For-Profit Hospitals Poised to Take Market Share From Non-Profits

Non-profit hospitals have been spending, hand-over-fist, on new construction and new wings, adding rooms that most communities don’t need, while investing in the same multi-million dollar medical equipment that five hospitals in a three-mile radius already have. On HealthBeat, I’ve been writing about the investments in hotel-like amenities for more than two years.

Hospitals were borrowing in order to build – interest rates were low; money was available—why not?  Inevitably, the recession would bring an end to all of that. I have predicted that many hospitals would find themselves running out of money in the middle of projects. Other are now saddled with debt, and struggling to hold onto market share.  

As the Dow Jones story below explains, for-profit hospitals are in much better shape. (Thanks to the Daily Yonder’s  ( Bill Bishop for calling my attention to this story.)  Investor-owned hospitals have access to Wall Street capital (i.e. they can sell shares) and so they continue to invest. And now, according to Dow Jones, investor-owned hospitals are poised to take market share from smaller non-profits. They’ll be buying up non-profits. In some cases, they’ll just close them. In others, they’ll turn them into for-profit hospitals.

What does this mean for patients? According to this Health Affairs study, for-profit hospitals decide which services to offer based on how profitable they are.  This means that they tend to shy away from trauma centers, ERs, burn units, psychiatric services and obstetrics. They prefer more lucrative lines of business: cardiology, cardiac catheterization labs, orthopedic surgery, open-heart surgery, fitness centers, pediatric intensive care, and sports medicine.  Since we know that supply tends to drive demand, if you live in an area where for-profit hospitals begin to replace non-profits, you can look forward to more heart surgery and orthopedic surgery.

And if you give birth, chances are higher that you baby will wind up in a pediatric intensive care unit—whether or not she needs to be there. (As I write in Money-Driven Medicine, research has shown that hospitals are over-using pediatric ICUs; this means that well babies wind up in units with very sick babies. And the well babies don’t have a chance to bond with their mothers.

 But what parent is going to say “no” when a doctor says “We want to put your baby in the ICU for a day or two—just to be on the safe side?”  From the hospitals point of view, the only way to pay for the very expensive investment in an ICU is to use it. And for-profit hospitals have an obligation to their shareholders. . . .

Meanwhile, more investor-owned hospitals equals fewer trauma centers, burn units and ERs. In some parts of the country this can mean that if you’re in an accident it will take longer to bring you to a hospital where you can receive emergency care.

Finally, a 2000 Health Affairs study shows that when it comes to most hospital errors  (including  infections due to medical care, foreign object left in the body during a procedure, and  complications involving anesthesia) the rate of “adverse events” is  higher at  for-profit hospitals.

Nonprofit Hospitals' Woes An Opportunity For Big Players

By Dinah Wisenberg Brin
Investor-owned hospital operators are positioned to gain market share from smaller, nonprofit competitors struggling with tight credit markets, investment losses and diminished endowments.

Publicly traded hospital companies, shares of which have generally doubled or more from their year lows, say the credit crisis and recession of the past year continue to squeeze nonprofit competitors, offering the for-profit companies opportunities to acquire patients and, possibly, hospitals.

Steve Filton, chief financial officer for Universal Health Services Inc. (UHS), said the not-for-profit hospitals have really cut back on their capital spending and their investment in infrastructure.

"The fact that our not-for-profit peers are spending less means that we'll have opportunities to take market share" by making strategically critical investments, Filton said. Nonprofits account for at least half of Universal Health's competition and comprise 85% of U.S. acute-care hospitals, he said.

Nonprofits spent capital at "record rates" for years and that has changed dramatically, Filton said.

Dr. Scott Cooper, president and chief executive of the nonprofit St. Barnabas Hospital in New York City, discussed the hospital's lack of financing for capital projects in a YouTube video posted in April.

"We actually have tried to cut back on programs that we were going to expand. Expansion is no longer an opportunity for us, the ability to replace aging physical plant is no longer an opportunity for us. We've had no access to capital markets, our own lenders have tightened their credit terms and so we've had to make do with what we have," said Dr. Cooper, who wasn't available to expand or update his remarks.

According to Oppenheimer analyst Amit Hazan, "increasingly aggressive and risky management of assets by nonprofit hospitals" produced investment income that fueled capital spending for years. That position is "unwinding" as hospitals seek "safer, lower yielding products" that will likely damp capital spending. He sees a power shift back toward for-profit operators, which didn't have the same investment losses as nonprofits.

Oppenheimer surveyed 44 chief financial officers at nonprofit hospitals and found that fiscal 2009 capital expenditure budgets are forecast to fall 17%, while fiscal 2010 budgets are expected to rise 15%. The research firm noted, however, that the 2010 proposed budgets remained 10% below peak fiscal year 2007 levels, and that smaller hospitals were excluded from the survey.

