When we first heard that Mercy had decided to close this hospital permanently, the community was in a state of shock. Anger. Disappointment. We thought it would always be here. When bad things happen in our lives we like to blame people. And there was a lot of finger pointing. In rural towns across the U.S. hospitals are in crisis. Since 2010, 121 rural hospitals have closed. And the National Rural Health Association says more than one-third of all rural hospitals in the U.S. are at serious risk of shutting down.
And it’s not just rural hospitals that are going out of business. Several hospitals in urban areas including Phoenix and Chicago have shut down. One recent high profile closure was in the heart of Philadelphia. Hahnemann Hospital was a 496-bed hospital considered by many to be a lifeline for the city’s neediest. But in September 2019 it shut its doors as it struggled with monthly losses of $3 to $5 million, according to news reports. The closure of the hospital was pretty upsetting, was pretty heartbreaking for I think everybody who worked there.
But not all U.S. hospitals are suffering. Since the 1990’s, a series of mergers and acquisitions have created mammoth hospital groups. Many of these hospital consortiums are turning huge profits every year by offering high priced services like cardiac and orthopedic care to well insured patients. So why is it that some U.S. hospitals are making billions while hundreds of others are going out of business? Hospitals in the U.S. got their start in the mid-18th century. Before, if a person got sick, a doctor would come to your home and treat your illness – for a fee. Poor sick people often found shelter in almshouses. Charitable organizations that housed the destitute.
But things changed in 1736 when two the oldest hospitals in North America opened. The charity hospital opened its doors in the colony of New Orleans – the same year New York’s Bellevue Hospital began operations. Early h ospitals were really welfare institutions, not particularly clean places. Infection was rampant and they were really the houses of the last resort. But it wasn’t until after the Civil War that hospitals really took off in the U.S. With advances in medicine and more people moving into cities, churches as well as local governments started to build hospitals across the country. In 1873, there were 178 hospitals in the U.S. By 1909, there were more than 4,000.
By the 1920s and 30s, hospitals are pretty much having to start charging patients. Most of these systems were in place that formed the modern hospital. We had laboratories, machines that could do blood work. Hospital construction picked up after the Hill-Burton Act passed in 1946. The federal law gave out $3.7 billion over the span of 30 years for hospital expansion across the U.S. The passage of government funded medical insurance program Medicare in 1965 injected even more cash to build more hospitals. By 1975, there were about 6,000 hospitals in the U.S.
But in the mid-1970s hospitals started to close. Analysts say, that had a lot to do with advancements in technology procedures that previously required hospitalization didn’t anymore. Mergers were another factor for driving down the total number of hospitals in the U.S. Rising health care costs starting in the 80s pressed hospitals to team up to survive. The first wave actually started in the mid 1990’s. Then it took a pause and then we saw mergers and acquisitions come back with great velocity in the mid 2000s.
Between 2008 and 2014, there were more than 750 hospital acquisitions and mergers in the U.S. And that trend has continued to today. By 2018, the most recent year this data was available, there were over 5,000 hospitals in the U.S. an 11 percent drop from 1975. There are thousands of hospitals, big and small, but about 5,000 are considered acute care hospitals where you go for short term care and urgent medical treatment. For the purpose of this video we’re just going to focus on this type of hospital.
Every hospital has its own model for how it brings in cash. Revenue is also dependent on a whole lot of factors, including the type of insurance a patient has and the medical and surgical services offered by the hospital. Hospitals can also make money from graduate medical training subsidized by Medicare, investments on endowments and money from donors. But generally speaking, the bulk sum of hospital income comes from commercial payers like private health insurance and government payers like Medicare, which is typically for people aged 65 and older and Medicaid, which is for people with a low income.
Hospitals prefer patients with private health insurance because that insurance pays the best. Medicaid pays the least. Here’s how it works in practice. The Mayo Clinic is a non-profit academic health care system with hospitals in Minnesota, Arizona, Florida, Iowa and Wisconsin. The Mayo Clinic had revenue of $12.6 billion in 2013. Almost 85 percent of that money came from medical service revenue, which includes all the cash a hospital gets for patient treatment. Four percent came from grants and contracts, three percent came from investment returns and the remainder from a mix of other smaller sources.
