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For-Profit Enterprise in Health Care. 1986. National Academy Press, Washington, D.C. Hospitals and Their Communides: A Report on Three Case Studies Jessica Townsend The Institute of Medicine's (IO~M's) Com- mittee on the Implications of For-Profit En- terprise in Health Care reviewed and commissioned studies that use numerical data and statistical analysis to enhance understand- ing of the impact of for-profit providers on numerous aspects of the nation's health care system and those who use it. These studies quantify similarities and differences among health care providers of different ownership types. But observations derived from aggre- gated data cannot show how organizations in- teract at the community level. Nor can such data show how differences among providers affect other providers and residents of com- munities, or the dynamics of interactions among the diverse elements that comprise local health care systems. To help fill some of these gaps, the IOM committee conducted three case studies in 1984, using site visits by committee members and stab. These studies were designed to il- luminate several topics of interest to the com- mittee. Two questions were of primary interest: in communities, what differences and similar- ities can be observed among health care or- ganizations of different ownership types? What are the effects of the introduction of for-profit providers on a community's other health care providers and on those who seek care? Other topics that flow from these two questions relate to changes in the financial status of provider organizations, changes in the cost and quality of care and in access to care, changes in the competitive environment in the communities, and changes in relationships among physicians and institutions. Ms. Townsend is a professional associate with the Institute of Medicine. 458 METHODOLOGY Three communities were selected as study sites. Selection was based on the following cn- teria: 1. Each community should include at least one investor-owned chain hospital and one not- for-profit hospital that was a member of a mul- tihospital system. This criterion was to help ensure that similarities and differences be- tween not-for-profit and investor-owned hos- pitals were likely to be related to ownership, rather than membership or nonmembership in a multi-institutional organization. It also was intended to enable investigation of similarities and differences in the relationship between not-for-profit and investor-owned hospitals and the systems that own them. 2. The investor-owned hospitals in different communities should each belong to a different corporation. This criterion was included to al- low observation of differences among investor- owned corporations in the extent and type of control exercised over hospitals and in other characteristics that may differ according to cor- porate policy. 3. Each community should include no more than four hospitals so that a site-visit team would have sufficient time to visit all hospitals and other important facilities. 4. The communities should be In states In which investor-owned hospitals have substan- tial representation, and each site selected should be in a different state. These criteria were in- tended to ensure that the study sites were in states with characteristics (such as demo- graphic or regulatory characteristics) typically selected by investor-owned corporations for the location of hospitals, and also that some differences among states would be reflected in the studies.

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HOSPITALS AND THEIR COMMUNITIES Communities that fi~filled these criteria were selected from the 1983 American Hospital As- sociation Guide to the Health Care Field. Per- mission to visit the hospitals was requested from the hospital administrators and from headquarters of the multihospital systems. In one case permission to visit a hospital was re- fused by an investor-owned company (on the grounds that the hospital was not typical), and an alternative city was chosen that fulfilled the criteria and that included a hospital owned by the same company. Interviews were requested with people holding key administrative and medical positions in the hospitals-chief ad- ministrator; administrators in charge of fi- nance, marketing, and planning; chairman and members of the governing board; medical di- rector; chief of staff; physicians who admit sig- nificant numbers of patients to the hospital; and physicians who work under contract with the hospital. In addition, contact was made with owners and operators of the major non- hospital health facilities, such as ambulatory surgery centers and urgent care centers. All agreed to participate in the study, and all helped arrange the meetings we requested between members of our site visit teams and the people (or types of people) with whom we wished to meet. In several cases, visits were also arranged to the home offices of the multihospital sys- tems. Interviews were conducted with people holding positions such as chief executive offi- cer, and directors of finance, planning, and marketing. The site visit teams were composed of one physician and one nonphysician member of the IOM committee, and two staff members. Before the site visits, background information was obtained about demographic and eco- nomic aspects of the community and about the history and current status of the major health care providers. During the course of a 2- or 3-day visit to each of the three communities, all of the hospitals and most other significant health care organizations were visited. Inter- views were generally conducted by teams of site visitors and were generally recorded. In- terviews were based on lists of topics-some of which were explored in all three commu- nities and some of which were specific to a particular community or a particular hospital. 459 Through preparation of these topic lists in ad- vance and through periodic consultations dur- ing the course of a visit, efforts were made to cover the same topics in different communities and hospitals, as well as to learn about signif- icant factors that were specific to a particular community or institution. Conclusions drawn from the case studies are based on numerous respondents confirming each other's views. THE COMMUNITIES The names of all places and hospitals have been changed to preserve the anonymity of the communities, organizations, and the peo- ple interviewed, who gave most generously of their time. Valleyville Valleyville, a city of 50,000 people, is the major trade and commerce center of a large semirural area. At the time of our visit, the effects of a 3-year economic recession were evident. Unemployment was higher than na- tional and state averages. The city of Valley- ~rille is located in Hill County, whose mainly white and growing population is, by most mea- sures, poorer than the national average. The supply of physicians in Valleyville has grown with the population and is close to the national physician-to-population ratio. There are three hospitals in Valleyville. The largest is the 200 bed Miracle Hospital. Since the 1940s this hospital has been owned by a Catholic multihospital system that owns sev- eral other hospitals in the state. The hospital has been rebuilt and enlarged to meet the health care needs of Valleyville's growing population, and provides high-technology services such as computed tomographic (CI) scanning, am- bulatory surgery, and 24 hour emergency room coverage. Miracle Hospital is Valleyville's des- ignated trauma center, and is the only hospital in the city that provides obstetrical and spe- cialized cancer services. The second largest hospital is Valley Hos- pital. This 150-bed hospital was built by a phy- sician in the 1940s, subsequently sold to a group of doctors, who in turn sold the hospital to the current owner a major investor-owned mul- tihospital system. Valley Hospital, like Mira

