Industry rhetoric says hospitals and healthcare systems are shrinking.
Healthcare providers boast about "downsizing" and "consolidating" to "eliminate duplication" and "achieve economies of scale."
But in many markets, the medical arms race flourishes. Shiny new facilities, duplicative clinical services and dueling magnetic resonance imaging units are springing up like physical mutations in a Darwinian struggle to survive. Meanwhile, hospitals are swallowing up other hospitals like big fish in an amply stocked pond. In the war for market share, size and affiliation seem to matter.
Changes in healthcare mirror those in the banking industry, said Bill White, director of the hospitals division of Pennsylvania's health department. Services may be duplicated less often in the same block or town, but the industry isn't necessarily smaller. "Consolidation and expansion are going on at the same time," he said.
The flurry of activity has communities questioning whether their healthcare dollars are being spent appropriately. In Boston, for example, observers wonder whether Massachusetts General Hospital needs to proceed with plans to open an obstetrics program now that it's affiliating with Boston's Brigham and Women's Hospital, which operates the largest obstetrics service in New England. Critics think it's a waste. Massachusetts General says it will be providing "a much-desired service to a group of patients who already look upon (Massachusetts General) as `their hospital."'
There's evidence that prudent spending has indeed helped to contain the healthcare industry's ravenous appetite for bricks, mortar and machines. The Center for Healthcare Industry Performance Studies in Columbus, Ohio, reports a significant reduction in the rate of capital expenditure growth beginning in 1992.
The capital expenditure growth rate shows what percentage of a hospital's total gross property, plant and equipment was added in a given year. In 1992, the median for all hospitals dipped to 0.071 from 0.074. And in 1993, it dipped again to 0.069.
It shows that hospitals are spending less on capital and investing more wisely, said William O. Cleverley, the center's manager and professor of hospital and health services administration at Ohio State University.
However, 23 states had either the same or higher margins in 1993. The greatest increases were in Wyoming, where the median capital expenditure growth rate leapt to 0.219 in 1993 from 0.076 in 1992, and Utah, where the rate rose to 0.107 from 0.087. Neither state has a certificate-of-need law (See chart, p. 42).
Also, many people believe hospital mergers and acquisitions will help to wring out excess capacity. Clearly, fewer acute-care hospitals remain in operation today than a few years ago. According to the American Hospital Association's annual hospital closure report, 34 acute-care hospitals closed in 1993, compared with 39 in the previous year.
If providers continue to engage in a game of one-upmanship, where will thelong-term savings come from? Will the healthcare empires amassed today yield lower costs, better quality and equal access for all? It may take years before the answers are known.
Fight for survival. While the industry
claims to be slimming down, and there is evidence that is happening, interviews with health regulators, business groups and watchdog organizations reveal cases of gluttony. Many new projects and programs create excess overhead and duplication, critics charge. Such initiatives have more to do with institutional survival than community need, they contend.
"What you basically have are hospitals trying to acquire, maintain or expand markets," said Robert D. Gumbs, executive director of the Health Systems Agency of New York City, the city's health planning agency. "It has very little to do with community need. It has to do with what I call `speculative healthcare."'
One project that's stirred up plenty of controversy won't be open for business until 1998. The 300-bed acute-care hospital and medical services complex proposed by Fallon Healthcare System in Worcester, Mass., will cost some $200 million, including $122 million in hospital capital costs.
But by sharing systems and housing physicians and patient services in the same space, services can be provided more efficiently, said Robert E. Maher Jr., Fallon's administrator. And project officials hope the new hospital will attract more enrollees to Fallon's HMO.
The Fallon system includes the 300-member group practice known as Fallon Clinic; the 170,000-enrollee Fallon Community Health Plan; and Saint Vincent Healthcare System, the parent of Worcester's Saint Vincent Hospital.
Modeled after Medical City Dallas Hospital, a Columbia/HCA Healthcare Corp.-owned facility, the new Worcester-based Medical City will replace the old Saint Vincent facility, erected in the 1950s and licensed for 483 beds.
Rebuilding the aging facility, at an estimated cost of $35 million, was an option until Fallon executives received an offer from the city of Worcester that made starting from scratch possible, Mr. Maher said. The city and state are investing some $40 million to acquire the land and prepare the site for construction.
In February, the state's Public Health Council approved a scaled-down version of Fallon's original project, which called for 379 beds. The new hospital takes 183 beds out of service.
Is it necessary? Still, the project has many critics, including some in the business and academic communities. "Why would you build a new medical city in this day and age?" asked a healthcare consultant, who declined to be identified. "It does not make any sense at all."
But Mr. Maher said, "It's easy for people to say we don't need it." Such thinking neglects the physical deficits of the old facility, renovation costs, the difficulties of reconstruction and physical constraints that prevent two competing facilities in town-the Medical Center of Central Massachusetts and University of Massachusetts Medical Center-from expanding, he said.
