Current Business Practices and Financing the Health Care Industry In the US - Don't Work

 

My last post discussed current and historical business practices to ration medical care and increase profits by reducing reimbursement to hospitals and physicians while decreasing benefits to patients.  The net result of those practices is shifting the cost of care to patients or in the extreme case just not paying the bills at all.  The current situation at Hennepin County Medical Center was the case in point. 

This morning an article came out in the Star Tribune  HCMC is too big to fail, but Hennepin County leaders say it’s now on life support (1).  That well-worn description of being too big to fail misses the point that many large county hospitals have failed.  It did not matter how many services they provided ro the fact they were training physicians.  In one famous case all of the physician trainees were informed the hospital was closing and they needed to find a new training program. 

The most famous case was Hahnemann Medical Center in Philadelphia 2019.  In that case 570 trainee across 35 separate programs.  Hahnemann had been a safety net hospital for low-income populations for over 170 years.  The permanent closure of Hahnemann resulted in 20% increase emergency room volumes and an 80% increase in wait times. An additional 12-14 Pennsylvania hospitals are at risk of closing by 2031 largely due to reductions in Medicaid funding.

The Hahnemann closure was one of the first examples of what can happen to healthcare assets under private equity management.  In the case of Hahnemann, there was a debt financed purchase of the hospital. The real estate assets were spun off into private management while the hospital was left to pay off a high interest loan and went bankrupt 18 months after the acquisition.  There was controversy about the 570 residency slots and 6 local healthcare networks bid $55M – but courts eventually ruled that they were not assets.  The properties were eventually broken up and sold to recoup the cost of the bankruptcy.  The state of Pennsylvania passed laws to prevent hedge funds or private equity from interfering with healthcare businesses that are in the public interest and they require a 6 month notice with a closure plan for any hospital in the state.

Almost on cue – the New England Journal of Medicine (NEJM) came out with three commentaries (4-6)  on what can only be described as the predatory financing of healthcare.  For the record – I consider rationed healthcare and cost shifting and all the mechanisms associated with that - predatory financing.  Healthcare is about the only field I know where you can do the work, business managers can decide not to pay you, and they are backed up by some government regulation. It is not like the work is elective or some kind of scam.  In all my years of acute care psychiatry – I was not pulling people in off the street.  I was generally trying to solve severe problems that many other people had decided required hospital care and passed on to me.  Despite that consensus – some business manager could decide against reimbursement or decide the patient should pay the bill even if they thought they were covered.

The first paper looks at the issue of health care equity and the effects of private equity (PE).  Private equity companies generally raise capital to acquire companies, take control of them, improve their efficiency and then sell them in a fairly short period of time.  The general idea is that PE has substantially higher returns on investment than typical stock market.  As the PE industry has grown, the premium return for investors has become more debatable.

The first paper in the NEJM Perspective looks at the impact of PE on healthcare financing. The use the CDC definition of health equity:

“Health equity is the state in which everyone has a fair and just opportunity to attain their highest level of health. Achieving this requires focused and ongoing societal efforts to address historical and contemporary injustices; overcome economic, social, and other obstacles to health and healthcare; and eliminate preventable health disparities.” CDC

As noted in the previous post the safety-net hospital concept is there to address income and healthcare insurance inequity.  The Emergency Medical Treatment & Labor Act (EMTALA) law is another.  EMTALA is commonly recognized as a rule that no emergency department can turn a person away who requires that level of care based on ability to pay. 

The authors in this piece describe accumulating evidence that PE has reduced access to care for many vulnerable populations including people with rural, elderly, low-income, and racial and ethnic groups.  Several policy factors and failures have led to an expansion of PE investment. There is a concern that there is limited oversight of these companies compared with publicly traded companies.  The authors provide several examples of tactics used by PE firms that have led to the failure of the medical entity, reduced or no access for patients, and greater profits for the investors.

