\^ 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.