The past two decades have brought a whirlwind of change to healthcare, with much of the action being driven by Washington through legislation or the threat of the dreaded "reform."
A prospective payment system for Medicare, cuts in reimbursement in Medicare and Medicaid, antitrust enforcement and even some of the merger and acquisition frenzy of the past several years all have resulted directly or indirectly from federal activity.
For all the news from Washington, however, the three most important changes that have rocked the industry in the past 20 years can be attributed as much to market pressures-such as private-payer demands, competition and the profit motive-as to government intervention.
While there have been hundreds of changes in this evolving marketplace since MODERN HEALTHCARE began being published by Crain Communications in August 1976, the three developments that have had the most pervasive presence in our coverage have been the spread of managed care, a shift from inpatient to outpatient care and the rise of investor-owned healthcare companies.
Spurred by the passage of the Federal Health Maintenance Organization Act of 1973, a response to problems of high medical costs and inadequate access to care experienced by millions of Americans, the HMO industry has grown up. Proponents of prepaid medical care, chiefly Paul Ellwood, M.D., led the charge, arguing that the incentives of fee-for-service medicine worked to prolong the treatment of illness. Prepayment rewards preventive healthcare, Ellwood argued.
In the words of the legislation, "HMOs, if effectively designed, largely eliminate many of the problems presented by the prevalent fragmented solo-practice model" of healthcare delivery. The law required businesses with more than 25 employees to offer at least one qualifying HMO-if available in the vicinity-along with traditional insurance. Grants and loans were provided to develop new HMOs.
Since the passage of the federal HMO law, other forms of managed-care organizations have evolved and thrived, including PPOs, exclusive provider organizations and point-of-service plans.
Providers have organized into systems-such as independent practice associations and physician-hospital organizations-in order to contract with managed-care plans.
And the tools of managed care-utilization review, case management, provider contracting, capitation and information technology-have grown more sophisticated.
In 1982, responsibility for overseeing HMOs was transferred from the Public Health Service to HCFA's Office of Prepaid Health Care. That signaled the federal government's intent to use managed healthcare plans-including HMOs and other capitated organizations-to contain the rising costs of Medicare, Medicaid and the Civilian Health and Medical Program of the Uniformed Services. Also, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982, which allowed HCFA to pay HMOs on a capitated basis to serve Medicare beneficiaries.
HMOs have expanded geographically by enrolling members of government programs. Currently, Cypress, Calif.-based PacifiCare Health Systems is the largest Medicare provider, while Rancho Cordova, Calif.-based Foundation Health Corp. has snagged most of the CHAMPUS contracts. Numerous states have embarked on programs to move Medicaid recipients into HMOs.
The enthusiasm of private employers for managed care has introduced most Americans to HMOs. Such large employers as AlliedSignal, Digital Equipment Corp., GTE Corp., AT&T and Xerox Corp. began offering HMOs in an attempt to keep a lid on their soaring healthcare costs and to monitor the quality of care provided to their employees. Smaller employers followed suit.
Large employers and the National Committee for Quality Assurance devised the Health Plan Employer Data and Information Set, or HEDIS, which provides a standardized format for HMOs to report their performance. Outcomes measures are being added to the continually developing HEDIS report card.
Meanwhile, managed care helped slow the healthcare cost spiral. Large purchasing coalitions such as the Pacific Business Group on Health negotiate rate reductions and performance targets with HMOs.
Through mergers and acquisitions, giant healthcare organizations were formed as companies sought a national presence. The first big deal was Cigna Corp.'s acquisition of Equicor, a joint venture of the Equitable Life Assurance Society of the U.S. and Hospital Corporation of America in 1990. Other big deals followed: Travelers Corp. and Metropolitan Life Insurance Co. formed MetraHealth Cos. from their respective health insurance operations. United HealthCare Corp. then bought MetraHealth.
There was something of a backlash against managed care in 1995 as the media featured horror stories about HMOs. Consumer groups, decrying perceived HMO abuses such as the denial of necessary care, assailed the high salaries of HMO chief executives. Legislators responded with bills restricting HMOs. The industry is fighting back while seeking ways to maintain profitability in an intensely competitive market.
Despite the rhetoric, there are now 58.2 million people enrolled in about 575 HMOs.
Twenty years ago, ambulatory care, also known as outpatient care, was one of those industry buzzwords that was more talk than action.
