Profits in hospital care: how good an Rx? . Big merger of hospital, supply firms sparks a debate on the private route

It was billed as the ``great debate'' -- a verbal shoot-out pitting the chief executive of the largest hospital company in the United States against the leading critic of for-profit hospitals. The debate was held here earlier this week in the wake of the biggest health-care merger to date: the union of Hospital Corporation of America of Nashville and the American Hospital Supply Corporation of Evanston, Ill. Both are the largest in their respective fields.

The merger, which represents a vertical integration of the medical-supply business with the hospital-care business, comes at a time when occupancy rates in United States hospitals are falling and earnings growth of some private medical corporations is slowing.

Dr. Arnold S. Relman, editor of the New England Journal of Medicine, debating Dr. Thomas F. Frist Jr., head of Hospital Corporation of America (HCA), contended that not all for-profit hospitals are more efficient or charge less:

``What they save on the [hospital] `hotel' functions they spend on the headquarters functions, on acquisitions and marketing and advertising and everything else big corporations do. . . .''

Dr. Relman cited industry- and state-sponsored studies to show that charges in for-profit hospitals on average were 10 to 20 percent higher. He also pointed to potential conflicts arising from meeting earnings expectations of investors and providing good-quality health care to the poor.

Dr. Frist retorted: ``I have never said we were a low-cost provider nor a high-cost provider. The question is, can we continue to uphold the standards of a quality product . . . and still survive and prosper in this new pro-competitive environment?''

Frist agreed he was ``uncomfortable'' with aspects of the commercialization of medical care and with some of his company's marketing strategies. But he said that ``the real world'' is competitive and ``we have to position ourselves to continue to provide the quality health-care product.''

Last Sunday HCA announced the plans to merge with American Hospital Supply Corporation (AHS). The $6.6 billion friendly merger is the largest outside the oil industry. The merger is seen as strengthening both companies at a crucial time.

In the last decade or two, investor-owned health-care companies have been proliferating and snapping up hospitals. Some 15 to 20 percent of all US hosptials are now owned or managed by for-profit companies. The payment structure of medicare (federal medical support for the elderly and the young) and medicaid (federal medical support for the poor and disabled of any age) has enabled these companies to flourish.

Even critics of for-profit hospitals say their success has brought improvements to a health-care system with massive problems. Dr. Stanley Wohl, in his 1984 book, ``The Medical Industrial Complex,'' writes that health care had become ``a haphazard unaffordable compendium'' of ``ivory tower . . . decaying . . . mismanaged'' government-supported hospitals.

But competition has brought change. The for-profit hospitals are often credited with forcing the non-profits to run tighter ships. More important, the medicare system no longer pays a percentage of medical costs. Instead, hospitals get a fixed fee for designated procedures. If they can perform the services for less, they make a profit. If not, they absorb the loss.

For several years now, occupancy rates have been falling as a result of the medicare changes, pressure from corporations to hold down employee medical expenses, and the continued high cost of hospital care. Some Wall Street analysts say the HCA-AHS merger is but another sign of the competitive crunch this $400 billion industry is facing.

For example, American Hospital Supply posted slower growth last year. Net earnings slipped to 12 percent from its normal 15 to 20 percent annual growth range.

The merger should benefit AHS by enabling it to sell to the 420 hospitals owned or managed by HCA. For HCA, the merger means it can continue its hospital-buying expansion.

HCA's acquisition spree to date has piled up enough debt that lenders may balk at further loans. The combined companies will have a much lower debt-to-equity ratio. Thus, the new company could borrow as much as $1 billion for further hospital purchases, Dr. Frist told a meeting of shareholders and analysts here Tuesday.

An HCA goal is to develop a national health care system -- from free-standing emergency and surgical centers at shopping malls to insurance programs and health maintenance organizations. The vertical integration of products and services enables the company to feed patients into its hospitals, which remains HCA's ``revenue center,'' according to Frist.

Meanwhile, Dr. Relman's role as ``corporate conscience'' to the medical community is valuable, Frist concedes. The two agreed that medical care for the poor is a problem needing attention.

Relman noted: ``Once you say that health care is a commodity like any other, then . . . marketing and advertising and the bottom line -- the primary bottom-line needs of the equity investor -- will dominate. Then access of poor to health care, meeting community needs -- providing unprofitable services -- all take second place.''

Dr. Frist responded: ``Last year we wrote off $200 million in uncompensated care. . . . That uncompensated care is growing rapidly.'' Bad debt, he said, will near 5 percent of gross revenues if costs aren't shifted to the private side.

The solution? ``If I had my `druthers,' I would have the taxpayers take up the slack. But that's not the real world. My second choice would be to set up some type of pool [and] spread it over everyone to try to equalize it out.'' He suggests that hospitals giving less than, say, 5 percent of free care pay those giving more than 5 percent.

Dr. Relman argued that while ``deregulation'' may work in areas such as financial services and transportation, ``it's not going to work in health care.'' Costs will be controlled ``at the expense of turning away millions and millions of people who are not getting the health care they need.''

``Main Street should be controlling health-care expenditures, not Wall Street,'' Relman said, adding that communities must be able to determine their own health-care needs and expenditures.

But as the federal deficit mounts, shifting health-care costs back to the government seems unlikely. At present, state and federal governments foot all or part of the medical care bill for about 22 percent of the US population.