New York City Health and Hospitals Corp. and Columbia/HCA Healthcare Corp. illustrate the striking contrasts to be found within the diverse world of multihospital systems.
Like many of the 182 hospital systems in MODERN HEALTHCARE's 1996 Multi-unit Providers Survey, both HHC and Columbia are consolidating operations, downsizing work forces and increasing outpatient services in the face of employers and their surrogates-insurers-which are demanding steep price concessions.
For HHC, however, change in 1996 is a matter of breaking even in the face of a bureaucracy built up through years of inaction, city politics, and crushing indigent-care and Medicaid patient loads.
For Columbia, change means building local integrated delivery systems, improving efficiencies and keeping earnings growth high enough to attract and retain shareholders.
Nashville, Tenn.-based Columbia ranked first in MODERN HEALTHCARE's 20th annual survey, which ranked multihospital systems by annual revenues. HHC was fifth.
There are other similarities. Both tout the quality and accessibility of their care to their respective patient bases. Both are experiencing greater outpatient service demands and smaller increases in government reimbursements.
But the bottom-line differences are stark.
HHC lost $152.1 million in 1995 on $3.77 billion in net patient revenues, a -4% operating margin. The 11-hospital public system has a patient mix of 72.3% Medicaid and charity care, 18.1% Medicare, 8.4% private pay and 1.2% uninsured or self-pay.
Critics say that for more than 10 years, HHC has been an overbedded, overstaffed and inefficient public hospital system. During that period, HHC has rung up losses of more than $2.4 billion, including a record $704 million deficit in 1989.
"It is a very difficult time for us that requires major surgery and a need to be very creative," said Luis Marcos, M.D., who became HHC's president in September 1995. He acknowledged the corporation is facing a $550 million deficit in fiscal 1997, which begins July 1.
Marcos said HHC plans to shave half its deficit later this year by eliminating 8,000 of the system's 38,000 workers (May 6, p. 24). About $350 million of the savings will come from personnel reductions and the remainder from general operations, which will be achieved by Jan. 1, 1997. "The issue here is survival," he said.
Meanwhile, Columbia posted net operating income of $1.9 billion in 1995 on net patient revenues of $17.2 billion, an 11% operating margin. The investor-owned hospital chain has a patient mix of 40.4% Medicare, 13% Medicaid, 13.9% commercial, 28.3% discounted and 4.4% self-pay.
Although Columbia faces many of the same pressures caused by efforts to reduce Medicaid and Medicare spending growth, Richard Scott, the company's chairman, chief executive officer and president, sees promise for his burgeoning company.
"If we continue our strategy of building local delivery systems, working with physicians, working with insurers, then Medicare and Medicaid changes will be very positive for us all," Scott told stock analysts last November.
The contrast between Columbia and HHC, however, lies in strategy and leverage. HHC is downsizing, which can be a costly operation in itself.
Columbia is expanding, and that growth attracts partners wanting to grow with it-vendors, physicians, payers and other providers. Although the chain closed more hospitals in 1995 than any other hospital system-eight-its growth overwhelms its cutbacks. In addition to merging with 115-hospital Healthtrust, Columbia purchased at least 50% of 41 not-for-profit hospitals in 1995.
Since its founding in 1987, Columbia has become the nation's largest healthcare provider, boasting 340 hospitals and 130 outpatient surgery centers.
Analysts predict Columbia will continue to grow. Merrill Lynch & Co. projects the company will post an 18% increase in net income in 1996 and a 9% increase in revenues.
Although Columbia's size and regional dominance intimidate its smaller competitors, it's hardly a national monopoly. Its 1995 revenues of $17.2 billion amount to just 5% of the hospital industry's revenues, according to investment bank Donaldson, Lufkin & Jenrette.
For all systems, controlling costs, integrating with physicians and streamlining inpatient and outpatient operating units are priorities this year and for the remainder of the decade, said Gordon M. Sprenger, CEO of Minneapolis-based Allina Health System and chairman of the American Hospital Association.