After all, inpatient care was reimbursed at cost by Medicare and private payers, so there was no urgency to establish lower-cost services such as outpatient surgical centers or ambulatory-care centers.
Then came DRGs.
In 1983, fixed-rate reimbursement based on diagnosis-related groups forced hospitals to hunt for lower-cost treatment alternatives. The outpatient-care industry exploded. Investor-owned companies jumped into the field, and hospitals began to offer both in-house and freestanding outpatient centers.
For example, in 1980 there were 215 freestanding outpatient surgery centers. By 1985, there were 692. In 1995, the number had leaped to 2,314, according to SMG Marketing, Chicago.
Outpatient care also includes clinics that provide services in chest pain, physical therapy/sports medicine, occupational health, pain management and mobile imaging. In addition, clinics provide psychiatric care and substance abuse treatment, kidney dialysis, wound care, occupational health therapy and urgent primary care.
Even cancer patients receive care at outpatient centers. In Jacksonville, Fla., Baptist Medical Center got more involved in all phases of cancer care and screening after its chief executive officer, Richard H. Malone, died of leukemia in 1984.
"It just sort of awakened everybody to the fact that we needed to do more and more in that area," said William C. Mason, now president and CEO of the merged Baptist/St. Vincent's Health System.
In 1991, Baptist opened the Baptist Regional Cancer Institute, a $7.6 million outpatient center, which includes the Malone Cancer Institute that focuses on research and education.
In its delivery, ambulatory care relies on the high-quality, low-cost goals of managed care. Hospitals are relying more on ambulatory care as a means to deliver primary care, preventive care and wellness services, especially to patients without adequate health insurance.
To attract new business, hospitals are marketing outpatient care as an ideal setting for programs in employee occupational health, wellness, fitness and children's healthcare.
In 1985, 54% of U.S. hospitals offered outpatient services, according to HCFA. By 1992, that figure had jumped to about 90%.
Whether their post-acute focus lies in skilled-nursing, subacute, rehabilitation or outpatient services, companies and systems are striving to meet the demands of payers.
As managed-care penetration increases from market to market, providers are becoming centers of one-stop shopping for post-acute and outpatient services.
The industry giant is HealthSouth Corp. The Birmingham, Ala.-based company has surpassed the U.S. Department of Veterans Affairs in the number of outpatient facilities operated, amassing 530 sites, 48% more than the 358 it reported in 1994.
Including acquisitions completed and announced since the beginning of 1995, the company now operates more than 900 locations in 45 states, counting both inpatient and outpatient surgery and rehabilitation centers.
The VA follows HealthSouth with 391 freestanding outpatient facilities. Next comes Kaiser Permanente with 242 centers. The king of inpatient care, Columbia/HCA Healthcare Corp., also has gotten into the outpatient-care act with 139 centers.
But the Medicare reimbursement issue threatens to rain on the outpatient parade. Medicare pays for hospital outpatient procedures, including surgery and radiology, using a blended-fee formula. This formula, according to the Prospective Payment Assessment Commission's 1993 annual report, "combines a portion of the hospital's costs or charges (whichever is lower) with a portion of the prospective rate that would have been paid if the surgery had been provided in a freestanding ambulatory surgery center."
The federal government is frustrated because the current system doesn't encourage cost-efficiency. In 1980, Medicare paid $1.9 billion for outpatient services. In 1993, outpatient payments were $12.2 billion, according to HCFA. In fiscal 1996, $23.2 billion will be paid to hospitals for outpatient services to Medicare beneficiaries. Of that, beneficiaries will pay $9.2 billion, or 40%.
Medicare patients are bearing more of these costs. In addition to the blended fee, a hospital receives a 20% copayment from the beneficiary. But that copayment is based on hospital charges, which are higher than the blended rate paid by Medicare.
Congress so far has failed to act on an outpatient prospective payment system.
The saga of for-profit hospitals, their founders, their victories, their failures and their imprint on America's hospital industry is one of the most interesting ongoing stories in healthcare.
Investor-owned hospital companies account for only 7% of the hospital industry's revenues. Columbia, today's industry giant that's both vilified and emulated, has a mere 5%.
Yet, for the past 20 years, investor-owned hospital chains have produced big news and major controversy.
