixed health care pre- mium cost for one year and limited increases of no more than the increase in the Con- sumer Price Index for Free years. Patients can choose their physicians, but are penal- ized for use of non-Humane hospitals by heavy out-of-pocket expenses. Similar or re- lated developments can be seen at the other major investor-owned hospital chains Trough the development of preferred provider ar- rangements, acquisition of HMOs, purchase of insurance companies, and so forth (Mod- em Heatthcare, 1985c; Hospital Corpora- tion of America, 19841. Such activities are not confined to the investor-owned sector. For example, the Health Central Corpora- tion owns an insurance company, St. Joseph Health System has purchased an HMO, and 41 Adventist Health System North is conduct- ing a joint venture with a for-profit HMO (Washington Report on Medicine and Health, 19851. The assumption of risk by hospitals and hospital chains is of major potential impor- tance because of the departures from the traditional incentives under which hospitals operate and because of the increases it en- tails in the size and scope of health care organizations. FOR-PROFIT/NOT-FOR-PROFIT HYBRIDS The discussion thus far has been couched in terms of not-for-profit as contrasted with for-profit organizations. Although this is an important distinction, the lines between the two types of organizations cross at numerous points, and at the crossover points new types of hybrid organizations are emerging. For He purposes of this section they are grouped into management contract arrangements, hybrids that emerge from corporate restruc- turing, alliances formed to help indepen- dent voluntary hospitals reap the benefits of multi-institutional arrangements, and joint ventures. The hybrids are often examples of diversification. . In general, the new, complex hybrid or- ganizations are designed to bring to one sec- tor some of the advantages of the other. Hybridization may become increasingly im- portant as competitive pressures grow and access to resources such as capital and per- sonne! become crucial to maintaining or in- creasing market share. The most familiar of these crossover points occurs in contract management. According to Modern Heatthcare, 76 multihospital sys- tems had contracts to manage 537 hospitals in 1984. Investor-owned systems managed 137 not-for-profit hospitals, but not-for-profit systems managed only 1 for-profit hospital. Public hospitals managed under contract numbered 288, of which 53 percent were under investor-owned management Uohn

OCR for page 26
42 son, 1985~. Contract management of inde- pendent hospitals by systems brings the management concepts, skills, and systems of the multi-institutional sector to troubled hospitals, while more or less preserving the goals and autonomy of the employing hos- pital. A closer linkage of for-profit and not-for- profit forms is seen in the establishment of for-profit subsidiaries by not-for-profit hos- pital corporations. The mechanism usually used to accomplish this is corporate restruc- turing, described as "the conversion of a not-for-profit hospital operating corporation into a multiple-corporation system or a net- work of related corporations for strategic purposes" (Bryant, 1981~. Corporate re- structuring involves the unbundling of ser- vices into separate organizations under an umbrella parent organization. Not-for-profit corporations can create for-profit companies under the not-for-profit umbrella. Corpo- rate restructuring has been used for a num- ber of reasons. One frequently cited reason is to enable hospitals to diversify into both health and nonhealth areas, thus increasing revenue flows. Another is to gain access to equity markets. Hospitals have built parking lots and physician offices, sold services to physicians and other hospitals, and invested in housing for the elderly, supermarkets, and many other activities. There are no data available on the number of not-for-profit hospital corporations with for-profit subsidiaries, but examples are le- gion. One is Roanoke Memorial Hospital Association, which operates for-profit sub- sidiaries that include a collection agency, a long-term-care center, an air ambulance service, and widely dispersed real estate op- erations (Kidwell, 1983~. Another is not-for- profit Lutheran General Hospital in Illinois, which runs for-profit Parkside Medical Ser- vices Corporation, a consulting and man- agement company that also owns or manages freestanding alcohol treatment centers and performs numerous other Unctions (La- Violette, 1983~. FOR-PROFIT ENTERPRISE IN HEALTH CARE Multi-institutional systems can also be hy- brids. Not-for-profit Intermountain Health Care Inc. operates five for-profit subsidi- aries that include insurance, shared ser- vices, and professional services businesses. One subsidiary, Golden Valley Care Unit, takes the notion of hybridization a step be- yond the creation of for-profit subsidiaries into joint for-profit, not-for-profit owner- ship. This subsidiary is a "behavioral med- icine hospital" owned jointly with