If the experience of hospitals in other communities is any indication, Mercy Hospital and Medical Center in Chicago stands to lose business when physicians it shares with Michael Reese Hospital and Medical Center and Grant Hospital decide to put their patients where their money is.
Columbia/HCA Healthcare Corp., owner of Reese and Grant Hospital, signed an agreement last week to sell the facilities for $60 million to Scottsdale, Ariz.-based Doctors Community Healthcare Corp.
About 200 physicians–150 from Reese and 50 from Grant Hospital–will purchase a 20 percent financial stake in the combined facilities later this summer as part of their own arrangement with Doctors Community, a health-care management firm they brought in to help with financing when Columbia announced it would shed the two Chicago hospitals. An offering memorandum is being drafted and will soon be distributed to the physicians.
It is routine for physicians to have admitting privileges for more than one hospital, and growing evidence indicates it is equally routine for doctors to quickly change allegiances to hospitals where they have a financial interest.
Across the country, more and more physicians are feeling the income pinch from managed health care’s cost controls, and many are looking to boost their incomes by investing in health-care facilities.
For example, Quorum Health Group of Brentwood, Tenn., which owns rural and suburban hospitals, and MedCath of Charlotte, N.C., which teams up with cardiologists to build hospitals specializing in heart surgery and treatments for cardiovascular diseases, are among companies offering physician investments in their hospitals.
Analysts say there are more than 50 such joint ventures around the country, but they are starting to crop up outside of highly competitive markets like Texas and Florida where for-profit hospital chains are dominant providers of medical care.
“Quorum is starting to do them again, and others like Paul Tuft (chairman of Doctors Community) are now doing them,” said Josh Nemzoff, a former health-care consultant who now runs his own hospital company, Nashville-based Mission Health. “Chicago is simply becoming more competitive.”
In Huntsville, Ala., Columbia Medical Center of Huntsville sold 23 percent of the hospital to 80 physicians two years ago for $4.95 million.
Columbia Medical Center’s chief executive, Thomas Weiss, told an Alabama certificate-of-need hearing earlier this year that both inpatient and outpatient admissions have gone up since the physicians bought their part of the hospital. It’s been a different story for Columbia’s cross-town rival, Huntsville Hospital.
“The hospital has had no growth in the last two years, while Columbia has testified to tremendous growth,” says Joe Campbell, an attorney for Hunstville Hospital.
In El Paso, Texas, where former Columbia/HCA Chairman Richard Scott bought his first two hospitals and launched Columbia 10 years ago, he did the same thing Doctors Community Healthcare Corp. is doing with Michael Reese and Grant.
Scott and Texas billionaire investor Richard Rainwater launched Columbia by each putting up $125,000 and forming an investment partnership with physicians to buy the chain’s first two hospitals from another for-profit company, which had given up on them as financial losers.
Through the physician investment, admissions growth skyrocketed at Columbia’s two El Paso hospitals and came at the expense of the facilities’ competitors. Scott would often crow to Wall Street analysts that the El Paso hospitals were among the company’s most successful.
R.E. Thomason General Hospital, a public hospital just six miles from Columbia East Hospital in El Paso, saw Medicaid admissions drop 10 percent after physicians the two hospitals shared sent their patients to the Columbia hospital in which they invested.
“Once the physicians on our staff and theirs bought shares in the Columbia hospital, they weren’t admitting anywhere else but Columbia East,” said Thomason chief executive Pete Duarte. “They changed their admitting patterns. When doctors get an equity share, why would they want to send their patients somewhere else?”
Duarte calls such investment practices unethical, because not-for-profits can’t compete in such an environment. If a not-for-profit would allow a physician to buy part of its hospital, it would lose its tax exemption at the least.
Criticism has caused Columbia to decide to unravel its physician ownership strategy as it pares operations in light of a 17-month-old federal investigation of its operations. But Columbia CEO Thomas Frist has said it is because his company wants to avoid even the appearance of illegality as the company cooperates with federal investigators.
Legal experts maintain the hospital-physician ownership deals are sound as long as the physicians aren’t being paid for patient referrals, which would be deemed an illegal kickback.
“No one can guarantee a physician certain returns on their investment,” says Scott Becker, an attorney with Chicago law firm Ross & Hardies and an author of articles on physician investment in health-care facilities.
“No physician should get better economic rights than any other party just because they bring more to the table, like referrals,” Becker said. “It’s when you do that kind of stuff that you get in trouble.”
In Columbia’s case, investigators reportedly have been examining patient referral patterns between its hospitals and its home health operations. The investigation has focused partly on Columbia’s El Paso operations, which were raided by scores of federal agents in March of last year.
Columbia last month sold its home health business, which included its Illinois home health operations, to a Florida company in an effort to break those ties.
Doctors are less likely to be financially induced to have to send patients for surgery or hospitalization, so the government deems for-profit hospitals and as relatively safe investments.
“The government is trying to police the areas that are most likely to be subject to abuse, like labs, diagnostics and home health,” Becker said. “It’s very easy for a doctor to send a patient to those type of services without giving it a second thought. People are less likely to induce the (physician’s) decision to diagnose a surgery.”
Physicians investing in Reese and Grant say they believe it’s their right to have a financial stake in the place where they work, just like employees do at other companies with employee stock purchase programs. They also feel they should get a piece of the hospital’s net income when they are the ones directing the revenue flow through admissions.
Doctors Community Chairman Paul Tuft says the partnership with the physicians should result in a turnaround of Reese and Grant. The hospitals have been losing about $15 million annually on revenues of $225 million.
“I think that physicians working with communities and directing the delivery of care and making the day-to-day decisions can really benefit the community,” Tuft says. “We’re the catalyst to bring those facilities together.”
But Reese’s closest competitor on Chicago’s South Side, Mercy Hospital and Medical Center, stands to lose the most, because more than 50 physicians are on both medical staffs, sources say.
“What the impact of this will be, who knows?” says Ron Sellers, vice president for system support services at Mercy.
Enrique Beckmann, a pathologist at Michael Reese and president of the Reese-Grant Acquisition Group, says he and his fellow physician investors are simply trying to preserve Reese and Grant, where they have practiced medicine for years.
“We aren’t doing this to scare anybody,” Beckmann says.
