When Tenet first appeared there was both concern and skepticism about the presence of a for-profit entity. The concern was that Tenet would have both financial muscle and expertise from its experience in other markets to step-up the already fierce competition among hospitals, and do so with a for-profit’s bottom-line mentality. The skepticism centered on the ability of any outsider, including a for-profit, to be successful in Philadelphia’s heavily overbedded market where Independence Blue Cross and US Healthcare (Aetna) had cut reimbursement to the bone.

A growing presence by other for-profits, plus Tenet’s track record over the past three years sheds some light on the nature of these companies, how they operate, how they are viewed by practicing physicians and how they compare to non-profit hospitals.

Community Health Systems, based in Brentwood, Tennessee has a rapidly growing presence in eastern Pa. It entered the state in 1999 when it acquired the hospital in Berwick, Pa. In the past eight months it has acquired three more hospitals - Brandywine Hospital, the Southern Chester County Hospital and Easton Hospital. The Southern Chester County Hospital has been renamed the Jennersville Regional Medical Center. Nationally, as of September 2001, CHS owned 54 hospitals and had annual revenues of approximately $1.7 billion.

The newcomer among the for-profits is King of Prussia-based Universal Health Services, Inc. UHS has just completed the acquisition of North Penn Hospital, a 150 bed facility in Lansdale, Pa. Reflecting the competitive nature of the hospital industry even in the suburbs, UHS has quickly moved to re-brand the hospital and initiate business development activities. Its name has been changed to the Central Montgomery Medical Center, a new CEO has been named and a new board has been formed.

Central Montgomery is UHS’ first acute care hospital in the region, although it owns four area behavioral health facilities. UHS is the country’s third largest hospital management company with annual revenues of approaching $3 billion, and it now owns a total of 100 medical and behavioral health facilities plus a variety of ambulatory surgery and radiation therapy centers.

Tenet, headquartered in Santa Barbara, Ca. is the country’s second largest hospital company with 114 hospitals and annual revenues of about $13 billion. During its tenure in Pa., it closed one of its hospitals, the osteopathic hospital on City Avenue, leaving itself with seven area hospitals.

For-Profit Growth Criteria

The 12 for-profit hospitals in eastern Pa. represent less than 10 percent of the acute care hospital market, but consolidation of individual hospitals by the for-profit companies continues to mount. This consolidation is occurring in suburban areas and smaller cities, not within Philadelphia. Community Health System is in the process of seeking regulatory approval to acquire Memorial Hospital of Salem County in Salem, N.J., and Lock Haven Hospital in Lock Haven, Pa.

Gary Newsome, senior vice president of Community Health Systems in charge of Pa. operations stated that his company focuses on facilities in small to medium sized towns and suburban areas. "We are the only hospital in 85 percent of the communities we serve," commented Newsome. Sole provider status eliminates the need to compete for doctors and patients and avoids costly duplication in programs or facilities. In limited cases it may also provide additional leverage in negotiating contracts with third party payers.

Marc D. Miller, the new CEO of the Central Montgomery Medical Center, reported that Universal Health Services generally targets suburban hospitals and those in small to medium sized communities, with particular emphasis on growing communities. Miller stated that UHS has been slow to enter this area, in spite of the proximity to the company’s headquarters, simply because the right situation had not presented itself. He acknowledged that UHS is interested in purchasing more hospitals in Pa.

Newsome stated that CHS sees its growth being driven by the increasing difficulty that smaller hospitals have in raising capital for facilities or rapidly changing medical equipment, and in mustering internal management expertise to contend with expanding regulations and an increasingly complex industry. In the past it has been common for the for-profit hospital companies to be approached by facilities in deep financial trouble. Newsome reported that his company is more frequently being contacted by hospitals that may be doing reasonably well, but the board realizes the institution will not be able to remain independent on a long term basis.

As far as future acquisitions are concerned, both Miller and Newsome did not disclose their specific plans, indicating instead that acquisitions are evaluated using a combination of financial, demographic and business opportunity criteria, not primarily in terms of their geographic location.

Tenet’s business development executives would not disclose their acquisition strategies. Tenet maintains that it has become financially successful with its Philadelphia hospitals. Barry Wolfman, the senior vice president in charge of the Philadelphia regional operations reported that the road to local success was more difficult than originally anticipated. Soon after its local acquisitions Tenet saw the loss of its top Hahnemann cardiologists to Jefferson University Hospital and the University of Pennsylvania Hospital. Likewise, it saw Graduate Hospital’s largest orthopedic group move to Pennsylvania Hospital. In addition, MCP Hahnemann University saw many of it medical school faculty leave. Therefore, Tenet has devoted much of its development effort to physician recruitment and replacing lost admissions at its hospitals.

