To stay alive, hospitals must stay on their toes in the battle-scarred healthcare sector of the City of Brotherly Love.
Consider the case of Abington (Pa.) Memorial Hospital, one of the last of the successful independents in a well-integrated, well-utilized marketplace. The suburban Philadelphia hospital tried three times in nine years to obtain a license to run a cardiac surgery program, and failed each time. Some criticized it as a brazen attempt to drain business from several nationally renowned heart centers in Philadelphia.
Undaunted, Abington moved ahead with its plans, building a cardiac-care unit and assembling a team of surgeons supplied by Temple University Hospital, Philadelphia--on the supposition that someday the nightmare would end. It did, and Abington was ready. Within 24 hours after the state's certificate-of-need law lapsed on Dec. 18, 1996, surgeons at Abington repaired a mitral heart valve on a 54-year-old woman.
"I think the initiation of open-heart surgery was a turning point for this hospital," says Richard Montalbano, vice president of management services at 508-bed Abington. "There's something of a halo effect with open-heart. The public assumes once you do open-heart surgery, you are in the big leagues in tertiary care. I also think it made a big difference in the confidence of the hospital."
Confidence, indeed. Insecure hospitals would not survive long in this hospital-eat-hospital market. The nine-county metropolitan area, which includes four southern New Jersey counties, has 4.9 million people and ranks sixth in the nation by population. It hosts five medical schools within the city limits--one of the highest concentrations of academic medicine in the country. Philadelphia business leaders brag that the city trains one in every five of the nation's physicians at some point in their careers.
Philadelphia is a city of healthcare firsts, holding the distinction of being home to the nation's first hospital, medical school, women's medical school and children's hospital.
More recently, the city was in the news for having the single-most devastating bankruptcy in healthcare. The collapse of the Pittsburgh-based Allegheny Health, Education and Research Foundation in 1998 threatened to take down eight Philadelphia-area hospitals and a medical school before a knight in gold-plated armor, Santa Barbara, Calif.-based Tenet Healthcare Corp., arrived on the scene. The investor-owned chain closed only one AHERF hospital--City Avenue Hospital and began nursing the others back to health, launching a marketing campaign with the theme "Let the healing begin."
And so it did.
In the struggle to regain footing in the two years since, Philadelphia's hospital market seems at odds with itself. Hospitals report they are bursting at the seams with patients, but the cash pools remain shallow. Even the most successful hospitals are operating with wafer-thin margins.
Access to care? No problem. If anything, the market suffers from an embarrassment of riches: three National Cancer Institute-designated cancer-care centers and three dedicated children's hospitals just within the city limits. Need an organ transplant? Take your pick of 13 programs at more than half a dozen hospitals, says Gerald Katz, president of Plymouth Meeting, Pa.-based Katz Consulting Group.
For-profit rides into town
But the entrance of an investor-owned chain in the Philadelphia marketplace marked a crucial turning point for not-for-profit healthcare in the city.
"The introduction of the for-profit concept with a growing acceptance of the Tenet approach, I think, becomes contagious," says Donald Cramp, president of the Hospitals and Higher Education Facilities Authority of Philadelphia, a quasi-governmental organization that acts as a conduit for not-for-profit hospitals seeking loans. "A good example is the serious deliberation the University of Pennsylvania gave to the concept of divesting (the University of Pennsylvania Health System) and turning it over to a for-profit chain."
Cramp refers to the recent decision by the university to spin off the debt-laden UPHS into a wholly owned not-for-profit subsidiary (Feb. 19, p. 6).
Raising new capital weighs heavy on the minds of the dominant not-for-profit health systems in the market: Temple University Health System; Jefferson Health System, Radnor, Pa.; University of Pennsylvania Health System; and Crozer-Keystone Health System, Springfield, Pa.
"There's been a fair amount of downgrading over the course of the last few years in part because of AHERF," says Gerald Miller, president and chief executive officer of Crozer-Keystone, which operates a lean corporate machine with five hospitals under two licenses and one hospital CEO for the bunch. "It's harder to get capital."
