Psychiatric Annals

Multihospital Systems

Thomas J Conklin, MD

Abstract

THE CURRENT SITUATION

According to the latest statistics collected by the American Hospital Association, there were 256 different multihospital systems operating in the US in 1983. 2 These systems were composed of 539 investor-owned hospitals and 967 not-for-profit hospitals and together operated over a quarter of a million hospital beds.2

The past 15 years have seen an almost meteoric rise in the number of multihospital systems in the US. Multihospital systems were largely "debunked" in the mid-1960s; were seen as much more promising by the 1970s; and now, according to some health care experts, will easily include more than 50% and possibly as much as 65% to 70% of all health care facilities by 1986.3

Multihospital systems have climbed steadily from a low point of 261 hospitals in 1950 to over 25% of America's hospitals - more than 1,500 of all non-federal, general, and specialty hospitals (out of a total of approximately 6,000) are included in multihospital systems. Through merger, consolidation, and new acquisition, the size and number of multihospital systems is constantly changing. The largest system by far is Hospital Corporation of America (HCA), Nashville, Tennessee, which owns or operates 340 hospitals with over 45,000 beds. However, a system with the largest number of hospitals may not have the largest number of beds. On the other hand, NYC Health & Hospital Corporation has only 15 hospitals with over 10,000 beds. According to E. Taylor of the American Hospital Association (Nov 1983), this system is the third largest by bed size. Multihospital systems are often thought of as investor-owned; these systems control 36% of the hospitals but operate only 27 of the 256 multihospital systems in the country. The rest are church-related or voluntary not-for-profit systems. Four of the large, formal alliances of not-forprofit systems presently operating in the US include Voluntary Hospitals of America, with 30 member organizations; Sun Alliance, with 25 members; Associated Hospital Systems, with 10 member systems; and United Healthcare System, which also has 10 members.

The psychiatric industry is also involved in the multihospital phenomena. Psychiatric hospitals increasingly are owned or managed by a limited number of organizations and the ownership of private psychiatric hospitals is changing rapidly. In 1975, 50% of all private psychiatric hospitals were investor-Owned. In 1983, 66% were investorowned; six for-profit chains control 82% of the forprofit beds and 54% of all beds in psychiatric hospitals.

Acquisition efforts are turning to free-standing psychiatric hospitals with intense competition for these facilities. As of spring 1983, there were only about 200 free-standing private psychiatric hospitals in the country. Most of those are already owned or managed by investor-owned multihospital systems (including HCA, National Medical Enterprises, Charter Medical Corp., and Community Psychiatric Centers of Santa Ana, California). According to HCA 's Vice President Victor Campbell, "1 don't think there are a lot of [psychiatric hospitals] left to be acquired."4 However, multihospital systems continue to expand as the psychiatric market is not yet fully saturated. Systems not only continue to purchase free-standing psychiatric facilities, but many systems are now actively filing Certificates of Need to build new facilities. According to Linda Punch of Modem Health Care magazine, "The move toward decentralization in public mental health care and growing public awareness of the need for psychiatric services have encouraged the growth of private psychiatric facilities."5 The smaller multihospital systems also find psychiatric hospitals attractive because of the smaller financial commitment that is required in contrast to investing in a large general hospital.5 In addition, psychiatric facilities are finding themselves wooed by multihospital systems because they have profit margins which are just as good or even slightly…

THE CURRENT SITUATION

According to the latest statistics collected by the American Hospital Association, there were 256 different multihospital systems operating in the US in 1983. 2 These systems were composed of 539 investor-owned hospitals and 967 not-for-profit hospitals and together operated over a quarter of a million hospital beds.2

The past 15 years have seen an almost meteoric rise in the number of multihospital systems in the US. Multihospital systems were largely "debunked" in the mid-1960s; were seen as much more promising by the 1970s; and now, according to some health care experts, will easily include more than 50% and possibly as much as 65% to 70% of all health care facilities by 1986.3

