\^ i \ w ,l»° HEALTH POLICY Market Transformation: Will Not-for-Profit Providers Survive?

BY JANE HIEBERT-WHITE

ospitals across the country are increas­ "Some Catholic hospitals will make it, but I think ingly joining integrated delivery sys- they should redirect their mission elsewhere. . . . terns, and a number of those systems I hate to be crass, but I don't think a group of H 70-year-old nuns have the energy to compete in are organized on a for-profit basis, lie percentage of acute care hospitals in for- this market." Queally is a general partner of profit healthcare systems rose from 42.5 in 1992 Sprout Group, the venture capital affiliate of to 44.7 in 1994; meanwhile, the percentage of Donaldson, Lufkin & lenrette. hospitals in Catholic systems declined from 27.2 William Cox, executive vice president, Catholic in 1992 to 23.7 in 1994, according to the 1994 Health Association (CHA), responded by noting and 1995 Multi-Unit Providers Survey, spon­ that "investment bankers like Paul Queally have a sored by Modern Healthcare. In 1995 Columbia/ personal financial interest in seeing turnover [of Ms. Hubert-White HCA—the for-profit hospital system that most health facilities from not-for-profit to for-profit]. healthcare observers see as a catalyst for market There is tremendous personal financial reward change—showed phenomenal growth, acquiring is executive editor, involved, so their market analysis and observa­ 143 hospitals, thereby bringing its total to 338 tions must be examined critically." On the issue and its annual revenue to S4.6 billion.1 Health Affairs. of management, Cox said: Data from the American Hospital Association show that the nature of hospital ownership has Queally's denigration of Catholic hospitals' remained fairly stable over the past decade: Not- capacity to compete is completely gratu­ for-profit hospitals made up 58.4 percent of facil­ itous. Beyond his demeaning ad hominem ities in 1985 and 60.0 percent in 1993; investor- attack on the management skills of sisters, owned hospitals were 14.0 percent of the total in he provides no evidence that Catholic hos­ 1985 and 13.6 percent in 1993. Yet it is owner pitals are less well managed than Columbia/ ship of hospitals in systems—especially the newly HCA's. As CHA examines each market, \\ c emerging regional systems—that really bears find that, in general, Catholic hospitals and watching, since U.S. healthcare is moving toward health systems are strong competitors. Our system integration. challenge is to compete successfully, but in As market trends pressure the owners of some a way that doesn't undermine our identity not-for-profit hospitals to sell their facilities to— as Catholic organizations. or form joint ventures with—for-profit systems like Columbia/HCA, this has renewed an old This column delves into some of the issues debate among policy and system leaders concern­ raised by the not-for-profit versus for-profit ing the relative value of for-profit and not-for- healthcare debate and looks at policy analysts' profit healthcare delivery (see also Emily predictions for the future. Friedman's article on pp. 28-34). Perhaps no one has put the issue more baldly than venture capi­ FOR-PROFIT VERSUS NOT-FOR-PROFIT CARE talist Paul Queally. He said, at a November meet­ A recent national survey found that Americans' ing hosted by the Alpha Center in Washington, perceptions of for-profit and not-for-profit hospi­ DC, "In 10 years, I think Catholic charities will tals are mixed.2 For instance, Americans generally be out of the healthcare business. They lack the believe that for-profit hospitals are more efficient management and capital to effectively compete (59 percent for-profit versus 35 percent not-for- today and in the future." profit) and provide a higher qualify of care (57 Queally, a Catholic who sits on the board of a percent for-profit versus 34 percent not-for-prof­ Catholic hospital, elaborated in a conversation: it). Survey respondents also believe that for-profit

