Hospital consolidation, conversion and vertical takeovers in Connecticut

There is a current nationwide trend toward hospital consolidation and conversion aimed at a number of states, including Connecticut. It is a trend of which those of us who live in under-served rural areas such as the Northwest Corner of Connecticut should be especially wary.

By “consolidation” is meant the merger or taking over of smaller community hospitals and health-care facilities by larger, more sophisticated and well-funded, often urban, hospitals. Those larger entities can provide higher levels of care by taking advantage of economies of scale as well as reduction of price competition thanks to monopolization, while closing down “excess” facilities.

By “conversion” is meant the privatization or conversion of public nonprofit hospitals to private for-profit hospitals and their purchase by investment corporations, thus giving hospitals more access to sufficient equity capital and better bond ratings to raise money to invest in needed improvements in infrastructure and services. Of course, for-profit hospitals have the disadvantage of being subject to local, state and federal taxation. My own view is that all hospitals, public or private, serve the common good, and therefore ideally should be tax-exempt. But there’s a hitch. The two have similarities but also significant differences.

For-profits and nonprofits face much the same challenges, including the need to achieve a favorable balancing of revenues versus costs. In this sense, they both seek what might be called “profits.” The difference, however, is that for-profits export those profits, often out-of-state, to maximize investors’ wealth, whereas nonprofits are expected to reinvest those revenues in the health systems of the communities they serve.

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Particularly during adverse economic cycles, for-profit hospitals can be quick to cut back on services, demand longer hours with reduced pay and lay off competent staff in order to protect the profits of out-of-state corporate investors, at the expense of the health of the local community. Nonprofits are more likely to have to stick it out and seek other ways to get through hard times, including bond issues, local bank financing and temporary taxpayer support.

Unfortunately, both for-profits and nonprofits have a marked tendency to grossly over-pay administrators and executives, and under-pay medical and nursing staff. Both for-profits and nonprofits have to operate in a new health system environment which as been largely redesigned and taken over by the for-profit insurance industry. The lack of adequate regulation of insurance pricing adversely impacts patients, medical practitioners and hospitals — both public and private.

A number of studies based on Darwinian-style business models have suggested that for-profit hospitals should in theory be more efficient and more competitive than nonprofits, and possibly provide a higher standard of care. Unfortunately, comparison of actual results tends to show quite the reverse. A recent World Health Organization report concluded: “In the United States, nonprofit hospitals are more efficient than for-profit hospitals.” Furthermore, the office of U.S. Senator Chris Murphy of Connecticut released a report on the subject showing that “for-profit hospitals prioritize financially profitable services, and states with more for-profit hospitals spend considerably more taxpayer money per Medicare beneficiary.” 

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To protect citizens from undue exploitation, Connecticut recently passed laws reasonably regulating for-profit hospital services and pricing. In reaction to this, Tenet Corporation of Texas has withdrawn its application to purchase five public hospitals in Connecticut. Would a corporate investor in Texas really know or care about the health needs of a patient in Connecticut? Which would the investor believe comes first, health or profit? So, in this case, it’s seller beware.

There is also across the United States and in Connecticut a new trend toward vertical integration, that is, hospitals acquiring clinics, medical practices, home health agencies, nursing homes and the like. The phenomenon has its advantages and disadvantages. Personally, I would prefer a concept of networking, that is, more collaboration between parties, rather than outright acquisition. In fact, the whole concept of life or death competition between providers (e.g. hospital versus hospital), which is an a priori assumption of business philosophy and practice in the capital marketplace, is probably contrary and counterproductive to good medical care practice.

Sharon Hospital was founded in 1909 by medical doctors and concerned citizens whose only motivation was the health of the community — not investment profits. Our greatest weakness in follow-up has been the subsequent failure of all our towns to take responsibility for the hospital and the health system serving our catchment area. By “catchment” is meant the natural constituency of actual or potential patients from our surrounding towns on both sides of the state line, including Sharon, Lakeville, Salisbury, Canaan, Cornwall, Millerton, Amenia, Wassaic, Dover Plains, Pine Plains, Copake, Hillsdale and others who are the actual and potential users of our hospital.

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What would an alternative to the for-profit solution have been? Together our towns could have and should have provided the operating capital and commitment to put Sharon Hospital and its affiliated network of related health services on track as a solvent, effective health care institution and model for rural America. We could have experimented with various means of organization, financing and provision of health insurance, without waiting for the nation to wake up and adopt Obamacare.

For example, we could have tested out and adapted a version of primary health care pioneered by Thailand, whereby everyone in a multi-town catchment area buys into a very affordable family insurance card valid for all family members at local clinics and practices, entitling them to defined preventive, curative and palliative care, with referrals to the district hospital for higher levels of care. If it’s a better mousetrap, adopt it; if not, don’t. Now that we have Obamacare, we don’t need this particular solution, but the point is that when the local community gets together and gets involved, we can try new things out, adopt best practices and accomplish what the capitalist for-profit system alone cannot or will not do.

The moral for us in rural northwest Connecticut is that we must exercise extreme caution when considering the import of some of the current nationwide trends toward hospital consolidation, conversion and vertical integration. The wiser approach is to mobilize our local citizens and town committees in our entire catchment area to generate public cooperation and commitment to community health, and to work for the success of our local hospital and related medical practices — public or private. This we can do. Our primary goal is our own and our children’s health, not someone else’s financial profit. 


Sharon resident Anthony Piel is a former director and general legal counsel of the World Health Organization.