Multihospital systems have climbed steadily from a low point of 261 hospitals in 1950 to over 25% of America's hospitals - more than 1,500 of all non-federal, general, and specialty hospitals (out of a total of approximately 6,000) are included in multihospital systems. Through merger, consolidation, and new acquisition, the size and number of multihospital systems is constantly changing. The largest system by far is Hospital Corporation of America (HCA), Nashville, Tennessee, which owns or operates 340 hospitals with over 45,000 beds. However, a system with the largest number of hospitals may not have the largest number of beds. On the other hand, NYC Health & Hospital Corporation has only 15 hospitals with over 10,000 beds. According to E. Taylor of the American Hospital Association (Nov 1983), this system is the third largest by bed size. Multihospital systems are often thought of as investor-owned; these systems control 36% of the hospitals but operate only 27 of the 256 multihospital systems in the country. The rest are church-related or voluntary not-for-profit systems. Four of the large, formal alliances of not-forprofit systems presently operating in the US include Voluntary Hospitals of America, with 30 member organizations; Sun Alliance, with 25 members; Associated Hospital Systems, with 10 member systems; and United Healthcare System, which also has 10 members.

The psychiatric industry is also involved in the multihospital phenomena. Psychiatric hospitals increasingly are owned or managed by a limited number of organizations and the ownership of private psychiatric hospitals is changing rapidly. In 1975, 50% of all private psychiatric hospitals were investor-Owned. In 1983, 66% were investorowned; six for-profit chains control 82% of the forprofit beds and 54% of all beds in psychiatric hospitals.

Acquisition efforts are turning to free-standing psychiatric hospitals with intense competition for these facilities. As of spring 1983, there were only about 200 free-standing private psychiatric hospitals in the country. Most of those are already owned or managed by investor-owned multihospital systems (including HCA, National Medical Enterprises, Charter Medical Corp., and Community Psychiatric Centers of Santa Ana, California). According to HCA 's Vice President Victor Campbell, "1 don't think there are a lot of [psychiatric hospitals] left to be acquired."4 However, multihospital systems continue to expand as the psychiatric market is not yet fully saturated. Systems not only continue to purchase free-standing psychiatric facilities, but many systems are now actively filing Certificates of Need to build new facilities. According to Linda Punch of Modem Health Care magazine, "The move toward decentralization in public mental health care and growing public awareness of the need for psychiatric services have encouraged the growth of private psychiatric facilities."5 The smaller multihospital systems also find psychiatric hospitals attractive because of the smaller financial commitment that is required in contrast to investing in a large general hospital.5 In addition, psychiatric facilities are finding themselves wooed by multihospital systems because they have profit margins which are just as good or even slightly better than most acute care facilities. Investment costs tend to be less and, with less ancillary services and equipment, profit margins can be higher. It has been estimated that it only costs half as much per bed to build a psychiatric facility as compared to a general hospital.

A BRIEF HISTORY

Early in our nation's history, most small clinics and hospitals were owned by physicians, usually serving as an extension of their offices. At the turn of the century, the small doctor-owned hospital was gradually replaced by more sophisticated community or church-owned nonprofit facilities. The number of proprietary hospitals steadily decreased until, in 1968, they were less than 11% of the total.

During the Depression, many privately owned hospitals went bankrupt and were replaced by governmental, charitable, religious, and other types of nonprofit hospitals. The growth and viability of the hospital industry was largely assured by two separate events: 1) the Hill Burton Act of 1946, which provided federal money for hospital construction; and 2) the passage of Medicare and Medicaid legislation in the 1960s, which guaranteed funds to pay for the hospitalization of the poor and the elderly.6

Over the past 20 years, the hospital industry has gradually become more regulated, while at the same time facing increasing demands for comprehensive and cost effective services and while keeping astride of rapid advances in medical science and technology.

With the advent of Medicare, hospitals became enmeshed in planning regulation, cost containment, and other regulatory requirements. Sharing services with other hospitals, consortia and affiliations of one sort or another, multi-unit management systems, and hospital mergers became increasingly common in the late 1960s when the general movement toward cooperation and coalescence was seen as a voluntary response in order to provide high quality of services during a period of financial restraint and constraint.

The common denominator in all of this is change, and many hospitals have been entering into cooperative arrangements of one sort or another with other health care facilities in order to try to stabilize their operations and strengthen their management techniques. Although the number and types of arrangements may differ, they all share one common phenomenon: they represent a movement on the part of the hospital industry away from its historical structure as completely autonomous, independent organizations to complex, highly interdependent multi-institutional organizations.

Because multi-institutional arrangements vary widely in content and structure, attempts to classify them employ a number of dimensions. Several multihospital systems have evolved and follow a continuum from a fairly simple affiliation agreement to a complex system of corporate reorganization and ownership (Table).

WHY?

