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Is competition working?

Are hospitals on a buying-and-building spree, battling for market share? Indiana hospitals say a freer marketplace invites cost-saving innovations and cooperation.

The theory goes like this: When retailers compete, the price goes down; when hospital compete, the price goes up. Retailers boast of their rock-bottom prices, while hospitals push their new services and equipment that heal better and faster, but at greater cost. And the bills continue to grow.

Critics concerned about spiraling health-care costs find sense in this argument, and it gives them a place to point their fingers. Hospitals, however, say it's not that simple. True, regulatory changes in the 1980s left medical providers on a much more competitive footing, and health-care consumers are much more service-oriented than price-conscious. But hospitals say one of the major components of the theory outlined above--excessive duplication of expensive services--simply isn't true. And they add that hospitals' competitive mode encourages them to act as other businesses do, seeking creative ways to corral costs and arranging sensible cooperative ventures, all the while offering the products that consumers demand.

An understanding of the issue must begin with a little history. "In multiple-hospital communities, there has always been a form of friendly competition for the types of services," says Robert Morr, vice president of the Indiana Hospital Association. "However, it became a matter of public policy in the 1980s. Reaganomics changed public policy and said the types of governmental controls that had been in place in the '60s and '70s really had not controlled growth in health-care spending in this country, so why don't we try the competitive marketplace philosophy? It works in the private sector, so why don't we let that play out?"

Prior to the mid-'80s, Indiana and many other states had a "certificate of need" process that required hospitals to argue their cases in front of regulators before buying major new equipment or building a new facility. In addition, many states had mandatory regulation of rates, and Indiana had a voluntary rate review process. Now, most of those controls are gone, and critics say hospitals have gone on a buying-and-building spree, battling for market share without really considering the need for a new piece of equipment or a new service.

Fort Wayne had the dubious honor last year of being a Wall Street Journal example of this alleged type of reckless competition. Among other things, the article charged that competing hospitals there were bringing to town more expensive pieces of equipment such as magnetic-resonance imagers than necessary, and costs were going up as a result. MRIs, in fact, often are at the center of duplication-of-services allegations, in Fort Wayne and all the other cities where hospitals compete.

Such arguments would seem to presume that hospital administrators don't have the smarts to make good business decisions. That offends people such as William J. Loveday, president and CEO of Methodist Hospital of Indiana, an Indianapolis institution that has not one, not two, but three MRIs. "I think it's a question of whether you have the demand for it. What you can't do is you can't afford to buy an MRI and run it just five or six hours a day. But if you've got demand and have three MRIs that run 16 hours a day like our three do here, you need them."

Hospitals, he says, know the realities of supply and demand. "From an investment standpoint, you can't afford as a hospital today to make investments in technology that are low-utilization. That's an asset that sits on your books so to speak, and if it doesn't have sufficient demand, you just can't afford to take on that cost without adequate offsetting revenue. You've got to take into consideration what the demand is."

Clearly, Methodist has found enough demand to support the installation of three MRIs. But what's a hospital to do if it is located in a smaller community that doesn't have the patient base to run even one MRI most of the day? Cooperate.

"For two years, we shared an MRI unit on a mobile basis with Deaconess Hospital," Douglas D. French, president and CEO of St. Mary's Medical Center in Evansville, says of his crosstown competitor Eventually, MRI demand outgrew the cooperative arrangement and allowed each hospital to install a unit on-site, but the two institutions and a third competitor--Welborn Memorial Baptist Hospital--remain cooperative in other ways.

"We now share a mobile lithotripter unit with Deaconess. It's expensive technology, and it's on a tractor-trailer truck that runs between several hospitals, but we're the main two," French says. "We continue to talk among the three of us about ways in which we can work together on a case-by-case, project-by-project basis. For expensive technology it makes economic sense for us to do that, and we will continue to do that as good business."

Carol Ormay, director of community relations and marketing for Clark Memorial Hospital in Jeffersonville, says her hospital also has found cooperation to be expedient. "We went in conjunction with Floyd Memorial Hospital and bought an MRI unit, and that way neither of us was fully burdened with the whole $2.5 million to purchase the unit." Ormay says Clark also has joined forces with Jewish Hospital, located across the Ohio River in Louisville, Ky., to set up a cardiac catheterization lab. "We provided the space and footed the bill for the renovation, and Jewish Hospital then bought the equipment."

Similarly, Indiana University Medical Center and the Richard L. Roudebush Veterans Administration Medical Center in Indianapolis are working together to install an imaging system even more advanced and expensive than the MRI. The $5 million nuclear-medicine device known as a positron-emission tomography scanner, or PET scanner, can display real-time changes in the body's biochemical activity. A brain surgeon, for example, can integrate information from a PET scanner, an MRI and other devices to locate blood vessels and critical tissues before performing surgery to remove tumors.

