Investment Opportunities in Physician-Owned Hospitals
The U.S. Healthcare is becoming complex with its ever-growing expenditure on healthcare, need for performance improvement, and the goal for achieving universal health care. Affordable Care Act, a legitimate trial to reform healthcare, imposed ban on establishing and expanding physician-owned hospitals, a niche popular for arranging luxury care and forging profits. Before starting a healthcare company to acquire vulnerable physician-owned hospitals or investing in a new hospital in competition with rural non-profit hospitals, it is beneficial for an entrepreneur to dig into the market strategy of hospital care. The information shared in this article is a picture of hospital structure, billing for services, flow of money in a value chain, valuation, factors affecting investment, fate of the physician-owned hospitals to favor entrepreneur, and scope in making profits.
Community Hospital; Physician-owned-hospital; Affordable Care Act; Medicare; Medicaid
At a Glance
- Healthcare trends in the USA
- From community hospital to physician-owned hospital (POH)- Where to invest?
- Source of revenue
- Paying for hospital services
- The Affordable Care Act and POH
- What would happen to physician-owned hospitals?
- Investment options
- The final take
Out of every $6 Americans spend, 1 $ is spent on healthcare. Investors admit that industries other than energy and manufacturing are far more productive, especially the healthcare industry. Healthcare sectors, specifically, hospitals can be an excellent investment opportunity for an entrepreneur inclined towards healthcare.
U.S. economists point out 0.6% surge in the currency spent on hospital care in 2014. This bit of information hooked us on the road to figure out the model of hospital funding, administration, market strategy, and the impact of Affordable Care Act on the hospitals, particularly, physician-owned hospitals.
Healthcare trends in the USA
The United States has the most expensive health care system as compared to other countries across the globe. A sum of $2.9 trillion accounts for nearly 17.4% of GDP of a nation. Any clue why these figures ring the bell? It was the total national health expenditure of U.S. in 2013! Though, 20 cents of every $1 spent on healthcare is used in marketing, underwriting, administration and making a profit.
Figure 1: Expenditure based on specific services
By all means, the U.S. healthcare system has got the edge, notably in precautionary cancer screening, with its advanced research and equipments. Going by records, the US has the highest survival rate of cancer patients. On the other hand, the U.S. healthcare system exhibited low performance in specific areas, such as access, equity, quality, and efficiency, in comparison with low revenue Asian and European countries. An article Mirror, Mirror on the Wall, published by Commonwealth Fund, 2014, focused on below normal standards in access, equity, quality, and efficiency of health care in the U.S.
Figure 2: Chart displaying the performance of U.S. Healthcare at specific areas
From Community Hospital to Physician-Owned Hospital (POH)- Where to Invest?
Which hospital model is best for an entrepreneur’s investment? It depends totally on the type of hospital, the structure of administration, the source of revenue, and profitability of the business model it follows. For that, the entrepreneur should have a good understanding of the types of hospitals in the US.
Figure : Types of Hospitals
The focus of the investors have now shifted to either for-profit or non-profit hospitals as there is nothing much an entreprenuer can directly get by investing in government hospitals.
Physician-owned hospitals (POH) are investor-owned, for-profit hospitals in which a physician or a direct family member may be an owner or investment partner drawing share in profit perhaps as equity, debt or investment interest. These models are popular as single specialty hospitals, such as orthopedic, cardiology, etc.
In POH, the healthcare is directly supervised by the physician. These hospitals usually maintain an optimum nurse-to-patient ratio which ensures personalized approach of patient care, and delivery of highly-defined quality care.
In community hospitals, the healthcare is controlled by administrative and management departments of hospital which in turn are under the influence of individuals possessing little insight into the medical procedures. A physician is employed and compensated on a monthly basis.
Based on the recent data published by American Hospital Association, there is upsurge in the number of hospitals in the past decade.
Figure 3: Total number of U.S. registered hospitals, 2013
Source of Revenue
Whatever be the type of hospital, the ultimate inflow of currency in a hospital is from the consumer payment for services or more precisely payment for performance.
In the US, the compensation for services in hospital industry involves a third party, in addition to the service provider and the receiver. The cost of hospital services vary among the public, private health insurance companies, third party payments, and out-of-pocket, self-paying consumers. The highest price index marked on self-paying, out-of-pocket consumers and the least for the consumers under the coverage of government programs. The pricing for private health insurance companies is a one-to-one negotiation indexed between the highest and lowest prices.
Figure 4: Expenditure needs met through insurance companies
Paying for hospital services
1. Medicare and Medicaid: A hospital receives major portion of funding through public health insurance which are government driven programs like Medicare delivering services to population above 65yrs or to children with social security disability insurance. Medical services of low-income group are funded through Medicaid, however children from low-income group apparently above the standards set for Medicaid are funded by Children’s Health Insurance Program.
2. Private health insurance: The consumers of private health insurance and particularly, the uninsured people paying from one’s own pocket are affected because of lack of transparency in these billing techniques. To compensate for revenue lost in patients covered under government programs, hospitals provide the consumers with private health insurance, at highly discounted prices for service which is anyway higher than the actual value for the service.
3. Out-of-pocket: A person under Medicare pays $6000 for a hospital service might have to pay $30,000 out-of-pocket for the same service received from the same hospital. The uninsured population mostly comprising of the middle-class population not included in private health insurance programs or the very high income group getting services from physician-owned or specialty hospitals are burdened with inflated prices.
