America's Rural Hospitals Are Dangerously Fragile

This is the story of a small-town, publicly-owned hospital that, after thriving for decades, is struggling and now in all likelihood about to be appended to a large regional health-care system. The tale of Berger Municipal Hospital is, like that of many sectors of the American economy, one defined by industrial consolidation and the costs that come with it. The story begins in 1929. That year, the city fathers of Circleville, Ohio, in the south-central part of the state, dedicated the town’s new hospital, funded partly with money willed by a local patron named Franklin Berger.

The hospital opened at a time when other small towns had been building them, too. Turn-of-the-century medical breakthroughs such as disinfectants, sanitary surgery, and new technology like X-ray machines (invented in 1895) helped transform hospitals from last-resort warehouses for the sick poor (the rich were usually treated at home by private doctors) into places where all members of a community would go to receive care. Mothers began to deliver babies in hospitals instead of at home, and birthing (and, in more recent years, prenatal care) became big business for community hospitals. Not only would Berger help improve the health of Circleville residents, but it was expected to be a sign of modern welfare that would attract business executives and workers. As was typical, Berger was owned and operated by the city, and then, a generation later, jointly by both the city and surrounding Pickaway County.

Last November, however, Circleville’s voters chose another direction, one that, in other places, has resulted in an economic hit to the community—mostly in the form of job losses and stagnant wages—as well as a lowered quality of care. At the urging of city and county leaders, and Berger’s administrators, residents voted to allow local politicians and the hospital’s board to begin a process to turn Berger, one of the last publicly owned and operated hospitals in the state, into a nonprofit private corporation. Following that, Berger would most likely be integrated into a larger regional system, probably the Columbus-based nonprofit Ohio Health, with which Berger has an ongoing relationship. The hospital and the local leaders campaigned hard for that approval, but not because it was the ideal future they envisioned. They feared that Berger wouldn’t survive any other way.

Hospitals have been struggling—especially independent public and/or nonprofit hospitals located in smaller cities and rural towns. Last year, for example, the National Rural Health Association, a nonprofit, estimated that 673 rural facilities (with a variety of ownership structures) were at risk of closure, out of over 2,000. And with the new tax legislation, and events like the merger of the drugstore chain CVS and the insurer Aetna, the turmoil looks to get worse. In response, stand-alone nonprofit hospitals have been auctioning off their real estate to investors, selling themselves to for-profit chains or private-equity firms, or, like Berger, folding themselves into regional health systems.

The implications of those moves can be profound, as consolidation can hurt hospitals and the smaller cities and towns they’re located in. Not only are community hospitals vital to many places’ social fabric and image of themselves, but they are often the largest local employers now that manufacturing jobs have faded. “When I started here in 1999, we were coming off losing multiple thousands of jobs to globalization,” Tim Colburn, Berger’s CEO, says. Berger is now the biggest employer in Circleville, generating an estimated $50 million a year of economic activity in the area, including wages, the purchase of goods and supplies for the hospital, and follow-on spending, such as when hospital visitors eat in local cafes.

Fairfield Medical Center (an independent nonprofit hospital) in nearby Lancaster, Ohio, is the largest employer there. Bryan Hospital (also an independent nonprofit) is the largest employer in Bryan, Ohio, in the northwest corner of the state. The same is true of hospitals in many communities across the country: Health care in the U.S. accounted for $3.2 trillion in spending (about $9,900 per person) and 17.8 percent of GDP. Whereas a good local hospital was once seen as a way to attract employers, such hospitals have now become the primary employers. “And I don’t say that with any pride,” says Phil Ennen, the president and CEO of Community Hospitals and Wellness Centers, which includes Bryan.

Small nonprofit or city-owned hospitals seem like public assets, like roads or a sewer system. But they’ve always been hybrids—part social-welfare organization, part business. “It is that contradiction, that health care is both a public service and a private profit center, that our system has never resolved,” Beatrix Hoffman, a historian at Northern Illinois University and the author of Healthcare for Some: Rights and Rationing in the United States Since 1930, explains. “We’ve never had that moment every other country has had when they decided to have universal care. We haven’t, and so we have this contradiction continue.”

“Hospitals walk this fine line,” adds Nancy Tomes, a historian at Stony Brook University and the author of Remaking the American Patient: How Madison Avenue and Modern Medicine Turned Patients Into Consumers. “The nonprofits have to look like they’re a benevolent public trust, and yet, on the other hand, they have to behave like a local car dealership,” promoting their brands so they can make money. That balance is becoming  difficult to sustain as for-profit hospitals attract well-to-do (or well-insured) patients who can pay for expensive procedures, Tomes says—“Give me those cardiac bypasses!,” she jokes, is the cry of the for-profits. The nonprofits then feel pressure to keep up so they don’t lose their market.