The first tactic is a sale-leaseback transaction. The medical facilities acquired are sold to an entity affiliated with the firm and leased back to the hospital or clinic at inflated rates.  During a dividend recapitalization the PE takes on additional debt to pay investors rather than investing in the medical business. They give an example of a system where these measures led to tripled debt while senior managers got large bonuses.

Quality of care has been a marginal issue since managed care took over medicine in the mid-1990s.  In the above example, quality of care declined to the point it was ranked among the worst in the state and it was eventually closed leaving residents no access to acute care. They cite increased deaths in emergency departments and after surgeries. The same company had a venture in another state that failed as well. The formula involved cost savings at the expense of employees (lay-offs, reduced FTEs, reducing physicians in favor of extenders, and cutting low margin services).  On the administrative side upcoding, surprise bills, and higher charges are used. As well as selecting younger and healthier patients. 

They suggest several fixes to the various PE problems that involve targeting the various management and accounting practices that can result in profits for investors, but closed hospitals, bad debt, and no access to emergency care for the patients involved.   Some of those suggestions include personal liability for some of the company officers and clawback provisions for profits made by some of these exploitative techniques.  There were no suggestions about adequate reimbursement for hospitals in the first place.

The second paper (3) discusses a political change at the Centers for Medicare and Medicaid Services (CMS).  Since the Trump administration is focused on denying that a lack of equity exists in the country they have changed the focus to efficiency. Efficiency as in free-market solutions is a long time Republican slogan that lacks any evidence that it is useful in healthcare.  The most significant piece of evidence that free markets do not work is the existence of Medicare and Medicaid and the remarkable number of people and services that they cover. Without those programs – none of that healthcare would be delivered and there would be considerably more morbidity and mortality.

The program titles have changed from States Advancing All-Payer Health Equity Approaches and Development to Achieving Healthcare Efficiency through Accountable Design (AHEAD).  It replaces equity plans with accountability plans including “chronic disease prevention, choice, and competition.”  On the choice side of the equation increased telehealth, and decreasing qualifications for networks and providers.  This seems to be a straightforward approach to decreasing quality to produce a cheaper product. The authors do not state that explicitly but say there is limited evidence it would work. 

The most likely outcome of AHEAD is that it will decrease investment in safety net facilities.  Combined with Medicaid funding reductions the impact on safety net hospitals will likely be significant. 

The final paper was about medical credit cards.  Before reading this paper – I could not think of a worse idea.  The threat of medical bankruptcy drives the for-profit medical industry in the US.  Most medical bankruptcies occur in the US.  That combined with medical charges and the way they are billed is the primary reason American are highly motivated to have health care insurance. At the time of this post the Annual percentage Rate (APR) of credit cards in the US is between 20 and 25% depending on credit rating and other factors.  About 8-9% of the population has medical debt. Three million owe over $10,000.  Since credit cards calculate daily interest – it could take 20 years to pay off this debt by paying the minimum amounts.

One in every 4 people with medical debt is using a credit cared to pay it off.  There can be incentives on both sides of the equation.  From the billing side – it is paid of on a timely basis.  From the consumer side – there can be delayed interest arrangements if the debt of paid off in a specified interval.  That has led to most medical credit card sign up occurring in medical offices.  Compared with the APR rates for typical consumer cards medical cards may be as high as 40% - people with the lowest credit ratings incurring the highest rates. 

Medical credit cards are complicated by the fact that insurance companies may not be paying the same rates for the same services that are being charged to cards due to negotiated deals.  The person paying cash pays the higher amount.  In some cases, people may qualify for medical assistance programs but they are not informed about this option.  The medical providers offering the cards may get a rebate in terms of lower transaction fees.

The overall conclusion of this final paper is that medical organizations should not actively market medical credit cards to patients. They suggest that the existing federal laws be expanded to provide transparency about terms of medical credit cards and offer more payment options. In my experience, no patient should be charged more than an insurance company for the same service just because they are paying cash and are not part of a negotiated fee schedule. Most of the health care organizations in Minnesota offer monthly payments with specified minimums – but the interest calculations may not be clear.

