Example

Case Note THE HEALTHCARE COMPANY

1. Is a market-driven approach valid for the health care industry? Do you support or oppose tradeoffs between care quality and efficiency? When comprehensive health care reform foundered early in the Clinton administration, government ceded leadership in health care delivery to the private sector. HCA and other for-profit entities naturally created effective, market-driven strategies. Some of these strategies, and the operating methods that went with them, were designed to contain costs, but they clashed with cultural values about health care. People felt that treatment should come through a healing relationship between physician and patient, not in a corporate environment where decisions are made based on dollars and efficiency dominates over caring. The primary ethical conflict in for-profit, managed care medicine is that managers are agents of shareholders with a duty to maximize return on investment while simultaneously having an ethical duty to maximize health care for patients. They must serve patient needs, but also hold costs down. This conflict of interest generates much criticism, especially by those who distrust unregulated markets, seeing them as prone to generate selfish behavior and unlikely to self-correct when abuse occurs. Those who defend HCA and corporate medicine can make the following arguments. Rationing of health care is inevitable. It is better to let private enterprise do it than to leave it up to government. Government bureaucracies are inefficient and stifle innovation. Rationing health care through market incentives does not reflect an absence of caring. On the contrary, it represents a broader definition of caring because efficient corporations will expand the delivery of medical care to more customers. It is not ethically wrong to sacrifice small, additional, and costly benefits to people with adequate health care in a system that will spread health care to other people who lack adequate medical care. The corporate model best alleviates the primary health care problem, which is rising, unreasonable costs. Competitive markets are self-correcting. Health care corporations will battle each other for customers. Those that provide poor care and service will wither and fail. Incentives arising in competition will lead to innovation. Medical care will improve.

Those who attack corporate delivery of health care can make the following arguments. For-profit health care reverses ethical priorities. Treatment need should be considered first, costs and profits last. It is unethical to pass up even an infinitesimal patient benefit

to make money for third parties such as shareholders. The incentive in for-profit health care is to lower costs and skimp on treatment. Medical care is a complex product. Consumers cannot judge outcomes the way they can evaluate the taste of hamburgers from one fast food chain to another. They cannot comparison shop. The size of organizations in the United States corporate health care system is growing. In the past many industries have become too concentrated and monopolies or schemes of restrained competition have emerged. This is an ever-present danger. Government regulation cannot be taken out of health care. The story of Columbia/HCA proves the point. Without strict regulation and oversight major abuses are bound to occur.

2. Is health care a basic right? Can it be limited if the cost of providing unlimited treatment is prohibitive? If so, should it be regarded as a commodity and limited by market mechanisms, or should it be rationed by government regulation? If not, how can the nation pay for it? Americans consider health care a basic right. Through Medicare, Medicaid, and employer health plan requirements government has arranged broad access to health care. Yet, like other rights, it is limited. For example, patients in managed care do not have the right to unrestricted care and some expensive treatments. Medical costs continue their rise and the nation cannot afford lavish, universal health care. Instead of a comprehensive rationing system imposed by government, market forces will determine how, when, and for whom care is limited. The HCA saga is a small, but conspicuous part of this trend. 3. How should the strategies behind HCAs rise to prominence be assessed? Were they fundamentally flawed, ethically wrong, and unworkable? Or were they appropriate and workable in the industry environment but badly carried out? Under Rick Scott, Columbia/HCA used an interlocking set of strategies to raise revenues and reduce costs. Motivate physicians by offering equity interests in hospitals. Dominate local and regional markets. Increase market share even if short-term losses are incurred. Vertically integrate health care facilities through acquisition of testing, outpatient, and home care businesses. Aggressively bill Medicare. Emphasize quantitative controls and performance measures coupled with strong pressures and financial incentives to show results. Centralize purchasing, information systems, and capital management to eliminate duplication and achieve economies of scale. Cut labor and material costs at hospitals.

Create national brand recognition for Columbia/HCA facilities.

Scott used these strategies to resolve problems in the health care market environment faced by both profit and nonprofit entities. Problems included the long-standing friction between doctors and hospitals, an overcapacity of hospital beds, fragmentation in delivery of services to patients, rising costs of treatment, and government imposition of complex Medicare billing procedures. These strategies are sound. With two exceptions, physicians equity and national branding, they are all used by nonprofit hospitals today. The main difference is one of degree. They were pursued with great tenacity by Columbia/HCA. Some of these strategies lure those who implement them into inappropriate tradeoffs between patient care and profit. When such strategies are coupled with strong performance pressures, ethical compromise is inevitable. After Scott, the new management team revised strategy. It stopped rapid expansion, ended annual bonuses for hospital administrators, ended physician equity relationships, sold the home health care business, stopped the branding campaign (as some hospitals dropped the company name), changed billing procedures, and increased audits of Medicare billings. The companys name was changed to HCAThe Healthcare Company. A comprehensive ethics program was put in place. A new Mission & Vision statement promising to recognize the intrinsic worth of each life, to treat patients with compassion, and to act honestly is in place. However, incentives in the market environment of HCA and other hospitals dictate that some of Scotts vision must still be carried forward, although less aggressively. 4. On balance, did HCA use health care resources more efficiently than competitors, or did it compromise care by shifting costs to patients and staff and moving the savings to executive salaries, dividends, and acquisitions? Beginning in the late 1980s and until its excesses caught up with it in 1997, Columbia/HCA had a run of rising revenues and profits. From 1989 through 1996 its annual net profit margin was between 6.1 and 7.6 percent, its annual return on shareholder equity averaged more than 17 percent, and its return on total capital ranged between 10 and 15 percent.1 This performance was better than that of competing, investorowned hospital chains and anecdotal evidence suggests that during these years not-for-profit hospitals generally struggled financially. So, on traditional measures for use of capital, Columbia/HCA was efficient. However, as critics suggest, its outstanding performance was achieved at the expense of patients, staff, vendors, and the government. It was accused of overbilling Medicare. Money that might have gone into patient treatment, salary, supplies and charity care went instead into the pockets of executives and stockholders. 5. HCA experienced terrible difficulties. Could they have been prevented? If you could go back in time, replace Rick Scott, and run the company, at what point would you choose to arrive and what changes would you make to salvage the good and prevent the bad? The difficulties experienced by HCA might have been prevented with several changes. A time traveler going back to replace Scott might choose to arrive in the early 1990s and consider the following advice.
1

Columbia/HCA Value Line (CD-Rom version), April 2, 1999.

Slow growth. The manic rush to expand may have diverted the attention of managers from qualitative issues and ethical standards. Reduce staff cuts and provide generous benefits. Avoid charges of understaffing and the animosity of unions. Be wary of strategies that impose high pressures for performance. Use of such strategies is a classic way to encourage corner-cutting by employees trying to meet profit goals. Work closely with government regulators to make sure that billing practices meet the letter of the law. Establish a Washington office and a strong government relations staff to track shifting political winds, work with agency staffs, and lobby for acceptance of company practices. Set up an ethics program. If the mission statement and ethics code used by HCA today had been adopted and strongly reinforced the company could not have engaged in some practices that led to its downfall. And, if the company was fined, the existence of the program would be a mitigating factor.