Drum roll, please. For the first time in five years, the biggest wheelers-and-dealers in 1996 were not-for-profit systems, instead of their giant for-profit brethren.
It was close, though.
The growth rate of not-for-profit systems, as measured by total hospitals, was 12% in 1996, compared with 11.3% at for-profits, according to MODERN HEALTHCARE's 21st annual Multi-unit Providers Survey.
In truth, the data probably understate not-for-profits' expansion and overstate that of for-profits, at least in terms of ownership sector. That's because the not-for-profit universe covers at least 200 systems, of which 156 responded. But in the for-profit world of 13 systems, an unusual wrinkle in just one company's reporting, such as the accounting of a major acquisition, alters the picture of the entire sector.
What does this mean? It looks as if not-for-profit systems are making a rush on smaller hospitals in rural areas and outlying cities. For-profits, meanwhile, probably are at a stage much like the reorganization of closets that follows a shopping spree.
"As some of the urban-based systems and networks have begun to settle down (in their major markets), they are branching out to include rural outreach," says Stephen Shortell, professor of healthcare services management at Northwestern University in Evanston, Ill. "For example, in Minneapolis, each of the big players has a statewide network."
Catholics lead. Notably, the survey shows that Roman Catholic healthcare systems, in particular, are picking up their expansion pace. The 42 Catholic systems in the survey showed a 12% growth with the addition of 55 hospitals, bringing their total to 527, or 23% of the hospitals reported.
Moreover, the two biggest acquirers of other hospitals were Catholic Healthcare West, which added eight hospitals to bring its 1996 total to 32, a 33% rise, and Sisters of the Sorrowful Mother-U.S. Health System, which added seven hospitals for a 1996 total of 22, a 47% increase. By percentage growth in hospitals, they far outpaced for-profit Columbia/HCA Healthcare Corp., which had net growth of eight hospitals for a 3% growth rate.
Sister M. Therese Gottschalk, SSM president, says the system has moved to create stronger regional networks, merging and collaborating where necessary to provide a broad array of services. Its vision includes "cradle-to-grave care and services," including preventive care, rehabilitation, prenatal and elder care, as well as "a full continuum of health insurance projects," Gottschalk says. "Our main objective is to build each region to be a freestanding, financially viable, self-supporting health delivery network."
Evidence that smaller hospitals are being acquired, while cost pressures grow, lies in not-for-profit systems' financial data. The sector's net patient revenues, which were reported by 148 not-for-profit systems, rose by 7% to $83.7 billion in 1996, well below the growth in total hospitals. Investment income and other nonpatient services generated some $9 billion more.
Shortell says urban systems' expansion into rural areas also is due to rural hospitals' growing willingness to work with larger systems. While many urban-based systems are setting up statewide networks, rural hospitals are finding that networks made up of only rural facilities don't do well, he says.
The not-for-profit sector includes Catholic, other religious or secular systems. Public systems aren't included in the not-for-profit sector totals. Because of tax subsidies and a larger-than-expected burden of charity care, MODERN HEALTHCARE's survey treats public systems separately.
Not-for-profits' total operating income, which was reported by 137 systems for both 1995 and 1996, jumped a bit-the first increase reported since 1993. All told, the not-for-profit sector earned $3.4 billion from operations in 1996, a 12% growth. But total net income, reported by 135 systems for 1995 and 1996, rose just over 1% to $4.4 billion.
The financial picture is less pretty when profits are measured as a percentage of revenues. Not-for-profits' operating margins-which take into account the 137 responding systems-rose two-tenths of a percentage point to 4.7% in 1996. And the net profit margin actually dropped to 5.3% in 1996 from 5.7% the year before.
One caveat: The data are self-reported. Healthcare-system researcher Shortell warns that hospitals' financial information often is flawed because of poor cost-accounting. In the public sector, additional irregularities arise because of systems' different methods of accounting for tax subsidies.
The 19 responding public systems lost a total of $765.5 million on operations in 1996, an average of $40.3 million each, for an operating loss of 7%. That was somewhat better than in 1995, when their operating losses totaled $906.4 million, or $47.4 million each, for an operating loss of 9%.