In summary what can be learned from the recent financial problems with Hennepin County Medical Center and these perspective in the NEJM.  First, the public and private financing of the US healthcare system is getting progressively more precarious.  There are more safety net and rural hospital failures, less quality care, and more expansion fo private equity investment.  Second, despite the emphasis on access and cost both of those measures are diminished significantly by the current financing structures. Despite the current administration’s emphasis on efficiency over equity there is no way efficiency can be maintained when there are large shifts in emergency department utilization and admissions due to the elimination of safety net hospitals.  Third – there are an endless number of ways the system can be gamed to make money or avoid regulation. Much of that gaming is in the form of rationing and cost shifting but there are also accounting maneuvers to make it seem like the required amount of financing dollars is going to medical care.  How is that possible in a system that has seen a 3,000% increase in administrators compared with a 100% increase in physicians over the past 50 years?

The only rational solution at this point is to eliminate the healthcare companies and go to a single payer system.  Single payer Medicare for all is an idea that is more frequently floated these days.  Medicare traditionally has vey low administrative costs but it admittedly is less intensive than managed care organizations. In the previous post I cite the Swiss system as saving a trillion dollars per year if applied to the US system.  I have seen experts debate how healthcare financing in other countries might affect the US.  I think the only way to find out is to bring experts from Switzerland to the US and suggest how to make that transition.

It is apparent that nether political party in the US is capable of the task. 

     

George Dawson, MD, DFAPA

 

References:

1:  Roper E.  HCMC is too big to fail, but Hennepin County leaders say it’s now on life support.  Minneapolis Star Tribune. March 8, 2026.

2: Rosenbaum L. Losing Hahnemann - Real-Life Lessons in "Value-Based" Medicine. N Engl J Med. 2019 Sep 26;381(13):1193-1195. doi: 10.1056/NEJMp1911307. Epub 2019 Aug 28. PMID: 31461591.

3:  Pomorski C.  The Death of Hahnemann Hospital. New Yorker.  June 7, 2021, Vol. 97 Issue 15, p30-37.

Excellent look at the chaos and fragmentation of health care that happens when a large safety net hospital closes and how it happens during a private equity leveraged deal.

4:  Yearby R, Alsan M. Private Equity's Transformation of American Medicine - Implications for Health Equity. N Engl J Med. 2026 Mar 5;394(10):937-940. doi: 10.1056/NEJMp2415615. Epub 2026 Feb 28. PMID: 41770029.

5:  Figueroa JF, Meara E. From Equity to Efficiency - Navigating Changes to the AHEAD Model. N Engl J Med. 2026 Mar 5;394(10):940-943. doi: 10.1056/NEJMp2514355. Epub 2026 Feb 28. PMID: 41770017.

6:  Alvarez A, Sloan CE, Ubel PA. Debt by Design - Navigating the Hazards of Medical Credit Cards. N Engl J Med. 2026 Mar 5;394(10):943-945. doi: 10.1056/NEJMp2514612. Epub 2026 Feb 28. PMID: 41770001.

Do Safety Net Hospitals Need A Safety Net?

 

 

This is about the current financial crisis at Hennepin County Medical Center (HCMC).  It is one of the flagship medical centers in the State of Minnesota.  It provides unique care that is not available anywhere else. It was the first place I interviewed at for a residency position out of medical school back in 1981. The first person I talked with was (the now late) Mark Mahowald, MD.  Dr. Mahowald was a world-famous sleep researcher and long-time head of the Hennepin Healthcare Sleep Disorder Center.  He has over a hundred publications on sleep and its implications.  He and his colleagues also trained physicians from several other disciplines in sleep medicine in their fellowship program.  That clinic is being shut down because of budgetary problems at the hospital.

