When healing collides with the bottom line

Behind the resignation on Friday of the top executive of Columbia/HCA, the world's largest health care company, lie the same pressures to satisfy Wall Street that have confounded other for- profit hospital chains.

The executive, Richard L. Scott, has been the most visible proponent of the philosophy behind for-profit hospitals -- that healthy patients and healthy profits do not conflict. In less than a decade, he built Columbia into a $20 billion company with about 350 hospitals and hundreds of other treatment centers.

But federal investigators are now asking whether Columbia/HCA Healthcare achieved its profits partly through fraud -- by overstating their expenses to increase their compensation from federal programs like Medicare, for example, and by regularly conducting unnecessary blood tests. Scott's grudging responses apparently contributed to his downfall. In some ways, the profit-driven companies like Columbia have set higher standards in how hospitals operate, cutting costs with greater buying power and leaner bureaucracies. Many administrators at not- for-profit hospitals agree that their for-profit competitors have forced them to become far more efficient. Some for-profit hospital companies have prospered without a hint of impropriety. But their greater challenge is generating profits in a business where the government and private employers limit their payments and where not-for-profit competitors have joined together -- to buy supplies, for example -- to achieve the same economies of scale. "On virtually every single study, there are no cost differences between the profits and the nonprofits," said Gerard Anderson, director of the Johns Hopkins Center for Hospital Finance and Management in Baltimore. The investor-owned chains are left in an ethical quandary, he said. "In order to generate substantial profit margins," he said, "they need to take some liberties." Columbia is only the latest example of a for-profit hospital chain that has run into legal or financial woes in its efforts to provide shareholders with returns more common to the makers of software or soda water. In 1993, National Medical Enterprises and its psychiatric hospitals were accused by the government of bribing doctors for their patients, taking in patients who did not need treatment and then keeping them against their will until their insurance ran out. National Medical's successor company, renamed Tenet Healthcare and now the nation's second-largest hospital chain, paid $379 million to settle the federal accusations. Tenet has in recent days been negotiating to merge with Columbia. Humana, the most daring chain before the rise of Columbia, faced patient lawsuits and federal and state inquiries into its pricing and billing: among other items, $7 Tylenol tablets and $5,000 in charges for an operation that cost the company about $1,200. Columbia later absorbed Humana's hospitals. Several other hospital chains were forced into bankruptcy or mergers in the late 1980s after they built too many hospitals or failed to adapt to lower Medicare payments. The pursuit of higher revenue has also affected not-for-profit hospitals, which make up 85 percent of the nation's total. The competitive new world of health care has led some of the most vaunted not-for-profit institutions to break the law, too. Over the last year, the government has broadly investigated the nation's largest teaching hospitals to determine whether they have fraudulently double-billed Medicare for certain services. Already, two teaching hospitals in Pennsylvania have agreed to pay more than $40 million to settle charges of fraud. The investor-owned chains argue that only they have the financial discipline to cut costs and raise efficiency, themes that play well in the battle against medical inflation. But charity hospitals can do as well. In Houston, Dr. Denton A. Cooley's Texas Heart Institute at St. Luke's Episcopal Hospital does heart bypasses for about a third less than most other hospitals, with healthier outcomes as well. Some experts wonder how long Columbia can keep up its performance no matter what its tactics. The company, said Jeff Goldsmith, a health care consultant, has had to keep buying hospitals at bargain prices to maintain its profit margins and its appeal to investors. Even though the company's stock has fallen from its peak, investors still value it at about $25 billion. But the hospital chains, including some not-for-profit groups, have a tough time squeezing higher surpluses, from their hospitals year after year. Saving money through bulk ordering of bandages is one thing, but saving through cuts in hospital staffs and procedural shortcuts has clear limits. "These institutions are vastly more complicated than any business," Goldsmith said. "You are literally custom-making a product for everyone who comes in."

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