The loudest critic of Fallon/Saint Vincent's Medical City is Alan Sager, a professor at Boston University's School of Public Health and leader of the Access and Affordability Monitoring Project, which tracks healthcare costs in Massachusetts. "I call it an example of solid waste," Mr. Sager said. He said the additional beds just aren't needed.
Furthermore, the monitoring project's analyses contend that Medical City's actual cost will be $831 million when incremental operating costs, including financing costs and other operating expenses, are factored in. And if the project defaults, it "would impair subsequent bond sales by other hospitals," the project's members charge.
The employer community remains divided. Some believe it will help revive downtown Worcester. Others still question the project's size.
"This idea of `Medical City' has a certain grandiose quality to it," said Katherine Metzger, consulting director of the Central Massachusetts Business Group on Health, which represents 40 businesses in the Worcester area.
Many of the group's members have large numbers of employees enrolled in the Fallon HMO. Project planners have assured employers that the impact on HMO rates will be negligible because of increased efficiencies, but Ms. Metzger remains skeptical.
Fallon Community Health Plan's rates have increased in recent years, but at a much lower rate than many other HMOs, Ms. Metzger said. Most employers will see little or no increase in 1995, she said.
Rebuild or close. It's not just new
hospital facilities that are under fire. Several large reconstruction projects across the nation are raising eyebrows. According to critics, preserving inpatient beds doesn't seem to make sense when hospitals' overall occupancy dipped to 61.4% last year and outpatient service demand is growing.
"One of the unfortunate things here in California is that we don't have a handle on need," said Mark Legnini, deputy director of the Office of Statewide Health Planning and Development. With no health planning or CON requirement, "it's easy to build new things here," he said. As a result, a lot of very-low-occupancy hospitals remain in business, he said.
In addition, a state program to provide debt service assistance to hospitals that serve a disproportionate share of Medicaid patients has stimulated some new construction and renovation. Currently, four hospitals are under contract to receive debt service reimbursements, and another 35 have indicated interest, said Tim Matsumoto, a program analyst in the Medi-Cal operations division of the state's department of health services.
Saint John's Hospital and Health Center in Santa Monica is investing $35 million to recover from earthquake damage. One wing was damaged beyond repair, and other operations were forced to close temporarily. A grand reopening of the rebuilt hospital, funded through insurance money, is planned for Oct. 2. The new facility will operate just 170 beds. The old hospital had staffed 360 of its 500 licensed beds.
But as of Dec. 31, 1993, only 55% of Saint John's 457 available beds were occupied, according to state figures. The average occupancy for 147 hospitals in the Los Angeles region was just 53.7%. Statewide, 55.7% of available beds were occupied.
Some observers are asking why the hospital, located four blocks from Santa Monica Hospital Medical Center, is needed at all. "I would seriously question it," said Mary Reiner, chairperson of the Employers Health Care Coalition of Los Angeles, which represents 11 large employers in the 11-county area. But even if it's not needed, it "has lots of people to call on for fund-raising," she said.
In fact, Saint John's is recognized locally as the hospital of the rich and famous-such as former patient Elizabeth Taylor and board chairman Ronald Reagan.
"Yes, it has been, and probably will continue to be, a place where wealthy people come," said Thomas M. Heric, M.D., vice president for public and business affairs.
After the earthquake, administrators met with community groups and struggled to determine the hospital's fate. The options were to build an entirely new hospital, repair the damage or close the facility.
Ultimately, the hospital's sponsor, Sisters of Charity of Leavenworth (Kan.) Health Services, decided it had a mission in Santa Monica that it wanted to continue, Dr. Heric said. The hospital has identified some community needs it hopes to address, such as care for the elderly, Alzheimer's services and psychiatric care.
Repairing the hospital is an interim step because earthquake code only allows the rebuilt facility to remain open for five years. Administrators have formed a task force to envision a permanent replacement that will meet community needs in the year 2000 and beyond.
At the same time, the hospital continues to discuss a merger with neighboring Santa Monica Hospital, a unit of the Burbank, Calif.-based healthcare system UniHealth America. The hope is the two will jointly build a new facility, but talks have proved fruitless so far.
"We feel there's only room for one healthcare facility in this city. We would like it to be ours," Dr. Heric said, adding, "It may not be."
So, efforts to plan a new facility are moving forward. "We would like to reach a compromise with them, but you can't just sit here waiting to compromise and do nothing," he said.
CON review revival. In some states,
legislators are reviving CON reviews to curb duplicative or unneeded projects.
After a six-year hiatus, Wisconsin reinstated CON review for hospitals on July 1, 1993. In the past year, Wisconsin hospitals submitted applications for 30 capital projects worth $34 million. A total of $4 million has been approved, and $22 million is pending a decision. The balance was either withdrawn or denied.
But in the nine months before CON review began, hospitals were only required to report their capital expenditures. That period was the last opportunity to buy and build without state scrutiny, and hospitals, apparently, took advantage of it.