After getting selected into the program at the University of Minnesota – half of my residency class (n=8) went to St. Paul-Ramey Medical Center (SPRMC) and the other half went to HCMC for the rotating internship year.  In those days both were designated as county hospitals.  That meant they were subsidized to some extent by the counties where they were located and mandated to treat anybody that showed up at their door whether they had health insurance or not.  When you have that kind of mandate you develop services that nobody else has, because you are the provider of last resort. You also develop expertise in treating people with the most severe problems largely because that is a group defined by social determinants including whether they have healthcare insurance.

Both hospitals are Level 1 Trauma Centers.  Both hospitals have burn units.  Both hospitals have extensive Emergency Medicine services closely aligned with paramedics.  Behavioral emergencies are most likely brought to these hospitals adding to the psychiatric training. Both hospitals treat the most people who require involuntary psychiatric treatment in the state.  The specialist physicians in both places are excellent clinicians and teachers.

After I completed my training – I went back and became staff at SPRMC.  I enjoyed working at a county hospital.  Reimbursement was not great, but I liked seeing people with the most severe problems.  I liked close relationship with consultants in every department and the fact that we had a certain esprit de corps.  We were all squarely focused on providing the best possible care to people whether they could afford it.

SPRMC and HCMC were on parallel courses until the 1990s.  At that point the physician group affiliated with SPRMC decided to cede control of the hospital to HealthPartners – a managed care company in 1993. Prior to that the facility had been public since its 1872 founding as the City and County Hospital, later becoming Ancker Hospital (1923) and St. Paul-Ramsey (1965).  The rationale for the merger was that SPRMC was in a market saturated with hospital beds and it assured access to an increased number of patients needing hospital beds.  It also provided access to the specialty physicians of Ramsey Clinic the associated medical group.

In the meantime, Hennepin County Medical Center remained a county hospital.  The county owns the land, physical plant, and assets.  In August 2025, the Hennepin County Board took control of the hospital from a volunteer board – The Hennepin Healthcare System that had managed the hospital since 2007.

In February 2026, the county board warned that the hospital could close as soon as May of 2026 if solutions to a funding crisis could not be found.  Repurposing a 0.15% sales tax was proposed as well as staff and programming cuts.  The tax was originally in place to pay off financing for Target Field and that should happen in the next year.  Increasing the sales tax to 1% at that point will provide $280-$341M in annual funding.  Since 40% of HCMC patients come from outside of Hennepin County this was thought to be fairer than increasing the property taxes for residents of the county.

In researching this article, I found a document on a Minnesota State web site entitled Minnesota Hospital Uncompensated Care and Its Components, 2013 to 2023. The range of uncompensated care for HCMC during that time frame was $37.5M in 2013 to $64.2M in 2023.  The highest years in the range were $81.5M in 2022 in and $65.3M in 2021.  Total uncompensated care for the entire time was $453M.  There are estimates in various documents that the uncompensated care could reach as high as $200M/year.

The uncompensated care figures can be put into perspective in several ways.  First – these numbers are the largest of any hospital in Minnesota including some with a larger bed capacity.   Second – they have become progressively larger over the years compared to many of the other 131 hospitals that have relatively flat uncompensated care totals.  Relative to the 2025 HCMC operating budget of $1.57B, the uncompensated health care for that year was is estimated at over $100M or about 6%.  There are estimates this figure will stay at $100M/year and an addition loss of $1.7B in Medicaid Revenue over the next decade.

In the short term, significant cost cutting measures have been put in place. They include shutting down 100 beds (461 to 361).  There have been staff layoffs with 100 positions eliminated.  Several programs including Sleep Medicine, acupuncture, and chiropractic care have been eliminated.  The geriatrics program has been incorporated into primary care.  Retirement fund contributions for employees have been frozen. 

But the real crisis at HCMC is that they are not being compensated for the services they provide.  It is a crisis of the American healthcare system rather than of just one hospital.  It is continually misunderstood and mismanaged at the political and business level. There is a general lack of awareness over the past 40 years that American healthcare has been taken over by business entities.  The disappearance of county hospitals like SPRMC was one of the first signs. As a physician, the other signs included the disappearance of staff who assisted with all the paperwork and a new billing and coding system that depended on that paperwork.  In my case that was three fulltime people.  The billing system was relative value units or RVUs that could be assigned a conversion factor to determine what reimbursement might be.  RVUs were tied to the billing document that was structured to contain a certain number of bullet points necessary to qualify for that RVU.  It was an easy formula to ration reimbursement – just reduce the multiplier or deny the care all together.