"We are in the same magnitude of change as in 1984-1985 when DRGs (were introduced) and even going back (to 1966) when Medicare began," Sprenger said. "But there is more (financial) variance between hospitals."
Sprenger said purchasers of healthcare-government, employers and payers-are demanding lower prices. As a result, hospitals that serve the poorest citizens are taking a financial beating as they are less able to shift costs to the fully insured.
"There has not been one word the past year on taking care of the (indigent)," Sprenger said. "We know that problem has not gone away. The public institutions can't walk away from those problems. Somebody has to take care of them, and increasingly public hospitals are doing so with less reimbursement and tax support."
Survey data. For the second straight year, operating profits of tax-exempt healthcare systems declined in 1995 while investor-owned chains reported double-digit margins, MODERN HEALTHCARE's survey found.
At the 10 for-profit chains that reported financial information, operating income increased 44% in 1995 to $2.94 billion from $2.04 billion in 1994, with an 11.2% operating margin.
The 128 reporting not-for-profit systems, excluding 14 public systems, suffered a 7% decrease in operating income to $2.53 billion in 1995 from $2.72 billion in 1994. Consequently, operating margins dropped to 3.9% in 1995 from 4.4% the previous year.
The 14 reporting public systems lost a total of $590.2 million on net patient revenues of $7.81 billion in 1995, a -7.6% operating margin. That compares with combined losses of $316.5 million in 1994 on revenues of $7.7 billion, a -4.1% margin.
Fueled by the for-profits, total operating profits rose 9.8% in 1995 to $4.88 billion for the 152 systems that reported financial information. That compares with previous MODERN HEALTHCARE*surveys that showed operating profits rose 17.7% in 1994, 7.3% in 1993, 28% in 1992, 45% in 1991, 95% in 1990, 10% in 1989 and 68% in 1988. In 1987, profits declined by 4.8%, and in 1986, profits dropped by a whopping 48%.
An even rosier picture of the booming hospital business is total net income, which includes interest income, donations and business deductions. In 1995, that figure rose 25.6% to $5.26 billion from $4.19 billion in 1994. Total margins for all systems increased to 5% in 1995 from 4.4% in 1994.
Despite the good year posted by for-profit hospital chains, long-term liabilities increased 55.7% in 1995 to $16.5 billion for 11 reporting chains. Assets of the 11 for-profit systems increased 35.7% to $32.8 billion, but that didn't offset the accumulating debt.
Those figures are somewhat misleading, however, because of the $3.3 billion acquisition of Dallas-based American Medical International by National Medical Enterprises in 1995, which formed Tenet Healthcare Corp. That deal is accounted for as an acquisition of AMI by Santa Monica, Calif.-based NME. The merged company, Tenet, is the nation's third-largest system, according to the MODERN HEALTHCARE survey. Tenet is based in Santa Barbara, Calif.
Because of the accounting treatment, AMI doesn't appear in 1994 figures in the survey but is included in 1995 numbers as part of Tenet. That boosts the for-profit gains in all categories-revenues, beds, hospitals, debt and assets.
The accounting treatment is different from Columbia's merger with Healthtrust in 1995. Although that was a larger deal-valued at $5.6 billion-it was a pooling of assets. That means the company's prior-year figures reflect both companies in the newly merged firm.
Acquisitions can be more costly than mergers. For example, Tenet took on an additional $1.5 billion in debt to pay AMI's shareholders.
Meanwhile, 132 not-for-profit systems reported that they increased their long-term liabilities in 1995 only 0.9% to $31.8 billion in 1995 from $31.5 billion in 1994. Assets increased 7.3% to $97.6 billion in 1995 from $91 billion in 1994.
Bigger is better. A total of 269 systems responded to MODERN HEALTHCARE's 1996 survey, made up of 182 acute-care hospital systems, 57 nursing home systems, 13 psychiatric hospital systems, 10 continuing-care retirement communities, four rehabilitation hospital systems and three other types of systems.
