A Nation of McHospitals?
By DAN DIAMOND
For years, the nation’s hospital chains worked to get bigger, bigger, bigger. In the 1980s and 1990s, for-profit companies like HCA and Tenet emerged as juggernauts, snapping up local hospitals and opening clinics in one town after another. Their ambitious not-for-profit cousins, the big academic medical centers like Harvard-affiliated Partners Healthcare, scooped up smaller rivals in response. Just four years ago, the Tennessee-based Community Health Systems spent $7.6 billion to buy a competitor and become the nation’s largest for-profit hospital company, with more than 200 hospitals in 29 states.
Today, in any town or city, in any region of the country, you’ll almost certainly see the same scenario: Only a handful of hospitals, sometimes owned and operated by a company thousands of miles away.
As the pace and scale of consolidation picked up, the outcome long appeared inevitable: an American future in which a handful of hospital chains dominate American health care, with brands like Tenet and Catholic Health Initiatives and the Mayo Clinic competing for patients the way Panera and Chipotle and the Olive Garden compete for diners.
But something happened on the way to becoming a nation of McHospitals. That ambitious growth, driven by dreams of dominating a transformed health care landscape and recently fueled by Obamacare revenues, hit a wall.
In the past year, two of the nation’s three largest for-profit hospital systems, Tenet and Community Health Systems, began selling off dozens of their hospitals while entertaining bids to break up their entire companies. Prominent not-for-profit chains like Partners Healthcare are reporting nine-digit losses. Even Mayo Clinic is pulling back from some rural locations in the Midwest.
In part, the shift is just a typical business cycle working its way through the health care industry. “There are these testosterone-driven waves of deal making” in health care, said Jeff Goldsmith, a hospital consultant. “And then there are waves of post-coital regret that follow.”
But in part, the change is driven by policy decisions being made in Washington — how health care is paid for, and who has access to it. And as that shift unfolds, it’s raising questions that will shape American health care for a generation: What will the future of hospital ownership look like? What should it look like?
Even at the height of merger mania, no one could quite agree on whether the McHospital trend was a good thing or not. Some people — mostly in the hospital industry — argued that consolidation was long overdue, and that large companies’ deeper pockets and economies of scale would keep costs down and improve the quality of care for patients. Obamacare gave hospitals financial incentives to manage entire populations, rather than just get paid patient-by-patient — an effort that required building big data sets and buying up other services too, like physician practices.
But others were concerned about the growing concentration of ownership of the nation’s hospitals by a shrinking number of companies. It put local hospitals’ decades-long relationship with their communities at risk, as important local institutions started reporting to shareholders or distant nonprofit boards. These worriers foresaw a future in which just a handful of chains competed to carve out the most lucrative segments of health care, like cardiac procedures and orthopedic surgery, and offered substandard care for everyone else. And despite the chains’ promises, years of reports have shown that when hospitals combine, their prices tend to go up.
Providers’ growing market power has “been the leading reason for the [rise] in health care spending” for decades, Bob Berenson, a former Carter and Clinton administration official said in 2015. (“And in conventional political circles,” he added, “it’s still being overlooked.”)
But the changes underway are starting to transform the nature of the hospital itself — and could open the door to a landscape even more different than we imagine.
The direction of the American hospital has shifted radically over time. Initially, hospitals were charity wards where the poor went to die. But as cities grew, and health care became more expensive and capital-intensive, hospitals became destinations for wealthier patients: Top hospitals were the ones that could afford the latest medical technologies and perform the most complex surgeries. The creation of Medicare in 1967 fueled new revenue and attracted more competitors, leading to the birth of major chains.
Today, about two-thirds of the nation’s 5,000 hospitals are parts of chains, up from about half of hospitals just 15 years ago, and the share of for-profit hospitals has steadily climbed — more than one in five hospitals are now owned by investors, rather than run as a not-for-profit or by the government. Established hospitals are grappling with how to balance institutional advantages like high-end facilities and expensive technologies with the need to stay nimble and adapt to health care’s changes. It’s a hard balance to strike, and after a few boom years, the industry is experiencing its worst financial performance since the great recession.
It’s always been expensive to own and operate a hospital. Preparing for possible emergencies requires round-the-clock staffing and immense sunk costs. Most major hospitals also try to offer dozens of different business lines, from cardiac surgery to behavioral health care — but that’s only gotten harder as niche competitors chip away at the most lucrative high-end services. It also got pricier thanks to the latest merger mania, as hospital chains collectively took on billions of dollars in debt to buy up their competitors and acquire other services, like physician offices.
An industry that had already consolidated in the 1980s and 1990s — seeking new efficiencies and to get bigger when negotiating with insurance companies — received new incentives under Obamacare, as millions of newly insured patients entered the market and hospital chains raced to capture the new customers. But the Affordable Care Act also accelerated changes to health care payments in ways that made hospitals seem a little outmoded.
Medicare, other federal programs and insurance companies are increasingly shifting away from fee-for-service reimbursement — in which doctors and hospitals are rewarded for the number of procedures they perform — toward “alternative payment models” with more incentives for follow-up care and improved long-term outcomes. That’s encouraged hospitals to make new investments, like buying up nursing homes and hiring more workers to deliver home-based and long-term care. Some hospital leaders are actively talking about trying not to fill their beds, which would’ve sounded like heresy in the industry just a decade ago.