All that sounds boring and technical.  It was based on trying to quantify a purely subjective system.  To cite one example, from my experience in 2 successive years of billing and coding audits I went from the top ranked physician (a dubious honor) to the lowest rank without making any changes in how I recorded the notes. The only thing that changed was the judgment of the people doing the ratings. To make matters much worse, physicians learned that we were now legally responsible for any errors and that in the worst case we could be held liable for wire fraud under RICO statutes if an erroneous bill went out in the mail.  Before 911 - there were FBI raids of physician offices looking for these errors. 

When I look at the independent auditors’ data available for HCMC for 2024 – it seems like there is a straightforward loss of $40M (net operating revenue – net operating expense).  At the same time care patterns (average length of stay and average daily census) were flat.  Case mix acuity was slightly higher and the auditors’ comment that there are often no good discharge scenarios for the patients.  Discharges were higher (17,090 compared with 16, 502 the previous year).  Work RVUs (WRVUs) were 5.2 % higher.   These WRVUs are reflected in a gross patient charge figure of $3.66B.  From that figure there is a $2.1B deduction based on rate discounts with various providers and a slight add back for government subsidies that leaves a net patient service revenue of $1.337B.  Patient services are discounted by about 60% due to the way governments and insurance companies operate. 

If it seems like that is a steep discount for quality services – it is. And that discount is not evenly distributed across services. The best example is the mental health (or behavioral health) carve out.  That means that a managed care company manages mental health problems through separate system that typically reduces reimbursement to physicians by an additional 20% relative to medical surgical providers.  Medicaid carve outs typically pay 20-30% less than Medicare. The managed care system can also simply deny care (and payment) to anyone admitted to a hospital based on their subjective review of the hospital record.  In any individual patient the range for discounting services can be anywhere from 60 to 100%. 

How did the USA arrive at such an irrationally financed system of health care?  The short answer is that it was a government facilitated transfer to for-profit businesses.  When I say government facilitated – I mean all the regulations I have talked about so far and more make it easy for health care companies to make huge profits.  They have taken very locally managed businesses focused on service and quality and built large networks focused on profit and shareholder wealth.  In the political landscape this has been facilitated by a party that uses the physician-patient relationship to leverage an underlying agenda of dictating and in some cases criminalizing healthcare available to women and accusing people with no healthcare of being lazy. The problem they say is that people are not working even though most workers can not afford health care premiums especially due to the current administration. 

There are obvious solutions that American politics ignores.  Here is one that is truly cost saving, covers everybody, and provides at least the same level of high-tech healthcare as the current system while saving a trillion dollars a year.  But don’t expect it anytime soon.  Despite all the talk abut the high cost of healthcare – the real rationale behind this system is shifting money to the people at the top – businesses, CEOs, and investment funds.   The people operating this system have no interest in universal coverage or quality care.  They see a large pool of premiums and government subsidies and are focused on how to get as much of it as possible.  There is not an easier path than denying care to patients and steep discounts to hospitals and physicians.

That is the real crisis for HCMC.  They are the safety-net hospital for all those people that commercial and government insurers will not cover. They take more government discounted payers than anybody else and even then, have difficulty enrolling the uninsured in those programs.  They provide a massive level of high-quality service to these folks.  They have 239 trainees in 20 different disciplines including 29 residents in psychiatry.  Time to stop pretending that this crisis is not the result of an irrational system and start funding HCMC like it would be funded in a rational system of care.  