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460 cle, has grown over the years and provides a wide range of high-technology services. Valley Hospital has the only cardiac catheterization laboratory and rehabilitation unit in Valley- ville. At the time of our visit, Miracle and Valley hospitals were competing to attract physicians through the provision of a working environ- ment that physicians would prefer, and by cap- turing specific segments ofthe market through the provision of specialized services. Physi- cians generally had admitting pnvileges at both hospitals which were about a lO-minute Hive from each other. They frequently allowed pa- tients to choose their place of hospitalization. The hospitals therefore also competed on pa- tient amenities. The third hospital is Hill County, which at its peak operated 150 beds, of which lOO were closed as Miracle and Valley hospitals ex- panded. This county-owned hospital has a his- tory of financial problems dating back to the late 1970s. The board of county supervisors had at one time considered closing the hos- pital, and had offered to lease or sell the hos- pital. However, no acceptable offer was received. In 1983 a management contract with an investor-owned hospital company was signed under which the hospital was to be operated on an annually declining county subsidy, drop- ping to zero in the fifth year. Coast Town Coast Town, a city of approximately 60,000 people, is the medical center for the surround- ing Tree counties as well as the adjacent areas of two contiguous states. The city enjoys a sta- ble economic base and weathered the recent recession well. Unemployment remained be- low the national level. However, the per capita personal income of the town and surrounding Sunshine County is substantially below state and national averages. Coast Town has a large (one-third of the population) black community. It has four hospitals. Ibe oldest hospital in Coast Town dates from 1915. It is 300 bed St. Mary's Hospital, owned by a Catholic multi-institutional system that owns hospitals in several states. St. Mary's Hospital is preeminent in pediatric care in Coast Town, operating a level II neonatal care unit FOR-PROFIT ENTERPRISE IN HEALTH CARE and a specialized children's hospital on the grounds. St. Mary's Hospital operates primary care centers that function as feeders to the hospital, and a freestanding ambulatory sur- gery center on the hospital campus. A public hospital, Sunshine County Hos- pital was built in the 1940s. At the time of the site visit, this 150-bed hospital was in the first year of operation under a management con- tract with an investor-owned management company. Under the contract, the manage- ment team must set up data systems to put in order financial accounting procedures that had been in disarray. More importantly, because the county had decided to reduce and even- tually eliminate county subsidies for the facil- ity, the management company was in effect required to reduce uncompensated care and to seek to attract private-pay patients that had been drawn to Coast Town's private hospitals by their more attractive facilities and reput- edly superior quality of care. The most con- troversial change made by the contract managers (with the county's agreement) to put the hospital on a more healthy financial base was closure of the emergency room. Memorial Hospital is a large (500-bed) in- dependent hospital that opened in the early 1950s, and built its census in part by drawing patients from Sunshine County Hospital. Ibis church-a~iliated hospital is becoming the nu- cleus of a smalD multi-institutional system through the purchase or contract-management of several hospitals in nearby small commu- nities. The most recent hospital to be built was investor-owned Coast Hospital located in a suburb of Coast Town. This 400-bed hospital opened in the 1970s with immediate access to a substantial patient base because of an agree- ment it made with a large multispecialty group practice (Health Clinic). This group practice, which included approximately half of the com- munity's physicians, agreed with a major investor-ow~ ned hospital company to jointly buy land on which the company would build a hos- pital. Health Clinic physicians had been dis- satisfied with the voice they were given in the administration of St. Mary's and Memorial hospitals, and with what they perceived as a cavalier attitude toward their group's needs at these two hospitals. They were, therefore, ready

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HOSPITALS AND THEIR COMMUNlTlES to work with a corporation that promised to be more responsive and would establish a hos- pital in which Health Clinic physicians would be a major power. The Health Clinic today numbers roughly 100 physicians, one-third of all Coast Town physicians, and provides al- most all admissions to Coast Hospital. The construction of Coast Hospital, and the loss of the Health Clinic's substantial volume of patients caused immediate severe census and revenue losses at St. Mary's and Memorial hospitals. Administrators at both hospitals de- vised strategies that had restored the health oftheir institutions by the time of our site visit, 8 years later. However, at the time of our visit to Coast Town, St. Mary's and Memorial hos- pitals were feeling the effects of the closing of the emergency room at Sunshine County Hos- pital. Increasing numbers of indigent patients, who formerly gained access to hospital care through the emergency room at the county hospital, were seeking care at nearby St. Mary's and Memorial. Center City Center City is a town of over 100,000 people that is experiencing a sharp economic down- turn after substantial economic and population growth in the 1950s and 1960s. The city is within an industrialized standard metropolitan statistical area (SMSA) that includes a rela- tively large (30 percent) black population and a high unemployment rate that is thrusting many people into medical indigency as union health benefits expire. The major providers of health care in Center City consist of three private acute care hos- pitals, a psychiatric hospital, a dialysis center, three urgent care centers, a surgery center, and two diagnostic-imaging centers expected to be operational within a year. Absent from the array of health care providers is a public hospital. Many indigent patients travel out of the county for care at a public hospital. The largest hospital in Center City is St. Ricardo, a 450-bed member of a Catholic mul- tihospital system that operates in several states. This 90-year-old hospital was rebuilt and ex- panded as demand for a larger, more modern facility occurred. St. Ricardo is the leading 461 hospital in Center City in terms of size and level of care, operating the most active emer- gency room, cardiac catheterization labora- tory, and open heart program in the city. In the 1940s a protestant denomination felt they should also have a hospital and estab- lished Church Hospital which, like St. Ri- cardo, grew in response to growing demand for care to its present size of 350 beds. The hospital is one of several in the state that is owned by the church, but the hospitals are operated without centralized control. Like St. Ricardo, Church provides sophisticated ser- vices such as CT scanning and cardiac surgery, but fewer such procedures are performed. Church recently closed its maternity unit which had been losing money because of low utili- zation and few paying patients. Center City's newest and smallest hospital is an investor-owned company's 250-bed Wal- nut Hospital. In the 1970s Center City was experiencing a shortage of hospital beds. Si- multaneously a substantial number of physi- cians were becoming distressed at their inability to have an impact on decisions at St. Ricardo and Church hospitals. Furthermore, new phy- sicians recruited by St. Ricardo Hospital ap- peared to be given favorable treatment, causing many physicians to fear that their influence would further diminish. In response, 60 phy- sicians formed a partnership to buy land, and then sought an investor-owned corporation to finance, construct, lease, and operate a hos- pital. The physician investors bear no risks nor do they share in the profit of the hospital. What they sought to gain was a hospital in which the administration would be responsive to their desires. The hospital has become a place to which physicians admit paying pa- tients needing uncomplicated care. Elective surgery is emphasized. Trauma, obstetrics, complex cardiology, and neurosurgery pa- tients are admitted to the other hospitals. Unlike the situation in Coast Town, the con- struction of the investor-owned Walnut Hos- pital did not cause immediate disruption at the existing hospitals, which had been operating with extremely high occupancy levels. Phy- sicians in the group of investors in Walnut Hospital continued to admit patients to St. Ri~rdo and Church hospitals.