By the time Crain Communications bought MODERN HEALTHCARE, some for-profit chains had been around for a decade. Interest in the investor-owned model grew following the introduction of Medicare in 1965, a financing engine without peer.
Entrepreneurs saw a window of opportunity. Here was a reliable payer that would cover the costs of services. Obviously, the game plan changed radically in the mid-1980s with diagnosis-related groups, and it has changed again with the advent of managed-care contracts.
But the founders of Hospital Corporation of America, Humana, National Medical Enterprises and American Medical International-often referred to as the Big Four of investor-owned chains-saw a profitable business that could benefit greatly from good management.
No one has endured in the for-profit world like Thomas Frist Jr., now vice chairman of Columbia.
Frist brought the idea of a hospital chain to his father, Thomas Frist Sr., as a medical version of Holiday Inns of America. Both father and son were physicians by training.
HCA went public in 1969. It was a blockbuster, soaring from $18 to $46 per share on the first day of trading.
Wall Street loves a trend, and within two years, there were 38 for-profit hospital companies, more than a dozen of which were traded publicly.
By the mid-1980s, HCA was really making waves. The blockbuster came in 1984 when Wesley Medical Center, a Wichita, Kan., not-for-profit hospital, signed a deal with Frist's company.
The repercussions of this announcement were huge. Investor-owned chains were targeted as the enemy in many not-for-profit board rooms. Their executives were viewed as cream-skimmers.
The mid-1980s were the end of the first wave of halcyon days for investor-owned chains. Until DRGs debuted, most were riding a heady wave, expanding and growing, pushing the envelope into new deals. Perhaps the most ambitious push came from Humana, a Louisville, Ky.-based company that launched a managed-care foray that many, including tax-exempt VHA, tried to copy.
Founded in 1961 by David Jones and the late Wendell Cherry, Humana's history is marked by two milestones, the launch of Humana Care Plus in 1983 and the recruitment of William DeVries, M.D., in 1984 to venture into artificial heart transplantation.
Humana Care Plus faltered-for a variety of reasons such as antagonism from physicians-and led to the split of the company in 1992. The insurance business stayed with Humana; the hospitals went into a new company called Galen Health Care.
By the late 1980s, most investor-owned hospital chains were struggling. The rural ones, such as National Healthcare, Westworld Community Health Care and Gateway Medical, lacked strong leadership and suffered from a disparity in rural Medicare reimbursement.
The big four were restructuring as they struggled to make money under DRGs. Interest rates were raging in the double digits, putting investor-owned chains at a considerable disadvantage to competitors who borrowed at tax-exempt rates.
Stock prices stagnated and junk bonds were king, which led Frist to return his company to private hands rather than risk a hostile takeover. In 1987, HCA spun off rural hospitals into HealthTrust-the Hospital Co., and in 1989 Frist and his managers took the company private.
Critics often assail for-profits as being too bottom-line oriented, doing anything for a buck. For-profit psychiatric hospitals in the 1980s seemed to embody this. The problems were raised into public view when National Medical Enterprises paid the largest fraud settlement in history, $379 million, in 1994. NME's "golden boy," Peter Alexis, admitted to paying between $20 million and $40 million in bribes to keep NME's psychiatric hospitals full in Texas.
Following the settlement, NME merged with AMI, whose high-powered investors pushed for a sale. The merged firm changed its name to Tenet Healthcare Corp. in 1995.
Meanwhile, Columbia took investor-owned hospital ownership to new heights. While some investor-owned chains were scraping to get by and trying to figure how to enhance shareholder value, Dallas attorney Richard Scott and Fort Worth investment whiz Richard Rainwater teamed up with a dream, deep pockets and a drive to build through acquisition.
The story is a familiar one now. Rainwater had investment capital in both HCA and AMI, but he wanted to build a hospital company from scratch and knew the key was good management.
He called Scott, who had never managed a hospital in his life but knew the art of the deal and could keep both bankers and physicians happy. Each put up $150,000 to buy two struggling hospitals in El Paso, Texas, and thanks to Rainwater's connections, Citicorp chipped in $65 million.
The rest is history. Acquisitions continued-HEI Corp. in 1990 established Scott and company in Houston; Basic American Medical in 1992 got them into Florida. The big jump came with Galen's acquisition in 1993, followed by HCA and Medical Care America in 1994, and Healthtrust in 1995.