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In Philadelphia, survival strategies blur lines between for-profit and nonprofit medicine

From the March ACP-ASIM Observer, copyright © 2002 by the American College of Physicians-American Society of Internal Medicine.

By Phyllis Maguire

For-profit hospitals receiving more scrutiny

When Tenet Healthcare Corp. came to Philadelphia four years ago, many in the medical community were on edge.

While the national chain was entering the market to bail out the bankrupt Allegheny Health, Education and Research Foundation, not everyone viewed Tenet as a white knight. The city, after all, was one of the last bastions of nonprofit health care, and many wondered if the giant for-profit newcomer would fit in. How would for-profit medicine affect patient care—and the city's physicians?

Today, the answers to those questions have surprised the city's health care establishment. In the wake of the Allegheny catastrophe, Tenet has received high marks from the city's other systems and its physicians. Even more interesting, however, is how the city's nonprofit systems have behaved in what analysts call one of the country's toughest health care markets.

Philadelphia, like many other large medical markets, has been devastated by a convergence of factors. Because academic medicine so thoroughly dominates the city's medical establishment, federal cuts to teaching hospitals (an estimated $1.5 billion since 1997) have left the city's academic centers reeling. At the same time, nursing shortages, spiraling malpractice premiums and managed care monopolies have plagued for-profit and nonprofit systems alike.

In an aggressive response, the city's not-for-profits have slashed staffing levels, consolidated facilities, cut employed physicians loose and hired insurance experts to gain business expertise. In short, they have been exhibiting the type of behavior typical of for-profit health systems.

Analysts say that as for-profits and nonprofits confront the same problems, they increasingly must rely on the same survival strategies. That trend has blurred the lines between how for-profits and nonprofits operate.

New player in town

While Allegheny's troubles dominated the local headlines in the late 1990s, Philadelphia medicine had already been through some tumultuous times.

Allegheny, along with the city's other large hospital systems-the University of Pennsylvania Health System, Jefferson Health System and Temple University Health System—was gripped by consolidation fever. The networks vied to buy or align with smaller hospital systems in a race to gain market share and managed care leverage.

As part of that integration mania, health systems competed to buy physician practices, spending huge sums to lure physicians into their fold. By the end of the decade, however, the strategy proved to be spectacularly unprofitable. Allegheny had collapsed into bankruptcy, in part because of its spending spree, and Jefferson, Temple and Penn were drowning in red ink.

That's when Tenet entered the scene, purchasing the smoldering remains of Allegheny and promising to rebuild. By all accounts, Tenet crafted one of the city's most dramatic turnarounds, guiding Allegheny's hospitals to profitability in 2000. Even more remarkably, the company's road to recovery silenced many critics who claimed that the arrival of for-profit medicine would shut down community hospitals, damage the system's educational mission and cut charity care. (See "For-profit hospitals receiving more scrutiny," below.)

While Tenet did in fact close one of Allegheny's old hospitals, union officials said that Tenet dealt fairly on severance and re-assignment. And instead of gutting its remaining community facilities, Tenet kept each hospital full-service. It equipped several hospitals, including its two suburban facilities, with new cardiac catheterization labs, diagnostic imaging centers and expanded oncology services.

The chain also launched a women's health services initiative throughout its system. That strategy, community physicians say, made each hospital stronger and kept patients from automatically going downtown for specialized services.

Faculty physicians' response has also been positive. Department chairs at Tenet's teaching hospitals say the for-profit has been "very supportive" of the internal medicine residency and fellowship programs, providing extra stipends for physician training and funding start-up research projects. Physicians throughout the seven-hospital system also applaud a capital improvement program that will total $140 million by the end of this fiscal year to refurbish old hospitals and launch new services.

In terms of charity care, community advocates give Tenet an average rating. While Tenet originally pledged to maintain Allegheny's level of charity care, advocacy groups say they had to wrestle a specific policy out of Tenet the year after it arrived. (Because Philadelphia is the largest U.S. city without a public health system, city hospitals provide up to $250 million a year in uncompensated care.)

"They're no better or worse than any of the other hospitals here," said Evonne C. Tisdale, assistant director of the Philadelphia Unemployment Project and a member of Tenet's community advisory board. "The demand for uncompensated care is huge and growing. All Philadelphia hospitals are having a hard time."

Cost-cutting and consolidation

As Tenet has been busy wooing the city with its brand of for-profit medicine, the city's nonprofit health systems have been cutting costs.

