The Death of Independent Hospitals

Without fanfare, and with hardly with any notice at all, the Walnut Hill Medical Center closed its doors one recent Friday. Employees lost their jobs. Doctors have one less place to take patients. Investors lost money. Lenders lost money, and it is likely that lawsuits will follow. Little in the way of information or detail was offered in explanation.

The impact of this is noteworthy. This is another case of consumers losing choice. Oligopolies, including HCA, Methodist, Baylor, and THR, now comprise fully 98 percent of the market in DFW. Similarly problematic is the formation of oligopolies on the payor side as well. Cigna, Aetna, United, and Blue Cross collectively dominate the Dallas marketplace.

Individuals have long since stopped paying for their healthcare. They rely on insurance usually provided by their employer, and the employer is looking for the best plan at the lowest cost. The “best plan” usually covers the largest geographical area to make it more convenient for the covered employees. The employer then looks at the total cost of the employee, and adjusts the cash compensation accordingly to create a market competitive rate of pay for that employee.

Insurance companies use their size and scale to negotiate with service providers to establish rates. Insurance companies are looking for ubiquity and low price from the service provider, but are happy to concede the latter for the former. It is common for the larger providers mentioned above to have reimbursement rates as much as 50 percent higher for the same procedure or service offering from the same physician, and after the large system buys the independent, at the same facility.

The Texas Insurance Commission is of little help in this tragic comedy. Under law, insurance companies are required to do three things: give every service provider a fair chance to be in the insurance carrier’s network, respond to proposals timely, and create networks comprised of a diversity of providers. Even if you concede the first point, the Commission has no insight or governance tools to address the second point. And, the third point requires an analysis of data collected from the insurance companies that is unintelligible by and not actionable by the Commission. Further, what action would they take?

It should come as no surprise that independent hospitals and other healthcare service providers are getting squeezed out of the market. If the service provider is not part of a larger “system,” they are less likely to get a comparable reimbursement rate. That means that they must do more procedures at a lower cost to make the same revenue, albeit at a lower margin. Worse yet, it is even more difficult for those deigning to make a profit because most of the systems against whom they are competing are non-profits and don’t pay taxes. For the well managed non-profits, they amass great cash reserves which they can then use to buy others (hence, mergers occur like Baylor and Scott and White).

The undiscussed leg of the stool is government programs like Medicaid and Medicare. Many hospitals are not allowed to take reimbursements from those programs. However, Walnut Hill was able to take those payments, and for reasons not yet disclosed, their contract was not renewed. The non-renewal of the contract creates problems because the volume of cases processed under those programs is a very significant percentage of the total. Further, it helps cover the fixed costs of the service provider. However, there is a logistical problem created for the physicians as they now have to move from one facility to another to serve patients at a hospital that can accept payment from either that insurance provider or that government program. The loss of that very valuable time serves as a disincentive to the physicians in taking their cases to that facility. The unsurprising result is that the physicians end up aggregating at fewer facilities.

There will be industry observers, advocacy groups, and others who will decry the fact that Walnut Hill was either a problem or a victim–that it suffered from bad management. The reality is that Walnut Hill had been struggling for quite some time, the industry has had diminished volumes this year, and the byzantine payment structure manifest in the U.S. healthcare industry is a gale force headwind in which all independent service providers are running. When the Medicare contract was not renewed, there were no choices left for Walnut Hill, and one fewer choice for the healthcare consumer in Dallas.

Todd Furniss is chief executive of Dallas-based glendonTodd Capital.

Posted in Expert Opinions.
  • Britt Berrett

    An intriguing perspective from someone uniquely qualified to opine. However, much is being left unsaid. Perhaps a robust discussion hosted by UTD would be illuminating. . . and well attended!