CompCare, a major investor-owned company (Gray, 1985~. Intermountain also has a joint ven- ture with the Hospital CoIporation of Amer- ica for operation (and ultimate replacement) of two hospitals in one community. Memorial Care Systems in Texas, a multi- institutional not-for-profit system, has been described as "a labyrinth of companies." It controls a not-for-profit subsidiary that acts as the parent's investment arm. This sub- sidiary formed for-profit Health Ventures, offering shares to physicians who are mem- hers of Memorial Health Net Providers, an- other subsidiary of Memorial Care Systems. Holders of Health Ventures preferred stock can convert to common stock if He company goes public, as intended. Other activities of Memorial Care Systems' subsidiaries in- clude third-party claims administration, a real estate company, and developing and managing surgery and urgent care centers (Tatge, 1984a). These for-profit/not-for-profit hybrids permit diversification to control lo- cal markets, to achieve new revenue sources outside of core inpatient care activities, and to raise capital. The effect on institutional behavior has received little study. Another example of a hybrid is designed to bring to independent not-for-profit hos- pitals some of the advantages of member- ship in a multihospital system without sacrificing institutional autonomy. Volun- tary Hospitals of America Inc. (VHA) is a for-profit company whose member share- hoIclers include more than 70 large not-for- profit hospitals and medical centers. VHA's companies and subsidiaries (all for-profit)

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE provide members and affiliates with man agement services, and access to capital, and engage in their own entrepreneurial activ ities. The complex structure of VHA in cludes VHA Management Services (a subsidiary that developed VHA Regional Healthcare Partnerships), which sells ser vices to members and affiliates. Voluntary Health Enterprises (VHE) is a holding com pany created by VHA and a New York fi nancial services company. VHE privately sold $11 million in common stock to finance a number of activities, including a VHE sub sidiary that offers consulting and equity in vestment in ambulatory surgery centers. Behavioral Medical Care is a joint venture of VHE with Comprehensive Care Corpo ration which operates alcohol treatment centers and provides related consulting and staffing services. American Health Capital, Inc., formed in conjunction with the MeHon Bank, is a subsidiary of VHA that, with itsSeveral major shifts are taking place si subsidiaries, helps members meet capitalmultaneously in the ownership, control, and needs and offers real estate developmentconfiguration of health care organizations. and a syndication. Other services availableInitiation of some of these changes took place from VHA include physician recruitment andin for-profit organizations; others in not-for a telecommunications network (Tatge, 1984b;profit. Some changes were direct responses Voluntary Hospitals of America, undated).to government actions; some were stimu In short, VHA offers member hospitals alated by other factors. wide array of services that members of multi-From the many organizational responses institutional systems often receive from theirto the change in environment, some general home office management. A total of 31 not-for-profit multihospital systems have become shareholders in a sim ilar sort of alliance, American Healthcare Systems (AHS). AHS is a for-profit corpo ration with divisions for centralized pur chasing and shared services, the development of new businesses, and access to capital through multihospital bond issues and stock offerings. AHS describes its purpose as "to improve the competitive and economic po-concentration varies among different types sition of our shareholders." To do that, itof providers, but in most cases the largest says, "we treat the business of health carechains are for-profit. like a business. We run lean, we manage tough and we retain control of community health at the local level" (American EIealth care Systems, undated). 43 One further example of emerging hybrids is joint ventures between for-profit and not- for-profit entities. For example, a for-profit surgery center chain, Medical Care Inter- national, is engaged in a joint venture with Mission Services Corp. (operated by the Daughters of Charity, St. Vincent de Paul) to clevelop and construct freestanding arn- bulatory surgery centers. A 1984 American Hospital Association survey of hospitals regarding 10 types of jolt ventures found that 12 percent of hospitals had such ventures. The most frequently re- ported type was for preferred provider or- ganizations. Hospitals in large cities were most likely to engage in joint ventures, sug- gesting that competition plays an important role (Morrisey and Brooks, 19851. CONCLUSIONS trends can be identified. First, there is a tendency toward consolidation of health care providers into larger organizations. This is seen in the emergence of the large investor- owned and the smaller not-for-profit multi- institutional organizations, and it is seen in the emergence of chains of varying size in almost every provider field, from primary care centers to nursing homes, and from dialysis centers to HMOs. The decree of A second trend is the development of new services or traditional services in new set- tings, often led by entrepreneurial physi- cians. (Issues of control and conDict of interest

