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Hospitals Winning the Battle for Profits

by Peter Downs

There is right now a battle going on for control of health care. It is a battle between insurance companies or HMOs, on the one hand, and hospital companies on the other. It is not a battle over managed care. Both sides embrace managed care. Both sides embrace tightening the screws on health care workers and patients.

It is a battle over profits.

In many places, hospitals are winning that battle. Over the last several years, hospitals have done better financially than ever before. They've enjoyed record profits. One national industry magazine last year labeled St. Louis, for instance, a "provider's paradise" because of all the money area hospitals were making.

Dictating Terms

One way hospital systems are able to make such money is by dictating terms to insurance companies. They can do that because they control large chunks of the market.

St. Louis' Barnes-Jewish-Christian hospital system claims to control 40 percent of health care revenue in St. Louis. Last fall it told United Healthcare what it wanted. When the insurer balked, it fired a warning shot by barring that company's insurance products from two of its hospitals. United Healthcare got the message, and settled. The following month it threatened to stop doing business with Prudential unless that company accepted BJC's rate schedule. In December, the insurer accepted the hospital company's rates.

St. Louis is not unique in having powerful hospital systems. Modern Healthcare magazine points out that similar situations exist in Chicago, Detroit and Indianapolis, and throughout Texas. As one Texas hospital executive said, the whole reason for creating a system is to get enough market share to do business on your own terms.

The Best Kept Secret

The common thread through all of these is that a system big enough to control a large fraction of the market can dictate its own price.

As obvious as that is, it has to be one of the best kept secrets in health care.

Health care analysts across the country are predicting bruising battles this year between hospitals and insurers over how to split the premium check. The big systems will win big increases, they say, and stand alone hospitals won't.

While hospital profits have soared, the quality of health care has suffered. You can see this in countless little ways: From the patients who can't get their scheduled surgery because there aren't any gowns to dress them in for the operation; to the patients who return to the hospital after surgery, because inferior anesthesia left them so nauseated their vomiting busted open their sutures.

And while the quality of care is declining for almost everybody, it is especially deteriorating for the poor.

It is not the urban poor that are causing hospitals to lose money, it is the suburban well-to-do.

Hospital systems have built gleaming new suburban hospitals that stand three-quarters empty. They built the hospitals not to fill a need for health care, but to stake a claim to a future market, and they are subsidizing the losses with urban income.

That is market driven health care. It is not efficient. It is not designed to serve the whole population. It only follows the money. The result is greater inequities.

In summary, two types of corporations are battling for control of health care: the insurance companies versus the hospital companies. Both have decided that health care shouldn't include caring. Both have decided to inflict additional pain and suffering on their consumers, and more work on caregivers, in the name of improving their bottom lines. That the hospitals in many cases are winning does not improve care.

[Peter Downs is a St. Louis health care industry analyst.]

But in Michigan...

Michigan hospitals may be strong in negotiations with insurance companies. But the major payers--the Medicaid and Medicare systems--are stronger. State government cut our Medicaid program by 20 percent last year, slashing the income of urban hospitals; Medicare reimbursements were cut as well.

In response, hospitals are cutting staff: 2,000 jobs cut at the Detroit Medical Center, 550 at Henry Ford, 500 at St. John, and the latest announced: 1,350 jobs cut from Mercy Health Systems.

Needless to say, there hasn't been a corresponding decrease in the need for hospital care.

Are Michigan hospitals following the money by building in the suburbs, as Peter Downs reports above? In Michigan, they'd have to file a "Certificate of Need" application to get state approval for doing so. In recent years, approvals have been hard to come by.

Watch for more on Michigan's Certificate of Need program, and how it helps preserve access for poorer communities, in May.