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462 THE CONTEXT Site visits made in the summer of 1984 oc- curred at a time of change and disruption for many community hospitals. Nationally, occu- pancy rates were falling, and employers and others who pay for services or insurance were becoming increasingly aware of their bargain- ing power in the medical marketplace. Health care providers were responding to the new cost-consciousness of payers by developing new and less expensive types of care. Medicare's prospective payment system was being phased in. Many of the people interviewed in the course of the case studies commented on the impact of these changes. They contrasted the current focus on containing hospital expenses with ear- lier times. They described a time when com- petition between hospitals meant striving to provide more lavishly equipped facilities and a broader array of services. Sustaining occu- pancy rates was formerly of less concern than at the time of our site visits, when competition between hospitals was likely to mean working hard to keep physicians happy and revenues flowing. Future-minded hospital administra- tors were also starting to perceive that price competition could become a reality. Cost con- trol through physician cooperation as wed as effective management had already become reality with the start of prospective payment. But, although these and other factors were changing the environment in which hospitals operate, one development caused several of the hospitals to make rapid and dramatic changes. That development was the advent of competition from providers of health care in freestanding centers such as surgery, urgent care, and diagnostic-imaging centers. In one community all the hospitals had reacted rap- idly. They had reduced emergency room charges,~and, more dramatically, they were developing freestanding centers themselves, often as a joint venture with physicians. In another community the hospital administra- tors, hearing that physicians were seeking fi- nancing to establish freestanding centers, attempted to engage in joint ventures. To the dismay-of the administrators, other financiers had already concluded deals. Although in this latter case the hospitals reacted too slowly, the perception of administrators was that the cen FOR-PROFIT ENTERPRISE IN HEALTH CARE ters were real threats that demanded imme- diate action. Indeed, the ability to respond rapidly and flexibly to changes in their environment was one of the most striking features of many of the hospitals studied. This was particularly ap- parent in some not-for-profit hospitals that had to recoup their market positions after the con- struction of an investor-owned hospital. It was also notable in hospitals that altered, delayed, or cancelled expansion plans in response to diminished or changed demand. And it was notable in the response of hospitals to pro- spective payment the acquisition of new data systems, the dissemination of cost data and other information to physicians, and the ini- tiation of more stringent cost control. Differences in the economic, political, and social environment of the communities ap- peared to affect the actions and reactions of members of the health care community to events or changes in their communities. For example, physicians' political stances ap- peared to affect their influence. Physicians in one community frequently spoke of their be- lief in traditional, solo practice and their dis- like of the newer prepaid plans or preferred provider organizations, which some described as socialized medicine. These physicians, who valued their independence, showed little in- terest in uniting with other physicians to cre- ate power blocks to promote their interests in hospitals. In another example, the economic stability and growing population of a com- munity enabled not-for-profit hospitals to re- build their census after an investor-owned hospital opened its doors. In sum, the hospitals, physicians, and other health care providers observed in the case studies exist in local and national environ- ments. Each interacts with the other. The local environment was often a determinant of how people and institutions responded to changes in the larger national environment. And changes at the national level often produced responses in the local environment. COMPETITION How the introduction of an investor-owned hospital affected the competitive climate of the communities involved and how the existing

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HOSPITALS AND THEIR COMMUNITIES heal care providers responded were to a great extent determined by the circumstances be- hind the advent of investor ownership. But it should be remembered that the impact of the newly built investor-owned hospitals involves more than the impact of investor ownership per se. The construction of a new hospital, regardless of ownership, is likely to affect ex- isting providers. However, in these instances it was investor-owned companies that built (or bought) a hospital. The impact of the advent of investor-owned hospitals on the competitive environment in the community was different in each case. These differences illustrate the importance of the cir- cumstances surrounding the introduction of investor ownership to a community in deter- mining how the competitive situation will be affected. In Valley~ille the purchase of an existing hospital by an investor-owned corporation was followed by improvements in plant and equip- ment. The newly upgraded hospital then be- came more serious competition to the existing not-for-profit hospital, although not a threat to its survival. The not-for-profit hospital re- mained financially healthy, carved out some specialty niches in which it dominated the market, and retained a reputation for superior quality in many of the hospitals' departments. The not-for-profit hospital also had lower charges than the investor-owned hospital a factor that appeared to be becoming increas- ingly important as it became known and as physicians in Valleyville became more protec- tive of patients' purses. Another event that some in Valleyville viewed as potentially changing the competitive balances among the hospitals was the recent management contract between the public hospital and an investor- owned corporation. If the new managers suc- ceed in attracting more paying patients to the public hospital, the private hospitals will be the losers. In Center City and Coast Town, the inves- tor-owned hospitals were constructed with the support of groups of discontented physicians. In both cases administrators of existing hos- pitals were considered to be unresponsive to physician's needs and had balked at giving physicians the degree of control that they sought. In Center City, where demand was 463 sufficiently high for new capacity to be ab- sorbed and where physicians continued to ad- mit to all hospitals, the introduction of an investor-owned hospital caused little disrup- lion. Only when a recession later reduced de- mand for hospital care did the relative strengths and weaknesses of each hospital become ap- parent. Of the two not-for-profit hospitals the one with the stronger administration, greater financial resources, strength in specific ser- vices, and better relationship with medical staff appeared to be in sound economic condition at the time of our visit. The weaker not-for- profit appeared to be in marginal economic condition and was badly in need of more pay- ing patients. Possibly its financial position would today be a little less precarious had the third hospital not been built. By contrast in Coast Town, the construction of a new investor-owned hospital, which was connected with the large multispecialty phy- sician group practice, immediately and radi- cally changed the competitive situation among hospitals. The census at the two not-for-profit hospitals immediately dropped 30 to 50 per- cent, forcing prompt action to alleviate the situation. While these two hospitals took dif- ferent approaches to restoring their financial heals, the outcome was the creation of a fiercely competitive situation. The hospitals brought new physicians to the community (but not in such numbers or specialties as to upset their important admitters), provided office space, helped with referrals, and so forth. Physicians in the community reported greatly increased responsiveness of administrators to physicians' needs, and each hospital moved to develop a cadre of physicians who would not admit pa- tients elsewhere either because of loyalty or economic connection. Such steps included en- gaging in joint hospitallphysician ventures such as urgent care centers, and the development of office buildings. As a result most physicians in Coast Town developed clear primary loy- alties to a particular hospital. A new cohesive- ness has developed among the physicians that admit to each hospital, and the physicians have become willing to work together in the health maintenance organizations (HMOs) and pre- ferred provider arrangements that were at an incipient stage. By contrast, in the other two communities studied, where competition