Hospitals like Berger need to make a margin—a little profit—so they can plow cash back into facilities, increase wages, and hire new employees. Four percent is considered a healthy margin. Three percent is fine. Ennen, a former chairman of the board of the Ohio Hospital Association, the trade group for government-owned, for-profit, and nonprofit facilities in the state, estimates that only about one-third of Ohio hospitals are comfortably in the black. Another third have margins of less than 2 percent, and the remaining third are losing money. Berger makes about 1 percent. The same goes for Bryan. Last August, the credit-rating agency Moody’s downgraded the Lancaster hospital’s $92.8 million in outstanding bonds—meaning analysts thought the hospital was at greater risk of not being able to pay its debts. Moody’s cited operating losses for the first six months of the 2017 fiscal year and “expectations that performance will remain modest.”

One reason why performance may remain “modest” is that such hospitals, like many others in the U.S., live off of government payouts. The United States relies on a two-track system to pay for medical care: private and employer-subsidized health insurance, and federal and state health-insurance programs like Medicaid (the federal health-insurance program for low-income people) and Medicare (which covers Americans over 65). (Military veterans have the additional option of the Veterans Health Administration system.) As of 2015, Medicaid and Medicare accounted for 40 percent of personal health-care purchases, private insurance 35 percent. And since rural residents account for an outsized portion of Medicare expenditures, it’s no surprise that roughly two-thirds of the revenue for all three of these Ohio hospitals come from Medicaid and Medicare. “I live in a conservative community, and I tell them, ‘If you’re opposed to socialized medicine, you are way too late,’” Ennen says, referring to how much public money hospitals already receive. “That horse left the barn a long time ago.”

Ohio’s governor, John Kasich, unlike some other Republican governors, forced a reluctant legislature to adopt Medicaid expansion as provided for under the Affordable Care Act (ACA). In 2008, 36.1 percent of Ohio residents ages 19 to 64 who lived at or below 138 percent of the federal poverty line had no health insurance. After expansion, that percentage fell to 14.1 percent. No wonder Ennen calls expansion a “godsend”: As more people gained health insurance, the hospital swallowed fewer unpaid bills, and more people were able to use the facility in the first place. Small-town and rural hospitals are also supported by Medicare “extenders”—extra payments designed to help them survive. There’s a low-patient-volume extender, for instance, a rural-ambulance-service extender, a Medicare-dependent-hospitals extender. The payments that flow from the Children’s Health Insurance Program (CHIP) are another important source of revenue.

The new Republican tax legislation threatens all these. The tax cuts eliminate the ACA’s individual mandate. Healthy younger people may drop insurance, helping to drive premiums for everybody else skyward. Then, even those who want insurance may be forced out of it if they can no longer afford it. After the ACA was passed in 2010, some employees, like those who did not work enough hours to qualify for ACA-mandated employer-provided insurance, shifted onto newly expanded Medicaid. But both Medicaid and Medicare face big cuts under the new law, with possibly more to come. “I said to the Republican House delegation [from my area], ‘You think these people can get off Medicaid, find jobs, and won’t need to be on Medicaid anymore?’” Ennen recalls. “I do not disagree there are jobs out there for able-bodied people, but there’s no health care tied to those jobs anymore. You’re asking people to take jobs and lose health-care coverage.” And even if they are covered with a new job, Ennen argues, often the employee’s share of the payment can be far too expensive. So they’ll do without, and not use his hospital, or use it even if they’re unable to pay the bill.

In a last-minute deal, Congress extended the funding for CHIP through March, easing the immediate concern of a cash crisis, but doing nothing to end the uncertainty. (And there are concerns that funds might run out sooner than that.) If CHIP and the extenders were to go away, Ennen says, that could mean a $2.3 million yearly loss to Bryan Hospital. “I have spent the past 96 hours trying to make people in D.C. realize they are about to do something that will really hurt,” Ennen told me when we spoke as the final bill was being hashed out in the House and Senate.

Consolidation, naturally, is sweeping the industry partly as a defense against this turmoil and partly as a way for hospitals to gain some negotiating power. According to the economist Martin Gaynor of Carnegie Mellon University, there were 1,412 hospital mergers between 1998 and 2015, and 561 in just the five years from 2010 to 2015.

Health-care consolidation in general worries Ennen as his hospital becomes an ever smaller fish in a pond filled with whales. “The more health care moves towards consolidation and the corporate world—well, Aetna sends letters out telling us what they will do with zero input from us,” Ennen says. “CVS will continue that. It’s hard for me to figure out how to have a conversation with CVS or Aetna. I feel less empowered today than I did yesterday.” Ennen doesn’t know how exactly the CVS-Aetna merger will affect his facility, and Troyen Brennan, the chief medical officer for CVS Health, says Ennen shouldn’t worry that the merger will change Aetna’s position in the insurance marketplace vis-a-vis hospitals. Aetna, Brennan argues, won’t have any more market power than it did before. But the merger is symbolic of what Ennen fears will be a health-care oligopoly that leaves his own hospital with less control over its own fate.   

