Prescription for Profits

Private hospital firms bring management skills to the bedside

Every morning about 1 million Americans wake up in hospitals. By the end of the day they have run up medical bills totaling some $375 million. Until about ten years ago, most hospitals were operated as nonprofit community institutions without much regard for cost-effective management. But now private enterprise has discovered the hospital business. Says U.S. Senator Howard Metzenbaum of Ohio: "There is one business that is growing faster than the computer business—franchised medicine."

Nearly one in every five U.S. hospitals is now owned or managed by profitmaking companies. The number has grown more than 40% since 1977, even as the overall number of U.S. hospitals has declined about 10%, to some 6,900. At present, publicly held companies own 1,045 facilities and manage another 283. Private enterprise was drawn to the business primarily by steep increases in expenditures for medical care, especially for Medicare and Medicaid, which totaled $86.2 billion last year.

The investor-owned part of the hospital industry had 1982 revenues of $11.2 billion and profits of some $520 million. In the past five years, the earnings of the five largest hospital companies (Hospital Corporation of America, Humana, American Medical International, National Medical Enterprises and Lifemark) increased at an annual rate of 30% to 50%. Last year Standard & Poor's index of stock prices for hospital management companies zoomed 68%, making the otherwise healthy 14.8% rise in the S & P index of 500 industrials look anemic by comparison.

Hospitals-for-profit are not a new phenomenon, of course. Groups of local doctors have long owned some small facilities. But today those hospitals are more likely to be members of large national chains. Indeed, nearly 40% of all U.S. hospitals are already linked in multihospital systems. More than 60% are expected to belong to such groups by 1990.

The need for capital has been a major driving force behind hospital changes. Aging buildings, spiraling costs and rapidly evolving, expensive medical technology created huge demands for money. Traditional revenue sources, such as philanthropy, tax-exempt bond issues and other public subsidies, are no longer enough. Between 1980 and 1990, U.S. hospitals will have to spend an estimated $150 billion on plant and equipment. Says Shephard Plotner, executive director of the Forkosh Memorial Hospital in Chicago: "It is going to be increasingly difficult for independent hospitals, particularly the smaller ones, to survive."