Like Switzerland for example…

 

George Dawson, MD, DFAPA

 

References:

1:  Hennepin Healthcare Financial Reports (2022, 2023, 2024):  https://hennepinhealthcare.org/about-hennepin-healthcare/financial-reports

2:  Hennepin County 2025 Operating Budget:  https://www.hennepincounty.gov/-/media/hennepinus/your-government/budget-finance/documents/2025-operating-budget-book.pdf

Supplementary 1:  The Swiss have roughly three times the number of psychiatric beds per 100K compared to the US.  Just another sign that the US system is rationed to make money for the people at the top (see bar graph):  https://real-psychiatry.blogspot.com/2018/07/governments-and-psychiatric-beds.html

Supplementary 2:  I tried to make the above essay as focused as possible on the root cause of this financial crisis.  There are a lot of complicating factors including the demoralization and anxiety of the staff.  It is very common for example to scapegoat the staff for financial crises.  It sems like the most common administrative approach used in healthcare.  It reads like this in staff meetings: “We are in a crisis because you are not productive enough.”  And by productive they mean not generating enough RVUs through patient contacts.

Let me describe a hypothetical scenario of what happens to a typical medical staff.  Staff meetings occurred at the time of the changeover to RVUs.  Prior to this change every physician had assigned jobs and was busy seeing patients all day long and doing the associated work.  Suddenly RVUs are calculated and there is a suggestion that not everyone is pulling their weight (not everyone is producing the same number of RVUs).  The administration decides there will be a 10% holdback of everyone’s salary until all staff have met their minimum RVU quota.  Before that announcement everyone was quite happy with their world and colleagues, but suddenly there is a competitive factor that has been artificially introduced.

It becomes clear that everyone has met their minimum RVU quota.  At a new meeting each clinician now finds that they have been billed for any assistance they get from administration as well as the lease of the old building they are working in.  They have to pay for that bill in RVUs.  At another meeting the RVUs are recalculated after a staff person points out the administrators were using the wrong calculations.  In individual reviews with the head administrators, physicians find that research and teaching do not count toward reimbursement – only RVUs though direct patient contact. Some staff are reluctant to teach due to the administrative burden and the lack of reimbursement or even good will.  Some staff find themselves travelling to distant clinics just to get enough RVUs.  Some staff quit and move to a non-RVU based system. Some staff reduce the time spent with patients to increase their RVUs and salary. 

The bottom line for this post should be that no matter how many RVUs that are compiled – if you do not get paid for most of that work – it is a losing and demoralizing proposition that is not the fault of an overworked and conscientious staff.  The staffs that I worked with in the above scenarios were all hard working and focused on doing the right thing.  In many cases they spent too much of their time and energy trying to compensate for administrative blunders and an inadequate reimbursement structure because they had the market cornered in poorly compensated or uncompensated care.     

Supplementary 3:  Length-of-stay (LOS) is a huge factor in rationing.  Diagnosis Related Groups (DRGs) are estimated lengths of stay based on diagnosis and reimbursement is based on where the LOS is relative to the DRG.  If the LOS days < DRG days there is profit.  If LOS days > DRG days there are varying degrees of loss.  In some cases of complex care the allotted DRG days be exceeded by months leading to negligible reimbursement until a large outlier figure is reached.  In those cases, additional compensation is possible.  Probate court involvement for civil commitment, court ordered medications, or guardianship and conservatorship can add weeks to the discharge date.

Reimbursement at SPRMC and HCMC is based on APR-DRG (All Patient Refined Diagnosis Related Groups).  Per diem does not apply and there is a fixed payment whether the stay is 3 days or 15 days. An exception is made if the stay exceeds 180 days.  Days 0 – 180 are still covered by the single payment but at 181 days reimbursement occurs as a cost-to charge ratio.  Although I have not found any specific breakdowns – single payment systems for complex problems especially in the absence of adequate discharge resources can rapidly decrease compensation to hospital systems and precipitate financial crises.      

Graphics Credit:

Hennepin County Medical Center - Minneapolis, MN taken on 25 August 2013.

Author:  Gabriel Vanslette

License:  CC BY 3.0 Attribution 3.0 Unported