Ownership differences. Two differences between the for-profit, not-for-profit and public ownership sectors stood out in the data.
First, for-profit systems are allocating a greater share of their operating budgets to management information systems-6% compared with 4% at Catholic systems, 5% at other religious systems, 3% at secular not-for-profits, and 3% at public systems. Data are not available for the not-for-profit sector as a whole.
Second, for-profits are financing their expansions with considerably more debt. The ratio of long-term debt to total assets averaged 46% at the nine for-profit companies that provided data. The average was 32% at the 140 not-for-profit systems and 50% at the 19 reporting public systems. All three are just about level with the previous year's figures.
For-profit companies generally have a greater incentive to borrow money than not-for-profits, says William O. Cleverley, director of the Center for Healthcare Performance Studies at Ohio State University. As long as the return on investment is greater than the interest on the debt, borrowing increases shareholder value.
But not-for-profit and public systems built up debt at a faster rate than for-profit companies in 1996. Not-for-profits' reported long-term debt grew by 7%, or about $2.4 billion, and their short-term liabilities soared by almost 15%, or $135 million. Publics added 8%, or $398 million, in long-term liabilities, but their current liabilities dropped 5%, or $153 million.
In comparison, long-term liabilities at for-profit companies rose 3%, or an additional $500 million in debt. Current liabilities increased just over 1%, or about $52 million.
Because assets of the for-profit and not-for-profit sectors grew at a similar rate, roughly 10%, the implications are troubling for not-for-profits, Cleverley says. "You can infer that probably what's happening is the not-for-profits have a lower growth rate in equity," he says. "And I think that's the key. Equity growth rate is really the final determinant (to success)."
Community benefits. Not-for-profit systems' charity-care expenditures, as measured as a percent of net patient revenues, held steady at 3%, according to the 124 responding systems. The charity care of 17 public systems dropped to 12% of net patient revenues in 1996 from 13% in 1995. Five for-profit systems reported charity care at 1.1% in 1996, down from 1.3% in 1995. Several of the for-profits said their accounting systems don't separate charity care from bad debt, so they were excluded from the totals.
All ownership sectors, however, reported spending a slightly greater share of their net patient revenues on community benefits. The 80 responding not-for-profits said community-benefit spending rose to 5.9% of net patient revenues last year, from 5.8% in 1995. Eight public systems reporting community-benefit data said those activities rose to 25% of their net patient revenues in 1996 from 24% in 1995. Three for-profit companies reported spending 0.9% of their net patient revenues on community benefits-excluding taxes-in 1996, compared with 0.8% in 1995. The largest for-profit companies said they simply did not track such spending on a system level.
MODERN HEALTHCARE defines community benefits as the costs (not charges) of providing charity care, nonbilled services, research, education and training of health professionals, and cash donations to community agencies.
Data on charity care and community benefits probably are the least reliable in the MODERN HEALTHCARE*survey. There is considerable debate about how to calculate benefits. For example, some systems continue to track both categories by charges, instead of costs. Although MODERN HEALTHCARE screens the data for unusually high reports, it can't assure that each respondent abides by the definition.
When taxes are added to community benefits, six for-profit companies reported spending 4.5% of their net patient revenues on taxes and community benefits in 1996, compared with 4.3% in 1995.
Getting bigger. The data in this story apply only to acute-care systems, which MODERN HEALTHCARE defines as healthcare companies that own, lease or manage two or more acute-care hospitals. Other systems, which operate multiple specialty hospitals or skilled-nursing facilities, are discussed on pages 70-86. As usual, every measure of acute-care system size is up:
Ignoring ownership differences, in 1996, the average system operated 11.8 hospitals, earned operating income of $50.8 million on total net patient revenues of $687.4 million-for an operating profit margin of 4%-and reported total assets of $948.8 billion. In comparison, the average system just one year earlier operated 11.2 hospitals, earned operating income of $41.4 million on total net patient revenues of $621.4 million-for an operating margin of 4%-and reported total assets of $148.9 million.
