Good buy, health care
Why are local hospitals becoming for-profit – and what are the consequences?

August 8, 2011 - Hoboken Reporter

Within the span of 19 months, Hudson County residents have witnessed the sale of one of the local hospitals – Meadowlands Hospital Medical Center in Secaucus – and the pending sales of two others, Hoboken University Medical Center and Christ Hospital in Jersey City. In all three instances, the hospitals switched, or will switch, from nonprofit ownership to become for-profit entities.

These sales come just a few years after the closures of Greenville Hospital and St. Francis Hospital in Jersey City, and three years after Bayonne Medical Center also changed hands from nonprofit to for-profit ownership.

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‘Only time will tell if this is ultimately good or bad for the society.’ – Mahmud Hassan
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Of the county’s six hospitals, only two will remain nonprofit for now – Palisades Medical Center in North Bergen, and Jersey City Medical Center.

Hospitals face difficulties staying afloat when they are compelled to treat uninsured patients and compete with private facilities that perform MRI’s and other specialized procedures. Private owners who have taken over nonprofits have turned a profit by canceling contracts with insurance companies and renegotiating rates for various services – but that has sometimes put consumers in a difficult position. So what is the impact in the future if most of the local hospitals are run by for-profit entities?

California hospital chain makes bid for Christ

The news recently became public that Ontario, Calif.-based Prime Healthcare has made a bid to purchase struggling Christ Hospital.

Unlike the 2010 sale of Meadowlands Hospital to the newly-formed and little known limited liability corporation MHA, Prime Healthcare has a long history and track record. Owned by Dr. Prem Reddy, Prime Healthcare already owns 14 profitable for-profit hospitals in southern California.

According to the company, all its hospitals were in severe financial distress or in bankruptcy when they were purchased. Under Prime’s management, these hospitals have turned around, according to the company, and are now recognized as among the best in the country.

But the advocacy group California Watch has investigated the company and has been critical of some of its business and medical practices.

In one investigative report released last month, California Watch alleged that Prime Healthcare admitted patients based on business strategy, not medical need. Specifically, the organization alleges that Prime was prone to admit out-of-network patients and keep them hospitalized at Prime facilities rather than transfer them to an in-network hospital.

Kaiser Permanente, one of the health insurers whose customers were allegedly subjected to this practice, has denounced this policy, according to California Watch.

Prime Healthcare has called California Watch’s reporting inaccurate and misleading.

But advocates in New Jersey say they are nervous about the company’s move to the Garden State.

The for-profit model: wave of the future?

According to Rutgers School of Business professor Mahmud Hassan, who has studied the for-profit hospital trend, the trend towards for-profit ownership of hospitals began after 1983, when there were major changes made to how hospitals could be reimbursed under Medicare.

Prior to 1983, Medicare reimbursement rates were uniform, based on the ailment and the type of treatment offered, according to Hassan. The idea was to encourage hospitals to be economically frugal in terms of how they went about treatments. But it didn’t make them frugal in terms of volume, as they created more bed space so they could treat more patients. This, he said, led to too many beds being created which could no longer be sustained once reimbursement rates were cut and were no longer uniform.

Federal reimbursements for Medicaid – which offers medical coverage for the poor – have also dropped over the years. So have reimbursement rates from private insurers. At the same time, medical costs have skyrocketed. Thus, said Hassan, hospital-based medical care has become extremely expensive, and many nonprofit hospitals are losing money.

Christ Hospital is reportedly losing as much as $4 million annually. Before Meadowlands Hospital Medical Center was sold to MHA last year, it was losing $700,000 a month.

At present, the health care industry is readjusting itself to these new realities. This adjustment, said Hassan, includes fewer hospitalizations, more out-patient care, and an overall downsizing of the number of hospital beds in the community.

“When a hospital becomes a for-profit,” Hassan said, “what is the pay-off? The pay-off is an inflow of capital. There will be an inflow of cash by the investors and improvements made at the hospital…But what does this mean for the community and the society once the hospital’s status changes? The for-profit hospital is going to eliminate some services that are unprofitable. They will restrict indigent care…Only time will tell if this is ultimately good or bad for the society.”

If communities want more services, Hassan said, they will have to be willing to pay for them in the form of higher federal taxes – to increase Medicare and Medicaid reimbursements – and higher health insurance premiums.

Business model makes a difference

Hassan said it’s possible the impact of the recent and pending hospital sales could be minimal, depending on the for-profit’s chosen business model.

