Health Care/Joan Retsinas

Hospitals: When Wall Street Steps In

The marriage of hospitals and Wall Street is not always happy. Witness the turmoil as investors assess their investments, and exit.

In a psychic long ago, community philanthropists founded hospitals. They sought to give patients a safe place for surgical interventions, for diagnostic tests, for therapeutic regimens, for “what-is-wrong?” medical quests. They were not aiming to make money. Revenue from insurers (Blue Cross plans were initiated to pay for hospital stays), from donors, from patients, and eventually from government, paid the bills.

The model was unexciting: No eight-figure salaries for executives, no mega-mergers, no vertical integration. And often little managerial expertise, outdated organizational models, and outmoded plants. This model was essentially static.

With profit as the goal, hospitals had the incentive to “compete,” to improve, to woo patients. Yet hospitals needed an infusion of capital to pay for the super duper technology we take for granted, to upgrade tired facilities, and to showcase the wisdom of the for-profit model. Spurred to make money, hospitals would innovate.

Enter venture capitalists as a deus ex machina - or, to continue the marital analogy, a rescue-bridegroom. These investors offered money, promised the managerial expertise of MBA wunderkinds, and made “chains,” “productivity” and “marketing” into mantras. After all, hospitals, like the rest of the country, were morphing into an increasingly competitive for-profit industry where the facilities that wooed the most privately insured patients would not just survive, but thrive. Hospital megaliths spawned their own venture capital arms, as the Cleveland Clinic, the Mayo Clinic, Kaiser Permanente, and many others did.

The incursion was steady. Today one-fifth of hospitals are for-profit; and one-third of hospital emergency rooms are owned by a venture capital firm. Patients who have never heard of the Carlyle Group or the Blackstone Group are beholden to them.

The marriages generally began happily, with each party expecting to get the best from the union. Hospitals needed money; the investors needed a profit.

But a few years down the pike, some unions disintegrated.

Sometimes management cut salaries, cut staff, and fudged with “diagnoses” to increase reimbursement. Sometimes those same wunderkinds drained hospitals of pension funds, diverted operating revenue, and siphoned off “product lines,” which could mean obstetrics, orthopedics, physical therapy. Sometimes a hospital that welcomed the investors with desperately open arms found itself worse off. And sometimes the investors, looking at the depleted hospital they “owned,” wanted out. Capital is fungible; the goal is to make money, all the while acknowledging that some of the “ventures” will not work out. Investors made billions on dating and ride-share apps; we don’t know the names of all the apps that fizzled. So too some of the investments in hospitals worked; but some - generally hospitals that serve the poorest patients - didn’t.

Consider Hahnemann Hospital in Philadelphia (New Yorker, June 7, 2021, “The Death of Hahnemann Hospital,” by Chris Pomorski). When American Academic Health Service, owned by California Paladin Heathcare Capital, bought Hahnemann Hospital (along with St. Christopher’s Hospital for Children) in Philadelphia in 2018, the mostly low-income patients were pleased. For 20 years Tenet Healthcare had owned the deteriorating Hahnemann, which needed repairs. (Tenet had saved Hahnemann from bankruptcy, but couldn’t make it profitable). Three years later, Hahnemann closed.

This is no Aesop tale of evildoers. Hospitals that serve poor people depend upon Medicare and Medicaid payments that fall short of operating costs. Furthermore, those hospitals serve a swathe of uninsured patients.

At the same time, hospitals face mounting costs, as technology, along with the hospital plant itself, deteriorates. Physicians, nurses, therapists, pharmacists — all warrant competitive salaries, with benefits. Sometimes investors can whisk in, like a deus ex machina, and save a hospital - but rarely a hospital that takes in less money than it must pay out.

When Hahnemann closed, the venture capital firm did not close — it continues to invest. The hospital’s 50,000 annual patients were the losers.

Joan Retsinas is a sociologist who writes about health care in Providence, R.I. Email retsinas@verizon.net.

From The Progressive Populist, August 1, 2021

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