OCR for page 26
~4 of physician involvement in for-profit en- terprise are examined in Chapters 8 and 9.) A subsequent stage of development of these seances occurred as hospitals entered new fields to protect their own interests and to ensure a flow of patients and revenues into their facilities. lhe spread of hospital control to nonhos- pital activities exemplifies a third trend- vertical integration and diversification of hospitals and multihospital organizations. This, like the combining of insurance and provider functions, has occurred as hospitals have recognized that inpatient care services have become a less-reliable revenue source, with prospective payment reducing occu- pancy rates, competition cutting pnces, and outpatient services drawing patients away from inpatient services. Finally, a pervasive trend is the increas- ing for-profit presence in almost all forms of health care. In some, such as nursing homes and Freestanding surgery centers, for-profits are the dominant form. In others, such as dialysis and home care, for-profit is a very substantial presence. An adjunct to the pro- liferation offor-profit activity is the creation of not-for-profit/for-profit hybrids, which bring to the not-for-profit form the advan- tages of the for-profit form (particularly ac- cess to equity capital) and which may be regarded as the not-for-profit way of circum- venting some of the disadvantages of the not-for-profit status. NOTES The number of investor-owned hospitals as re- ported by the Federation of American Hospitals (the trade association of investor-owned hospitals) exceeds the number reported by the American Hospital As- sociation. Each organization collects its own data, and the reasons for the discrepancies are not known. 2The six companies are Hospital Corporation of America, Humana, American Medical International, National Medical Enterprises, Republic Health Cor- poration, and Charter Medical. 31he membership of the rational Association of Pri- vate Psychiatric Hospitals excludes hospitals whose main business Is substance abuse, hospitals that are not ac FOR-PROFIT ENTERPRISE IN HEALTH CARE credited by the loins Committee on Accreditation of Hospitals UCAH), and hospitals whose patients are not admitted by a physician. 4Hospital Corporation of America acquired the ma- jority of its psychiatric hospitals through the purchase of Hospital Affiliates International in 1981. National Medical Enterprises acquired almost all of its psychi- atric hospitals when it bought Psychiatric Institutes of America in 1982 (Levenson, 1983~. 51he following discussion of nursing homes is de- rived from Hawes and Phillips (1986~. 6Several new organizational florins that combine pro- vider and insurance functions are proliferating. Hos- pitals are providing or purchasing insurance capability, and preferred provider organizations are bringing to- gether purchasers (employers and insurers) with sellers Hospitals and doctors) in negotiated arrangements where the price of care for groups is agreed upon. The key elements of these organizations include a contract be- tween payers and providers and the need for utilization control to gain control of expenses. 7Blue Cross/Blue Shield HMOs are excluded from the count of national firms because they do not operate as a centralized system. In 1983 these HMOs ac- counted for 11 percent of all HMO enrollees and 20 percent of all plaits. Multistate HMO firms enable employers active in more than one state to contract with a single, central- ized HMO entity an important advantage in a sector in which the vast majority of contracts are employer- related. Other advantages of the multistate network firm include possible economies of scale and access to the lower-cost capital available to larger organizations. sin some states there are moves to bring primary care centers under certificate-of-need review and to develop licensing standards. Three states require li- censure of He centers if the name or advertising claims to provide emergency care. Five states are expanding certificate-of-need programs to include primary care centers. REFERENCES American Healthcare Systems (undated) The Positive Alternative for Not-ForProfit Hospitals. San Diego, Calif.: American Healthcare Systems. American Hospital Association (1984) Hospital Sta- tistics. 1984 Edition. Chicago, Ill.: American Hospital Association. American Medical Association (1983) Changing Medical Practice Arrangements. SMS Report 2(November). Baker, Noel, Jeanne McGee, and Maureen Shadle (1984) HMO Status Report 1982-1983. Excelsior, Minn.: InterStudy. Bryant, Edward L., Jr. (1981) The Financial Ex- change. Trustee 34(November):11-12.