Despite the capital worries, volumes are booming. Hospitals, many of which have worked hard at reconfiguring beds and services, are running at or near full capacity after trimming more than 3,000 beds from their collective rolls since 1995, says Andrew Wigglesworth, president of the Delaware Valley Healthcare Council (DVHC) of the Hospital and Healthsystem Association of Pennsylvania. However, others acknowledge removing beds sticks a Band-Aid on the real problem: too many hospitals.
"The distinguishing feature (of the market) was and remains that there are only several dominant insurers and too many providers," says Leon Malmud, M.D., president and CEO of seven-hospital Temple University Health System.
Philadelphia's strange juxtaposition of impressively high utilization rates and alarmingly negative margins is laid bare in data collected by SMG Marketing, a Chicago-based healthcare information and marketing consulting company. The market is well-integrated. Nearly 72% of all acute-care hospitals belong to an integrated healthcare network, compared with 48% across the U.S., according to SMG.
The Philadelphia market's 78 acute-care hospitals staff an average of 217 beds, compared with 151 beds staffed by hospitals nationwide. From 1998 to 1999 they admitted 50% more patients than hospitals nationwide--9,252, compared with 6,131. Hospital occupancies in the Philadelphia market were running at an average 63%, compared with 46% nationally during the same period.
Philadelphia's population makes more use of these services, according to SMG data. For every 1,000 people, area hospitals collectively racked up 810 patient days in 1998 and 1999, compared with 592 patient days per capita reaped by hospitals nationwide. Philadelphia hospitals also performed more inpatient and outpatient surgeries per capita than the average U.S. hospital.
Costs per admission were as much as 22% higher in Philadelphia than the nationwide average--$13,277 vs. $10,864--a function, most observers agree, of having so many medical schools and of practicing medicine in the expensive Northeast.
All of that translates to net patient revenue nearly twice as large for the average Philadelphia hospital than hospitals nationwide--$120.1 million vs. $65.6 million. But hospitals lost nearly three times as much on operations as hospitals nationally, or 8.87%, compared with the national loss of 2.96%.
What, then, is Philadelphia doing wrong?
The market suffers from a host of challenges not unlike those facing hospitals nationwide: a decline in reimbursement rates and a rise in uncompensated care. But Philadelphia also struggles with unique challenges. For one, two insurers with a long history in the area dominate the market and dictate the tenor of rate negotiations, Wigglesworth says. Combined, Independence Blue Cross and Aetna command more than 81% of the managed-care market in southeastern Pennsylvania, according to the DVHC's accounting.
Officials at Aetna, which counts 929,591 members in nine southeastern Pennsylvania counties, say they are committed to the market, and maintain contracts with nearly every physician and hospital in the area. Costs are understandably high in part because of the level of teaching activity going on, but there also is a "supply-side pull" from the high concentration of physicians and hospitals, says Don Liss, M.D., regional medical director of Aetna. In an upside-down way, supply drives demand: More patients use the services because there are so many services available.
Officials at Independence Blue Cross did not respond to several requests for interviews.
The market also is buckling under the weight of high professional liability insurance premiums, posing a challenge to recruiting efforts. Though it poses a crisis throughout a state that has failed to institute tort reform, the situation is exacerbated in southeastern Pennsylvania, where juries seem to be particularly generous to plaintiffs, Wigglesworth says.
Philadelphia also is the largest city in the nation without a public hospital. Although all the health systems perform their share of uncompensated care, Temple University Hospital, because of its location in a besieged section of the city, carries the brunt of the responsibility.
Temple is the single largest Medicaid provider and at the same time the busiest penetrating trauma center in the state, Malmud says.
Meanwhile, with Medicaid a losing proposition--40% of Temple's payer mix--and private insurers paying Temple less than they pay other teaching hospitals, Medicare represents Temple's best payer.
So the system struggles to succeed with a lean operation. Malmud boasts that when the turnaround firm the Hunter Group came in several years ago, the consultants recommended that Temple lay off just 12 people. He compares that to the 2,800 jobs that were eliminated by UPHS as part of its turnaround in the last year.