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464 among hospitals was less intense, physicians maintained their independence from individ- ual hospitals and resisted efforts to form lIMOs and preferred provider organizations. Other responses to increased competition in the communities included vertical and hori- zontal diversification. After corporate restruc- tunng, not-for-profit hospitals began to develop home care agencies, nursing homes, congre- gate housing facilities, and other health ser- vices. For-profit subsidiaries to seD such services as data management, consulting, and market- ing were also developed. These initiatives rep- resent attempts to sustain and enhance revenues in the face of erosion by decreased lengths of stay and competition from other hospitals and providers of out-of-hospital care. In two of the communities, competition from out-of-hospital providers in facilities such as urgent care centers was causing hospitals (not- for-profit and investor-owned) to move to pro- tect their market shares. Indeed these free- standing centers the first ones being started as for-profit enterprises by physicians were in some cases viewed as a much more serious threat to the not-for-profit hospitals than was the establishment of an investor-owned hos- pital. In an effort to retain their market share, several hospitals set up freestanding ambula- tory care centers. However, it can be hazard- ous for a hospital to enter the freestanding ambulatory care market. In one community two major admitters to the investor-owned hospital opened an urgent care center. In an attempt to preserve the good will of these im- portant physicians, the corporate owners of the hospital financed the new center's mar- keting campaign. Other physicians inter- preted this as the hospital supporting an activity that was a direct threat to their office practices. Some outraged physicians stopped admitting patients to the investor-owned hospital and succeeded in having the administrator fired. While increased competition among hospi- tals could be observed in communities after the entry of an investor-owned company, in no case had a not-for-profit hospital failed. In the short run, some not-for-profit hospitals had to make major strategic changes to recoup lost census. Others had to make more minor ad- justments to compete with newly renovated and updated facilities by actively marketing to FOR-PROFIT ENTERPRISE IN HEALTH CARE patients and physicians. In only one case does the longer run survival of a not-for-profit hos- pital appear doubtful. Although competition from the investor-owned hospital may con- tribute to this hospital's problems, it also ap- pears to be suffering from poor administration that cannot move rapidly enough to cope with the fast-changing external environment. Price increases also contributed to the sur- vival of not-for-profit hospitals. The new inves- tor-owners often priced services substantially above existing not-for-profit rates possibly because substantial capital costs were involved in construction or renovation. Not-for-profit hospitals could, therefore, raise prices, in- crease their revenues, and still remain com- petitive. In sum, the case studies indicate that whether the introduction of an investor-owned hospital has an immediate effect on the status of com- petition among hospitals depends to a great extent on whether demand for hospital ser- vices can absorb additional capacity or the up- grading of existing capacity. Two of the communities studied suffered from an eco- nomic recession some years after the advent of investor ownership. Demand for hospital care fell and all hospitals operated at low oc- cupancy rates. When this occurred the com- petition from an investor-owned hospital, which had earlier been viewed by the administrators of not-for-profit hospitals as neutral or even as a positive stunulus to improve quality, was then viewed as more threatening. From this follows the question of whether all the hos- pitals in the communities studied can survive in an environment of increased competition, and whether ail investor-owned hospital may cause existing hospitals to fail. Whether all the hospitals can continue to thrive as reimburse- ment gets tighter and competition stronger is unclear. If in the future some of the hospitals fail, it is likely to be for several reasons, of which increased competition from investor- owned hospitals is but one. Furthermore, if some hospitals in the communities studied are going to fail it is not at all certain that the investor-owned hospitals will not be counted among the failures.

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HOSPITALS AND THEIR COMMUNITIES CARE FOR POOR PEOPLE Two important questions have arisen in the context of investor ownership and people un- able to pay for care. First, have investor-ownecl hospitals made it more difficult for not-for-profit or public hospitals to care for these people? Second, do investor-owned and not-for-profit hospitals provide similar amounts of uncom- pensated care relative to total care provided? The latter question is best answered by the national- and state-level data, as are discussed in the committee's report. Some observations regarding the former question were generated in the case studies. Three factors appear to affect the way not- for-profit ant} for-profit hospitals approach the issue of providing uncompensated care and af- fect each other's provision of such care. First is the magnitude of the problem-whether a community includes such large numbers of people in need of free care that hospital ad- ministrators and trustees perceive demand to exceed the amount they are able to supply. Second is whether a public hospital is available where poor patients can seek care and to which they can be transferred by private hospitals. Third is the depth of the hospitals' commit- ment to providing uncompensated care. The case studies provided examples of the importance and interactions of these factors. In a community where there existed a public hospital with sufficient subsidy and earned revenues to enable the hospital to satisfy most of the demand for uncompensated care, the investor-owned and private not-for-profit hos- pitals exhibited similar behavior. Uncompen- sated cane represented between 2 and 3 percent of gross revenues in both hospitals. Both hos- pitals had similar policies for pre-admission deposits, credit checks on patients, ant] refer- ring or transferring stable patients to the pub- lic hospital. The vast majority of people unable to pay for care went directly to the public hos- pital knowing that free care was available there. Moreover the private hospitals, especially the not-for-profit hospital, were less conveniently located for the central city population. The Catholic hospital administrators in this com- munity spoke of a mission to provide care for people unable to pay. The corporate chief ex- ecutive officer of the Catholic system spoke of 465 uncompensated care as a necessary business practice to enhance image. The investor-ownecl hospital administrators spoke of admitting nonpaying patients as a service to physicians. Whatever Me attitude, since Me public hos- pital took care of most of the demand for un- compensated care, private hospitals could provide small amounts and the competitive balance between them was hardly affected. In the two other communities, the situation was very different. In both communities pro- viding care for medically indigent people was a serious problem. In one community there was no public hospital; in the other the public hospital had restricted access to become fi- nancially viable in the face of a reduced public subsidy. ~us, in both communities many people in need of care and with no source of payment were dependent on the willingness of the private hospitals to provide free care. In these two communities there were differ- ences in the uncompensated care load of the not-for-profit and investor-owned hospitals. For example, in one community deductions from revenues for the not-for-profit hospitals ranged from 6 to 10 percent. For the investor-owned hospital that figure was 4 percent. Although the issue of uncompensated care was of great moment in the two communities, the role of the investor-owned hospitals as a provider of uncompensated care scarcely en- tered the debate. There were several reasons for this. In one case the investor-ownecl hos- pital was not located in an area convenient for the city's poverty population. This hospital's proximity to a major highway may have given it more than its share of traffic accident vic- tims, some of whom could not pay for their care, as well as some indigent patients from other communities. In the other community, the investor-owned hospital did not provide the services most likely to draw indigent pa- tients obstetrics, neonatal care, and trauma- and for many years did not operate an emer- gency room. The omission of these services came about because the physicians who estab- lished the hospital intended it as a place where they could admit patients needing routine elective surgery and uncomplicated medical care. The physicians also did not want to be on call for a third emergency room in the com- munity.