OCR for page 26
OWNERSHIP CHANGES IN HEALTH CARE Committee on Government Operations (1982) Man- agement ofthe End-Stage Rena1 Disease Program. House Report No. 97-918. Washington, D.C.: U.S. Govern- ment Printing Office. Demkovich, Linda E. (1983) AMA, Government Of- ficials Skeptical of"Convenience Medicine" Facilities National Journal 15 (November 26~:2470-2473. Derzon, Robert, Lawrence S. Lewin, and l. Michael Watt (1981) Not-for-profit Chains Share in Multihos- pital System Boom. Hospitals 55(May 16~:65-71. Fackelman, Kathy A. (1985a) Number of Beds Rises as Demand Increases. Modern Healthcare 15June 7):120-123. Fackelrnan, Kathy A. (1985b) Top Firms Guarded Market Share in '84. Modern Healthcare 15June 7~:160 161. Federation of American Hospitals (1980) 1981 Di- rectory of Investor-Owned Hospitals and Hospital Management Companies. Little Rock, Ark.: Federation of American Hospitals. Federation of American Hospitals (1984) 1985 Di- rectory, Investor-Owned Hospitals and Hospital Man- agement Companies. Little Rock, Ark.: Federation of A~neric;an Hospitals. Frost and Sullivan, Inc. (1982) Home Health and Hospital Temporary Staffing. New York: Frost and Sul- livan, Inc. Gibson, David, and Michael McMullan (1984) End- stage Renal Disease: A Profile of Facilities Furnishing Treatment. Health Care Financing Renew 6(Winter3:87 90. Gray, Bradford H. (1985) Overview: Origins and Trends [of the New Entrepreneurialism in Health Care]. Bulletin of the New York Academy of Sciences 61Jan- Feb):7-~. Group Health Association of America (1984) 40 Mil- lion HMO Enrollees by 1990 Says Study. Group Health News 25(November):3~. Hawes, Catherine, and Charles D. Phillips (1986) The Changing Structure of the Nursing Home Industry and the Impact of Ownership on Quality, Cost, and Access. This volume. Health Policy Week (1984) For-profit Hospice Stirs Controversy. February 6. Henderson, John (1985) Surgery Centers May Dou- ble: Consultant. Modern Healthcare 15Qune TJ:148- 150. Hospital Corporation of America (1984) Annual Re- pore. Nashville, Tenn.: Hospital Corporation of Arner- ica. Hospital Corporation of America (1985) Form OK for year ending December 31, 1984 (filed with the Securities and Exchange Commission in Washington, D.C.~. Nashville, Tenn.: Hospital Corporation of America. Hospitals (1984) Investor-owneds Enter Not-for- profits' Bastion. 58(Apnl 16):100-101. 45 Hoy, Elizabeth W., and Bradford H. Gray (1986) Trends in the Grown of the Major Investor-Owned Hospital Companies. This volume. Iglehart, John K. (1984) HMOs (For-Profit and Not For-Profit) on the Move. The New England Journal of Medicine 310(May 3~:120~1208. InterStudy (1985) HMO Summary, 1985. Excelsior, Minn.: InterStudy. Johnson, Donald E. (1985) Investor-owned Chains Continue Expansion, 1985 Survey Shows. Modern Healthcare 15Qune 7~:75-90. Keenan, Carol (1981) Not-for-profit Systems Position Themselves to Meet Upcoming Challenges. Hospitals 55(September 1~:77-80. Kidwell, Roland (1983) RMH: A Growing Concern. Roanoke Tiaras and World News (May 8~:A-15. Kuntz, Esther Fritz (1984) For-profits Adding Home Healthcare to Aid Bottom Lines. Modern Healthcare 14(May 15~:168-184. LaViolette, Suzanne (1983) Parkside Is 'for-profit' in Name Only. Modern Healthcare 13~0ctober):34 35. Levenson, Alan I. (1983) Issues Surrounding the Ownership of Private Psychiatric Hospitals by Inves- tor-Owned Hospital Chains. Hospital and Community Psychiatry 36(December): 1127-1131. Levenson, Alan I. (In press) The For-Profit Move ment. In S. Shar~stein and A. Beigel feds.) Prospective Payment and Psychiatric Practice. Washington, D.C.: American Psychiatric Press. Lubic, Ruth Watson (1984) Presentation by the Gen eral Director, lbe Maternity Association, New York, before the Institute of Medicine's Committee on the Implications of For-profit Enterprise in Health Care, March 15, Washington, D.C. Modern Healthcare (1985a) Home Healthcare Sales Will Hit $9.4 Billion by 199~Study. 