Why are hospitals joining multi-institutional systems? What motivates the health care facility to contract with or to enter into corporate ownership with another hospital or corporation? Since multihospital systems are growing rapidly, the advantages must be more than hypothetical.

The reasons that hospitals are interested in multi-institutional systems vary, depending on whether they are investor-owned or voluntary and not-for-profit. The not-for-profit hospitals want freedom from regulatory control and to gain sources of revenue for their hospitals. The investorowned hospital seeks these broad advantages as well as seeking to make a profit or a "return on equity for their stockholders."7

It has become increasingly clear that multihospital systems provide technological, financial, and managerial services and can achieve economy and quality of scale that are necessary in today's health delivery system but are not usually available to an independent, free-standing hospital. A major economic advantage for the investor-owned system is the ability to obtain capital financing. The ability to raise capital funds in substantial amounts is crucial to the successful outcome of any building project or major acquisition. The investor-owned system, through the sale of shares of ownership in a corporation, can quickly raise large amounts of capital which, in tum, can become the financial base for borrowing additional funds from banks or corporations.8

Permanent sources of capital are necessary for continued growth - the sale of stock or, for taxexempt hospitals, contributed capital. As philanthropy declines, the nonprofits must rely more heavily on a combination of earnings and long-term debt to finance capital requirements. Voluntary nonprofit hospitals can also finance their growth by selling and leasing back facilities and by raising funds through taxable subsidiaries.6

It has been suggested that multi-institutionai systems can achieve greater degrees of effectiveness and efficiency in the delivery of health services. Systems have more political clout. They are also far more effective in developing marketing programs and have superior ability to capture particular strengths or capacities in administrative or clinical areas such as financial management, personnel and labor relations. Both investor-owned and not-forprofit institutions can derive many advantages from affiliation with multihospital systems. These include, but are not limited to, capital funding, informational systems of national scope, broad management services, and strategic planning utilizing national experts and data bases which allow for specific and accurate forecasting.9

Many hospitals have realized that there is strength in numbers and that they develop more political and economic power through consolidation and cooperation with other hospitals. Individual hospitals were able to function better in the past with a less complex environment. Now many hospitals do not possess the resources in terms of capital, services, or personnel to measure up to the demand for a full array of sophisticated health services. Because of these advantages, systems are often able to help a troubled hospital stave off closing and to help other hospitals not only to survive but to prosper as well.

Table

TABLEMULTIHOSPITAL ARRANGEMENTS

TABLE

MULTIHOSPITAL ARRANGEMENTS

Levenson points out that growth in investorowned psychiatric hospitals has been stimulated by at least five important factors:

1. personal financial gain for the investor;

2. emphasis on short-term treatment;

3. demand for additional private psychiatric hospitals;

4. expanded insurance coverage providing a funding base for services; and

5. provision by a well-run psychiatric hospital of both good patient care and a reasonable financial return.9

WHAT LIES AHEAD?

It appears that the future for multihospital systems lies in two areas: consolidation and diversification.

There are currently over 250 investor-owned and not-for-profit multihospital systems. There will be a significant trend toward consolidation of many of the systems to form giant corporations. Most of the voluntary hospital systems even now are too small to have the advantage that they are going to need in the 1980s. Some experts have estimated that the number of hospitals involved in systems will rise to 60% to 65% by the end of the decade and the number of systems will fall to approximately 100 to 150. Others feel that there will be far fewer systems than 100. Royce Diener, Chief Executive Officer of American Medical International has stated, "By 1990, you could see fewer than 100 systems . . . you will see 25 systems that control 35% or possibly 40% of all hospitals in the country." Uranus Appel, founder of American Medical International, is much bolder in his predictions concerning consolidation, "Eventually, the hospital field in the forprofit sector will be composed of three or four large companies."10 As consolidation continues, freestanding hospitals will have increasing difficulties in surviving. John Bedrosian, Senior Executive Vice President of National Medical Enterprises, is of the opinion, "If I were a free-standing hospital in the country today, I 'd be looking around for help - how to shore up my defenses and strengthen my market position. The pressure on freestanding hospitals - the reimbursement pressures, legislative pressures, and cost of coping - are going to increase. That should make it more of a buyer's market than it has been." The number of for-profit systems has been decreasing while the number of mergers grows. Changes are taking place so quickly that it is almost impossible to keep up with the latest situation. For example, it has recently been announced that American Medicai International, third in size among the investor-owned systems, and Lifemark Corporation, eighth among the investor-owned systems, have signed an agreement to merge through a transaction valued at close to one billion dollars. All-Adventist Health Systems have announced the consolidation and formation of Consortia-Adventist Health System-US. The four systems combined would total 72 hospitals and 9,259 beds. Samuel J. Tibbetts, President of Lutheran Hospital Society of Southern California, predicts that the number of hospitals in multihospital systems will double in the next five years. He feels that the Medicare prospective payment system will make it very difficult for small and independent, free-standing hospitals to raise capital. As a consequence, the investor-owned hospitals will find it easier to recruit new members. While some experts predict that increasing state and federal regulations could prove difficult for multihospital systems, Tibbetts holds the opposite view. It is his opinion that, "Prospective rate setting and health planning commissions will favor multihospital systems . . . increased state regulation also will encourage change to improve productivity, lower their rates, and develop more political clout ..." Walter Weisman, President of American Medical International, feels that in the next five years "acquisitions by the five largest companies will range between a combined total of 50 and 100 hospitals a year." Most hospital industry leaders predict that the advent of Medicare prospective payment and competition for privately insured patients will strengthen multihospital systems and weaken independents so much that they will have to affiliate with chains. The standard forecast is that more than 50% of the nation's hospitals will be part of a system in five years.11