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466 An emergency room was eventually opened by the chief a:lministrator with corporate sup- port. The administrator believed that admis- sion of additional paying patients through the emergency room would more than offset the amount of uncompensated care incurred. The private physicians who admitted patients to the hospital and who objected to having an emergency room were appeased by the hos- pital's contracting for physicians to staff the emergency room and by these physicians being able to admit the private physicians' patients in their absence. The emergency room, thus, became a convenience for physicians. Neither the investor-owned corporation nor the phy- sicians at this hospital had any desire to admit nonpaying patients in significant numbers. Thus, for different reasons-location in one case, range of services and physician prefer- ence in another-the investor-owned hospi- tals were substantially insulated from the uncompensated care problem. By contrast, the not-for-profit hospitals in these two communities were quite heavily in- volved in providing uncompensated care. While only one of the four not-for-profit hospitals in these two communities failed to produce pos- itive margins (in two cases total net margins were in excess of 7 percent), the uncompen- sated care load was perceived as a problem by administrators at all the not-for-profit hospi- tals. The problem was most often couched in terms of maintaining solvency and distributing limited resources. The problem, however, was not always directly financial. One adm~stra- tor observed that private patients disliked sharing the facility with patients who were ob- viously poor. In this community the two not- for-profit hospitals were negotiating to manage the public hospital, and it was widely assumed that their intent was to change the policies that had shifted more of the uncompensated care burden Dom the public hospital to the two not- for-profit hospitals. in the communities studied it was clear that when publicly provided care was insufficient, the not-for-profit hospitals made significant contributions to the care of those unable to pay. It was also clear that the provision of un- compensated care was constrained by a regard for the financial health of the institution. In some Catholic hospitals, two mission-related , . . FOR-PROFIT ENTERPRISE IN HEALTH CARE notions caused tension. On the one hand was the desire to care for those in need; on the other hand was the need to practice prudent stewardship. This latter function was de- scribed by one individual as not only conserv- ing, but enhancing, the order's assets. The second requirement constrained the magni- tude of the first requirement. Not-for-profit hospitals (like investor-owned hospitals) had mechanisms for deflecting some number of pa- tients unable to pay for caret One not-for-profit hospital closed its maternity service when the financial drain became insupportable. It was acknowledged at several institutions that when it was possible, patients were transferred to public hospitals. Pre-admission financial screening was performed and deposits were generally required. Staff were alerted to fre- quent emergency room users who did not pay their bills. And legal action was taken to obtain payment of bills. Less directly, hospital ad- ministrators were active in the political arena trying to secure funding for the care of indigent patients. Not-for-profit hospital administrators gen- eral~y did not believe that the presence of an investor-owned hospital in their community had affected their provision of care for poor people. Rather, these administrators focused their attention on the provision of care by pub- lic hospitals and the need for the public sector to fiend care for those unable to pay. However, looking toward the future, the erosion of rev- enues likely to be caused by increased out- patient services-often supplied on a for-profit basis-was seen in one community as likely to result In a reduction in uncompensated care. One administrator also noted that providing substantial uncompensated care would put his hospital at a competitive disadvantage with the investor-owned hospital a disadvantage that would become important if health care pur- chasers became more price conscious. Thus, the investor-owned hospitals in the communities studied made relatively small contributions to the provision of uncompen- sated care because of decisions about loca- tion and range of services that ensured that the vast majority of people unable to pay for their care sought care elsewhere. Administra- tors of the not-for-profit and public hospitals that provided substantial amounts of uncom

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HOSPITALS AND THEIR COMMUNITIES pensated care did not feel that the presence of an investor-owned facility had reduced their ability to do so. The not-for-profit hospitals were able to provide varying and sometimes substantial amounts of uncompensated care while generally operating with healthy bottom lines. Although there were differences in the rel- ative amounts of uncompensated care pro- vided by not-for-profit and investor-owned hospitals, there was great similarity in the methods used to assure payment (e.g., credit and insurance checks, deposits, litigation where necessary, and transfer of patients). The fol- lowing description of emergency room pro- cedures at an investor-owned hospital was typical of procedures at many of the hospitals visited. A triage nurse was the first person to see a patient. If she juclged that a true emer- gency existed, the patient would be treated without evaluation of ability to pay. If the triage nurse did not view the case as an emergency, the patient would be interviewed by a business clerk. Should there be a problem with the patient's ability to pay, a physician would see the patient to make sure that he or she was not in peril. If not, the patient would be sent elsewhere. If the patient had a private phy- sician, an effort would be made to contact the physician before the patient was sent away. For the poor and uninsured people of the communities studied, the availability and lo- cation of hospital care was determined more by the existence and funding of a public hos- pital than the presence or absence of an inves- tor-owned hospital. If there was a public hospital able to care for those in need, it was the locus of indigent care, and private hospitals pro- vided minimal levels of uncompensated care. This situation pertained even when the sub- sidy to the public hospital was declining. The management contract at one (but not the overt public hospital specified that those in need of care must not be refused service. The corollary of this policy is that unless the public hospital generates sufficient revenue to subsidize free care, either the hospital will close or the county will have to continue financial support. By con- trast, at another public hospital the manage- ment contract emphasized financial viability over service to those unable to pay. To deflect unsponsored patients, the emergency room was 467 closed, and patients presumably sought care at nearby not-for-profit hospitals. Thus, be- cause of local governmental policies, the locus of much uncompensated care shifted to the private sector. And in the community without a public hospital, unsponsored patients either sought care in the not-for-profit hospitals, where they might or might not be admitted, or they traveled approximately 2 hours to the nearest public facility. MULllliOSPlTAL SYSTEMS Also explored in the site visits was what it means for patients, physicians, board mem- bers, and administrators that their hospital is a member of a multihospital system. Are fi- nancial resources more readily available? Are administrators' areas of decision making more circumscribed? Are physicians less influential in hospital decision making? Is the board less influential in decision making? Does the home office provide valuable technical assistance? Responses to questions about the effect of sys- tem membership were varied. And just as the meaning and importance of membership in a system varied among hospitals, so did the sys- tems vary in the extent and type of control they exercised over the hospitals they owned. The three communities studied contained seven hospitals that were members of multi- hospital systems. The investor-owned systems appeared to have clear policies concerning the extent of centralized management; all three investor-owned hospitals functioned under well- established procedures that defined their re- lationship with the home office. Two Catholic hospitals were members of systems that ap- peared to be still unsure where to establish the boundaries for local autonomy in hospitals. These two systems were slowly increasing the amount of control that devolved to the central offices. Finally, two hospitals were members of not-for-profit systems that had few central- ized functions, and few positive or negative aspects of system membership were noted. The systems can be grouped as follows: "nominal" not-for-pro~t systems without central manage- ment; centrally managed not-for-profit sys- tems; and investor-owned systems. An example of a nominal system was a hos- pital owned by a religious denomination that