The Penn system, for instance, used drastic cost-cutting measures to turn itself around. Throughout the late 1990s, the health system mounted progressively higher losses, threatening the entire university.

As recently as 1999, Penn was regularly posting operating losses of hundreds of millions of dollars. After implementing a fiscal austerity program that slashed its nonclinical workforce by 20%, Penn squeaked out a $25 million profit in 2001. The Penn health system has also implemented other changes to speed its decision-making processes. Late last year, for instance, Penn established a separate board and corporate entity for its health system and medical school. While the new governance was designed in part to protect the university from massive health system losses, it also gives the system the "flexibility to make quick decisions" in research and capital improvements, said chief executive officer Robert D. Martin, PhD.

Across town, the Jefferson health system recently named a former insurance executive as its newest president. While Jefferson officials declined to talk about the appointment, analysts speculated that one reason for bringing a former managed care executive on board is to use his insider's expertise to improve reimbursements.

And in north Philadelphia, Temple has used another corporate strategy to cut expenses: buyouts. Temple decided to save more than $35 million over five years by offering buyouts to its senior faculty. The buyouts applied to full-tenured (and salaried) physicians who were 55 or older—an offer that led almost 80 faculty members to depart in 2000.

However, Temple's key strategy to stanch current losses—which are estimated at about $50 million a year—is much more ambitious. The health system is consolidating services among the community hospitals it acquired in the 1990s, several of which are clustered within a few miles of Temple's flagship academic center.

Temple will decommission two hospitals as acute care facilities and retool them for other purposes. While one will still have an emergency room, its beds will be devoted to behavioral health. The second hospital is being converted into an outpatient primary care center with housing for the elderly.

Temple is also consolidating clinical services among the remaining acute care facilities. The plan is to transform the health system—including several long-term care facilities and a new pediatric hospital in the same part of the city—into a campus linked by shuttle service. Temple officials say that consolidation is the only way that the system can survive, in part because Temple is the state's largest provider of Medicaid services.

Physician reaction

Philadelphia health systems' moves may be necessary for their financial health, but they get mixed reviews from physicians working in the trenches.

At Temple, for example, the buyouts of tenured faculty produced mixed results. While the move paved the way for younger researchers with lucrative research grants to join the system, physicians say the orchestrated exodus hurt morale and took away many mentors for younger clinicians.

Many wonder how Temple's reconfiguration will affect its relationship with community physicians. However, Donald B. Parks, MD, a part-time Temple faculty member who practices in the community and heads Temple's community outreach program, pointed to one reason why community physicians support Temple's plan: The health system gives community physicians the opportunity to follow their own patients in the academic center while using Temple's subspecialty care.

Donald B. Parks

Donald B. Parks, MD, is helping Temple gain community physicians' support for its ambitous consolidation program.

 

 

 


"For black physicians who have historically been excluded from the university setting," Dr. Parks said, "that carries a lot of weight." He estimates that more than 400 African-American physicians practice in the city.

At Tenet, physicians have been subject to even more change. When the for-profit entered Philadelphia, it closed its home health services and divested the physician practices it owned, retaining only a "few dozen" employed physicians, according to a Tenet spokesperson. That figure is down from the several hundred practices it inherited from Allegheny in 1998.

Again, Tenet surprised many in the physician community. While some physicians working for other systems have experienced an abrupt "unwind," physicians formerly employed by Tenet say divestiture has been a boon for their practices.

Gary D. Yeoman, ACP-ASIM Member, said that Tenet gave him and his partner extensive contacts and resources to help them launch Founders Medical Practice in Philadelphia. In addition, the Tenet hospital where they admit has opened doors for them with seniors and the Latino community. The hospital even helped market the practice and guaranteed part of a first-year salary for a new physician.

Gary D. YeomanGary D. Yeoman, ACP-ASIM Member says that Tenet, which formerly owned his practice, helped him and his partner strike out on their own.

 

 

Dr. Yeoman added that the hospital has said it will help the group launch an occupational health service that he pitched. "Tenet looks very hard at the numbers," he explained, "but it's willing to support physician entrepreneurs if it likes what it sees."

While Tenet has parted ways with most of its employed physicians, Jefferson and Penn have continued to hold onto much of the integration they put together over the past 10 years. As part of that strategy, both systems continue to retain many of their owned physician practices.

