The Daily Journal, Johnson County, Indiana.

Largest for-profit hospital chains set poor example

By SCOTT HALL
Daily Journal staff writer
shall@thejournalnet.com

Nov. 29-30, 2003

Columbia/HCA Healthcare Corp. set the standard for investor-owned hospitals, in more ways than one.
As the Tennessee-based company pioneered the concept of the for-profit hospital chain in the 1980s and 1990s, it also assembled a record of Medicare fraud and shady tactics that cast a shadow across the entire industry.

Although some observers defend for-profit hospitals as an economically efficient way to deliver health care and respond to changing markets, others say their focus on the bottom line leads almost inevitably to questionable business practices, high costs and declines in quality, staffing and charity care.
“Not only is their quality of care worse, but they’re not cheaper, so they don’t save money,” said David Himmelstein, an associate professor at Harvard Medical School. “What they do is, they’re better at billing and at fraud, and that’s why they’re able to profit.”

For-profit companies own about 15 percent of the nation’s 4,900 community hospitals, according to the American Hospital Association.
Because of rising expenses and inadequate payments from federal programs and commercial insurance companies, many find it difficult to please shareholders without resorting to unethical, if not illegal, methods, said Linda Miller, president of the Volunteer Trustees Foundation for Research and Education in Washington, D.C.

“Every time there’s a scandal, it’s the for-profits that have been either pushing the envelope or trying to get in under the radar,” said the nonprofit advocate, whose group evolved from a national association of hospital boards. “They just prove to be constantly on the make, and it’s because reimbursement for services is being cut back, and for-profit companies have to grow, and there’s a basic inconsistency between those two things.”

The most prominent example is the former Columbia/HCA, now known simply as HCA Inc. Despite having shrunk since its peak, HCA remains the nation’s largest hospital chain, with about 190 hospitals and 78 outpatient surgery centers in 22 states and Europe.
The company was formed in 1994 by the merger of Columbia Healthcare with the Hospital Corporation of America, which was founded by the father and brother of U.S. Senate Majority Leader Bill Frist of Tennessee.

Columbia/HCA took cues from Wal-Mart and McDonald’s and expanded aggressively through acquisition, earning the nickname “Pac-Man” in the health-care industry, according to news accounts. The company had 350 hospitals and annual revenue of $20 billion in early 1997 when federal agents investigating Medicare fraud began a series of raids on its offices across the country.

The probe uncovered systematic efforts to bribe and pressure doctors for referrals, exaggerate diagnoses to increase billings and misrepresent expenses to obtain inappropriate federal reimbursement. Evidence suggested both companies had used fraudulent practices even before their merger.
Amid the controversy, Columbia/HCA ousted top executives and began selling off many of its hospitals. In July 1999, two executives were convicted on fraud and conspiracy charges. The renamed HCA Inc. has since agreed to pay a total of $1.7 billion in fines and settlements to the federal government, though it has admitted no wrongdoing.

Still, HCA’s presence is such that Nashville, Tenn., and its suburbs remain the hub of the for-profit hospital industry. Executives from one hospital holding company often strike out on their own to start similar ventures.

Tenet’s troubles
The record is no better for the nation’s second-largest for-profit hospital chain, California-based Tenet HealthCare Corp., which owned 114 hospitals and other related facilities in 16 states as of December 2002. Tenet was known as National Medical Enterprises in the 1980s, when allegations emerged that the company had been bribing politicians, exaggerating diagnoses to increase billings and keeping patients for excessive periods of time, sometimes against their will.

In 1994, National Medical agreed to pay $379 million to the federal government to settle charges that it paid bribes and kickbacks to doctors for referrals, then fraudulently billed Medicare, Medicaid and other programs for the treatment. The company replaced upper executives and changed its name to Tenet.

Problems have continued, however. Tenet now faces multiple lawsuits and federal investigations into possibly improper billing practices and unnecessary patient treatment. The Internal Revenue Service has ruled that the company owes $269 million in back taxes and interest. The Justice Department sued Tenet in January, alleging the company overbilled Medicare. The CEO of 10 years resigned in June under pressure from shareholders, as the nation’s growing number of uninsured patients led to losses of $215 million for the first half of 2003.

In July, a federal grand jury indicted Tenet on new charges of paying bribes and kickbacks to doctors for referrals. In August, Tenet agreed to pay $54 million to settle government allegations that doctors at a California hospital performed hundreds of unnecessary heart surgeries. The federal Securities and Exchange Commission and the Department of Health and Human Services also have begun investigations within the past year. The company recently announced the sale of seven hospitals and plans to sell 14 more.

The histories of the two companies raise a red flag about investor ownership, said Himmelstein, a doctor who advocates a national health system. The scandals were significant enough to slow for-profit consolidation to a crawl after a burst of activity in the mid-’90s.
“Those are by far the two biggest players in the hospital industry, and they’ve been crippled in terms of their acquisitions because they’ve spent so much of their time fighting subpoenas,” he said.

The American Hospital Association, whose 4,600 members include both for-profit and nonprofit hospitals, does not officially favor one kind over the other. Senior Vice President Rick Wade denied that problems were inherent in investor-owned health care and said hospitals should be judged on their behavior and impact, not their ownership.

“You can’t make any rules about these things,” Wade said. “If they invest back in the community, if they’re a good, stable employer, if they’re doing outreach in the community, if they’re expanding services and investing in new technology, and they’re doing that in an open way with a lot of public input, then ownership isn’t the issue. The issue is what happens in the community.”

Caution is key

A community that makes a deal with a for-profit health-care company can protect its interests by keeping the process open to public scrutiny, he said, and by insisting that any sale, lease or partnership agreement include written guarantees that vital services will continue even if unprofitable.
“The places where this has worked out most successfully is when there’s a lot of information that goes to the public and there’s a good process in place to make the public comfortable with the change,” Wade said. “The county government obviously has a responsibility to lock a lot of that into the terms of the lease, but there’s also the responsibility of the new owner to have a sense of the culture of the community and the expectations of the community and then live up to it.”

In light of the unique role hospitals play in their communities and the strong feelings residents have for them, local leaders should deliberate carefully before making any significant changes, he said.
“There’s a lot riding on this decision for the local government,” Wade said. “If this doesn’t turn out to be good for the community, somebody’s going to be upset.”

Miller, of Volunteer Trustees, is even more adamant in urging caution when dealing with for-profit hospital companies.
Unless local leaders are very careful in drafting agreements, she said, a lease can be as final as a sale. Promises of good intentions mean little unless put in writing.

The community also should specify what happens if the for-profit company decides to sell or lease the hospital, she said. She knows of hospitals that have been through several for-profit owners.
“The real problem is that you’ve got your sprawling suburban community at the behest of a for-profit hospital that will offer those things that are profitable and probably won’t stay more than a few years, because their turnover is very high,” she said. “There are so many examples all over this country where for-profits started to expand and then cut, and the hospital and the county are really left holding the bag.”
Echoing Miller’s concerns, Himmelstein said communities should be skeptical when any hospital transaction is touted as a win-win situation for everyone involved.
“I’d ask if they also are trying to sell you a bridge,” he said.
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