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468 owned several hospitals in one state but that lacked any central organization to control or direct local operations. Membership in this system was of little direct importance to hos- pital operations. The hospital received $300,000 a year from the church and was required to adhere to certain rules relating to the com- position of its board; physicians were excluded from board membership, and a certain num- ber of ministers had to be included. Apart from those matters, the hospital functioned as an independent unit. At the other end of the spectrum was a hos- pital owned by a highly centralized, investor- owned hospital company. Corporate oversight was apparent in almost every aspect of the operation of this hospital. Capital spending re- quests went through several layers of corpo- rate review, depending on the size of the expenditure. Equipment was to be chosen from a list provided by the home office. Mainte- nance of equipment was often under a national contract negotiated by the home office. De- tailed financial and operating goals were de- veloped locally and negotiated with central management. Administrators' career advance- ment and compensation were linked to accom- plishing these goals and to achieve these goals, secondary goals that pertain to such details as staffing levels had to be met. Although a not-for-profit "nominal" system was the most decentralized operation and an investor-owned system was the most central- ized operation in the hospitals visited, an ex- ample was also seen of an investor-owned system that appeared to allow as much auton- omy to individual hospitals as one of the not- for-profit systems with central management. No conclusion that one sector is always more or less highly centralized than the other could be supported from our visits. Not-for-profit Systems with Central Management The following description is an amalgama- tion of elements from the two centrally man- aged not-for-profit systems that had not yet finalized the extent of home office control. The existing structure was developed because the organization recognized that the increasing complexity of health care demanded types of FOR-PROFIT ENTERPRISE IN HEALTH CAM expertise that would be too costly to provide to hospitals unless they could be centralized in the home office. It was also recognized that a strategic planning approach was needed for the system as a whole, and that growth re- quired capital that could be obtained more cheaply by a corporate system. The system floated a large bond issue in 1983. Although recognizing both the necessity for and the benefits of some degree of centrali- zation, corporate policy distinguished be- tween what were described as strategic issues and operational issues. Strategic issues (e.g., future directions and financial goals) were de- fined as corporate responsibilities, as were functions that offer economies of scale such as purchasing, management development, and educational programs. Operational issues re- garding how strategies or financial goals would be met were delegated to hospitals. For individual hospitals, this meant that the administrator had considerable freedom within some overalD constraints. Constraints included some powers that were reserved to the parent corporation changing the hospitals' articles 0 f i I 1 c 0 ~ p 0 r a t i 0 n ; m 0 r t g a g i n g , b 0 r r 0 w i n g a g a i n s t , or selling property; adding or closing services; and entering a substantial association with an- other hospital. Capital expenditures over $30,000 and outside the budget required cor- porate approval, and employee benefits pack- ages were determined and administered centrally. The corporation determined com- pensation for top-level hospital employees by use of a program developed by outside con- sultants. It offered slightly higher salaries than those at investor-owned facilities, to compen- sate, it was said, for lack of incentive bonuses. However, in the future, performance moni- toring wilD be increased and local administra- tors given incentive compensation. Although the centralized data system al- lowed the corporation to review detailed fi- nancial data from individual hospitals, the only financial goals specified by the corporate office were a net margin goal and a retun~-on-equity goal. Administrators, therefore, had almost complete discretion in how to attain the bot- tom line. The flow of money between the corporation and individual hospitals in the not-for-profit systems was limited to the payment of a man

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HOSPITALS AND THEIR COMMUNITIES agement fee based on a complex formula that relates mainly to operating cost and use of sys- tem resources. A payment in lieu of salaries for the nuns who worked in the hospital was made by the hospital to the religious order that provided support for the nuns. Investor-Owned Systems It is more difficult to describe a typical investor-owned system because the extent of central control varied widely among the three we encountered. Common to each, however, were centralized financial data systems, capital budget processes that required higher levels of company approval for higher levels of ex- penditures, and reiterative or negotiated bud- get processes to develop annual financial goals which were translated into monthly goals and broken down to determine the contribution of operating units such as the emergency room, neonatal unit, radiology, and so forth. Some centralized purchasing occurred, and advice and consultation from the home office was available. There was a local advisory board composed largely of physicians but including business and other representation. Hospitals paid a corporate management fee. Advantages and Disadvantages of Ownership by a Centrally Managed System Administrators in the hospitals belonging to centrally managed systems had different opin- ions about the pros and cons of multi-institu- tional membership. Their views appeared to be unrelated to whether the system was not- for-profit or investor-owned, and unrelated to the extent of oversight from central office. In one investor-owned hospital the chief ad~nin- istrator described the relationship with the home office as excellent and the corporate structure as providing some advantages. Other administrators there commented on the ex- cellence of headquarters staff and easy avail- ability of technical assistance. Also mentioned as advantages were the ability to compare the hospital's operating data with other hospitals in the system, and access to other administra- tors in the system with whom problems and solutions could be discussed. Similar com 469 meets were heard in a not-for-profit system with central management. In a not-for-profit system hospital, although access to other administrators in the system and the existence of a career ladder were viewed positively, there were complaints about time and energy spent on demands from the cor- porate level. For example, after plans for a home health agency had been approved by the local board, the administrator had to "sell it all over again" at the corporate level. Decision making at corporate level was described as slow and cumbersome. There was hope among hos- pital staff that some of the problems would be ironed out. Similar complaints came from medical staff in an investor-owned hospital which described the administrator as being hampered by corporate oversight. Among physicians and board members there appeared to be no consensus on what belong- ing to a multi-institutional system meant. While one physician board member at a not-for-profit said, "We'd never know the hospital belongs to anyone," another member described the same board as "emasculated," and added, "All decisions are made at the corporate level; you cam's initiate anything that goes against cor- porate policy." He also added that in the past the system had "never griped about spending money" but this had resulted In what he con- sidered to be waste in the use of supplies and in the purchase of excessive equipment, with the expense being passed on to patients "We have laser equipment and no eye surgeon to use it." However, this physician described a changing attitude with a far greater emphasis on cost control, which he thinks the admin- istrators can successfully carry through "The administration is really good. They are not slowed down by the corporate office, and the hospital has always produced plenty of profit." Despite differences of opinion about the ad- vantages and disadvantages of being part of a hospital system, some themes emerged from our interviews. The most generally perceived benefit of system membership was access to capital. In all but the two hospitals in the "nominal" systems (where the hospitals them- selves raise capital), administrators, physi- cians, and board members pointed to the advantages of the availability of corporate cap- ital. Physicians indicated that their system made

