This Week, Industry Snapshot Looks at
Hospitals

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Health Management Associates, Inc.

Magellan Health Services, Inc.

Tenet Healthcare Corporation

Quorum Health Group, Inc.

Universal Health Services, Inc.

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This Week's Industry Snapshot

The unfortunate legacy of fee for service healthcare in the U.S. has been overutilization. The cushy "inefficiency" that deep-pocketed payers and careless providers spawned has resulted in a backlash of sorts. Of all the segments in healthcare, hospitals have fallen victim to the most stringent cost cutting measures over the last couple of years, and many have failed as a result. Over 700 acute care hospitals emptied their beds between 1987 and 1995. Despite this, the hospital story is still one of overcapacity. In 1996 it is estimated that there were 1.14 million hospital beds nationwide, with demand filling only about half of these. This was largely a result of overzealous building in the fat years of the Great Society and Medicare expansion without regard for actual community need.

This development in conjunction with improved care over the years (reducing hospital stays) has led to a quandary. No community likes to see a hospital close down -- they want it to "be there" regardless of the degree of saturation in the market because healthcare still retains a vital social component, which makes a pure, rational economic calculus difficult, regardless of desirability. This outlook has led to a politicization of the capacity issue and has resulted in projections of only a 1% decline in capacity per year.

The hospital industry in the U.S. generates a staggering $400 billion in annual revenues and is America's largest employer. A leaner, meaner corporate environment has spilled over into this realm over the last decade, which strictly speaking is not ideally suited to pure business fundamentals. Ushering in the change, 20% of America's hospitals are operated on a "for profit" basis and function with consistently higher operating margins than many other healthcare segments, such as the margin challenged HMOs. These entities have certainly stirred the pot of public opinion, dredging up concerns regarding the quality of care in a managed environment and muddying issues surrounding what has to happen in order to insure that American healthcare remains the best in the world. Resurfacing repeatedly in the debate is the aforementioned capacity question.

A report by the Sachs Group, a healthcare consulting firm, concludes that demand for inpatient beds (overnight stays) is likely to drop as managed care strategies continue to take root. Studying the effects of managed care on Seattle, Washington, the Sachs Group extrapolated from this model and projected that yearly demand for beds in the U.S. will drop to 315,000 by the year 2000, with the average length of stay falling to from six to four days. If this scenario comes to pass, that is, if the U.S. turns into Seattle (scary), capacity issues will come to a head sooner rather than later.

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