Gary Stein, president and chief executive officer of Touro Infirmary in New Orleans, is talking with a reporter in his office when a voice from his desktop computer breaks in.
"The time is 10: 30."
The fact that Stein's computer clock provides 30-minute updates is indicative of the frenzied market in which the not-for-profit hospital competes. This market, some say, is like a game of musical chairs.
Grab a seat with a system because when the music ends, those left standing may be out of business.
National trend. What is happening in New Orleans is what many pundits believe will happen in other urban areas.
Where 20 hospitals competed just a few years ago, analysts now believe only three or four systems will remain.
Emerging as the city's two health system Goliaths are Columbia/HCA Healthcare Corp. and Tenet Healthcare Corp. New Orleans may be the first urban market where the nation's two largest investor-owned chains compete head-to-head with major systems.
Their moves in this market-most re- cently Tenet's agreement to buy the city's largest private not-for-profit hospital-have the independents scrambling.
The purchase of Mercy-Baptist Medical Center for about $200 million will double Tenet's market share in the New Orleans area to 21%.
"It accelerates the anxiety. The remaining ones (independents) have fewer options," says John Finn, president of the New Orleans Hospital Council about Tenet's proposed purchase of Mercy-Baptist (May 22, p. 3).
Underlying the anxiety are questions about the future of the city's 10 not-for-profit hospitals and whether they can operate within systems to battle the well-capitalized for-profits.
"All the not-for-profits in New Orleans are talking. We're focused on putting together a not-for-profit system," said Phillip Robinson, Ochsner Foundation Hospital director.
Robinson and others hope the market's consolidation will make the community more efficient and healthy. Despite an oversupply of hospitals and physician specialists, the New Orleans population is less healthy than the average for all metropolitan areas, and healthcare is more costly (See chart, p. 42).
Few not-for-profit mergers.
Not-for-profit mergers don't have much of a track record in the New Orleans area. Mercy-Baptist, formerly two separate hospitals, was only a year into its merger when it decided to put itself up for sale to an investor-owned chain.
"The not-for-profit community is hampered because there is no single dominant force that can shape it and pull it together," said Byron Harrell, Mercy-Baptist's president and CEO. "If we must sell sooner or later within the next five years, then we need to sell when we have our highest and best value."
Merger talks between Ochsner and Tulane University Medical Center broke off last year, and Tulane subsequently signed a deal with Nashville, Tenn.-based Columbia.
"The right time to do a sale is when you are doing well," said David Fine, president of Columbia's New Orleans division. Fine spent 23 years in university hospital administration-five of them at Tulane-before he joined Columbia as part of that hospital's sale this year.
He describes Tulane as a "small, boutique university hospital" whose 4% market share wasn't nearly enough to survive the oncoming managed-care trend. The university wanted to continue its missions of research and teaching, but it faced federal funding uncertainty. By selling 80% of the hospital to Columbia, the university reaped $130 million and 20% of future profits.
The Tulane deal was a market domino, giving Columbia a prestigious tertiary-care center to anchor its area network. Columbia, which is negotiating with teaching hospitals in other cities, often showcases the Tulane deal. Columbia's Fine says he has spent about a third of his time in recent weeks talking with prospective Columbia acquisition targets.
A glimpse of the future. System consolidation is happening more quickly in New Orleans than in other markets because many hospitals see the writing on the wall, observers say.
Two medical schools have stuffed the city of 1.3 million with an oversupply of physician specialists. One-fourth of the population is uninsured, receiving most of its care at the state-owned Medical Center of New Orleans and University Hospital.
Taking out Medicaid and Medicare beneficiaries leaves just 300,000 in New Orleans' commercial-pay population. Margins for those patients are expected to drop as 15 HMOs spar to sign enrollees.
"We have 6,500 hospital beds here; we will need 2,500, and I'm being real loose. Some say the number is 1,800. So why do you want to own a hospital?" Harrell asked.
Apparently, Columbia and Tenet do. Both say they're not done building their networks.