“I’m starting to make a distinction between all these for-profit hospitals,” said Renee Steinhagen, an attorney with New Jersey Appleseed Public Interest Law Center, an advocacy group that has raised concerns about some of the recent hospital sales. “I’m not going to lump Salem Memorial Hospital and Mountainside Hospital, which are both for-profit, with MHA and HUMC Holdco [the company that owns Bayonne Medical Center and is now trying to buy Hoboken University Medical Center]. MHA and Holdco have a business model that I think abuses the hospital system. At Salem and Mountainside, you don’t see outsourcing. You don’t see health insurance contracts ended. You don’t see the labor problems. You do not see per diem employment. But you see it in these other hospitals and in Bayonne.”

But a spokesman for Meadowlands Hospital Medical Center said patient care will actually be improved as a result of the current trend because the new hospital owners are more likely to have the financial resources to make significant capital improvements in these facilities.

Meadowlands Hospital has, for example, renovated its emergency room, increased the number of beds in the ER, and has invested $5 million for two new MRI machines. The hospital is also developing an advanced brain trauma center and is on track to become one of only two facilities in the country capable of handing certain head trauma cases.

But health advocates have also raised red flags about some Meadowlands practices and decisions since MHA took over the facility. These concerns have been raised with the New Jersey Department of Health and Senior Services (DHSS) based on the results of DHSS site visits at the hospital last month.

In a letter to the department dated Aug. 2, Steinhagen asked that a state health monitor be appointed at Meadowlands Hospital to address “deteriorating work conditions at [Meadowlands Hospital Medical Center] and…violations that directly threaten patient or worker safety and pose serious risks to the affected communities’ access to safe, affordable, and quality health care services.”

Steinhagen did not reveal who had informed her of these alleged practices at the hospital.

Minutes from several Meadowlands Hospital board meetings concern Steinhagen. The Feb. 3 meeting minutes, for example, paraphrase Felicia Karsos, vice president of patient care services, as noting that the hospital has set a goal to “improve surgery capacity and turnaround time to efficiently and safely handle 100 patients a day [and to]…increase emergency room volume by 30 percent.”

“Traditionally, there has been a recognition that the provision of health care needs to be the primary mission of any hospital,” Ev Liebman, director of organizing and advocacy for New Jersey Citizen Action, told the Reporter last fall as part of a story on the sale of Meadowlands Hospital. “Once you move into the for-profit realm, what becomes the primary mission of any for-profit entity is return on investments to its shareholders or investors.”

For example, last year, during the sale of Meadowlands Hospital, MHA provided a document to the state Department of Health and Senior Services which noted that its investors could expect to receive a 43 percent return on their investment within a few years.

“They have a passion for health care. Right now their focus isn’t really on making money, as far as a profit for themselves. It’s to get that money that they generate and put it right back into the hospital,” said John Reilly, a spokesman for MHA, last week. “They’re very business-minded. They run it like a business. They see where their profit margin is, and they see what their losses are. They’re trying to track in services that they feel are needed in the area that are profitable. Services that don’t turn a profit, and are not necessary, they need to eliminate them.”

What about insurance?

It remains to be seen whether Christ or Hoboken will successfully negotiate “in-network” agreements with the major health insurance companies, allowing people covered by those companies to pay the rates agreed upon between the hospital and their insurer.

Should the hospitals fail to negotiate managed care contracts with insurance companies, then patients may have to use these hospitals as out-of-network facilities – meaning they’ll have to pay the hospital’s rate for treatment rather than a rate negotiated between the hospital and their insurance company. Or they’ll just have to go to a different hospital that has a contract with their insurer, a hospital that may be farther away.

Earlier this year, just months after buying Meadowlands Hospital, MHA cut ties with Empire Blue Cross/Blue Shield.

A similar situation unfolded at Bayonne Medical Center in 2008 and 2009 after it, too, switched from being a nonprofit facility to a for-profit. Bayonne Medical dropped its contracts with some insurance carriers. The result was a nightmare for patients who were told by their insurers that they would have to cover the full costs of their treatment, or go elsewhere for their hospital needs. The standoff between Bayonne Medical Center and Horizon Blue Cross Blue Shield landed in court in 2009.

Bill Carlos, a health care consultant, speculates that severing ties with insurers could be a strategic move to increase reimbursements. In one article, Carlos wrote that New Jersey is one of only two states in the country – the other being California – that requires insurers to fully reimburse medical service offered in out-of-network emergency rooms.

What the future holds

Given the number of questions being asked now about the pending sales of Christ and Hoboken, and possible new scrutiny on Meadowlands, Steinhagen believes the state legislature will eventually get involved.

“I think things are going to be pushed so far that the legislature is going to act to prohibit abuses with out-of-network treatment,” she said. “And any hospital whose business model is based on that is going to get out of the game.”