10 • MAY - JUNE 1996 HEALTH PROGRESS hospitals are somewhat more responsive to cus­ Columbia/HCA, has forced not-for-profit tomers (54 percent) than are not-for-profit hos­ providers to enhance their competitiveness. In a pitals (42 percent). study of 15 U.S. communities for the Robert But the survey also showed that not-for-profit Wood Johnson Foundation, healthcare research­ hospitals are viewed as being "more helpful to the er Kathryn Duke of the University of California- community" (65 percent not-for-profit versus 32 San Francisco found that "all of the study com­ percent for-profit). And Americans have the munities consistently cited Columbia/HCA's impression that not-for-profit hospitals cost them actual, expected, or rumored entry into their less (73 percent) compared with for-profit hospi­ community as a major influence on the actions of tals (22 percent). local hospitals.'" Indeed, a Catholic hospital sys­ When asked what the trend toward for-profit tem based in Cleveland has gone so far as to enter healthcare meant for the country, a majority (54 \n an era a joint venture with Columbia/HCA. The 1995 percent) perceived it as a "bad thing." On the agreement between the Sisters of Charity of St. other hand, a plurality (46 percent) said they where Augustine and the for-profit system was a first for trusted for-profit and not-for-profit hospitals Catholic providers. about equally to provide "high quality care at a healthcare Cox predicted that, given the competitive situ­ reasonable price" (26 percent said they trusted ation in some communities, "there will be other not-for-profits more, and 25 percent said they providers, Catholic hospitals that will sell out entirely to trusted for-profits more). Columbia/HCA or another for-profit chain. . . . This random-sample survey of 1,007 adults However, from our perspective, there's a big dif­ nationwide, conducted by Louis Harris and industry ference between completely selling to a for-profit Associates for the Henry J. Kaiser Family Foun­ hospital chain and entering into a 50/50 deal and dation, was released at a December 1995 media leaders—even calling the outcome 'Catholic.'" He continued: briefing. Kaiser Executive Vice President Mark Smith, MD, noted that "on one hand, people Medicare As a rule, CHA is very doubtful that these want the healthcare system to be more busi­ kinds of [joint-venture] relationships [with nesslike and efficient, Yet, given the philanthrop­ officials—are for-profits] can, over the long run, truly ic, charitable history, especially of healthcare sustain and further the ministry of Catholic delivery, people are concerned about the business scrambling to healthcare. They can sustain hospitals, but ethic coming to dominate the healthcare system." not the mission of a Catholic institution. Although the survey's findings describe per­ court the It's not that we believe the investor-owned ceptions, not facts, they do indicate that not-for- institutions are in any way morally inferior. profit providers need to improve their image if We just believe that a shareholder-driven they expect Americans to support a continued consumer, healthcare organization is not the prefer­ not-for-profit healthcare delivery presence. able structure for nurturing and sustaining CHA's Cox agreed that, even though "for-prof­ not-for-profit the ministry of Catholic healthcare. its are not necessarily more efficient and it's about a draw with respect to quality, there is a hospitals will In defending Catholic hospitals' ability to perception problem for not-for-profits." Cox remain competitive, Cox added that "Columbia/ noted that this perception problem is especially need to reach HCA has attempted to engineer a number of serious in Congress and state legislatures, where [joint ventures with Catholic facilities] over a regulations and laws concerning tax-exempt sta­ long period of time and has succeeded only tus are debated. out more once." He acknowledged, however, that "we are Regarding responsiveness to the consumer, going to see a determined effort on the part of Cox conceded that Catholic hospitals "have not to the Columbia/HCA" to use that success to leverage done a good job of marketing ourselves to indi­ their way into additional 50/50 deals with viduals. We haven't had to in the past." How­ individual. Catholic healthcare facilities. ever, in an era where healthcare providers, indus­ Downsizing Cox noted analysts' prediction that, try leaders—even Medicare officials—are scram­ between now and 2000, up to a third of hospitals bling to understand and court the healthcare con­ in the United States will close because of the sumer, not-for-profit hospitals will need to reach spread of managed care. "This will affect Catholic out more to the individual. institutions as well," he said. Some analysts suggest that not-for-profit THE COMPETITIVENESS QUESTION providers are less able than for-profits to respond Columbia/HCA The expansion into many commu­ quickly to market pressure for downsizing, given nities of for-profit hospital chains, especially the not-for-profits' organizational structure and