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470 available all that is necessary to practice state- of-the-art medicine; administrators noted that available capital allowed them to respond to changes in their markets; board members felt that if they could just)* capital spending de- cisions, implementation would follow because their hospital has access to capital acquired by the system. For an independent hospital vis- ited, the lack of access to capitalwas described as a severe disadvantage in a highly compet- itive environment. This hospital joined a na- tional alliance of not-for-profit hospitals whose capital-raising activities were described by the administrator as key to future survival. Another advantage of system membership often commented on by hospital staff was the availability of consultation or expert help from corporate headquarters. This was most notice- able in implementing diagnosis-related group (DRG) systems. Almost all of the hospitals in centrally managed systems were presented with educational material for physicians and hos- pital staff(sometimes including computer pro- grams, lectures, and films) and assistance with data systems. By contrast, at a "nominal" sys- tem hospital, three staff members had been given the responsibility of getting the hospi- tal's DRG system up and working. The staff described how they had read everything useful Hey could obtain, had attended numerous professional meetings, and had generally gath- ered information wherever they could. They said that it had been a difficult and time-con- suming process, and that they had lacked the support they felt they needed. They added that they were relying on the other community hospitals (members of centralized multihos- pital systems) to educate their physicians about DRGs. Some systems have developed career lad- ders and staff development programs to help retain staff. Only one not-for-profit system had implemented a career development program that would allow staff movement among hos- pitals and between central office and hospitals. All three investor-owned systems had such programs. The benefit of the programs to in- dividual hospitals was most clearly rlemon- strated when a new and experienced administrator arrived within a week after the chiefadministrator was fired. In another inves- tor-owned hospital, the chief administrator had FOR-PROFIT ENTE~SE IN HEALTH CAM previously been an assistant administrator at that hospital and had been moved to other hospitals in the system before eventually re- turning with much greater experience to go with his local knowledge. The management plans that hospital administrators in this sys- tem are required to prepare must include a description of a program to prepare promising lower-level administrators for advancement. PHYSICIAN INFLUENCE It is well recognized that physicians rather than patients make many of the decisions con- cerning patients hospitalization, and that in some circumstances physicians have the power to make or break a hospital. Recognizing this, the marketing activities of hospitals often focus directly on physicians. The case studies pro- vide some rather dramatic illustrations of the influence of physicians in shaping the config- uration of hospital services in communities. The studies also illustrate the augmentation of physician power that occurs when they act in groups. The histories of the establishment of inves- tor-owned hospitals in Coast Town and Center City illustrate how physicians can alter the configuration of hospital services. In both cit- ies, physicians upset about what they saw as unaccommodating attitudes at the existing hospitals had negotiated with investor-owned corporations to build a new hospital. In Coast Town the physicians were in an existing group practice. In Center City a group of physicians came together for the sole purpose of bringing to the community a hospital more to their lik- ing, and once they achieved this purpose, they no longer functioned as a group and did not confine their admissions to the new hospital. These two facts had important consequences. Since the existing hospitals in Center City con- tinued to receive admissions from He physi- cians, the impact of the new hospital was much less strongly felt than in Coast Town. Fur- thermore, the new investor-owned hospital in Center City did not begin with, nor had it yet developed, the lid of assured patient base enjoyed by the investor-owned hospital in Coast Town. The Center City hospital, therefore, had to seek admissions from all community physicians (including the original physician

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HOSPITALS AND THEIR COMMUNITIES investors) with whom hospitaVcorporate in- terests did not always coincide. This lack of accord was exemplified in the disagreement about whether the hospital should operate an emergency room, which was established de- spite physician objections. Because physicians had generally not aligned with any single hos- pital they had preserved the option of sending their patients elsewhere-an option that was used implicitly, if not explicitly, to influence decisions made at the hospital's home office. Clearly, even at a hospital operated by a well- capitalized and highly centralized investor- owned hospital company, the alienation of large numbers of physicians, able to control their admissions, can have a powered economic im- pact on the hospital. In Coast Town, a large multispecialty group of physicians committed its admissions to the new investor-owned hospital by budding their office building on the hospital campus. A sym- biotic relationship between the group and the hospital was reinforced by the alienation of many of the community's other physicians who would not admit patients to the new investor- owned hospital. This hospital's bylaws pre- cluded physicians not in the multispecialty group from governing board membership. This investor-owned hospital, with the group's ex- isting patient base, could locate in a growing part of town that was removed from down- town, from poor neighborhoods, and from the other hospitals. By contrast, in Center City the investor-owned hospital was located near existing hospitals because the physicians in- volved in its construction wanted to facilitate their seeing patients at all of the hospitals. In Coast Town, physicians who were not in the group practice became extremely valuable to the existing not-for-profit hospitals, and their influence increased as the census fell at those hospitals. At the time of our visit, the not-for- profit hospitals were acting to establish closer links with their staf~physicians in ways (e.g., via an office building) that may eventually cre- ate a situation that is similar to the one at the investor-owned hospital. It was generally difficult to see differences between investor-owned and not-for-profit hospitals in their responsiveness to physicians' needs, or in the influence of physicians in the hospitals. Rather, differences among hospitals 471 related more to the level of competition in the community and to physicians' ability to have an economic impact on the hospital. Important to the relationship between phy- sicians and their hospitals was the degree of autonomy allowed to local administrators. The harmony of the triad of corporation/Iocal ad- ministrator/physicians varied with the extent to which the three branches had common goals and with the extent to which corporate policy allowed the administrator the flexibility needed to reconcile conflicts. Physicians in two of the three investor-owned hospitals visited gener- ally expressed satisfaction with the respon- siveness ofthe corporation and administrators. In one hospital where corporate and local goals were to build census, establish a reputation for quality care, and carve out some specialty niches, the physicians' key role in those ob- jectives was well understood by corporate staff who realized that good physician relationships were a priority for the local administrators. In a second hospital, where almost all pa- tients were admitted by a multispecialty group whose members had effectively cut them- selves off from the other hospitals, there was a strong mutual dependence and unity of in- terest. In this most decentralized of the three investor-owned systems, both physicians and administrators commended the wide range of decisions that could be made locally without reference to corporate staff. In the hospital belonging to the third, most centralized investor-owned system, the ex- treme control exercised by the corporate office together with occasional divergence of inter- ests between physicians and corporate staff placed the hospital administrator in the ex- tremely uncomfortable and ultimately unten- able position of trying to balance conflicting corporate and physician demands with very little leeway for negotiation. SOME GENERAL CONCLUSIONS Because of the importance of local circum- stances in detennining how other hospitals will fare after an investor-owned hospital enters the market, it is difficult to draw general con- clusions about the impact of investor-owned hospitals from visits to three very different communities. Of particular importance were

