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OCR for page 458
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.
OCR for page 459
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
OCR for page 460
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
OCR for page 461
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.
OCR for page 462
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
OCR for page 463
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
OCR for page 464
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.
OCR for page 465
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.
OCR for page 466
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
OCR for page 467
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
OCR for page 468
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
OCR for page 469
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
OCR for page 470
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
OCR for page 471
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
OCR for page 472
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
OCR for page 473
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.
Representative terms from entire chapter:
public hospital