15(May 24):86. Modern Healthcare (1985b) Multi-unit Providers, 15Qune 7):75-160. Modern Healthcare (1985c) NME Introduces MediGap to Fend OF HMO Competition. 15(May 29):100. Morrisey, Michael A., and Deal Chandler Brooks (1985) Hospital-physician Joint Ventures: Who's Doing What. Hospitals 59(May 1~:74-78. Mullner, Ross, and Jack Hadley (1984) Interstate Variations in the Growth of Chain-owned Proprietary Hospitals, 197~1982. Inquiry 21(Summer):144-151. National Association for Ambulatory Care (19853 FEC Factor II. Dallas, Tex.: National Association for Am- bulatory Care. National Medical Enterprises, Inc. (1984) Annual Report 1984. Los Angeles, Calif.: National Medical En- terprises, Inc. Punch, Linda (1985) Investor-owned Chains Lead Increase in Beds. Modern Healthcare 15Qune 7~:126- 136. Richman, Dan (1985) Most Chains Report More Pa

OCR for page 26
46 tients, Profit. Modern Healthcare 15June 1~:158-159. Steinu aid, Bruce, and Duncan Neuhauser (1970) The Role of the Proprietary Hospital. Law and Contem- porary Problems 35(Autumn):817-838. Tatge, Mark (1984a) Memorial Sells Stock to Phy- sicians and Shelters Earnings from Taxes. Modern Healthcare 14(May 1):104-106. Tatge, Mark (1984b) Stock Deal Finances VHA Fields. Modern Healthcare 14(June):147-148. U.S. National Center for Health Statistics (1984) Trends in Nursing and Related Care Homes and Hos- pitals. Vital and Health Staffs, Series 14, No. 30, DHHS Pub. No. (PHS)84-1825. Washington, D.C.: U.S. Government Printing Office. Voluntary Hospitals of America (undated) The Fu- ture of America's Realm Care. Dallas, Tex.: Voluntary Hospitals of America. Wallace, Cynthia (1985) Ambulatory Care Facilities Multiply. Modern Healthcare 15June 7~:142-146. Washingon Report on Medicine and Health (1983) Vertical Integration: One Response to DRGs. Per- spectives, September 26. Published as a supplement to Medicine and Health. Washington, D.C.: McGraw- Hill. FOR-PROFIT ENTERPRISE IN HEALTH CARE Washington Report on Medicine and Health (1984a) Integration, Conversion Mark HMO Growth. Per- spectives, April 23. Published as a supplement to Med- mne and Health, Washington, D.C.: McGraw-Hill. Washington Report on Medicine and Health (1984b) DRGs Boost the Emergicenter Boom. Perspectives, March 26. Published as a supplement to Medicine and Health, Washingon, D.C.: McGraw-Hill. Washington Report on Medicine and Health (1985) Provider-based Insurance. Perspectives, April 1. Pub- lished as a supplement to Medicine and Health. Wash- ingon, D.C.: McGraw-Hill. Watt, J. Michael, Steven C. Renn, James S. Hahn, Robert A. Derzon, and Carl I. Schramm (1986) The Ejects of Ownership and Muldhospital System Mem- bership on Hospital Functional Strategies and Eco- nomic Performance. This volume. Zuckerman, Howard S. (1983) Industrial Rabonali- zation of a Cottage Industry: Multi-Institutional Hos- pital Systems. Annals of the American Academy of Political and Social Sciences 468(July):216-230.