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Thursday, January 20, 2011

The Rise and Fall and Mostly the Fall of the For Profit Hospital Industry

The For Profit Hospital industry, led by Hospital Corporation of America (HCA) and Tenet (which I liked to call Tenant based on how it treader providers), was the poster child for health care efficiency in the 1990's. HCA owned by former Senator Bill Frist and led by current Florida governor, Rick Scott, gobbled up as many hospitals in the mostly Southeast, California, and Great Plains as they could. Tenet was close behind. They boasted of their management talent, market clout, and economies of scale that would shake up the sleepy non-profit hospital industry and turn it into a real business.

The first experience with becoming a real business involved HCA being charged with the largest Medicare fraud case in US history and Tenet was charged with milking the Medicare Outlier Pool like a cow on growth hormones. Basically these foundations of capitalism figured out how to suck money out of government programs like a collapsed supernova sucks light or the Green Bay Packers just plain suck.

The For Profit Hospital industry has made the news again which underscores the lack of change in the health care system. First, the Federation of American Hospitals, which is the association for the For Profit Hospital Industry, wrote a letter to Medicare about their position on the new Accountable Care Organizations (ACO). A principle of ACO's is that provider groups are assigned both patients and the dollars associated with managing their care. This provides incentives to provide the right care rather than the most profitable. The Federation of American Hospitals likes being assigned the dollars but wants to pick the patients that are assigned to them. This is cherry picking or called being "neither accountable, nor caring, nor organized". This creates the images of the same Redding, CA Tenet hospital that did open heart surgeries on anyone that they could sedate long enough, assigning themselves all the wealthy retirees who need a knee surgery for the spring ski season. The chronically ill lower income patients can be assigned to the non-profit hospitals who lack their managerial talent to completely game the system.

It's gotten so bad for Tenet, that they made the news because they were the target of a takeover from another for profit hospital group called Community Health Systems, Inc. (CHS). CHS has accused the Tenet Board of Directors of not taking their shareholder interests into account but their own personal interests. That's kind of like a Hell's Angel accusing another biker of poor flossing habits.

The reason that the For Profit Hospital industry has such a poor track record was that their management talent and ability to turn around hospitals was mostly a myth. They were successful because they bought hospitals that had a monopoly in their current suburban or rural town or located in a wealthy area where everyone had great insurance. They successfully ran hospitals in one-hospital towns where they had no competition. They had to run them 20% more efficiently than their non-profit predecessors in order to make up for new taxes and required shareholder return. When they could not, that's when they started milking Medicare or forcing unnecessary psychiatric hospitalizations on patients. Whenever Tenet entered a competitive market as they did in Philadelphia with the purchase of 2 of the city's 5 academic medical centers, they did as poorly as everyone else.

The For Profit Industry has nowhere to go but go procreate with itself. All the lucrative hospitals with a local monopoly have been bought so there are no real new expansion opportunities. Which is probably why the latest For Profit hospital news stories provide better material for John Stewart and Stephen Colbert than for Harvard Business School case studies.

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