Western Pennsylvania to Get Taste of
Tennessee-Style For-Profit Health Care
April 20, 2014 12:00 AM
By Bill Toland / Pittsburgh Post-Gazette
Barbecue and country music may be Tennessee’s best-known exports, but its biggest is actually for-profit
hospital administration — and Western Pennsylvania is about to get a taste.
While Pittsburgh’s health care landscape is dominated by locally owned nonprofit hospital networks, in the
distant suburbs two independent community hospitals have been purchased by Nashville-area health chains
in the last few months. A third hospital is considering such a move.
Community Health Systems Inc., a for-profit health hospital chain based in Franklin, Tenn., announced this
month that it had completed its purchase of Mercer County’s Sharon Regional Medical Center, a deal valued
at $140 million. In March, Cambria County’s Conemaugh Health System agreed to be purchased by Duke
LifePoint Healthcare, also based in Tennessee.
And now, Community Health Systems is in talks with New Castle’s Jameson Health System (which is also
shopping itself to UPMC and Highmark’s Allegheny Health Network).
Community Health Systems, which is publicly traded, operates more than 206 hospitals in 29 states — with
more than a dozen in Pennsylvania, and all but one of those in the middle or eastern parts of the state. The
smaller LifePoint, also a for-profit chain, runs about 60 hospitals.
"We don’t feel like we’re handing over control. We feel like we’re partnering in control," said Scott A. Becker,
CEO of Conemaugh. Johnstown is "separate and distinct from the Pittsburgh marketplace," he said,
explaining why LifePoint was a better fit than either UPMC or AHN. LifePoint was a good fit, he said,
because of the company's two-headed approach to hospital medicine — the Duke end of the partnership has
the clinical know-how, while LifePoint has the health services expertise.
Nashville’s health care services industry generates income of more than $70 billion annually, and of the top
10 for-profit hospitals chains in the U.S., five are based in Tennessee. The chains operate some of the most
profitable individual hospitals in the country, often reporting double-digit operating margins. Most hospitals
are lucky to squeeze a profit margin of 5 percent. (In February, for example, UPMC reported a quarterly
operating margin of 0.4 percent, with just $85 million in operating income.)
Those supremely profitable hospitals are the outliers, though. For the most part, there’s a “dime’s bit of
difference” between for-profit chains and nonprofit counterparts, said Lawton R. Burns, professor and chair
at the Wharton Center for Health Care Management & Economics, University of Pennsylvania.
Patients “shouldn’t anticipate too much change in terms of overall quality of care or costs,” Mr. Burns said.
Those factors are generally driven by a hospital’s physicians, and the physicians that were onboard before a
conversion will remain onboard afterward.
For-profit hospitals are most prevalent in the South, but their influence — and geographic footprint — is
spreading. While three-quarters of the nation’s hospital market is still controlled by nonprofits, the number
of nonprofit and government-owned hospitals is shrinking, and the number of investor-owned hospitals is
growing steadily.
In Pennsylvania, out of about 170 general acute care hospitals, there are now more than 30 for-profit
hospitals. Go back to 1998, and Pennsylvania had only nine for-profit hospitals. What’s driving the change?
“Hospitals have to make big investments in information technology, in people, in processes, in order to
improve the quality of care,” thanks to a variety of new Medicare and health IT overhauls, said Martin
Ciccocioppo, vice president of research at the Hospital and Healthsystem Association of Pennsylvania, the
Harrisburg trade group.
Small community hospitals often don’t have the cash to make those investments or the bond rating to
borrow the needed money cheaply. So either they find partners or they look for a buyer.
Often, those buyers come from the South, and Tennessee is ground zero for the for-profit hospital shift.
Hospital Corporation of America started there first in 1968, went public in 1969 and is now the nation’s
second biggest for-profit hospital chain. Community Health Systems, thanks to its 2013 purchase of Health
Management Associates, is now first, LifePoint is third, Iasis Healthcare is seventh, and Capella Healthcare
is at No. 8.
