Private Hospital Firm Sets Industry Trends

NASHVILLE, Tenn. — In the world of heavily regulated industries, companies often find themselves stuck between two less than appealing options: either stay completely within the broadest interpretation of regulations, possibly sacrificing cost-saving opportunities in the process, or chasing savings while exposing themselves to higher risk of government intervention. Some companies try to interpret regulations in the broadest way possible, attempting to gain an edge on their competitors, but most companies and even local government agencies tend to take a very conservative approach. Most organizations err on the side of limiting the risk of bringing regulatory punishment down on their heads much as possible. Most groups never try any new strategies for interpreting regulations that haven’t already been proven by other organizations to be relatively safe.

Hospital Corporation of America (HCA), a fast-growing health industry powerhouse that runs more than 160 hospitals, is not one of these “normal” companies. Although many people feel America lost its pioneering spirit when we ran out of “new world” to discover, we still live in a society and economy that prides itself on taking risk, and gives massive rewards to those who survive those risks. HCA is definitely one of those companies that believe the risk is worth the reward and, given that it has had two governors and a senator’s family involved at various stages, it seems to have the brain trust needed to walk the regulation tight rope.

The particular risk that HCA signed up for was a policy shift in 2008, when the company changed the billing codes for the emergency rooms in its hospitals. Basically, the company changed its policies in a way that would move more emergency room patients into the column for those who need additional care. Patients in that column earn hospitals significantly more Medicare funds. HCA took a giant leap, going from an organization that had less of those patients than the industry standard, to one of the leaders. On the other side of the emergency room equation, HCA began requiring upfront pay for patients who show up at the ER with nonurgent conditions, like a turned ankle or the common cold. These adjustments address the two main issues hospitals face; too many patients never pay and too often the reimbursement hospitals do receive are not nearly significant enough to make up for that gap in funding.

HCA’s Medicaid strategy isn’t very surprising, given that it is owned by three private equity firms, including Bain Capital, Mitt Romney’s highly successful company. Former U.S. Senator Bill Frist’s family also bought a sizeable share of the company, coming full circle as his father and brother originally founded the company. The other two buyers were Merrill Lynch and Kolberg Kravis Roberts. These financial companies have become extremely adept at maneuvering through the complex regulations on Wall Street, and are taking the same approach here, as the three firms have more than tripled their initial $33 billion investment.

Now that someone has taken the initial leap, other investment firms are flocking to follow HCA’s success, buying up hospitals at a rapid pace. It is hard to overstate just how much larger that leap was for HCA, which made this change despite previously settling a Medicaid fraud case for over $1.7 billion, the largest sum the government has ever gotten in a health care fraud case. The settlement was accompanied by the resignation of current Florida Governor Rick Scott from his position as chief executive at HCA, although Scott was not one of the four people indicted during the case. Though some would say HCA took a significant risk by trying to find cost savings in an area related to Medicaid funding after that incident, it has clearly penciled out so far. The company has literally gone from being featured in Forbes Disaster of the Day column to becoming an industry giant and a poster child for privatization of hospitals.

Though HCA is controversial, it currently appears to represent the future. As hospitals struggle with the financial downturn, they become more focused on two major issues, crowded emergency rooms and the constant battle to lower the financial impact of providing services for people who will never pay their bill. Until someone else comes up with a better idea, HCA’s model will probably continue to drive industry trends.

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