The individuals enrolled in Medicare plan have almost doubled from 24% in 2013to 44% in 2014. The effect of any changes in government policy to alter the Medicare or Medicaid would be reflected in the revenue of the hospital.
Physician-owned hospitals enjoy a profit margin of 20-35%. The prices charged by them are extremely high because of the quality of care delivered, not any less than a five-star hospital providing luxury along with personalized care yielding high patient satisfaction. A different set of physician-owned hospitals is efficient, at the same time cost effective, easing the burden on the insurance companies and in turn the consumers.
The first round of clinical information obtained from the American Medical News to reward hospitals indicate 9 out of 10 performing hospitals were physician-owned hospitals, Treasure Valley Hospital in Boise, Idaho ranked no.1.
There is a strong opposition from a group of people who disagree with the physician-owned hospitals in respect to cherry-picking of profitable patients. The argument powered by these people point to the physician’s attitude to providing services to the healthier and wealthier consumers for their personal financial incentives. In consequence, the community hospitals deal with patients under the coverage of government programs.
This building of tension initiated the government to come up with healthcare reforms. March 23rd, 2010 marks the implementation of Patient Protection Affordable Care Act, apparently the benchmark in healthcare provider and consumer network.
The Affordable Care Act and POH
Value-based care is a one-stop solution to limit the expenses and add to the quality of healthcare.
The trend of physicians being a part of hospital management progressed until the implementation of Affordable Care Act. Section 6001 of the Affordable Care Act of 2010 amended section 1877 of the Social Security Act has imposed additional requirements for physician-owned hospitals to qualify among the other hospitals. However, exceptions are given to rural providers. This Act imposed severe restrictions on the already existing hospitals from expanding and also from starting up new ones.
What would happen to physician-owned hospitals?
With the strict imposition of law, it is highly impossible to get physician investment before starting a new physician-owned hospital. However, the task is simplified for already existing hospitals. The inherent quality to deliver cost-effective high-quality services contributed to patient satisfaction, positioning them strong in the race.
While the physician-owned hospitals without Medicare certification can go with other options of merging with healthcare organizations, it has an adverse impact on pricing of the other set of for-profit hospitals.
Healthy competition among peers would enhance the quality of care provided at minimal prices. The merging or termination of physician-owned hospitals eliminated competition for the community and other for-profit hospitals to dispense high-quality care at minimum prices on par with physician-owned hospitals.
The possible modifications in the ownership template can be considered to meet the requirements of a “whole hospital” mentioned in Starks Law.
- Merge with a hospital but maintaining ownership of a physician.
- Merge with a hospital or organization but sell the ownership of a physician.
- Completely dissolve the hospital from a business.
Figure 5: Changing pattern of physician ownership
The physician-owned hospitals came up with other options to continue in practice.
- Public equity market share is merging the hospital into a corporation whose shares can be sold in share market. In other words, converting the physician shares to public shares.
- Affiliate with physicians by employment without a direct equity.
- Real estate or equipment leasing service is an indirect ownership arrangement.
The hospital market is concentrated on capital with the potential areas for investing being real estate, medical equipment, IT sector, and skilled labor. According to the annual capital survey, 2012, conducted by the U.S. Census Bureau, of the $90.7 billion invested in the health sector, $56.7 billion was in the hospital industry, and $42.8 billion was in equipments of healthcare out of $ 47.9 billion invested in structure.
- Real estate: Theapproach in services delivered by the hospitals towards an out off the campus approach paved a way for the huge traditional hospitals to liquidize the property and invest for expanding the business. According to Laca Wong-Hammond, leading healthcare real estate firm, Weill Cornell Medical Center, New York City gained $65 million by selling 21,000 square feet of space for $3,095 per square foot to an investment banking firm.
- Medical equipments: It is a tricky sector where if the capital is not utilized properly can deploy the investment. After the implementation of Affordable Care Act, the expense spent on diagnostic equipments has seen a tremendous downfall. With the growing trends of acquiring equipments on the lease, it is wise to invest on cardiac, laparoscopic, surgical staples, interventional lung devices, diagnostics, imaging, and other sophisticated equipments.
- IT sector: After implementation of new legislation, 80% of the hospital IT applications need to be upgraded by spending millions of dollars in the coming years. Electronic-health-record systems and Clinical-decision-support tools help to maintain transparency of patient’s records. It is helpful in duplication of labor and diagnostic tests; adverse drug interactions providing quality care and minimize the chance of hospital readmission.
Hospitals are in need of capital investment for creating new facilities, acquiring new equipments, renovating or replacing old infrastructure. Large hospitals targeted for acquisition of small hospitals to enter regional market. A report from Bloomberg intelligence shows 87 deals worth of $9.2 billion so far and $7.9 billion for fiscal 2014. Some of the leading companies include community health system, HCA Holdings Inc., Tenet Healthcare Corporation, Universal Health services, and Life Point Hospitals.
The Final Take
POH, with its potential for future growth, can prove to be an interesting investment opportunity. An entrepreneur can utilize the broader opportunities available for investment in hospital sector be it the attractive forthcoming medical tourism, investing in shares or even starting up a company to acquire hospital and build a network of hospitals concerned with physician-owned-hospitals. For-profit hospitals strongly built on financial and operational strategies also provide enormous opportunities for an entrepreneur to investment.
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