Prescription for Profits

By Janice Castro

Private hospital firms bring management skills to the bedside

Every morning about 1 million Americans wake up in hospitals. By the end of the day they have run up medical bills totaling some $375 million. Until about ten years ago, most hospitals were operated as nonprofit community institutions without much regard for cost-effective management. But now private enterprise has discovered the hospital business. Says U.S. Senator Howard Metzenbaum of Ohio: "There is one business that is growing faster than the computer business--franchised medicine."

Nearly one in every five U.S. hospitals is now owned or managed by profitmaking companies. The number has grown more than 40% since 1977, even as the overall number of U.S. hospitals has declined about 10%, to some 6,900. At present, publicly held companies own 1,045 facilities and manage another 283. Private enterprise was drawn to the business primarily by steep increases in expenditures for medical care, especially for Medicare and Medicaid, which totaled $86.2 billion last year.

The investor-owned part of the hospital industry had 1982 revenues of $11.2 billion and profits of some $520 million. In the past five years, the earnings of the five largest hospital companies (Hospital Corporation of America, Humana, American Medical International, National Medical Enterprises and Lifemark) increased at an annual rate of 30% to 50%. Last year Standard & Poor's index of stock prices for hospital management companies zoomed 68%, making the otherwise healthy 14.8% rise in the S & P index of 500 industrials look anemic by comparison.

Hospitals-for-profit are not a new phenomenon, of course. Groups of local doctors have long owned some small facilities. But today those hospitals are more likely to be members of large national chains. Indeed, nearly 40% of all U.S. hospitals are already linked in multihospital systems. More than 60% are expected to belong to such groups by 1990.

The need for capital has been a major driving force behind hospital changes. Aging buildings, spiraling costs and rapidly evolving, expensive medical technology created huge demands for money. Traditional revenue sources, such as philanthropy, tax-exempt bond issues and other public subsidies, are no longer enough. Between 1980 and 1990, U.S. hospitals will have to spend an estimated $150 billion on plant and equipment. Says Shephard Plotner, executive director of the Forkosh Memorial Hospital in Chicago: "It is going to be increasingly difficult for independent hospitals, particularly the smaller ones, to survive."

The giant of the field is Hospital Corporation of America, which Dun's Business Month last year rated as one of the five best-managed companies in the U.S. With 367 facilities worldwide, a staff of 40,000 physicians and 7.5 million patients daily, H.C.A. has been called "the McDonald's of the hospital business." Founded in 1968 by Dr. Thomas Frist, 82, a Nashville cardiologist, his son Dr. Thomas Frist Jr., 44, and Jack Massey, 78, one of the founders of Kentucky Fried Chicken, H.C.A. is today run by the younger Dr. Frist. While he is a trained surgeon with a medical degree from Washington University in St. Louis, Frist sees himself more as a professional manager than a doctor. H.C.A.'s 1982 revenues rose 47%, to $3.5 billion, and earnings increased 39%, to $171.9 million.

Along with management know-how, private enterprise has introduced new marketing techniques to the hospital business. Cooper Medical Center in Camden, N.J., last January hired a plane to carry a streamer over Veterans Stadium in Philadelphia during a football game with the message: COOPER DOCTORS, YOUR OTHER WINNING TEAM. Some institutions give birthday parties for babies born in their hospitals in the hope of encouraging repeat visits. At Humana's Women's Hospital in San Antonio, which will open next summer, children visiting their newborn brothers and sisters will be entertained in a special "sibling room" equipped with games. Patients at Eastwood Hospital in Memphis, a Healthcare International facility, get a $10 refund if the floor nurse fails to respond to a call signal within one minute.

Many nonprofit hospitals are working with the successful hospital corporations to cut costs. Maimonides Medical Center in Brooklyn, a 670-bed public facility, is saving more than $1 million per year using an inventory-control system designed with the cooperation of the American Hospital Supply Corp. Maimonides saved $360,000 last year, for instance, by using A.H.S.C.'s house brand of supplies instead of buying in the open market. Says Maimonides Administrator William Horner: "I gave our medical staff a choice. I told our chief of surgery that if we used the non-name products, we could put the money we saved toward providing more surgery." The staff enthusiastically endorsed the switch.

Critics accuse the chains of overcharging patients or of skimming the cream from the patient population. At a hospital industry conference in April, Metzenbaum snapped at a group of private hospital officials: "You and your organizations have taken the side of private greed." According to the Senator, for-profit hospitals in Florida charge an average of 14.3% more than nonprofit ones.

Opponents claim that the profitmaking hospitals "dump" poor or uninsured patients by sending them to the nearest public hospital. Critics also charge that they concentrate on such relatively simple yet expensive treatments as delivering babies and removing gall bladders, but leave less profitable procedures like organ transplants and cancer therapy to large teaching hospitals.

Frist and other private hospital executives point out that indigents are primarily the responsibility of taxpayer-supported public hospitals. Nonetheless, private hospitals do provide some free care. Last year about 4% of their patients were charity cases, in contrast to an average of 5% for all hospitals.

Private hospital advocates like to point to dozens of community hospitals that would have been forced to close their doors if they had not joined for-profit chains. One example: the Glenn R. Frye Memorial Hospital in Hickory, N.C. (pop. 23,000). When it was acquired in 1971 by Beverly Hills-based American Medical International (1982 revenues: $1.4 billion), the leading cause of death in the area was automobile accidents. But since Frye was not equipped to handle neurological injuries, as many as 540 accident victims a year had to be transported 65 miles to Baptist Medical Center in Winston-Salem. Today Frye boasts a complete neurology and neurosurgery staff. Says Jean Settlemyre, A.M.I.'s vice president for nursing, who was herself born at Frye: "Only with money could you do that."

Some nonprofit hospitals are starting to adopt methods pioneered by private enterprise ones. One example is satellite treatment centers. These are small, independent facilities where the staff can perform minor surgery, deliver babies, treat alcoholism and offer other care that does not require the full resources of a hospital. As a result, costs to the patient can be cut by as much as 50%. In Beverly, Mass., Beverly Hospital has established satellite facilities on its grounds, including a delivery center for mothers who prefer the more intimate setting and a nutrition and weight-loss clinic.

The graying of America will swell medical costs for years to come. Some 11.6% of all U.S. citizens are now 65 or older, and by the year 2025 the figure will be up to 19.2%. This group generally needs about four times as much medical care as other sectors of the population. As America's medical demands continue to increase, both privately owned and nonprofit hospitals will be looking to professional managers who can wield a scalpel with the skill of a top surgeon when it comes to paring costs.

--By Janice Castro.

Reported by Anne Constable/Washington and Magda Krance/Chicago

With reporting by Anne Constable, Magda Krance This file is automatically generated by a robot program, so viewer discretion is required.