MODERN HEALTHCARE*defines a system as a healthcare organization that owns, operates or manages two or more acute-care hospitals, specialty hospitals, nursing homes, outpatient facilities or continuing-care communities. Some also operate or own HMOs, PPOs or physician group practices.
In 1995, for the fourth straight year, for-profit chains added hospitals at a faster rate than tax-exempt systems, although both sectors had slightly lower growth rates compared with previous MODERN HEALTHCARE*surveys.
For example, 14 reporting investor-owned chains said they owned or managed 874 hospitals in 1995, a 9.4% increase from 1994. The chains staffed 130,051 beds, a 15.9% increase from 1994, the survey found.
Although investor-owned systems like Columbia sometimes dominate the industry's headlines, the Multi-unit Providers Survey found that less than half-45%-of system hospitals were in investor-owned systems in 1995. And investor-owned systems owned 38% of the beds in systems in 1995. That's up from 44% and 35%, respectively, in last year's survey.
However, investor-owned systems are larger than not-for-profits. Of the top 10 medical-surgical systems ranked by total hospitals, all but two were investor-owned, the survey showed.
Meanwhile, 168 not-for-profit systems, including 15 public systems, accounted for 1,082 hospitals, a 6.6% increase from 1994. The not-for-profits staffed 216,145 beds in 1995, a 5.3% increase from 1994.
Through mergers, the average system size grew to 10.7 hospitals in 1995 from 10.2 in 1994, a 4.9% increase. The average system also grew in total staffed beds to 1,902 from 1,744, a 9% increase.
In the not-for-profit sector, the average system earned $19.8 million on operations in 1995, a 7% decrease from $21.3 million in 1994. For-profit chains earned an average of $294.1 million in operating income in 1995 compared with $204.4 million in 1994, a 43.9% increase, the survey found.
As in previous years, the difference between the two sectors lies primarily in size.
The average size of a for-profit hospital is 149 beds compared with 193 beds for not-for-profit hospitals.
For the first time, systems reported data on operating integrated management information systems. Some 138 reporting systems said they spent 3.2% of their annual budget on information systems.
Doc group buying spree. Reflecting the trend to build integrated delivery networks, the 118 reporting systems showed an 88.3% increase in owned or managed physician group practices to 1,825 in 1995 from 969 in 1994.
The 104 reporting not-for-profit systems operated 1,628 groups, a 90% increase from 857 in 1994. Those systems averaged 15.7 group practices each in 1995 compared with 8.2 in 1994.
The nine for-profit chains increased their number of owned or managed group practices by 83.9% to 114 in 1995 from 62 in 1994. They operated an average of 12.7 groups last year compared with 6.9 in 1994.
Some companies, like OrNda HealthCorp, see advantages in owning minority interests rather than acquiring group practices. For example, the Nashville-based hospital chain recently signed a deal to purchase Saint Vincent Hospital in Worcester, Mass., and a minority interest in Fallon Clinic, a 280-member multispecialty group practice that's part of the hospital system.
"It's a great opportunity to line up economic incentives," said Keith Pitts, OrNda's chief financial officer.
With the Fallon deal, both Columbia and OrNda will have made inroads into Massachusetts, which has been dominated by not-for-profit hospitals and academic medical centers.
Allina, meanwhile, nearly doubled the number of physicians under contract with the system to 600 in 68 groups in 1995 from 340 in 54 groups in 1994.
"We aren't purchasing that many more in 1996," CEO Sprenger said. "We will have internal growth by adding physicians to those practices."
Allina, which operates 19 hospitals and a 1 million-enrollee HMO in addition to the multispecialty group practice, has created a framework to become a truly integrated healthcare delivery system.
Formed through a merger of HealthSpan Health System and Medica in 1994, Allina's priorities for 1996 are to continue its five-year mission to integrate management and clinical services and such alternative therapies as chiropractic and acupuncture, Sprenger said.
