This fig leaf of non profit status has allowed organizations to engage in all kinds of corporate behaviors that might be questioned in other fields of business. Among the list of behaviors that would embarrass the Gambino crime family would be the ruthless elimination of competition in local markets. Do bodies wind up in gravel pits? Probably not. They don’t need to. The ruthless financial logic of consolidation means that forming ever larger medical businesses through acquisition just makes sense. The corporate titans who now run the American Hospital Industry have no desire at all to “beat the competition.” It’s much easier just to “eat the competition.” I will give you an illustration from my local market. Because I am still active in this market, details of the story have been altered, “to protect the names of the innocent.” Or not so innocent.
The urban area where I live has several million residents, many of whom are poor. So we had a large, nonprofit hospital that received some level of government support and was loosely supervised by board of county commissioners. We’ll call this entity “Healthy Memorial Hospital.” This hospital keeps its door open to all local residents, insured, uninsured, and everything in between. Unfortunately, this meant that many patients who were carried through its doors either could not pay at all, or had medicaid, which pays very, very little for essential services. After several decades of scraping by in this way, an entrepreneurial CEO rose to the helm and decided that the way to attract patients with better insurance was to build a hospital where those wealthier patients lived. Namely, the suburbs.
One of the benefits of government backing is the ease of borrowing money at low interest rates. So, this CEO worked his board of county supervisors like a champion salesperson, was able to issue bonds with implicit government backing, and used the borrowed money to build a shiny new hospital in the suburban area. We’ll call the new hospital “Healthy Memorial West.”
It worked. People still got into car accidents, fell off rooftops, or contracted breast cancer. But now, when they were carried into the hospital near them, they actually had insurance that paid more than the cost of the service, allowing Healthy Memorial West to subsidize its poorer sibling, the original Healthy Memorial. Bonds were repaid on time and with interest, publicity was good for county commissioners, and our enterprising CEO was given a raise by those same county commissioners.
Now that Healthy Memorial had two hospitals, they had a fairly professional accounting staff, could purchase supplies at better prices, and were building up a good name for themselves in the community. So, when another local hospital started to falter financially, it was only natural for them to look to join the Healthy Memorial Network. Additionally, those suburbs just kept growing with new subdivisions and shopping centers, and before we know it, Healthy Memorial has four hospitals, and has been rebranded, “Healthy Memorial System” because that are a chain, not just one hospital.
Now that Healthy Memorial System was acquiring more and more square footage in the suburbs, more and more of Healthy Memorial’s patients have private insurance. This means negotiation every few years about rates of reimbursement. The more physical space that Healthy Memorial dominates, the more leverage they have in these reimbursement negotiations. After all, well to do patients who pay high rates for premium insurance want to be able to see the doctor that they want, in the hospital that is physically near them. And Healthy Memorial has made sure that they are only a few blocks from the shopping malls and country clubs that these wealthier patients favor.
At some point, some of the players in the game come to the following realizations.
- Insurers are quickly losing leverage because they have less and less hospitals to play off of each other.
- Doctors realize that many minor surgeries that are performed in the hospital could really be done anywhere. Believe it or not, in many states a surgeon could be licensed to operate on you in his house if he felt like it. It’s just by convention and tradition that surgery happens in a hospital.
So the insurers band together with local groups of enterprising physicians, and they form “Same Day Surgery Centers.” These are mini operating rooms that are near, but not in, a hospital. Since the surgeons have ownership of the center, they are incentivized to do many minor surgeries in their own center, and insurers can pay less than the king’s ransom that they had to pay Healthy Memorial.
For a while it works. Despite owning more and more hospitals, Healthy Memorial actually starts to see revenue decrease because more and more surgeries are happening in non-hospital settings. So, if you were that enterprising CEO, with some strong local political connections, and paid lobbyists in the state capital, how might you respond?
Well, you might very well take a page out of the Gambino Mafia play book. First you would pull your political strings to make life very hard for doctors who dare compete with you. Little enforced licensing requirements could be dusted off, zoning inspectors could be called in; tax records could be scrutinized. While you can’t make competing doctors disappear into the swamp, you can make life uncomfortable for them.
Uncomfortable enough to accept your generous buyout offer. As our enterprising Non-Profit CEO has done many times before, he uses his government connections to borrow even more money under favorable terms, and he goes shopping once again. Not only does he buy all the surgery centers, he buys the medical practices that feed the whole machine, making sure that once competing physicians now receive generous, guaranteed income with no medical liability and limited working hours.
Soon Healthy Memorial, which started out as one money losing, struggling, Urban SAFETY NET HOSPITAL thirty years ago, now has 8 hospitals, ten surgery centers, hundreds of medical practices, and all kinds of ancillary medical businesses. If private insurers don’t give Healthy Memorial a great deal, then those privately insured patients can just seek care elsewhere, if they want to drive way out of their way or use a doctor that none of their friends know. Upon his $15 million dollar retirement, our enterprising non profit CEO can sail into the sunset secure in the knowledge that he has both delivered quality of care and patient choice. After all, over 1 million patients in the X county area can chose any Healthy Memorial Hospital they want.
But don’t take my word for it. It happens to be that in the comfortable community in which I live there exists that rarest of species – an independent, non profit hospital. While everyone else has been consolidating and growing like cancer, little Boca Raton Regional Hospital has quietly notched wins such a adding a medical school and leading in research. However, things have progressed to the point where even Boca Raton Regional is ready to throw in the towel and join some larger, “Healthy Memorial” style system. Please read the below quotation carefully, the emphasis is mine,
President and CEO Jerry Fedel said forming a strategic partnership for the hospital will be beneficial on a number of fronts including: enhancing Boca Raton Regional Hospital’s ability to develop nationally recognized clinical programs, establishing market essentiality, mitigating the challenges of a stand alone organization in a complex and evolving healthcare industry, and having greater access to capital. (3)
In other words, combining with a larger entity will mean that Boca Raton Regional has just removed one more competitor from the market, which will guarantee that prices for medical services stay high. Additionally, joining a larger entity will ensure access to the kind of borrowing that enabled “Healthy Memorial” to grow to hulking proportions. As an added bonus, although not mentioned in the press release, Boca Regional will also be able to optimize “synergies,” which means firing a lot of accounting and marketing personnel. Whatever network they join will already have a corporate office that takes care of those functions. What’s not to love? Revenue will go up, costs will go down, and our friendly local “non profit” will have another record year of profits. Not a bad gig if you can get it.
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