From Oct. 1, 1992, to July 1, 1993, 103 capital projects worth a whopping $630 million were reported. That far exceeds capital spending during the early 1980s, which averaged $88 million a year in Wisconsin. Neither inflation nor today's stricter CON filing standards accounts for the huge rise in spending during the nine months before CON reinstatement.
"You're hearing a lot about consolidation, but I haven't seen it," said Michael Corry, chairman of Wisconsin's Cost Containment Commission. "There's a lot of smoke and mirrors in this business."
Had employers been organized to challenge those projects, the money might have been spent differently, said Timothy Bowers, managing director of MEI, a provider of managed-benefit services to 42,000 employees and retirees of several large private and public Wisconsin employers.
Defense strategy. "Six hundred million (dollars) would pay for a lot of uncompensated care for many years," Mr. Bowers said. Although hospitals say they're investing in capital projects that will decrease costs, "I'm not sure that the relationship between capital and cost reductions exists," he said. Capital spending is being used as a defense strategy to build market share and prevent patients from migrating to competing providers, he said.
That's what some people think may be happening in the southeast corner of Wisconsin. A five-year agreement among four hospitals in Kenosha and Racine to share a single MRI unit is becoming history.
With the deal set to expire Dec. 31, the two Racine hospitals-Saint Mary's Medical Center and St. Luke's Hospital-which are now affiliates of All Saints Healthcare System, are acquiring their own $1.9 million unit. A spokeswoman said 60% to 75% of patients who used the shared MRI in Kenosha were from Racine. All Saints decided that putting an MRI in Racine made sense because it's such a frequently prescribed diagnostic tool.
St. Catherine's Hospital in Kenosha is studying several options but has applied for state approval to have its own MRI. Kenosha Hospital and Medical Center declined comment at press time.
Legislation recently introduced in Ohio addresses the widespread proliferation of MRIs. State Sen. Grace Drake (R-Solon), chairwoman of the Senate's HHS Committee, wants to beef up CON review requirements and crack down on providers who were flouting the law. The bill broadens reviewable projects and services, lowers CON thresholds and stiffens sanctions. In 1992, there were 166 hospital-based MRIs in Ohio, up from 124 in 1990. The numbers include some mobile units that may be shared among several hospitals.
Outpatient care. Outpatient care is another area prone to rampant duplication, observers said.
For example, two outpatient surgery centers have set up shop in the one-hospital town of Valparaiso, Ind. St. Anthony Medical Center in Crown Point, Ind., opened its center there in March 1993. Four months later, Porter Memorial Hospital in Valparaiso opened its facility.
St. Anthony's outpatient surgery center is a joint venture with St. Mary Medical Center in Hobart, Ind.
"Porter was approached several times but didn't want any part of it," said Carolyn Hager, St. Anthony's development director.
Porter decided to move ahead with the $3.7 million project (including equipment costs) because it believed it could provide services for at least equal quality and at a "considerably lower cost." It had three years of experience operating outpatient surgery centers in four other towns.
In the 10,000-person town of Chesterton, Ind., Saint Anthony Hospital and Health Centers of Michigan City is building an outpatient-care center about a mile from where Porter's $2.1 million outpatient center will be operated in a partnership with physicians. St. Anthony executives were unavailable for comment.
Some local businesses are befuddled by the rampant proliferation. "On the surface, it appears there's a problem," said Joanne M. Brown, a member of the board of the Northwest Indiana Health Alliance, a health insurance purchasing coalition. She contends the problem is a lack of communication between Porter and the business community.
But Don Wadle, Porter's chief operating officer, said it has good relationships with businesses that support Porter's efforts to keep costs down. He said "vastly overbedded" hospitals in surrounding counties are moving into the market "to recoup the business any way they can. That's the nature of competition."
The health alliance recently formed a healthcare issues round table to tackle such concerns, said Nate Sales, the alliance's executive director. Current topics include wellness and defensive medicine. Healthcare "capacity issues" are slated for future discussions, he said.
"I think the key word is communication," said Dave Albers, vice president and chief financial officer of the Restaurant Management Corp. in Michigan City, Ind. He wants to see healthcare providers and employers work together to build a better system that will curb soaring outpatient costs.
"We're beating each other over the head with a club to gain market share," Mr. Albers said. "To me that's ludicrous."
Healthy competition. In Springfield, Mo., the Ozarks Area Business Group on Health testifies against projects that make no sense, said Gordon Smith, the group's president. But the group remains staunchly in favor of healthy competition, giving its support to low-cost projects that provide a competitive alternative to available services.
Still, that hasn't been enough to keep healthcare costs in line. Some employers have seen their costs increase as much as 8% to 12% annually over the past three years. After years of watching from the sidelines, employers are taking matters into their own hands. The business coalition is organizing a group of physicians who will work with employers. Currently, it's a loose configuration of some 100 physicians, but plans to form an independent practice association or managed-care organization are under way.
"Our hope is we can force those hospitals over time to work with us," Mr. Smith said. "They'll have to compete for our business." Businesses want to see increased efficiencies that translate to decreased costs, he said.