That arrangement suits physicians like Bonnie Lee Ashby, FACP, an internist employed by Main Line Health, a three-hospital network that is part of Jefferson. While she said that her practice overhead runs as high as 60%—a sharp contrast to her costs when independent—being employed gives her protection in a market with monolithic managed care and rising malpractice rates.

"My life is easier, particularly in contract negotiations with insurers and benefit packages for my employees," Dr. Ashby said. "The many layers of nonmedical costs drive up overhead, but a lot of the grief is taken away."

Worsening conditions

Whether physicians in Philadelphia are employed or not, they still face a daunting market. The dominance of two insurers has led to bitter disputes over reimbursements, particularly at the hospital level. Independence Blue Cross controls 55% of the region's HMO and PPO products, while Aetna U.S. Healthcare controls 25%, making Philadelphia one of the most tightly controlled markets in the country.

Physicians say that tough times for the city's health systems have changed the practice environment in other noticeable ways. The days of physician "free agencies"—when systems threw money around to buy practices-are over, much to primary care physicians' relief. Generalists complained that those sums tended to go to subspecialties, bleeding money from primary care and capital improvements.

While subspecialists are no longer the objects of highly publicized bidding wars, they are still in short supply. Some have left town or been lured away by the area's pharmaceutical industry, which pays more than the city's health care systems. One internist said that a patient with a possible diagnosis of thyroid cancer can sometimes wait up to four months to see an endocrinologist within her own integrated health system.

An even more serious menace is rising malpractice premiums, which threaten both physicians and health systems. Penn, for instance, paid $20 million more in 2000 to insure its employed physicians and faculty than in 1999. Internists in private practice report a second year of 20% to 30% premium increases, leading them to join the state's concerted grassroots tort reform effort. (At press time, the state legislature was trying to hash out a tort reform bill that would provide some relief.)

Physicians are responding by looking beyond their health system affiliations for new ways to organize. The Delaware Valley Independent Physicians Association (IPA) is a case in point: Originally formed in 1998 to give physicians affiliated or employed by Tenet a forum for negotiating with the newcomer, the IPA has opened its membership to physicians outside the Tenet system and in the five counties surrounding Philadelphia. The IPA wants to grow its membership from 900 to several thousand, to possibly attract new managed care companies to the region and negotiate better liability insurance rates.

"We need to grow to get more clout," said Howard A. Miller, FACP, a general internist affiliated with Tenet's Hahnemann University Hospital and president of the IPA. "The problems we have to address now are no longer about dealing with one system."

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For-profit hospitals receiving more scrutiny

Responding to concerns about the ability of for-profits to be good members of the health care community, regulators and community groups are taking a closer look at for-profit hospitals.

While only about 15% of U.S. hospitals are owned by investors, advocacy groups dislike for-profit medicine. They claim that for-profits "churn" hospitals, buying distressed non-profits only to close or deplete them further before selling them off again.

Tenet Healthcare Corp. has been on the receiving end of some of that criticism. Between 1995 and 2000, for example, Tenet closed the most hospitals—five out of 23—in non- to for-profit sales in California.

Community advocates complain that for-profit hospitals drastically cut staff, shuttle physicians among facilities and generally cut indigent care and community programs. They also say that expensive services that communities need—burn units and trauma centers, for example—are often the first to go when for-profit medicine comes to town.

Some data support that view. A study published by the Consumers Union in 1999 found that charity care at one California hospital fell nearly 90% in its first year as a for-profit facility. And a report in the November 2000 issue of Health Affairs noted that hospitals converting from non- to for-profit status between 1991 and 1998 provided $400,000 less each year in charity care on average.

That trend may now be changing, however, in part because of new regulations. In the late 1990s, state attorneys general began exercising oversight of what was turning out to be the nation's largest transfer of community charitable assets. More than a dozen states have passed laws governing hospital conversions, and several states now require public disclosure and hearings before sales can take place.

Advocacy groups say these new laws have given community groups a seat at the conversion table, allowing them to secure commitments from for-profit companies to keep facilities open, as well as policies on community services and uncompensated care.

Several states have mandated similar oversight to counter another trend: the sale of hospitals among nonprofits. While Tenet closed the most California hospitals in the mid-1990s, the nonprofit Catholic Healthcare West was responsible for the second highest number of closures following sales, with three.

In Philadelphia, those regulations did not come into play when Tenet acquired the assets of Allegheny Health, Education and Research Foundation in 1998. That transaction was a bankruptcy overseen by a court, not a sale stewarded by the state attorney general and open to community groups.

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