Let’s take a closer look at some of these sources of income. Medical service revenue at the Mayo Clinic was $10.6 billion dollars in 2018. Fifty nine percent of that cash came from contracted health insurance plans, 24 percent came from Medicare, 14 percent came from non-contracted health insurance plans and self-pay and three percent came from Medicaid. According to analysts, a hospitals location is a big indicator of the type of insurance a patient will have. People living in wealthy areas tend to have private health insurance.
By and large, one of the greatest predictors of how much money a hospital makes is how wealthy the community is in which they are located. Hospitals in wealthy communities often raise a lot of money in philanthropy and have well insured patients. Hospitals that are predominantly taking care of government insured patients or poor patients tend to struggle. For some hospitals the self-pay category is a real game changer for profits. In 2018, the Mayo Clinic treated 1.3 million people from 138 countries.
A large internationally known clinic like the Mayo Clinic is still going to depend on payer mix but they’re also going to try to attract a lot of international patients, many of whom, if they can travel to the United States, they probably have a lot of money to burn on their health care. Medical and surgical specialties can also really boost a hospital’s bottom line. One well-known way in which hospitals can generate a lot of money is to either pivot to or grow high-ticket services like spine surgery, cancer care, cardiac surgery.
That’s a major source of income for a lot of hospitals, not just the high-end hospitals a lot of community hospitals have got in on the act. But perhaps the most effective way hospitals can drum up more cash – raising prices. Analysts say, that’s one of the reasons driving all mergers and consolidation across U.S. hospitals. As hospitals grow by acquiring other hospitals and jacking up prices, they get more leverage in negotiating insurance contracts so they can command higher prices. The bigger you are, the more power you have in the business world. Hospitals have begun acquiring others, developing regional systems. We’re seeing city after city consolidate into a few major systems.
Massachusetts General, a nonprofit affiliated with Harvard Medical School, is a member of Partners HealthCare. A health system that is made up of about 15 hospitals and medical centers. Analysts say that Partners HealthCare’s high prices are a result of the medical groups market dominance. A Massachusetts state agency report in February 2016 claimed Partners Health Care was the only health care system in the state where all of its hospitals had higher prices than the state median. In 2018, Partners had operating revenue of $13.3 billion.
That same year New York and Presbyterian Hospital’s operating revenue was $8.4 billion. Partners HealthCare, which includes the Massachusetts General Hospital and the Brigham and Women’s Hospital, has massive market domination in the Boston region. It’s probably one of the reasons why they also have extremely high prices for patients and insurance companies. CNBC reached out to Partners HealthCare, but they did not provide a comment for this story.
After 20 or 30 years of consolidation, we’ve ended up at a point where broadly 20 percent of hospitals in the US are in what is essentially monopoly markets. But while some hospitals are seeing big revenue gains, many rural facilities across the U.S. are facing a grim future. According to the National Rural Health Association, almost 700 rural hospitals are in danger of shutting down. Just take Mercy Hospital Fort Scott, a nonprofit 46-bed facility in southeast Kansas.
After 130 years, the hospital didn’t have enough money to keep going. For the community the news was crushing. When we got the announcement that the hospital was closing, myself and my wife, we were devastated. We’re like, okay, well, that’s the worst thing we’ve heard. The community took it hard as well. The CEO would get death threats even though it wasn’t her fault. The grounds of the abandoned hospital are now home to a small clinic and emergency department. For over a century, Mercy Hospital Fort Scott served not only the town, a rural community, of farming, ranching and light industry, but the surrounding Bourbon County area as well. Bourbon County has a population of about 15,000.
About 10 percent of people in the county lack health insurance and one in four children lives in poverty. In its heyday, the hospital was probably the community’s biggest employer. They had five or six hundred employees. We did a lot of surgeries. We attracted people from 50, 60, 70, 80, 100 miles away. A smaller number of reimbursements starting in 2013 from private and government insurance programs meant less money was coming in. And like a lot of struggling hospitals, the patients coming to Mercy Hospital, Fort Scott had little or no insurance.