"I think this market is ailing and recovering from the scars and wounds of battle," says Dan Grauman, principal of Health Data and Management Solutions, Bala Cynwyd, Pa. "This market was engaged in what I would call pretty aggressive health system warfare over the course of eight to 10 years. It did so because providers were trying to advance their position in the market."
Paying a price for integration
If Philadelphia hospitals committed any financial sin it was in believing in the power that could be wielded by vertically integrated health systems with full-risk contracts. To gain market share, health systems began buying physician practices.
No one is certain whether it was AHERF or UPHS that struck first, but the strategy launched a feeding frenzy where price didn't seem to be an object. Virtually every other health system moved defensively, buying practices so they wouldn't be left out in the cold.
"It was arrogance and stupidity--it still irritates me to no end," says Steven Altschuler, M.D., president and CEO of Children's Hospital of Philadelphia, whose faculty is supplied by the University of Pennsylvania. "It was a fiasco, with (UPHS) close to selling to a for-profit, which I think would have destroyed its prestige."
The buying spree ran up everyone's debt, from which most are still recovering as they try to ease out of the physician practice business. In 1999, Philadelphia hospitals were leveraging significantly more long-term debt with available capital than their national counterparts--62% in Philadelphia, compared with 38% nationwide--according to SMG.
"In the boardroom these strategies probably made a lot of sense," says Aetna's Liss. "But what might have been lost is that medical care is still very much a cottage industry. Certainly in Philadelphia, most primary groups are fewer than five physicians. Altering their practice habits to (the ways) of other providers or hospitals didn't happen with the vigor that the planners of these systems anticipated."
One system that seems to have weathered the storm is Radnor's 14-hospital Jefferson Health System, which was formed in 1995 as a parent holding company with some reserved authority. For years, Jefferson and the University of Pennsylvania have maintained a healthy rivalry on the order of Harvard and Yale. But businesswise, Penn faltered in recent years as it drowned in a sea of red ink, coming up for air only this fiscal year (Feb. 5, p. 36).
"One of the things Jefferson did right was they were never the first to do anything," Katz says.
Jefferson's conservative, decentralized approach is based on the "belief that a holding company ought not to operate so much as do things together," says Douglas Peters, the system's president and CEO.
From the start, the system has made a point of acquiring only healthy hospitals, and it didn't pay a penny for any of them. As an incentive to join, Jefferson merely offered potential partners an opportunity to refinance debt and negotiate as a block with third parties.
The strategy served Jefferson well in that aggressive environment. As a system, Jefferson earned $41.2 million on nearly $2 billion in operating revenue in the fiscal year ended June 30, 2000--a better-than 2% margin. Jefferson owns a 23% share of the Philadelphia acute-care market, Peters says.
"Sometimes the things you don't do are the most important," says Thomas Lewis, president and CEO of 981-bed Thomas Jefferson University Hospital, a member of the system.
Still, Jefferson cannot let its guard down. The entry of for-profit healthcare poses "a major test" for the market, Peters says. Tenet came first, but others with enviable wads of capital are waiting in the wings.
Indeed, Tenet has spent the last two years rebuilding what AHERF destroyed, but the corporation is now ready "to take it to the next level," says Barry Wolfman, senior vice president of Tenet in the Pennsylvania region. The company declines to share hospital-specific financials and utilization rates. But Wolfman says the next strategy is to take full advantage of Tenet's access to Wall Street capital "to give us some competitive advantage." Tenet is firmly committed to the Philadelphia market and recently entered preliminary discussions with nearby Easton (Pa.) Hospital.
To compete with Tenet, the not-for-profits will have to pay down debt and raise new capital while continuing to downsize and streamline operations, a tough proposition, Cramp says.
"The honor of Philadelphia has been the repayment of its debt, and that intrudes on consolidation," he says. "The trick in my mind is to bring about downsizing without damaging the credit reputation of the city, to enable the infusion of new monies where it's justified."
That will be some trick.