Differences

The executives of the for-profits tend to downplay any inherent competitive advantage they may have over the non-profits. The major potential difference is the perceived financial clout that comes from for-profit status. UHS’s Miller downplayed these differences. He countered the ability of the for-profits to raise low cost capital through stock offerings by citing that the non-profits do not pay taxes and that they can raise capital through contributions or public bond-issuing authorities. The SEC filings of the hospital management companies show frequent financing transactions through debt and equity instruments but they do not provide exact information on how the proceeds are used. Generally, the proceeds could be used for purchasing more hospitals or for developing facilities and programs at existing hospitals. In contrast, non-profit hospitals are usually forced to fund growth through internally generated profits or bond offerings. Occasionally, they may use for-profit subsidiaries or joint ventures as expansion vehicles.

The for-profits have one potential advantage over the non-profits in their dealings with doctors: they are not restricted by the private inurement prohibitions that apply to non-profits. These tax and business regulations restrict the nature and terms of joint venture and compensation arrangements with individuals. In other words, the for-profits could enter into a wider range of deals with doctors. However, the for-profits generally have taken a cautious approach. UHS appears to have the widest range of deals with doctors. The company operates a number of surgery centers and radiation oncology facilities. These may be wholly owned facilities or structured as joint ventures with physicians. Miller reported that the company has physician recruitment arrangements that provide for incentive payments to doctors or groups if necessary. He indicated further that UHS will consider many types of business arrangements with physicians.

Both Tenet and CHS take a more conservative approach. Wolfman reported that Tenet has not entered into any joint ventures with Pa. doctors. And the only such arrangement he is aware of throughout the company is a surgery center. Newsome reported that CHS has a standard approach to physician recruitment that provides an initial 12 month guarantee to new doctors, in exchange for a three year commitment.

Additional similarities between for-profits and non-profits, the for-profit execs note, include legal protections, regulatory requirements and community demands as factors that force them to act like the non-profits. These factors operate to prevent the profit motive from being the dominant force that governs their behavior.

The legal protections include the review of all hospital sales by the state attorney general under the Nonprofit Corporations Law, plus formal approval of a sale by the Orphans Court. In addition, the state Department of Health reviews all acquisitions as part of its licensing process. The attorney general’s reviews and court approval are designed to ensure that assets are not unfairly converted to for-profit use. The Department of Health review covers operational matters such as changes in programs or physical plant. It also requests information on the new owner’s plans for charity care.

Miller indicated that every acquisition by the hospital chains carries some strings for meeting health care needs or addressing other issues identified by the community. For example, UHS has announced plans to expand Central Montgomery’s emergency room this year, develop a new medical office building, install a new MRI and interventional radiology equipment, and develop a freestanding cancer center. One physician on Central Montgomery’s medical staff indicated that this extensive list of planned improvements is in response to moves by the Albert Einstein Health Network to build a totally new hospital nearby.

Community Health Systems’ acquisition of Easton Hospital also entailed commitments to the community. That purchase carried requirements for a six-year capital improvement plan, physician recruitment activities, a fund to support community-based health care initiatives and requirements for indigent care.

Tenet contends that its community commitment is reflected in the investment it has made in its hospitals. Wolfman reported, "During the past three years we have invested well in excess of $100 million on equipment and physical plant improvements in our Philadelphia hospitals." His claim is partially verified by Howard Kessler, M.D., the head of the radiology groups at Tenet’s Graduate and Warminster hospitals. "I have seen approximately $9 million invested in new radiology equipment."

Wolfman and several physicians reported that much of the money has gone to basic infrastructure improvements, not exterior and cosmetic improvements, because AHERF failed to adequately maintain the facilities.

There are extensive regulatory requirements that serve to force all hospitals, regardless of ownership, to operate in similar, prescribed ways. JCAHO certification programs, state licensure regulations and Medicare/Medicaid participation requirements force all hospitals to have organizational structures, policies and detailed operating procedures covering patient care activities, monitoring of the quality of care, evaluation of physician credentials, patient satisfaction, community service, patient access and financial management. For example, JCAHO certification requirements cover all aspects of hospital operations—everything from the cleanliness of the building, to proactive reporting of patient care errors, to the structure of the board.