For-profit systems were nearly nine times the size of not-for-profits, operating an average of 64.4 hospitals with $3.8 billion in assets. Not-for-profit systems averaged 7.5 hospitals and $819.6 million in assets.
Strong growth also occurred in systems' nonhospital operations. A total of 114 systems reported owning group practices with a total of 12,406 employed physicians in 1996, a 27% growth from 1997. Physician-practice acquisitions by ownership sector were not available.
For-profit hospital companies experienced record growth and robust profits in 1996. The eight for-profit hospital systems that provided financial data to the survey reported a 66% increase in net income, exceeding $2 billion in total profits.
Last year, 11 for-profit systems responded to the survey.
The growth of the two largest for-profit companies, Columbia and Tenet Healthcare Corp., is a sign they have established themselves as dominant players in certain markets.
"The trick is to get in place quickly," says John Hindelong, a Wall Street healthcare analyst and vice president at Donaldson, Lufkin, & Jenrette, a New York investment bank. "Capital requirements to dislodge a well-entrenched network would be enormous. Thus, capital becomes a major barrier to entry."
Now, the Multi-unit Providers Survey indicates not-for-profits are playing catch up in some markets.
Santa Barbara, Calif.-based Tenet announced its acquisition of OrNda HealthCorp of Nashville last fall, but it didn't close the deal until January of this year, so those numbers aren't included in this year's survey.
Even without the results of the Tenet-OrNda deal, the survey clearly shows for-profits continued to drive overall growth in the hospital sector.
The Columbia factor. However, there should be an asterisk by the overall net income in the survey's for-profit hospital sector. Columbia's 56% increase in net income to $1.5 billion last year comes largely because the company's 1995 figures included extraordinary charges related to one-time costs from the company's 1995 acquisition of Healthtrust. Excluding the merger charges, Columbia's net income would have been $1.3 billion last year (Feb. 17, p. 3).
Despite Columbia's consistent status as the biggest hospital system, the company still controls just 5% of total hospital revenues, according to Donaldson, Lufkin & Jenrette.
Columbia ended 1996 with 319 facilities it owned outright, the survey showed. However, Columbia is a partner in several 50-50 joint ventures that own and operate 24 hospitals, bringing the actual total of hospitals under its umbrella to 343. The 24 hospitals were not consolidated into the company's balance sheet for accounting purposes.
The company completed acquisitions or joint ventures with 27 hospitals and built another facility in 1996. However, it also divested, terminated leases, consolidated, closed or merged 23 acute-care or psychiatric hospitals. Columbia won't disclose the facilities involved.
As the largest for-profit chain, Columbia's consolidations were partly responsible for the survey's low growth of staffed beds at for-profit hospitals. While for-profit companies reported an 11% increase in the number of hospitals to 841 from 752, the percentage of staffed beds grew only 4% to 113,121 from 108,582.
"Not-for-profits have always been a big buyer, but there was obviously some impact (on the survey results) of no major consolidation last year among the for-profit chains," says Peter Costa, an analyst with the Boston office of Chicago Corp., an investment bank. "Columbia was buying bigger brethren in years past, and you didn't have that last year."
"Not-for-profits have been, for a number of years an aggressive acquirer of other not-for-profits. Last year, their efforts just came when for-profits didn't have a really big deal," Costa adds.
For-profit revenues showed much greater growth, however. Net revenues for the group totaled $28.9 billion, a 22% increase from 1995.
A dramatic increase in Tenet's revenues, to $5 billion from $2.7 billion, in the survey is largely due to an unreported quarter of earnings in fiscal 1995. Tenet, created through the March 1995 merger of American Medical International and National Medical Enterprises, didn't report four full quarters at the end of fiscal 1995, which was May 31, 1995.
Tenet's net operating income also rose sharply, increasing 77% to $692 million from $391 million.
Smaller hospital companies such as Brentwood, Tenn.-based Quorum Health Group, Naples, Fla.-based Health Management Associates and Brentwood-based Community Health Systems continued to acquire their targeted number of two to four acquisitions a year. All those firms continue to report double-digit net income and revenue growth.