There are other creative ways in addition to cooperation that hospitals are using to bring the latest technology to town. "You're seeing more cases now where leasing makes sense," says French. St. Mary's, in fact, leases its MRI. That cuts the up-front capital expenditure, and also will make it easier for the hospital to dispose of the equipment when something better comes along. "You'd be surprised how much use throughout the world some of his equipment can have" after leaves a U.S. hospital, French says.

Clark Memorial Hospital, meanwhile, leases its lithotripter, Ormay says. Under Clark's arrangement, the truck-based device spends some time in Jeffersonville and some time at hospital elsewhere, allowing Clark to have the service it needs without the major capital outlay.

As is the case with financing any type of equipment, leasing is best in some instances but not as good in others, and hospitals say they're attuned to that fact. "We leased an MRI initially," says Marjorie Soyugenc, president and CEO of Welborn in Evansville, "but we've now moved to the point where the most cost-effective approach is to purchase it."

"For a hospital our size, generally the interest cost of leasing is substantially higher than going out and buying," agrees Robert E. Gildersleeve, vice president of finance at Ball Memorial Hospital in Muncie. "So we lease very little."

Sharing the bill for high-technology is not the only way Indiana hospitals are working together to keep costs down. In some cases, just talking about common problems helps hospitals find cost-effective solutions, Gildersleeve says. Ball, for example, and about a dozen and a half other Hoosier hospitals of all sizes belong to an organization known as Voluntary Hospitals of America. "We meet on a continuing basis. We look at what one hospitals is doing to control costs in some area, and we take it back to our place and see if we can match it."

Such networking also benefits the 10 Indiana hospitals that are managed by Alliant Management Services, a division of Alliant Health Systems of Louisville. "With our system, we've been able to develop some pretty good standards that we allow our hospitals to access, so they know if the cost of meals served or the cost per pound of laundry, whatever, is out of line," says Phillip Blair, vice president of Alliant.

"We try to contain expenses or at least slow their escalation. By using a total of 24 hospitals, we've got a good handle on what's attainable."

Alliant manages hospitals from Corydon to Brazil to Hartford City, and Blair says affiliation with Alliant helps the smaller, more rural hospitals continue to provide the high-tech services and expert care that patients are demanding. That's not an easy task in a rural setting, Blair notes. "Competing for specialists is very difficult. We've got to pay close to what most of the urban areas pay, and there pay, and there are fewer patients to spread that across." Being part of the network gives these smaller hospitals more clout in hiring.

It also gives them leverage in buying supplies, since member hospitals are part of a nationwide power-buying network. Gildersleeve says Voluntary Hospitals of America members also have group-buying power on items such as drugs, medical supplies and even capital items. "If we wanted to buy beds, for example, I think they're having a sale," he quips.

The possibilities of hospital cooperation seem almost endless. Indianapolis hospitals, for example, saw the shortage of registered nurses as an opportunity to cooperate. "All five hospitals in town worked cooperatively to invest in an effort called Nursing 2000 and developed a first-rate program that ha shown very positive results in terms of interesting students in nursing as a career," Loveday of Methodist says. And if the pool of nurses grows, hospital will be able to keep their salary and benefit cots under better control.

In Fort Wayne, cooperation ranges from the glamorous to the inglorious. "At the present time, all three hospitals in Fort Wayne are exploring the possibility of a joint laundry," says Frederick H. Kerr, president of The Lutheran Hospital of Indiana. "Lutheran and Parkview Memorial Hospital jointly sponsor the largest home-care and hospice-care organization in this part of the state, known as the Visiting Nurse Service and Hospice. St. Joseph and Lutheran jointly sponsor a comprehensive outpatient rehabilitation facility, a freestanding facility in the northern part of Fort Wayne."

A similar thing is happening in Indianapolis, where Methodist and St. Vincent hospitals are developing a rehabilitation hospital on the city' west side. "Both hospitals have a pretty significant volume of rehabilitation patients," Loveday explains. "There had been a dialog going on prior to when I came to Methodist, based on the perception that Methodist didn't want to build its own facility and St. Vincent didn't either. When I heard about this discussion, I talked with physicians and with Bain Farris at St. Vincent, and between Bain and myself we developed the idea of a 50-50 joint venture to build an 80-bed rehabilitation hospital."

Which brings up another growing movement in health-care competition that holds at least the promise of keeping some costs under control: specialization and niche marketing. "You will see institutions that decide to compete as 'centers of excellence,'" says Morr of the hospital association.