Given this landscape, it’s no wonder Circleville’s hospital chose to join a larger health group. Colburn, Berger’s CEO, believes that’s the only way to maintain a local hospital that can serve local needs. While a deal hasn’t yet been worked out, Berger will likely be leased to Ohio Health. Ohio Health’s payment of the lease will take the form of investments in facilities, new specialists, and training and education for staff. That way, at least Berger could remain somewhat autonomous and local.

Other hospitals, including some in big cities, have chosen different paths when they’ve faced some of the same pressures. Some have used sale-leasebacks to real-estate investment trusts (REITs). In a sale-leaseback, a hospital sells its facilities, and then leases back those same facilities from the REIT. Such a deal can yield a lot of cash, but, according to Eileen Applebaum, a senior economist at the left-leaning Center for Economic Policy and Research, “The rent payments reduce the operating surplus of the hospitals, many of which already faced challenging economic circumstances.”

Some hospitals have been bought in leveraged buyouts by private-equity shops. For example, in 2008, Capella Healthcare, a chain of hospitals owned by the private-equity firm GTCR LLC, leased the city-owned hospital in Muskogee, Oklahoma. It subsequently executed a deal with a second facility, Muskogee Community Hospital, in which its lease payments are put toward eventual ownership of the hospital. The hospitals changed hands again when a REIT, Medical Properties Trust, purchased Cappella for $900 million. In April of last year the hospitals were flipped a third time when RegionalCare Hospital Partners, a chain owned by the private-equity giant Apollo Group absorbed Capella in a $650 million deal.

This merging, semi-merging, and buying out is of a piece with what’s been happening to airlines (Delta-Northwest and United-Continental), silicon chips (Broadcom–Qualcomm–NXP), and telecommunications (AT&T–Time Warner). Hospitals, however, are different. Consumers don’t usually pay directly for most of the expense—insurance companies or governments do. And while the same kinds of cost-saving plays—“synergies”—used in other consolidating industries can be run with hospitals, such maneuvers can benefit investors far more than the commonweal.

Increasing industrial concentration can work to the detriment of hospital workers, patients, and communities. Workers’ wages have stagnated or fallen as more hospitals have been taken over. As Ennen points out, any acquirer of Bryan Hospital would likely outsource jobs like food service and janitorial to contractors as a way to lower expenses and boost margins. Billing would be sent to some corporate headquarters far away. Agency nurses could pick up more hours from full-time nurses.

Also, property could be “monetized.” That’s exactly what Cerberus Capital Management did when it bought a small chain of community hospitals in the Boston area called Caritas. Cerberus, founded by Stephen Feinberg, an advisor to Donald Trump, created Steward Healthcare System in 2009 to buy Caritas and then squeezed cash out of Caritas’s assets through sale-leasebacks and other financial engineering, according to a report by Eileen Applebaum.

Exactly what all these maneuvers did for Steward’s balance sheet is still a little murky, and it did not respond to a request to answer questions. (The company is currently in a feud with the state of Massachusetts for not releasing financial information as required.) But it’s clear that investors in for-profit hospitals are finding it difficult to make money, especially when the hospitals are strapped with debt from executing financial moves such as issuing high-interest junk bonds and then using that pricey debt to buy facilities. Even big operators like Tenet Healthcare and Community Health Systems have struggled.

Consolidation can drive costs up and quality of care down. Carnegie Mellon’s Gaynor says costs can rise 20, 30, sometimes 50 percent after consolidation. “If the reason for your merger is to enhance your leverage with insurers, you’re not focused on doing better,” Gaynor says. “So guess what? You don’t.”

A 1999 study by Daniel Kessler and Mark McClellan found that “treatment of [heart-attack] patients in the least-competitive areas became significantly more costly than treatment of [heart-attack patients] in competitive areas.” More competition, they found, “had the potential to improve [heart-attack] mortality by 4.4 percent.” When Gaynor and his colleagues studied hospitals in Britain’s National Health Service after a series of 2006 reforms introduced more competition, they found that the more concentrated the market, the poorer the quality of care.

But the deepest scars of consolidation can be in the communities that have long hosted independent hospitals. If one closes, for example, babies are no longer born in town, and mothers may have to drive longer distances for prenatal care. And when a hospital becomes the largest employer in a town, it takes on the civic burdens that may have once been borne by a large business. Ennen’s board, he says, feels a deep commitment to buck the trend and remain independent. He says the board tells him, “Employ as many as you reasonably can. Let’s churn the economy for the community we serve.” And so he does. He’s just not sure how long he can keep doing it.