The Other major trend among multihospital systems is diversification. Hospital systems are diversifying into nursing homes, free-standing healthcare facilities, home care, and hotel and management services. It has been stated that, "There are few ideas that now exist on how health care services can be delivered that are not being seriously investigated as potential new businesses. Imagine almost any service that might attract clients, and someone is out there undoubtedly studying it and trying to find a way to produce it. Hospital systems which are corporately structured seek expansion through the development and acquisition of profit-making ventures outside of traditional inpatient services."12 In order to increase revenues, many multihospital systems market, sell, or contract to provide specialized clinical or management services to nonmember hospitals or to the business community.

The clinical services offered tend to be in the areas requiring high levels of technological and professional expertise, such as diagnostic imaging, chemical laboratories, pharmacy services, physical therapy and perfusion services. Although the possibilities are virtually limitless, other clinical opportunities for hospitals seeking to diversify while generating extra income include primary care centers, ambulance services, wellness and fitness testing centers, emergicenters, and pain management centers. Systems also offer a myriad of management and support services to hospitals and other businesses who are seeking more cost-efficient ways to provide these services within their own organizations. The most popular and financially successful of these include data processing, housekeeping, janitorial services, food services, linen and laundry services, and personnel programs.

UNRESOLVED ISSUES

Do investor-owned hospitals skim the "cream" of hospital patients (those with private insurance and uncomplicated illnesses) while ignoring the indigent, the chronically ill, and those on Medicare? An annual survey by the American Hospital Association supports this concept and indicates that a greater percentage of not-for-profit hospitals will offer a patient more specialized care than will the investor-owned institution.13 Relman believes that for-profit hospitals succeed by providing the most profitable services to the patients with private insurance. "The nonprofit hospitals could not employ such practices even if they wished to do so because they have community obligations and are often located in areas where there are many Welfare patients." Despite his concerns, Relman states that, "There are no critical studies on which to base firm conclusions about the extent and implications of a skimming phenomena in the proprietary sector."14 Levenson feels that, although investorowned hospitals are accused of seeking patients who require relatively simple surgical procedures and uncomplicated nursing care, the investorowned hospital would "appear to have little opportunity to engage in skimming in the sense of selectively admitting patients on the basis of differing potentials for generating revenue."9 There are a number of other issues that swirl among the investor-owned hospitals and multihospital systems in general. These include issues having to do with propriety and profits. The question has been raised about the propriety of investor-owned hospitals that are intended to produce a profit for their individual owners. This ethical concern can further be extended to physicians who are owners in such facilities especially when the costs of operating such a program are in large part under the control of the physicians.

Another issue widely debated is whether investor-owned hospitals are more efficient and costeffective than their voluntary counterparts. There are those who argue that multihospital systems bring the best in skilled management to a multibillion dollar industry. It has also been pointed out that hospital systems provide opportunities for cost cutting in the purchase of supplies, sharing of expensive managerial talent, and various other economies of scale.

