By Francis M. Miller
Within the next two weeks, Colorado Attorney General John Suthers will rule on the proposed sale of the HealthOne hospitals by the Colorado Health Foundation to Tennessee-based HCA. This $1.45 billion transaction would be a major transfer of nonprofit hospital assets to the private sector.
Testimony to date has centered on whether Colorado’s poor and indigent, who are enrolled in Medicaid or require charity care, will continue to be served. One option is to require HCA to continue serving these populations for at least five years. Another option is to let the Colorado Health Foundation channel proceeds from the sale into new areas outside hospital-based care. Both possibilities have pros and cons.
I assert that we are now at a unique point in the evolution of Colorado’s health care system and should look at the situation with a jaundiced eye.
When I arrived in Denver in 1971, Colorado’s hospital community was ethnic- and religious-based. To name just a few, there were Lutheran, Swedish, Jewish (Rose), Presbyterian and Catholic hospitals. Hospitals were flourishing not only as the post-war Denver population swelled, but because cost-based reimbursement paid by Medicare and Medicaid allowed hospitals to issue revenue bonds and build new facilities.
I consulted to most of these hospitals and knew their board members well. Their administrators were either from religious orders or the kind of guys who could have been interchangeable as school superintendents.
The issue of taking care of the indigent has long been with us, but between Denver Health & Hospitals, University Hospital and the religious mission of the community hospitals, the job somehow got done. It is a pastoral, romantic landscape of a bygone time.
The train derailed in the mid-1980s. By then cost-based reimbursement was fueling hyper-inflation in the health sector and the oil boom was causing Colorado’s population to grow. This was also happening nationally, and in 1986, Congress passed TEFRA, a budget reconciliation act that instituted prospective fee schedules for medical procedures.
Over the next 10 to 15 years this act ushered in the era of managed care. And, it precipitated feverish cost shifting between payors. Business reacted by forming coalitions, and alliances and hospitals responded by forming networks and hiring a new generation of CEOs.
There was great hue and cry for reform, but strong hydraulic forces within the hospital community and insurance industry negated any attempt to change the system except at the margins. Tinkering seemed to bring unintended consequences, and inflation in the sector has consistently run double or triple inflation in the economy at large.
This brings us to the pending sale of HealthOne hospitals. In their current incarnation, these hospitals only provide token alternative care such as prevention and public health. They are traditional, high-tech hospitals and, as such, are a place to go for surgery, a heart attack, chemotherapy and, yes, to die.
They have been forced to discount their services upwards of 40 percent to Medicare and Medicaid and, in turn, the insurance industry has negotiated similar discounts. As a result, the self-paying patient who lacks insurance pays 30 percent above average costs, and charity care is highly restricted.
That is the current system, and it matters little whether the hospital is nonprofit or for-profit. Hospitals simply must run like businesses and recover enough money to rebuild their buildings, acquire the latest technology and compensate their staffs. Hospitals are like fixed-cost railroads. Those that are highly occupied make money, but they all are reimbursed about the same by government and large insurers.
In the past 10 years, the in-migration to Colorado and the growth of suburban counties has resulted in near abandonment of the core hospital system in Denver. Even University Hospital and Children’s Hospital moved to Aurora, and St. Anthony moved to the Federal Center. Douglas County and the south suburban area are now home to three large new hospitals. The change in the landscape is truly profound.
In my mind these large hospitals are like the booster rocket on a NASA launch. A large, fuel-laden rocket is attached to the Space Shuttle and expends the immense energy to get it off the ground and into orbit. Once it is beyond normal gravitational pull, the booster rocket is jettisoned and the spaceship heads towards the moon. But, once there, the spaceship launches a lunar lander. This highly mobile, lightweight ship is launched to land on the surface and explore.
We need to jettison these large, cumbersome hospitals and turn them over to the private sector where they will be run like businesses. In the future, if hospitals need to be closed or staff laid off, a disciplined management team will get the job done or the market will punish them.
Right now, there is incessant hand-wringing by nonprofit board trustees who are more concerned about their social status, and this prevents hard choices. And, if capital is necessary, then the private sector managers will get investors to cough it up, not hold out a begging cup asking for donations and volunteers. Those days are over.
What remains to be seen is whether the Colorado Health Foundation can leverage the proceeds of the buyout to launch a new system that offers more prevention and alternatives. Hard-hitting programs to reduce childhood obesity and target special needs populations are direly needed. There is no shortage of opportunities to grow a new and different type of system. It’s the lunar lander equivalent.
As for charity care and public entitlement programs, I suggest little will change, either way. Continued inflation in hospital and doctor costs will put these programs under the legislative microscope.
Prior to 1965 and the enactment of Medicare, health care was a failed market dominated by insurance companies who did not innovate to find a way to care for the elderly or the poor. It took the intervention of the federal government.
We have to remember, though, when government uses the blunt force of public policy, it will, and should, demand care be provided at the marginal cost rather than higher average costs.
This is deemed a traumatic act by providers and insurers who want to be paid average costs. When hospitals respond, not by becoming more efficient, but by increasing utilization or shifting costs, then government has no choice but to respond by ratcheting down on reimbursements.
Insurance companies have only followed government’s lead during the managed care, cost-shifting era. This struggle has become existential and I do not believe it will cease until…..
Only when a new 21st-century health care system based on prevention, evidence-based care and alternatives outside the hospital-centric system is in place will the current medical model of care be eclipsed. And, that is the opportunity that all of the health care foundations in Colorado have before them.
It is a big challenge, but if not them, who? They are now the custodians of billions of dollars of capital accumulated from the old system. They alone have the opportunity to redeploy it to a new system in the 21st century. They should be jumping at the chance to do so.
Francis M. Miller is a management consultant, author and public policy analyst with a graduate degree from the CU School of Public Affairs. He was past president of the Colorado Business Coalition for Health and vice chairman of the Colorado Health Data Commission. He is the author of “Health Care 2050: The 13th Strategy.”