American health care. Mishap in the operating theatre

DATE 2-Aug-97 Economist, U.K.

Led by Columbia/HCA, a handful of huge for-profit hospital chains have transformed the economics of America's health-care business. Have they also transformed its ethics? A HEARTWARMING passage in the latest annual report from the world's biggest for-profit health-care and hospital company, Columbia/ HCA Healthcare, describes how Richard Scott, its chairman and chief executive, was approached in a hardware shop by a woman who lavishly praised him for the care her mother had received in a Columbia hospital. These days Mr Scott might do well to avoid hardware shops. On July 25th, in the wake of a widening probe by federal investigators into Columbia's business practices, Mr Scott quit, as did David Vandewater, the firm's president and chief operating officer.

More drastic surgery-perhaps including a merger with its biggest rival, Tenet Healthcare-may yet be required to cure Columbia's many ills. Yet, at first sight, Columbia, which is based in Nashville and owns 342 hospitals as well as hundreds of outpatient surgery and care facilities, looks well enough: on July 30th it announced a net profit of $891m on revenues of $10.5 billion for the first six months of this year. Appearances, it seems, are misleading. In recent years its business has developed worrying complications.

For-profit health-care and hospital chains, such as Columbia and Tenet, have prospered by cutting fat from a famously bloated business. They have done so partly through takeovers that have boosted their supply-buying power and enabled them to lop off layers of bureaucracy. (Since 1993, among other deals, Columbia has paid a total of $12 billion for Galen Health Care, Hospital Corporation of America and HealthTrust, three mergers that handed it more than 280 hospitals.) But the for-profits have also changed the way American health care is run, introducing unheard-of (at least in the hospital business) cost-cutting targets, and setting up integrated health-care systems that handle everything from heart surgery to home care.

Coining profits, however, is harder than it used to be. Health-care chains are being squeezed both by the government (on Medicaid and Medicare payments) and by managed-care schemes (which limit the sums health-care firms can charge a scheme's members). They are also facing increasing competition from not-for-profit hospitals, which still make up 85% of the industry. These have swiftly learned many of the for-profits' ways, and can now often beat them on price and service.

This has left the for-profits struggling to find ways to increase their earnings. Mr Scott's long-term plan was to introduce "disease management", a drastic standardisation of treatment that is similar to the step-by-step way in which McDonald's prepares Big Macs. In the meantime, think investigators, Columbia opted for a swifter profit-booster-fraud.

Disease mismanagement

The full extent of the company's alleged deception is unclear. Some actions may have been unethical rather than illegal. Most prominent among the unethical lot are Columbia's "partnerships" with doctors at its hospitals, which allowed physicians to take a stake in "their" hospital and share in Columbia's success. These arrangements, think investigators, encouraged doctors to refer patients only to specialists at Columbia-owned hospitals-even if this was not in a patient's best interests.

Similarly, some of Columbia's hospitals are alleged to have referred patients only to affiliated home-care providers-whether or not they offered appropriate or convenient care for the patients concerned. If such a practice resulted in, say, Medicare being overcharged for health-care services, it might constitute unlawful collusion.

Alleged illegal practices by Columbia are now being investigated by some 500 federal agents, who raided dozens of its facilities in July. The firm, it has been alleged, billed Medicare for blood tests on patients that doctors had not requested; "upcoded" the illnesses of some Medicare patients so that they appeared to have medical "complications" that added to Columbia's fees; paid "expenses" to specialists who were able to increase the flow of "profitable" patients; discouraged treatment of uninsured patients at some of its hospitals; and overcharged extensively.

Columbia has denied many of the allegations, perhaps in vain. On July 30th federal investigators revealed that they have already indicted three of the firm's executives. Messrs Scott and Vandewater, meanwhile, will say only that they "acted honourably and in the best interests of the company"-a statement that begs the question of whether they also acted in the best interests of patients.

If Columbia proves to be as guilty as is alleged, it will hardly be alone in a business that often seems to rival America's defence industry in over-pricing prowess. In recent years big clinical-testing laboratories have been fined a total of more than $800m for overcharging. One reason why Tenet is now being considered as a merger candidate for Columbia is because Tenet now has a cleaner image. But it was not always that way. In 1994 National Medical Enterprises (as Tenet was formerly known) paid $380m to settle charges that it had all but imprisoned healthy patients in its psychiatric hospitals until their insurance ran out; this year it also paid about $100m to the aggrieved patients.

Columbia has a few old skeletons in the family closet too. Humana, a pioneer of for-profit health care (and a forebear of Galen, which Columbia bought in 1993), spent much of the 1980s besieged by investigators and lawsuits. It allegedly once charged $7 apiece for Tylenol tablets. Before HCA merged with Columbia in 1994, it was the subject of a lengthy probe into its tax affairs by America's Internal Revenue Service ( IRS ).

Ironically, perhaps, it is the co-founder of HCA -and its chairman at the time of the IRS 's onslaught-who has now taken over as chairman and chief executive of Columbia. Thomas Frist says he will immediately end doctor-hospital partnerships (and dismantle existing ones), tone down Columbia's high-pressure marketing tactics and limit the firm's expansion into communities where Columbia has met (and often steamrollered) local opposition. Mr Frist also seems set to rethink the billing practices of Columbia's home-care businesses and the firm's relationships with affiliated home-care providers.

The mooted merger with Tenet now appears to be on hold-in part because Columbia's value depends on how big a fine it will have to pay. Antitrust problems could also arise, though the two firms would argue that they account for a tiny percentage of the total hospital industry. Many analysts reckon that a merger with Tenet-and a transfer of power to Tenet's management team-may be the only way for Columbia to clean up its image (although it could, in the tradition of health-care firms, simply change its name).

Since its run-in with federal investigators, Tenet has been a paragon of virtue, complete with annual health-care ethics courses for employees, a toll-free number for whistle-blowers and a "vision statement" boasting "integrity and honesty" as its prime principles. True, Tenet's profit margins are slimmer than Columbia's. But as Columbia and the rest of the health-care sector are discovering, being too wealthy is not always healthy. Or wise.