"We're still talking to hospitals," said Richard Freeman, regional vice president of operations in New Orleans for Santa Monica, Calif.-based Tenet.
The next hospital to sell likely will be Touro. The 140-year-old facility, the city's oldest private hospital and one of the oldest in the country, was founded by Jewish philanthropist Judah Touro.
Located in the stately Garden District of New Orleans, the 355-bed hospital hit a financial wall in the late 1980s as it struggled with Medicare's prospective payment system. During 1990 and 1991, the hospital lost more than $25 million.
Its fortunes turned around in 1992 when former Hospital Corporation of America veteran Stein took over, cutting expenses and tripling the size of the hospital's managed-care subsidiary.
Earlier this year, Touro's public relations department was touting the hospital as market contrarian-a solo community not-for-profit hospital that would survive the consolidation wave.
That strategy is already out of date. Stein and his board are weighing bids from investor-owned and tax-exempt suitors and plan to make a decision soon.
"Everything was happening at a much faster rate than we had projected it would," Stein said this month. "We really need to be part of an integrated system that's larger than we can create on our own."
Although Columbia and Tenet are binding their partners with tight ownership ropes, Stein sees a "fair amount of disunity" among the city's not-for-profit providers. While the for-profit systems link through common ownership, the owners of the city's not-for-profits hospitals vary widely. Some of the hospitals are private, like Touro. Others are held by various governments, including the federal government, the state and local parishes.
Like most urban areas, New Orleans has been dominated by not-for-profit facilities.
The state always has had a significant share of for-profits, however. In fact, in the mid-1980s, Louisiana Gov. Edwin Edwards was accused of selling certificate-of-need approvals. He was acquitted, but some contend that the ease of CON approvals during his prior administrations led to the state's overcapacity.
Despite their presence, for-profit hospitals never have been the dynamic force they are today. For example, Tenet's New Orleans hospitals have generated $230 million in operating revenues each of the past three years, showing little growth.
The acquisition of Mercy-Baptist will double its annual revenues in this market.
Harrell said he believes the clout of these investor-owned systems means the end of an era for the formerly powerful not-for-profits.
In fact, he seems ready to sound the death knell for private, not-for-profit hospitals in the city.
"Ochsner is the only question, and it is a severe maybe," Harrell said.
Not surprisingly, officials of Ochsner-a household name in the Gulf South-disagree. Ochsner Foundation includes a 381-bed hospital, a multispecialty physician group practice and the state's largest HMO.
"He's pretty bitter," says Ochsner's Robinson in response to Harrell's remarks. He attributes those comments to Mercy-Baptist's being left out of merger talks earlier this year between Ochsner and two other area hospitals, East Jefferson General Hospital in Metairie, La., and West Jefferson Medical Center in Marrero, La.
"They were upset about not being included in those talks in the beginning," Robinson said.
Mercy-Baptist had other problems as well. After the two hospitals merged, physicians gave Harrell a vote of no confidence twice. Harrell said physicians didn't like the hospital's decision to buy up physician practices. "I was the focus" of their dissatisfaction with that, he said.
Robinson noted that Mercy-Baptist had courted physician specialists for many years and was caught in a bind as the need for those specialists decreased.
"They can't dance with the one that brung them anymore," he said. "While we were building our primary-care network, some people were still building more (cardiac catheterization) labs."
Physicians at Ochsner, too, are somewhat restless. Ochsner's group practice clinic is evaluating capital partners, a move that could split its allegiances with Ochsner hospital. Robinson isn't worried, though.
"The physicians don't want to sell to PhyCor," referring to the Nashville-based company that buys physician group practices. "They want to be like PhyCor."
Both Tenet and Columbia will add new financial incentives for physicians. If Columbia follows its pattern in other markets, it eventually will sell a minority stake in the New Orleans network to its physicians.
In addition, Tenet plans to form a huge physician-hospital organization that will contract with payers and split the profits between the hospitals and the physicians.