Another important aspect of the debate over investor-owned hospitals relates to the cost per hospital day. A study conducted by Lewin & Associates comparing 53 not-for-profit community hospitals with 53 investor-owned hospitals found that, "Investor-owned hospitals had higher revenues per day and per stay. Their costs were only slightly higher than those of the not-for-profits; most of this cost difference was due to higher costs for administrative and certain ancillary services among the investor-owned hospitals. Shorter length of stays in the investor-owned hospitals reduced the charge and cost differences on a per stay basis. Marked differences in pricing practices were observed between the two groups." The investor-owned hospitals are slightly more expensive on a per day basis but essentially comparable on a per admission basis. The slightly lower costs per day in not-forprofit hospitals are the result of lower costs in ancillary and administrative services combined with a 5% higher length of stay. Compared to notfor-profits, investor-owned hospitals tend to price their services considerably higher than their costs, resulting in higher profits. Pricing differences are small for routine services (room and board) and very large for some of the ancillary services. Investor-owned hospitals tend to have fewer full-time equivalent staff, more occupied beds, and use lower comparable volumes of care.6

As multihospital systems strive to improve their competitive position by acquiring other hospitals, it is increasingly important that they review antitrust laws as they apply to their various activities. Through mergers, consolidation of system, and accessing capital, multihospital systems fall within the purview of federal antitrust legislation. The Sherman Act prohibits unreasonable restraints in trade that limit, suppress, or destroy competition. The Clayton Act defines specific types of anticompetitive behavior. Multihospital systems are acutely sensitive to Section 7 of the Clayton Act, which specifically forbids joint ventures, mergers, or consolidations where their effect "may be substantially to lessen competition or tend to create a monopoly."15 Both of these laws are intended to protect and promote free competition within the economy and to prohibit price fixing or the merger of organizations that create a monopoly or that are judged to be anticompetitive.

Finally, there is a question of the quality of care that is provided in the investor-owned hospital system. There are those who feel that proprietary hospitals must sacrifice quality in their quest for efficiency and profits. Levenson feels that, "It is clearly possible for an individual proprietary psychiatric facility to deliver the highest possible quality of care, and the Likelihood of a particular hospital's realizing its full potential in this regard depends primarily on a variety of factors and is independent of the hospital's proprietary status."9

When Schweicker was Secretary of Health and Human Services, he was quoted, with reference to multihospital systems, as saying, "One of the motivations for consolidation is political and economic clout. The clout will be held by fewer decision-makers who will be less accountable to the marketplace and to the local communities. What will they do with that power? Will they use it to exclude competitors? Will they increase what many think is already too much integration in the health care field?" The Senator has posed an excellent set of questions, and only time will present us with the answers.7

Over the past two decades more and more hospitals have joined together to form alliances and systems with the conviction that, by doing so, they have done everything possible to ensure their growth and survival in the face of increasingly tough regulatory pressures and competition.

REFERENCES

1. DeVrics RA: Strength in numbers Hospitals 1978: 52(March 16):81-84.

2. Directory of Multihospital Systems. Chicago, American Hospital Association. 1983. pp 85-86.

3. Brown M: Multihospital systems in the '80s - The new shape of the health care industry. Hospitals 1982; 56:71-74.

4. Punch L: Competition for acquisition of psychiatric hospitals heats up. Modern Healthcare 1983; 13:123-124.

5. Punch L: Psychiatric hospitals snapped up. Modern Healthcare 1982; 12:106-108.

6. Investor-owned hospitals. Perspective 1981: 16:19-28.

7. Brown M : Systems diversify with ventures outside the hospital. Hospitals 1 98 1 : 55:147-153.

8. Coyne (S: "Networking" and the future of not-for-profit hospitals. Hospitals 1981; 55:83-85.

9. Levenson AI: The growth of investor-owned psychiatric hospitals. Am J Psychiatry 1982; 139:902-907.

10. Ouncheon KF: Future bright, but rocky. Hospitals 1983; 1:15-24.

11. Johnson DEL: Multi-units are ready to boost their market share. Modern Healthcare 1983; 15:89-100.

12. Brown M: Systems diversify with ventures outside the hospital. Hospitals 1981; 55:147-153.

13. Hospital Statistics. Chicago, American Hospital Association, 1980.

14. Relman AS: The new medical-industrial complex. N Engl I Med 1980; 303:963-970.

15. Kinney ED: Better safe than sorry. Hospitals 1983; 1:20-24.

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MULTIHOSPITAL ARRANGEMENTS

10.3928/0048-5713-19841201-05

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