All are headquartered in Tennessee. (Vanguard Health Systems, also based in Tennessee, was sixth largest as
of 2013, but it was purchased last year by the Dallas-based Tenant Health.)
Why is Nashville a health care hub? A number of the companies are spinoffs of each other — Hospital Corp.
of America came first, while Community Health Systems was created by two former Hospital Corp.
subsidiary executives in 1985. LifePoint was a 1999 Hospital Corp. spinoff. The talent pool associated with
Hospital Corp. and Community Health Systems led others, such as Iasis and Capella, to headquarter in the
region.
“A couple of those Southern chains [are] sort of making the way around the country,” said Stephen Foreman,
associate professor of economics and health administration at Robert Morris University. “They target lessurban hospitals who are a [lone] provider in an area.”
2
When community hospitals join a big chain or convert to a for-profit organization, or both, the hospital
usually has better access to capital at lower rates. Having “a corporate parent with deeper pockets” results in
improved financial stability and flexibility, which means the newly acquired hospitals might see
technological upgrades and physical plant improvements, Mr. Burns said.
One of the chief worries among community members, post-conversion, is that the new ownership won’t
provide as much free care to the uninsured, the poor and the indigent.
But numerous studies have shown that isn’t the case. There are “no essential differences between [converted
hospitals] and [nonprofits] with regard to changes in uncompensated care, the price of care, an index of
unprofitable services, and community representation on hospital boards,” according to a paper by The
Commonwealth Fund, a foundation that pays for health research.
“The fears [are] not necessarily showing up in reality,” Mr. Burns said. “There was never a whole lot of
difference between [for-profits and nonprofits] to begin with. And it’s probably diminished over time.”
One of the reason those differences have diminished is that nonprofit hospitals have gotten much larger
through mergers and acquisitions, and have embraced a lot of the same revenue-generating and costsuppression techniques as their for-profit counterparts.
Even so, those nonprofits operating in many ways as for-profits typically steer what’s left over at the end of
the year back into the health system, and back into the region. Not so with privately held or publicly traded
hospital chains, Mr. Foreman said.
For example, Carlisle Regional Medical Center, near Harrisburg, had an operating margin of 20 percent in
2012, with a total, after-tax margin of more than 11 percent. Those profits, Mr. Foreman said, go to the
parent company, Community Health Systems.
Community Health Systems also cleared a 14 percent pre-tax operating margin at its Berwick, Pa., hospital
in fiscal year 2012. Easton Hospital cleared 25 percent, pre-tax.
“This is money that consumers pay” above and beyond the cost of care, Mr. Foreman said.
Of course, one of the alternatives to sending all that profit out of state is no profit at all. And if a community
hospital can’t turn a profit and can’t find a buyer, it often shuts down.
“For every case where the [converted] hospital closes an important service or otherwise restrict[s] access, we
found another case where a struggling hospital was given a new lease on life because it was better managed,
3
more diligent about collecting revenue,” said Christopher J. Conover, research scholar at Duke University's
Center for Health Policy & Inequalities.
And even if a hospital's offerings or local character changes after the handover of control, “It was never
realistic to expect the old hospital to survive in its current form,” Mr. Conover said. “It would have to strip
services on its own, regardless of ownership change. … In that context, being taken over, but being able to
survive, [doesn’t] look so bad.”
Mr. Becker of Conemaugh said as much. Even though Conemaugh was in a stable financial position prior to
its acquisition, the writing is on the wall for community hospitals.
All such hospitals must ask themselves, “Are we big enough to survive?” he said. “Health care is no longer a
growth industry. Volume is actually down.” Growth, if it comes, will be out of the hospital, in satellite and
outpatient services. The LifePoint deal will allow Conemaugh to make capital investments in those areas.
“When’s the last time somebody invested a half-billion dollars in the Johnstown marketplace?” Mr. Becker
asked.
The deal, he said, should close this autumn.
4