Wolfman indicated that Tenet is committed to the mission of patient care and community service and to the same values and principles seen in non-profit hospitals. He cited several categories of performance measures that go beyond profits, including patient care quality measures, cost monitoring, patient satisfaction measures and monitoring of nursing turnover. Tenet representatives added that each hospital has a community outreach effort: its local hospitals have purchased 24 portable defibrillators and contributed them to local organizations.

Another key point of comparison between the for-profits and non-profits is organizational structure and administration. All three of the for-profits follow the same basic approach to these critical items. They emphasize that each hospital has extensive local decision-making authority and local control of operations.

All three of the chains install an on-site management team that includes a CEO, COO, CFO and the equivalent of a chief nursing officer. This follows the top-level structure commonly found in non-profit hospitals. Where the non-profits differ is at the second organizational level. The for-profits have centralized many of these staff. For example, within CHS hospitals a designated individual in the corporate office handles managed care contracting. A non-profit hospital often has an in-house director of managed care.

Tenet provides some of the director level staff at a regional level. For example, it has a managed care expert in its Philadelphia regional office. Other functions that may be centralized at the regional or corporate level include marketing, medical staff office activities, selected personnel functions such as benefits management, and business functions such as purchasing.

The companies contend, however, that this centralization allows them to develop greater expertise than what many independent hospitals could afford or justify. The trade-off for this centralized expertise could be delays in getting answers or onsite assistance when it is needed.

All three of the chains establish a governing board at each hospital, however, the board is advisory only. The boards do not have fiduciary responsibilities nor do they have ultimate authority on matters such as budgets, new programs or the tenure of the CEO. The boards are commonly consulted on these items but final decisions are made at a regional or corporate level. The board is involved in matters that are required by outside regulations and certification requirements. This includes some personnel matters, approval of medical staff bylaws and quality assurance matters and financial controls.

The three companies emphasize the expanded role that physicians play on the board, plus the role of community members. UHS’s Marc Miller indicated that the Central Montgomery board of 12 outside members includes seven doctors and five community representatives. Newsome indicated that the boards of CHS hospitals generally have nine to 11 members with three to five physicians.

Each for-profit hospital usually has a traditional medical staff structure with a medical executive committee and a president of the medical staff, or its equivalent. These structures are required by state licensing or certification requirements. The medical staff organization deals with credentialing, medical staff bylaws and similar matters.

Track Record In the Region

From a physician’s perspective, these company claims of community service, local investment and an interest in quality care could be just public relations spin. The real issues encompass governance matters, the extent of local decision-making, the care delivered to patients and the interaction between corporate executives and the medical staff.

Tenet is the only local for-profit with a meaningful operating history that yields a picture of how doctors view these companies on items that are important to them. Some doctors interviewed at Tenet give positive grades to how the hospitals are run and to manner in which physicians are treated. Mark Tanker, D.O., a gastroenterologist on the voluntary staff at Tenet’s Elkins Park Hospital, as well as Jeanes Hospital and the Albert Einstein Medical Center, is the chairman of Elkins Park’s governing board. Tanker does not think that the limited advisory authority of the board on financial and operational matters has been a significant detriment to daily decision-making or to the development of the facility. According to Tanker, Tenet follows a business-like approach, which means that decisions are made objectively and, once made, they are executed. Tanker noted that the ability of Tenet to tap into corporate expertise in matters ranging from physical plant improvements to medical staff bylaws contributes to the right decisions being made the first time.

Other Elkins Park doctors were not quite as supportive of Tenet. These doctors reported that the hospital operates well, but they said they have not seen significant changes in things like the hospital’s appearance or in patient marketing efforts.

Elkins Park closed its labor and delivery unit, which some doctors consider crucial to maintaining the public’s perception that a hospital is a full service institution. Some doctors interviewed were critical of this move, while others were accepting, citing the need to have a strong program with a large number of deliveries, or not doing it at all.

Tanker indicated that, once the decision on the phase-out of obstetrics was made, the closing was handled well. He reported that the decision was communicated as positively as possible to employees and to the community, and that extensive work was done to respond to employee concerns. This included work with the nursing staff to offer or help with finding new positions.

Positive comments about Tenet also came from Howard Miller, M.D., an internist at Hahnemann Hospital. Miller holds a part-time teaching appointment at MCP Hahnemann University and he is the president of the Delaware Valley IPA, which encompasses 500 voluntary staff physicians plus the 400 faculty members of MCPHU.