HEALTH PROGRESS MAY - JUNE 1996 • 11 HEALTH POLICY

their hesitancy to close hospitals. Indeed, accord­ docs not go to shareholders—it is retained for the ing to Duke, "one Orange County |CA| hospital benefit of our members and the public in the CEO suggested that a philanthropic foundation form of facilities, technology, and lower premi­ could make a valuable contribution to local ums in the future."4 health care by reducing excess capacity through Lawrence added: "Health plans such as buying and then closing selected hospitals." Schaefrer's seem to view their primary activities as Cox countered that "Catholic hospitals tend to developing and marketing insurance products, close in the same proportion as the rest of the collecting premiums, and making the best eco­ universe and retain the same percentage pres­ nomic arrangements they can with providers. . . . ence," which argues for Catholic hospitals' ability We [at Kaiser] are not subject to the pressures of to remain competitive with other hospitals in the short-term profit-and-loss statements. We are market. In I960 there were 1,000 Catholic hos­ able to take a longer perspective in our decision pitals; today there are 680. Cox added, "On the making." face of it, being slower to react to market condi­ Schaeffer, in return, claimed Kaiser does not tions is not necessarily a bad thing for a commu­ live up to its community benefit claims, and nity's healthcare systems. A community-based argued that "nonprofit health plans should enjoy institution may take longer to act than a share­ tax subsidies only if their contributions to society f holder-driven institution, but that might well be wme equal or exceed the value of the subsidy." in the long-term best interest of the community- The question of not-for-profits' contribution Immediate efficiency gains should be only one to society will continue to be raised as for-profit measure of a healthcare organization's perfor­ analysts say providers make a stronger effort to demonstrate mance." their own contributions. For instance, at the Access to Capital For-profit hospitals are generally not-for-profit Kaiser Family Foundation press briefing, Stephen able to borrow money from banks at a lower rate Wiggins, CEO of the fast-rising for-profit Oxford of interest. On the other hand, not-for-profit hospitals have Health Plans, tried to persuade the press that his hospitals arc exempted from paying taxes. Yet a managed care plan provided community benefits number of Wall Street analysts perceive not-for- no real at least equal to those of his not-for-profit rivals. profits as struggling in the competitive market­ As for-profit providers make more of a case for place, with capital-starved facilities forming merg­ problem with community benefit, not-for-profit providers will ers "out of desperation." need to better justify their tax-exempt status. Other analysts, how ever, say that not-for-profit acquiring In the end, however, it remains to be seen hospitals have no real problem with acquiring whether for-profit providers will really be willing enough capital to compete with for-profits. Said to provide the "safety net" function often per­ Daniel Bourque, head of VHA Inc.'s Washing­ enough formed by not-for-profits. Health lawyer Peter ton, DC, office, "Lots of hospitals are sitting on Grant, of Davis Wright Tremaine, suggested at big pieces of cash, yet there is the attitude that capital to the Alpha Center meeting that "the publicly held they need more capital and deep pockets ro com­ for-profit system is not going to deliver care to pete with Columbia/HCA." Smith of the Kaiser compete with 50 million uninsured." Robert Restuccia, execu­ Family Foundation also disagreed with the notion tive director of the consumer organization Health that not-for-profits cannot compete because of for-profits. Care for All, concurred: "The time for charity lack of access to capital: "Once a [not-for-profit] care is now. The question is, Are we getting char­ hospital network is large enough, raising capital ity care from our nonprofits? We need a lot more isn't a problem. Hospitals arc cash cows. What accountability." He added that the "challenge for they bring to the market is money." [states'] attorneys general is to make nonprofits more accountable." THE ACCOUNTABILITY QUESTION When asked about accountability, some Wall The question of accountability is especially con­ Street analysts suggested that the publicly held tentious. Advocates of not-for-profit healthcare for-profits are actually more accountable than delivery argue that their organizations are not-for-profit healthcare providers. "Public com­ accountable to the patient and the public—not to panies are [held] under an incredible microscope" the shareholder. As Kaiser Foundation Health by investors, said analyst Geoffrey Harris of Plan head David Lawrence wrote in a pointed Smith Barney, Inc., at the Kaiser briefing. "I exchange with Leonard Schaeffer, CEO of Blue would argue that public companies have more Cross of California: "The most important distinc­ accountability than companies that are nonpublic tion between nonprofit and for-profit status is (whether nonprofit or for-profit). A nonpublic that the net income we (as a nonprofit) generate Continned on page 22

12 • MAY - JUNE 1996 HEALTH PROGRESS WHAT IS SPIRITUALITY? NOT-FOR-PROFITS Continued from page 17 Continued from page 12

