When opposites attract: will Americans accept for-profit/not-for-profit mergers?

Healthcare Financial Management, Sept, 1997 by Jeanne Schulte Scott

"In virtually every single study, there are no cost differences between the profits and the nonprofits." - Gerard Anderson, director of The Johns Hopkins Center for Hospital Finance and Management in Baltimore, Maryland.

The resignation in July of Columbia/HCA's two senior executives amid accusations of Medicare and insurance billing improprieties has caused a furor of recriminations about the role of for-profit organizations in healthcare delivery and a new round of soul-searching among healthcare financial policymakers. Columbia/HCA's former CEO, Richard L. Scott, had been the most visible proponent of the philosophy that healthy patients and healthy profits do not conflict. In less than a decade, he built the for-profit chain into a $20 billion company comprising more than 350 hospitals and hundreds of other treatment centers.

The rapid growth of the for-profit healthcare industry, however, has occurred at the same time the nation's healthcare delivery system has had to face significant new financial pressures. The emergence of managed care, declining Medicare and Medicaid reimbursement levels, and the gradual shift from inpatient to outpatient services have all strained provider resources.

Many overstressed hospitals have either closed their doors or merged with other institutions. According to the American Hospital Association's 1997 Hospital Statistics, the number of U.S. community hospitals declined from more than 5,700 in 1984 to less than 5,300 in 1996. During 1995, 735 of the nation's hospitals were involved in mergers or acquisitions. Approximately 20 percent of all community hospitals have changed ownership in the past two years.

As a result of these difficulties in the not-for-profit healthcare sector, community concern about the harmful impact for-profit chains might have on the public health and well-being has grown and led to a variety of responses. Several states attorneys general have initiated actions to block or significantly slow pending acquisitions of community and religious hospitals by proprietary chains. Legislation has been introduced in several states to impose new barriers to or place qualifications on such acquisitions. At the Federal level, the Federal Trade Commission has suggested the development of new charitable and community service guidelines to evaluate the market impact of all hospital mergers.

Government Bears Down

In 1996, California enacted a new law giving the attorney general broad authority to review the handling of charitable assets when a for-profit entity acquires a not-for-profit charitable institution. In February 1997, California Attorney General Dan Lungren, a Republican, derailed the acquisition of not-for-profit Sharp HealthCare by Columbia/HCA when he suggested that the proposed transaction would violate California charitable trust law.

Ohio Attorney General Betty Montgomery, also a Republican, forced Columbia/HCA to back out of a deal to acquire Massillon Community Hospital (Massillon, Ohio) citing insider influence on the transaction. The State of Ohio also is seeking to block the acquisition of one of its not-for-profit Blue Cross/Blue Shield plans by Columbia/HCA.

Wisconsin Attorney General James Doyle, a Democrat, is backing legislation that would give his state more authority to oversee the sale of hospitals, especially when a for-profit buyer acquires a not-for-profit seller. Texas Attorney General Dan Morales, another Democrat, notified Baylor University officials, then considering the sale of the university's hospital to a for-profit chain, that the system's charitable assets - the hospital-must continue to fulfill public health goals. The university then announced it was canceling its discussions with the chain. Currently, at least 15 states are considering or have passed legislation addressing charitable conversions, particularly among healthcare organizations.

Given the bipartisan nature of these actions, it reasonably can be assumed that they represent broad-based public policy opinion that weighs heavily against the acquisition of not-for-profit, charitable healthcare organizations by for-profit providers.

What's Going On?

The last time I looked, the United States still claimed to be a bastion of free enterprise that prefers to rely on the marketplace to guide economic decision making. Still, the clamor against healthcare "profiteering" seems to be echoing across the nation. What's going on?

Healthcare delivery arose in this country as a local endeavor that was often associated with religious or community charities. For-profit hospitals, where they existed, usually resulted from unusual circumstances and were usually owned by physicians who were at odds with the local establishment. In the East and in older, larger cities, municipal hospitals were commonplace, emphasizing that health care was a civic and charitable responsibility, not a business.

Things have changed. Today, even charitable hospitals have to meet their bottom-line objectives if they are to survive.