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472 the circumstances of the entry of investor own- ership whether at the behest of physicians, whether demand for hospital care was already being met, and whether physicians continued admitting to existing hospitals. Diverse sce- narios occurred because of the differences in local situations. In one community existing hospitals had to make strong efforts just to survive and eventually thrive in the highly competitive situation. In the two other com- munities, not-for-profit and investor-owned hospitals existed side-by-side and had only rel- atively minor impacts on each other until de- mand for care in the community lessened, causing the hospitals to try to secure their mar- kets in the face of increasing competition. Regardless of whether the investor-owned hospital was newly built or an existing hospital that was bought and upgraded, competition among hospitals had become intense in all three communities. As a result some hospitals started to offer new services, upgrade existing ser- vices, and develop strengths in specialty ser- vices, and sought to increase their attractiveness to physicians and tie physicians to the hospi- tals. Whether such developments would oth- erwise have occurred in these communities is difficult to judge. For patients, the choice of hospitals in- creased as a new or upgraded hospital was established, and many observers believed that greater competition had brought improve- ments in the quality of care available in the community. This was particularly noted in two communities. In Valleyville, an out-of-date, low-quality hospital was bought and upgraded by an investor-owned corporation. In Coast Town, the not-for-profit hospitals recruited to the community new and reputedly very good physicians and improved the quality of care in their hospitals. For physicians the advent of investor ownership often meant that the ex- isting hospitals became much more receptive to suggestions and more responsive to physi- cians' needs. In some circumstances physi- cians were able to increase their voice substantially in hospital policymaking. For payers, having an investor-owned hospital in the community appears to have brought in- creased duplication of services and price in- creases led by the investor-owned hospitals. These impacts can be traced to increased com FOR-PROFIT ENTERPRISE IN HEALTH CARE petition and may not be effects of investor ownership per se. Ejects of investor ownership can be sought not only in accounts about communities before and after the coming of an investor-owned cor- poration, but also in examining the similarities and differences between the investor-owned and not-for-profit hospitals that were visited. Before discussing investor-owned and not-for- profit hospitals as groups, it should be noted that the hospitals within each group were quite diverse. In the investor-owned group, we saw a hospital containing an array of state-of-the- art, high-technology equipment, and one equipped at a much simpler level. We saw one hospital over which the home office exerted tilt control, and one that functioned with rel- ative freedom from home office influence. We saw one hospital in which the relationship be- tween the physicians and administrators was one of mutual respect and cooperation. In an- other hospital the relationship was more con- flictual. The list could go on and the group of not-for-profit hospitals represents a similarly diverse set of institutions. The major difference observed between the not-for-profit and investor-owned hospitals was in the uncompensated care provided in the communities in which there was either no public hospital or more need for free care than the public hospital was willing to provide. The lesser amount provided by the investor-owned hos- pitals stemmed from their location and their having been established by physicians who wanted a particular type of hospital. The greater amount of uncompensated care in the not-for- profit hospitals appeared to flow in part from uncompensated care being seen as inherent in their mission. It also followed from their lo- cations, which sometimes came about because of the location of donated land. In some cases, when the hospitals were built, the area was more affluent. But regardless of reason, if a public hospital did not provide sufficient Dee care, people unable to pay for care were dis- proportionately cared for at the not-for-profit hospitals. There were, however, striking similarities between the not-for-profit and investor-owned hospitals in some of the ways in which they sought to ensure payment for care. These in- cluded credit checking, triage in emergency

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HOSPITALS AND THEIR COMMUNITIES rooms followed by referral to public providers when possible, litigation, and closing or not offering services likely to incur a burdensome uncompensated caseload. Other similarities observed between the investor-owned and not-for-profit hospitals in- cluded some elements of the relationship be- tween individual hospitals and the multihospital systems that own them. Almost all system hos- pitals were expected to meet financial goals- but these were often speDed out in greater detail by the investor-owned systems and to submit budgets for approval to the central or- ganization. To the extent that some investor- owned systems exercised more stringent con- trol over the activities of the local administra- tors, some exacerbation was observed in local problems (e.g., in hospital-physician relation- ships) that were ignored by home office staff. Some not-for-profit systems appear to be mov- ing towards oversight of more facets of hospital operations. There was no important difference between the two sections in the strength of the voice of local boards. In some not-for-profit hospi- tals, the board appeared to be dominated by decisions made in the central office or by local administrators; in others they played a more major role. In the investor-owned hospitals, the local advisory boards included heavy phy- sician representation, and the board's influ- ence seemed to depend more on the history of the hospital than on corporate policy. Sim- ilarly, physician influence in the hospitals was 473 dictated not so much by hospital or system policies as by organization of the physicians and their historical role in the hospital and the competitive environment. Indeed, the competitive environment and the changes that are taking place in payment systems, location of services, and types of health care facilities are pushing all types of hospitals in new directions. If there is any one lesson for the future to be learned from the site visits, it is that the speed and sensitivity with which hospitals respond to change will be an impor- tant determinant of their future. Whether investor-owned or not-for-profit hospitals will perform better in the new environment was not clear. We saw not-for-profit hospitals re- spond rapidly and effectively to intensified competition. Hey made major changes in their internal organization, reached out to become attractive to physicians, and made investments that generated horizontal and vertical diver- sification. However, one not-for-profit hospital that we visited had not responded sufficiently rapidly to the challenge of new freestanding providers and will likely increasingly lose segments of its markets to the new providers. The case studies also showed an example of investor- owned hospitals responding clumsily to com- petition of the new providers and alienating physicians, as well as examples of investor- owned hospitads engaging in joint ventures with physicians and new enterprises Hat may suc- cessfuDy protect their revenues.