There are the rehab hospitals, such as the joint venture in Indianapolis, a rehab hospital in Evansville and the Kokomo Rehabilitation Hospital. There are independent psychiatric hospitals going up in many parts of Indiana. There are mental health centers run by hospitals such as Welborn. Hospitals and hospital systems, such as Methodist, Clark, Alliant and many others, are setting up occupational medicine centers. The picture also includes some independents, such as the Fort Wayne Occupational Health Center and Southeastern Industrial Medical Center in Hammond and Chicago. There are facilities such as the Indiana Hand Center and Meridian Facial Plastic Surgery Center in Indianapolis, clinics that treat sports injuries, even centers that specialize in hernias.

These centers have varying marketing strategies, Morr notes, and most of them includes the most obvious selling point: that specialists often can provide the best care. But some of them also say their specialization allow them to offer lower prices for their services, since they do the same procedures so many times.

Kerr agrees that specialty clinics are sprouting all over. "It's been an explosion. It's certainly increased the number of competitors," he says. But while costs of certain procedures may decrease as a result, the effect on health care's big picture may not be exactly what people expect. "It has drawn off a tremendous amount of revenue from hospitals, and may be one of the things that is driving up the price of hospital care. That doesn't mean it's bad, but it has a number of impacts people don't think about."

Kerr draws an analogy to firefighting. "A community has to have a fire department, and they have to have a certain cost of facilities and equipment and staff that are able to put out fires whenever they happen. If the fire department puts out all the fires regardless of the cost or size, then they spread that cost out over the number of incidents," he says.

"but if somebody comes along and says, 'I can put out wastebasket fires cheaper than you because I don't have to have a hook-and-ladder truck and I don't have to have all those big raincoats, I'll just specialize in wastebasket fires,' then that's fine, they can do it cheaper. But you still have to have the whole fire department ready for the big fire. You still have most of the cost but you don't have the revenue to support it," Kerr says.

"That's the situation we have with hospitals and freestanding outpatient clinics," he says. With many of the lower-expense, simpler procedures migrating out the hospital doors--leaving behind the more expensive services--it's bound to have an effect on hospital balance sheets and subsequent costs to patients.

When hospitals talk about revenue shortfalls, however, most often it has to do with Medicare and Medicaid reimbursement. The federal government decides how much to pay for specific services, and hospitals complain that the reimbursement often fall short of the cost of the service. That can play havoc with hospital budgets, because those reimbursements total about half of all revenues.

"Medicare and Medicaid in some cases do not reimburse even close to the cost of providing care," Morr complains. "There are many hospitals that are failing financially, not because of bad decision-making but simply because of the reimbursement system. These are institutions that have a very disproportionate share of government-reimbursed care. These places can be managed well and still be at financial risk because of the nature of their clientele and who pays for their services."

That's one reason hospital costs are rising for everyone else, hospitals say. And to the extent that technology also might be helping to fuel health-care inflation, Morr points out that almost insatiable consumer demand is fueling the high-tech trend. Consumer demand may be so great, he says, because of the nature of insurance reimbursement.

"Health care is a very strange creature in that the person who pays the bills is not the direct consumer," Morr explains. "That is a major factor in health-care costs in this country. It's not like you and I going into the store and buying a VCR and we have to pay for it. It would be nice if we could go into the store and have our boss pay for it, because we'd go in everyday if someone else was paying the bill. It is understandable, then, why people want the best, the latest technology in the most convenient location."

"Frankly, we've spoiled ourselves with regard to access to technology," agrees French, but the emotional causes are hard to argue with. "When you or I or our mother comes into the emergency room, we want the best and latest equipment that's available."

With the health-care picture including such factors as reimbursement shortfalls and the voracious consumer appetite for health care, hospitals says it's wrong to blame spiraling costs on competition. After all, Morr says, the regulation of yesteryear didn't slow health-care spending. "There are going to be those who say that competition hasn't worked either, in that it has not stemmed the growth in aggregate spending on health care, and they may be right. But maybe the reason is that that's not the problem, regulation vs. non-regulation of the provider."

Hospitals, he says, welcome the competitive mode because it gives them more freedom to operate like a business and seek ways to run the business more efficiently. Those ways more and more are involving cooperative efforts, Loveday of Methodist adds, and hospitals would like the freedom to cooperate even more.

"The question is how do you cooperate and meet community needs on one hand, and still live within the antitrust laws, which we are all held accountable to," he concludes. "Right now, the law is fairly restrictive on the level of cooperation that hospitals can pursue with each other, but I think there's a much stronger readiness to pursue cooperative ventures."
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Title Annotation:hospitals say that competition is good both for them and the patient
Author:Kaelble, Steve
Publication:Indiana Business Magazine
Date:Nov 1, 1991
Words:2844
Previous Article:Enough talk.
Next Article:Getting down to business.
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