The clinic part was doing OK. But when you’re losing 90 percent or almost all of your money because you’re not keeping the beds full. That’s a real problem and it’s a very expensive problem. Dr. G ugnani started working at Mercy in 2004 and now works in the clinic run by the Community Health Center of Southeast Kansas. I’ll see anywhere between 25 to 30 people a day and it can vary from just simple cough and cold to they got diagnosed with cancer they want to make sure that their meds are right. I had to go to the ER the other day.
What were you allergic to? What did you get into? I have no idea. My arms are red and broke out in hives and my face was swelled up. Say ah . Your throat looks pretty good. You know, the bad part is I don’t know what caused it. According to Dr. G ugnani, some elderly patients have left Fort Scott to be closer to other hospitals, including roughly 80 oncology patients who had to find care elsewhere. Probably as recently as five years ago t here were maybe as many as 200 babies born here a year. Now those babies are being born elsewhere.
But if it’s not a hospital, what you rural towns like Fort Scott need? This hospital was built to last 100 years. It’s 20 years old now. We certainly didn’t need all the beds that we had. Honestly, I think you still need hospitals. You may not need a 40-bed hospital, but I do think you need a smaller version of that. For decades, Hahnemann University Hospital in Philadelphia was a lifeline for the city’s poor. Being a large safety net hospital next to a poor inner city neighborhood meant it cared for patients regardless of their ability to pay.
But with financial problems that started in the 1990’s the hospital had been in failing health for years. In 2018, the money losing facility was bought by American Academic Health System, a for-profit company led by Joel Freedman, an investment banker from California. Less than two years after the purchase, with reported losses of more than $3 million a month American academic health system closed the hospital. When I heard Honeyman was closing, I didn’t believe it. I think most people in the hospital were probably in some sort of denial.
It was extremely abrupt. Almost overnight, residents were left without a nearby facility, without a nearby emergency room. Twenty seven hundred employees lost their jobs. And Hahnemann was not alone. Since 1977, Philadelphia has seen nearly 20 hospitals close. Many located near low income neighborhoods. In 2016, the city’s poverty rate was more than 25 percent, with nearly 200,000 people living in deep poverty, according to a study by The Pew Charitable Trusts.
Like a lot of hospitals, Hahnemann’s payor mix was one of its biggest problems. We have a lot of patients of low socioeconomic class that don’t have the means to get private insurance and will rely on government funded insurance. Many other patients are uninsured. The patients who live near Hahnemann do have other options. The real issue is the emergencies. Where do you go in the middle of the night? But what outraged many in the community? The owners place the land beneath the hospital in a separate company that was not included in the bankruptcy filing.
Everyone from nurses unions to city officials began speculating that Hahnemann’s owners may not have intended to save the hospital, but instead planned to sell the land to property developers. The hospital’s location near City Hall makes the land extremely valuable for condominiums or a high end hotel. There were a lot of suspicions that the interest in the purchase wasn’t to serve the community. It was more to close the hospital. Develop the land from there. The land itself is probably worth around $50 million dollars, but its prime building territory.
Others fear that if the plan succeeds, it could be a blueprint for private equity firms to buy and close other hospitals across the U.S. This is a model that we’ve seen in the retail sector where the big legacy department stores can no longer operate. The stores go bankrupt and close and the real estate becomes tremendously valuable for commercial development. CNBC reached out to American Academic Health System, but they did not provide a comment for this story. With some rural and community hospitals on the decline.
Where do hospitals go from here? What should we expect from our local hospital? Should we have a local hospital? I think 50 or 60 years ago, every hospital did everything for everyone. I think ultimately that’s just not what the future looks like. According to analysts, the health care of tomorrow could be a move away from hospitals as new technologies drive the shift to outpatient care. Since 2009, there has been a drop in hospital admissions, according to the American Hospital Association.
Ten years ago, a knee surgery would have meant spending more than a week in hospital. Today, it’s possible to go home the same day. Hospitals have increasingly been seeking the better paying patients. They want people who can pay on their own. They want people who have good insurance coverage and they want people who are going to be treated for profitable conditions. The future looks like a smaller number of bigger hospitals scattered across the country that are providing very, very high intensity specialized care.
That could mean for rural communities and people living in lower income areas. Hospitals will be more difficult to reach and potentially more expensive to access. Having one less level, one trauma center in the city is not a good thing. Having less maternity wards is not a good thing. I think what we forget is the public good health care provides and we keep thinking of it as this business.