Allina ranked 30th in net patient revenues in 1995 with $876.5 million and reported a 13.7% increase in net operating income to $96.4 million, for an 11% margin. The system operated 1,965 staffed beds.
Sprenger attributed Allina's solid performance to controlling utilization, cutting overhead and improving productivity. But unless Allina wrings out more costs, future earnings increases may prove difficult, he said.
"We are getting zero to minimal increases in premiums for our health plan (from employers)," Sprenger said. "We have done a good job in containing medical expense increases to 5% to 6%. But we are only getting 1% to 2% increases in premiums."
Bad debt. The 151 systems that reported bad debt said it fell slightly in 1995 to 4.9% of net patient revenues from 5%. But total bad debt expense rose 6.9% to $4.6 billion in 1995 from $4.3 billion in 1994.
The eight for-profit chains reported a 17.4% increase in bad debt to $1.15 billion from $980.3 million. The average system reported bad debt of $30.5 million while the average for-profit chain reported bad debt of $143.9 million.
Bad debt is typically higher for investor-owned chains because many lump charity care into that category. Since investor-owned chains don't have to report charity care to maintain tax exemptions or Hill-Burton obligations, all uncompensated care is frequently reported as bad debt, said OrNda's Pitts.
Charity care. Charity-care expenses rose to 5.2% of net patient revenues in 1995 for 146 reporting systems from 4.9% in 1994.
As expected, public systems had the highest level of charity care as a percentage of net patient revenues: 24.9% in 1995, up from 22.4% in 1994. Investor-owned chains reported the lowest charity-care bills at 1.3% in 1995, down from 1.4% in 1994.
For the fourth consecutive year, the survey requested financial data on community benefits, defined as the costs (not charges) of providing charity care, nonbilled services, research, education and training of healthcare professionals, and cash donations to community agencies. Excluded are unpaid costs of Medicare and Medicaid programs, services generating low or negative margins, various taxes and bad debt.
The 82 not-for-profit systems that reported community benefits provided an average of $35.9 million per system in 1995, a 1.4% increase from $35.4 million in 1994. Systems provided $2.95 billion of community benefits in 1995. Only four investor-owned chains provided information on community benefits. They reported a total of $2.8 million in community benefits in 1995, a 7.7% increase from 1994.
Leading the way were the 11 systems representing the "other religious" category, which provided average community benefits of $85 million per system, a 3.8% increase from 1994. The 28 Catholic systems provided an average of $47.2 million per system, a 0.4% increase from 1994.
Taxes. As the not-for-profits expend considerably more dollars in community benefits and charity care, for-profit chains pay a greater proportion of income taxes.
Seven for-profit chains paid an average of $128.6 million in state and federal income taxes in 1995, a 49.4% increase from 1994.
Twenty-two not-for-profit systems reported they paid an average of $2.65 million in state and federal income taxes in 1995, an 8.4% increase from 1994. The systems paid $58.2 million in 1995 and $53.7 million in 1994.
Not-for-profit systems pay income taxes on for-profit ventures covered under unrelated business income categories such as HMOs and physician practice management services.
For the first time, MODERN HEALTHCARE*requested federal payroll tax information from all systems. Executives of not-for-profits argue that payroll taxes should be considered just as much a part of doing business for their systems as federal income taxes are for for-profits.
When payroll and other taxes are added to income taxes, not-for-profit systems report an increasing tax burden. Other taxes include local property taxes, state sales taxes and federal payroll taxes.
The 88 reporting not-for-profit and public systems paid an average of $14.2 million in other taxes in 1995, a 5.2% increase from $13.5 million in 1994. The six reporting for-profit chains paid an average of $66.7 million in other taxes in 1995, a 27.7% increase from $52.3 million in 1994.
The reporting not-for-profit systems paid other taxes of $1.25 billion in 1995 and $1.19 billion in 1994.