Is Our Healthcare System Headed Toward Creative Destruction?

Healthcare reform is speeding up mergers and acquisitions and only the most profitable may succeed


December 8, 2010 -- Americans are painfully aware of the irony of the Affordable Care Act.
New England Journal of Medicine authors assure us this landmark bill will usher in extensive changes through “creative destruction” of America’s fragmented healthcare system. Imagine the mythical phoenix arising from flames. Out of the ashes of destruction, Accountable Care Organizations (ACO) will build patient-centered medical homes “because that's where we're going to get the care coordination, cost savings and quality of care that we're all interested in."
Some skeptics worry that medical home providers will be pressured to limit choices and restrict access of patients to certain providers, just as gatekeepers did in the past. Reforms in the 1980’s and 1990s spawned integrated delivery networks of managed care and capitation, alienating doctors and patients alike. Certainly, distinguishing this model in existing preferred provider organizations and health maintenance organizations will be difficult.
Medical homes strive for team-based care rewards with adoption of electronic health records (EHR). But implementation is hampered by costs while innovations may be stifled and medication errors worsened. At great cost, Legacy hospitals  scrapped their first EHR.
The vast majority of healthcare leaders agree that mergers and consolidations of hospitals and medical practices will escalate with healthcare reforms. Only one in four of these leaders believe that they’ll have increased capital to do so.
Physicians, already besieged by the work of caring for patients, have been unloading their businesses over the past five years to hospitals to eliminate the financial tolls of billing and technology. Thus, large multi-specialty medical groups are unlikely to be the predominant architects of ACOs. Larger health systems “can get a good hospital for pennies on the dollar and possibly turn it around quickly,” comments Paul M. Doelling, a director of specialty clinics.
The most profitable publicly traded hospital company in America, Community Health Systems, is in good position to do that. It already boasts 126 hospitals in 29 states, having doubled the number of hospitals it owns or operates in the past five years. More than 2 of 3 affiliated hospitals are sole providers of services in the market served. That describes Flowers Medical Center, a CHS hospital in Dothan, Alabama that recorded $389 million in profits and was the most profitable hospital in America last year.
In the United States, daily expenses at non-profit hospitals exceed those at for-profit hospitals. Oregonians pay the 2nd highest daily rate in its 13 government, 43 nonprofit and 2 investor-owned hospitals, but for fewer admissions and inpatient days. The lower cost admissions to both investor-owned hospitals in Oregon (Willamette Valley Medical Center in McMinnville and McKenzie Willamette) reflect less complicated care for staffing registered nurses. Most Oregon insurance companies seek double digit rate increases while the largest companies (Regence, Kaiser and Providence—all non-profits) accumulate huge surpluses.
Recession-wary Springfield employees recently picketed CHS owned McKenzie Willamette hospital to protest proposed changes in health benefits. Lower-waged employees are worried that they won’t be able to afford healthcare. Their proposed benefit changes are effective wage cuts and starkly contrast with nearly $18 million compensation CEO Wayne Smith received in 2009. Smith has received top healthcare CEO honors three consecutive years… despite a lawsuit that alleges three CHS hospitals in New Mexico defrauded Medicaid of $47.5 million.
Charles N. Kahn III is president of the Federation of American Hospitals. As a lobbyist for investor-owned or managed community hospitals and health systems, he believes consumer protection laws will create barriers for ACOs and suggests, “To provide a fertile field to develop truly innovative, coordinated-care models, the fraud and abuse laws should be waived altogether.” That’s one way to beef up profits.
The big guys get bigger,” says Chris Jedrey, a partner at the law firm representing Caritas Christi Health Care, after its recent $830 million acquisition by private equity firm Cerebrus Capital Management. This financially troubled, non-profit, integrated system was 2nd largest health care system in New England.
Jedrey acknowledges that healthcare reform is speeding up mergers and acquisitions to get at the cost question. He says that America rejected single-payer as “politically unacceptable,” so the only remaining strategy is “shifting a lot of the costs of care risk to providers.” Providers must calculate how much financial reserves they need to bear the risk to bear the costs of information technology and other infrastructure.
 “Politically unacceptable” policy takes us down the road most traveled. Consequently, Oregon’s insurance companies hoard their nuts for a cold winter while more Oregonians are uninsured. Risky financial markets create slippery slopes that will rise far faster than Accountable Care Organizations can level them.
Is creative destruction just a euphemism for disaster capitalism? Without a single-payer, will we foreclose on patient-centered medical homes before they’re even inhabited?
Postscript: Today (December 10th) Tenet Healthcare, a privately owned hospital chain in 14 states, rejected an unsolicited a multi-billion dollar bid by Community Health. This merger would have created the largest hospital chain in America, exceeding privately owned Hospital Corporation of America. As noted in the Wall Street Journal, pressures to consolidate will be particularly true of smaller hospital systems that are struggling to keep afloat with increasing charitable care.
Dr. Kris Alman retired from healthcare to become a citizen activist for a healthier democracy. She advocates for fair taxation to invest in our common goods--prioritizing education, renewable energy, campaign finance and healthcare policies and laws.


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"Politically unacceptable" is a theme introduced to manufacture the conventional wisdom that America's health care system can avoid government (we the People) leadership despite government being the major financier for the system. The current financial model for our system is perfectly correct as long as the money keeps falling from the trees at our every orbit around the sun. But politically unacceptable for whom? If the citizens were adequately informed they could decide for themselves. Having common sense and a reasonable disposition a citizen would choose the government to move up from silent donor to sit as the formal, single payer. After all, the private insurers are consolidating their markets, expanding their dominance through buyouts, a less crass tactic for cornering the market that is unlikely to awaken the antitrust snooze artist at FTC. The Lewin Group has researched the cost effectiveness of some health care economic models and found that single payer is the most affordable. But America has a strong culture of distrust of science: it's blamed, along with technology, for challenging conventional wisdom. MJH