New York Braces for Private Investment in Hospitals

It was a warm day last June when a veritable army of nurses—over 1,000 strong–descended on Albany, driven by a single mission: to kill the plan to bring for-profit hospitals to New York State.

Armed with studies, fact sheets and lists of representatives, and backed by the presence of hospital workers from SEIU 1199 as well as doctors groups opposed to the for-profit model, members of the New York State Nurses Association (NYSNA) fanned out across the Capitol, trying to hold off Gov. Andrew Cuomo’s proposed demonstration project to open one for-profit hospital in Brooklyn and another upstate.

They were successful, until last week. Last Wednesday, citing rapidly failing hospitals and a lack of money to shore them up, Cuomo officially revived the push for private investment in hospitals, stopping just short of a call for for-profits and instead proposing in his executive budget that the state permit private investment companies to own or operate five hospitals in affiliation with academic medical centers.

Many states permit profit

For the governor, Health Commissioner Nirav Shah – who this month also called for relaxing state rules to allow companies like Wal-Mart to offer “limited service” health clinics in stores — and like-minded supporters in Albany and on Wall Street, opening healthcare to private capital and investment, and even private control, just makes sense.

All around the country, states are permitting—even encouraging—private investment in health care, not just in the South and the Midwest where for-profit chains like Nashville-based HCA and Dallas-based Tenet compete for market share, but closer to home, too. In Pennsylvania, Massachusetts and Connecticut, for-profit hospital chains are vying with nonprofits for patients and profits. In 2012 in New Jersey, in a move that may serve as a model for New York, the nonprofit Hackensack University Medical Center joined with the Plano, TX-based firm LHP Hospital Group, Inc. to buy and run two formerly struggling community hospitals, Pascack Valley hospital in Bergen County and Mountainside Hospital in Montclair.

While Hackensack, a well-regarded tertiary care hospital that performs very complicated and highly remunerative surgeries, maintains its nonprofit status, the hospital health network now has greater access to capital and patients through its affiliation with LHP and ownership of Pascack Valley and Mountainside. One could argue that it’s a “best of both worlds” scenario for the hospital and the patients.

Skeptics are not so sure.

One of the problems with private equity companies, say opponents, is that they tend to saddle struggling companies with tons of debt and upfront management consultant fees, inflate bills and impose cost-cutting changes that can send a fragile hospital into a tailspin.

A Jan. 24 front-page story in The New York Times revealed how Health Management Associates, a for-profit hospital chain in Florida, allegedly incentivized doctors to increase hospital revenue, pushing them to admit children with “fevers” of 98.7 and using peer pressure and a public “scorecard” to rate those doctors who admitted the highest share of patients over 65. The hospital chain is under investigation for these and other alleged tactics by the Justice Department.

A question of motives

When corporations make decisions about health care, the decisions aren’t about the health of the person being cared for, say opponents of efforts to relax the Certificate of Need or CON rules, the state regulations controlling who can manage and own hospitals and clinics.

“In some ways, the private equity model is more destructive,” says Leon Bell, director of policy for NYSNA. “They operate on a short horizon, three- to five-year investment model, extricate themselves and get back their investment with 10 to 15 percent profit.” What happens to the hospital in those three to five years isn’t of prevailing interest, insists Bell: “These companies are not in it for the long-term investment.”

While many states now permit for-profit hospital chains or private capital partnerships with nonprofit hospitals, New York State does not. New York State’s hospitals are classified as either public – i.e., part of the New York City Health and Hospital Corporation, a public benefit corporation created in 1969 – or voluntary or nonprofit.

Both the public and voluntary or nonprofit hospitals are obligated to serve anyone who walks in the door; the nonprofit hospitals are considered charity organizations and are tax exempt. Any revenue surplus is to be directed back into the hospitals’ operations.

In contrast, a for-profit hospital is not tax exempt, and any profits can be directed back to shareholders, or split between reinvestment and dividends.

While the governor’s budget proposal calls for private equity investment in nonprofit hospitals, as opposed to outright ownership by publicly traded corporations, Democratic Assemblyman Richard Gottfried, chair of the Assembly health committee, who opposed last year’s for-profit demonstration project, called the plan a distinction without a difference.

In an emailed statement to City Limits, Gottfried summed up the opposition: “Access to capital is a significant issue for hospitals, community health centers, and other providers. It’s important that the governor’s budget proposes a major new health care capital program. But for-profit corporate ownership and control of hospitals is not the answer for the problems of New York’s health care system.”

Gottfried continued: “The 2014 budget proposal says the corporate owners may not be entities whose shares are traded on a stock exchange. But the capital would presumably be raised from hedge funds or venture capital or private equity entities. I don’t think we’re any better off if a hospital is controlled by individual wealthy investors or their companies as opposed to people selling stock on a public exchange. The language telling the corporate hospital to ‘consider’ factors other than its own profit strikes me as largely cosmetic.”

Current system is clunky

But the money to shore up the state’s hospitals has to come from somewhere. A large part of the fiscal problem facing hospitals lies exactly in the CON rules, which were used to let hospitals expand for decades. Now, as the acute care model has changed and hospitals admit fewer patients for shorter stays, hospitals like Brooklyn’s struggling facilities—which rely mostly on Medicaid and Medicare reimbursement and charity dollars from the federal government—are deep in the red.

At conference after conference, Wall Street analysts and investment advisors have warned that hospitals have to retrench, close, merge or affiliate to stay alive. Chief among them is Stephen Berger, chairman of Odyssey Investment Partners and a long-time financial analyst who in 2011 headed the Brooklyn Work Group of the governor’s statewide Medicaid Redesign initiative.

“The state and hospitals all bear responsibility” for the mess we’re in, Berger told attendees at a healthcare conference in Brooklyn this past fall. “We have institutions built around acute healthcare. The question is how to move from acute care to preventative care.”

Supporters of private equity investment point to “transformational” initiatives, like the private capital-nonprofit partnership between HackensackUMC and LHP, as well as the behemoths in the for-profit world, like HCA, the world’s largest for-profit health care chain. Companies like HCA can use their size to deliver cost efficiencies as well as test new ideas, they say.

For change to work, it’s all about thinking about a health care system of which the hospital is a part. “In the case of Brooklyn we have over many years built a hospital centric [system] too expensive and not responsive to health needs of the community it’s supposed to serve,” observes one industry source. It “needs to be transformed into a value-for-patient, low-cost and high quality” system.

Added the source: “There are certain stakeholders who are very much nervous about what change means, because change means services are going to be coordinated. They are going to use terms like “rationed,” I will say rationalized. You are not going to have three struggling hospitals all trying to be a cancer center, cardiac service center. Instead, you are going to have an array of facilities that are going to complement each other, and if you do that there is ample evidence that you wind up with higher quality.”

Maybe. The presence of for-profit players in the hospital mix “is not a panacea. It’s not a guarantee,” of better outcomes, warns Dr. Robert Berenson, a health care policy advisor who has tracked patient outcomes and hospital costs for years, serving as advisor to presidents from Jimmy Carter to Barack Obama.

For-profits tend to locate in affluent areas, they “don’t typically go into areas like Downtown Brooklyn,” observes Berenson, now a fellow at the Urban Institute in Washington. There are exceptions, of course, as in the case in Washington, where a for-profit took over the struggling Greater Southeast Community Hospital, now in worse shape, maintains Berenson, than before. Assuming that a for-profit hospital would interested in moving into a neighborhood with low-income patients and a poor payer mix, “I would be nervous,” says Berenson, about the outcomes.