In comparison, for-profit hospital chains, while far from immune from economic and industry woes, generally have continued to invest. For example, Health Management Associates Inc. (HMA) plans to spend about 5% of net revenue on capital expenditures this year, not much different than last year.

"We expect to be able to gain market share in our markets because of our commitment to make capital expenditures when other hospitals are slowing down their expenditures," spokesman John Merriwether said.

A problem for the nonprofits is the lack of access to funds. Pali Capital Managing Director Sheryl Skolnick said Tenet Healthcare Corp. (THC) and privately held HCA Inc. have had several rounds of debt refinancing this year, while nonprofit hospitals would find it extremely expensive to borrow in the municipal bond market.

"If the for-profit publicly traded hospitals want to come to market … they can do it," she said.

Standard & Poor's in July cited evidence that credit pressure had increased for nonprofit health-care systems, with the recession exacerbating longer-standing operational challenges. In 2008 and through June 1, 2009, debt ratings were lowered for 107 nonprofit hospitals or health systems, compared with only 23 upgrades, S&P said.

The lack of access to capital, along with economic pressures, "could force the nonprofit hospital industry into a new era of consolidation," Oppenheimer said. "What will eventually play out is an environment of larger hospital systems that can more efficiently allocate capital and pressure vendor prices."

That could help the for-profit hospitals. Jeffrey Sherman, chief financial officer of LifePoint Hospitals Inc. (LPNT), told investors recently that nonprofit hospitals' woes help create "an opportunity over the next 12 to 18 months to really see more acquisitions coming thro
ugh the pipeline."

6 thoughts on “For-Profit Hospitals Poised to Take Market Share From Non-Profits

  1. single payer advocates were marginalized early on in the debate, but the bill we have been fighting for — hr 676 — would have returned all the investor-owned hospitals to non-profit status [among other important reforms].

  2. Maggie, this is a cynical piece and not consistent with the facts. The study you site is not conclusive: “The incidence of mortality-related events differed minimally across hospital control categories.”
    I worked for several years at a for profit hospital chain and the people are of the highest ethics and are in the business to promote quality and best outcomes.
    In terms of cost of care, New York City, CT and Boston have the highest health costs in the nation. Not a single for-profit exists – against the law.
    My father-in-law was recently hospitalized in Upstate NY. The quality of care was pathetic. Something that would never be tolerated at a for-profit. Remember the Boston Globe reporter that died from a medical error (10x chemo dose) at Dana Farber? They started looking at all kinds of errors there and ultimately had to merge the hospital. Such a pattern would never be tolerated at a for profit.
    If you think not-for-profit hospitals have pure motivations, I urge you to review executive and physician compensation at these places.
    Please don’t be enamored with the not-for-profit label. And please don’t trash the for-profits. They are by and large good people. 🙂

  3. given data from grassley and others on what we get in return for giving non-profits special status, it is hard to know who the good guys are here.
    there seems to be an embedded belief here that for-profit hospitals are somehow a bad idea. do we apply a similar standard to other for-profit providers, including physicians?

  4. Bill, Doug, Jim J.,
    Bill, I agree that there are good for-profit hospitals out there.
    And there are very bad non-profit hospitals out there.
    I grew up in upstate New York. Both of my parents died there, after receiving very poor care at non-profit hospitals. .
    But the largest for-profit chains have done some terrible things. (See my book: Money-Driven Medicine.
    Very clean, used copies are available on Amazon. I make no money on those sales)
    Unfortunately, in the late 1980s, for-profit hospital chains sold themselves to WAll Street by promising double-digit earnings gains.
    That’s just not possible in the hospital industry.The hospital industry is labor intensive. It requires huge capital investments in equipment.
    And it’s unpredictable (you have to have more beds than you need, and never know how many will be filed.)
    The large for-profit chains that have hyped their stocks on Wall Street have been able to deliver to investors only by cheating someone: Medicare fraud; paying kickbacks to docs to hopsitalize patients; lying to shareholers (cooking the books); and operating on patients who don’t need operations (Tenet.)
    In the book, I quote one of the most respected Wall Street healthcare analysts saying that for-profit hospitals just shouldn’t pretend that they are a “growth industry” (an industry where you can expect double-digit capital gains.)
    Doug– Thank you.
    I agree with you.
    I’ve written a number of pieces questioning how many non-proifts have really earning their tax exemptions.
    Down the road, I’m hopeful that health care reform will address this issue.
    At the same time, there are many very good non-profit hospitals out there providing real services for their communities.
    By contrast, rfr-profit corpoations don’t build hospitals in areas where they will attract a large number of poor patients who are uninsured or on Medicaid.
    Building hospitals in pockets of poverty would not be in the best interest of a for-profit corporations shareholders, and, by law, their first fiduciary
    responsibility is to their shareholders.