WHEN GOD COMES COURTING It comes with gifts in hand. Three grace­ How does the holy approach this ful abilities begin to show themselves in remarkable human being? When the attitude, speech, and behavior. The reli­ F mystery makes itself known to a person, giously converted long for an intimacy or- the human is filled with wonder and with the holy: We call this longing experiences being grasped by love. "hope." There is a knowing born of profits are not as If the person attends to this, several love: We call it "faith." And there is responsive to their changes take place. First, the divine takes action bom of religious love: Its name is its place clearly in human awareness, "charity." communities. effecting a religious conversion. Next, And still love is not finished. In the the new awareness usually changes mind a prudence grows, a wondrous behavior. The person realizes, I don't common sense amid the millions of deci­ company could probably cut quality' want to do some of the cheap stuff I've sions that lace up our days. In the will, easier than a public company," he been doing; and thus moral conversion justice appears like a rudder of fairness as said. begins. Third, the love strengthens the we relate to those on the job or in the But CHA's Cox said that although person to face the buried garbage of his neighborhood. In the psyche two capac­ for-profit companies are very or her life, including decisions or events ities permeate our image making and accountable to shareholders, they are that left scar tissue. Psychic conversion emotional energy: fortitude to deal with not as responsive to their communi­ may begin, often with therapy. Finally, what threatens, and temperance, which ties as not-for-profits are. "A for- the person might come to know herself moderates our sensual appetites and our profit hospital will pull up stakes and or himself—how he or she processes need for food and drink. move tomorrow if the shareholders things, avoids things, skips things. The Driven by a new obsession with what demand it," Cox said. "Because of person learns to be attentive, to intelli­ has become the person's primary love, a pressures from their communities, gently question, to reach reasonable transfiguration is under way. The project not-for-profits are rarely able to act conclusions, and to act responsibly. is nothing short of holiness, a wholeness so precipitously." Love's agenda is relentless, its goal the the human did not dare to dream of. total healing of the human. This is the fullness of spirituality. This is Is THERE A DIFFERENCE? But love does not just make demands. the destiny of each of us. • As Catholic providers seek to renew their mission, forging a "new covenant" to preserve the spirit and DEVELOPING LEADERS' SPIRITUALITY ministry of Catholic healthcare in a competitive marketplace, it will be In its 1994 study of outstanding leaders in Catholic healthcare, the Catholic critical for them to keep in mind Health Association's Center for Leadership Excellence identified a model of accountability to both the community' 18 critical competencies of leadership. Three competencies of spirituality are and the individual patient. If not-for- at the core of the model, having the most influence on leaders' behaviors: profit Catholic providers cannot con­ Finding Meaning, Faith in God, and Positive Affiliation. vince the public and the policymakers Responding to the essential role of spirituality in outstanding leadership, that they are caring for society's most the center has created a resource for developing these three competencies. vulnerable, and providing a communi­ To be released in June 1996, the resource—published as a guide for facilita­ ty benefit beyond that rendered by tors—includes descriptions of the behaviors and characteristics of these com­ for-profit facilities, then there will be petencies, along with case study discussion and self-reflection exercises for good reason for the public to ask, increasing awareness of these behaviors and characteristics. The guide also What's the difference? a includes helpful support materials: • Tools for teaching such disciplines as centering prayer and discernment • A glossary NOTES • Reading lists 1. Kathryn Duke, "Hospitals in a Changing • An introduction to accelerated learning techniques applied to the devel­ Health Care System." Health Affairs, opment of the spirituality competencies Summer 1996. • Essays, including one by Sr. Carla Mae Streeter, OP 2. Henry J. Kaiser Family Foundation, "A The resource is the work of a task force-Rev. Gerald Broccolo; Sr. Margarite Survey on American's Perceptions about For-Profit and Not-for-Profit Health Buchanan, RSM; Sr. Joanne Lappetito, RSM; Sr. Maureen Lowry, RSM; Sr. Sharon Care," Menlo Park, CA, December 1995. Richardt, DC; and center staff Regina M. Clifton, Carol Tilley, and Ed Giganti. 3. Duke. 4. David Lawrence, "Nonprofit Versus For- For more information, contact Regina M. Clifton at 314-427-2500. Profit Health Plans," Health Affairs, Spring 1996, pp. 237-238.

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