Are We Better Off: Whose Hospital Is It?

MCP Hospital didn't have any celebrity doctors or slick ad campaigns. All it had was a 150-year history serving its Philadelphia neighborhood--and in today's cutthroat health care industry, that's no longer enough.

Gregory Gay was born 21 years ago at the Medical College of Pennsylvania Hospital (MCP), a venerable community hospital in Philadelphia's East Falls neighborhood. He was shot six blocks away on January 24, not long after Tenet Healthcare Corp. decided to close the hospital. Tenet, the second-largest for-profit hospital chain in the United States, was in the process of shuttering or selling a quarter of its more than 100 hospitals nationwide. As it waited for a judge's permission to shut down MCP, the company was slowly withdrawing services, closing floors, and letting the staff fade away through attrition.

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When police and paramedics arrived moments after four bullets pierced Gay's body that icy Friday night, he was fighting for his life and lucid enough to give the names of two men who had shot him. But instead of zipping up Henry Avenue to MCP, the ambulance raced to Temple University Hospital, some 20 minutes away. MCP's struggling emergency room was on "diversion" -- temporarily closed to new patients -- that night, as it had been for much of that month. Gay died less than an hour later.

Gay's death, one of many in the violent North Philadelphia streets whose sick and wounded feed the hospital, has become part of a lawsuit seeking to keep MCP open while charging that Tenet neglected its obligations to the city. (Tenet management refused to comment for this story.) Of course, it is uncertain whether Gay would have survived even had the hospital been fully operational. But the closing of MCP, a community hospital in every sense of the word, would clearly mean more hardship for thousands of its neighbors. Symbolically, in the minds of the hospital's defenders, Gay's death has come to stand for the deaths to come -- not only the gunshot wounds, but the asthma attacks, the strokes and embolisms and diabetic comas that are likely to be aggravated by new delays and complications.

Not that MCP's fate is unusual. Tenet has closed three hospitals during its five years in Philadelphia; over the past decade, four other North Philadelphia hospitals have shut down their inpatient units. Nationwide, according to data compiled by the federal government and Modern Healthcare magazine, more than 560 hospitals have closed since 1990 -- clobbered by stagnant reimbursement rates from government and the insurance industry, rising malpractice rates, skyrocketing prices for drugs and medical equipment, and increasing numbers of uninsured patients who can't pay their bills.

Still, when Tenet tried to shut MCP, it hit a particular nerve. The hospital, whose 70,000 potential clients ranged from homeless crack addicts to the governor of Pennsylvania, has become a local cause célèbre. This is partly because Tenet has blossomed into the Enron of the hospital business, notorious for creative accounting and outsize payouts to its executives. It is a corporate behemoth whose entry into Philadelphia in the late 1990s was subsidized with generous tax breaks because of the city's desperate need to save hospitals then on the verge of bankruptcy. The struggle to keep MCP open, in other words, embodies a frightening larger story about the decline of health care in the United States.

By a strange paradox, we live in a time in which scientific breakthroughs are revolutionizing American medicine, while the system for caring for the majority of the population seems to be breaking down. "As a microdelivery system, medicine provides increasingly exquisite molecular elegance," says Eliot Sorel, a professor of psychiatry at George Washington University School of Medicine and the former president of the D.C. Medical Society. "As a macrodelivery system, it is falling apart."

All across the nation, doctors and other health care providers are battling thick layers of bureaucracy and crushing financial burdens to deliver care. "We're watching the meltdown of the medical system," says Dr. Donald Palmisano, the president of the American Medical Association. "We have a broken medical liability system, price-fixing on Medicare and Medicaid, and managed care has such monopoly power in many states that the physician has no power to negotiate a contract." Nurses have also been leaving their field, creating serious shortages that imperil care. "I advise all my patients before they go into the hospital," Palmisano's predecessor at the AMA, Dr. Yank Coble, recently told Medical Economics, "to take somebody with them. A friend or relative will increase safety more than anything else, especially in these days of nursing shortage." According to a 1999 Institute of Medicine report, as many as 98,000 people die in hospitals each year as the result of medical mistakes, making such errors -- often caused by staff shortages and overwork -- the eighth leading cause of death in this country.

A growing number of hospitals are facing an even more fundamental crisis: They simply cannot make ends meet. The price of a pint of blood went up 30 percent in just one year; a CAT scan machine costs $1 million. Malpractice insurance rates have been rising at vertiginous rates -- 20 to 30 percent nationally, and 40 to 50 percent in some areas, including Pennsylvania. The MCP emergency room has seen its malpractice rates increase from $18,000 to $40,000 for each doctor in five years.

And even as the cost of caring for patients has increased, a decade of payment cuts from insurers as well as the government -- especially Medicare and Medicaid, the public programs designed to provide coverage for the elderly and the poor -- has pushed hospital finances into the red. In Philadelphia, Medicaid now pays only 75 percent of the cost of patient care, leaving hospitals and doctors to absorb the rest. In his fiscal year 2005 budget, President Bush has proposed another $2 billion cut in federal funding for Medicaid, and Medicare reimbursements are failing to keep up with costs. "Hospitals," concluded a recent report by the American Hospital Association, "are bearing the cumulative impact of a series of forces that are beginning to erode the foundation of the essential public service they provide."

Nowhere are those forces more apparent than in the community hospitals that serve as the nation's health care system of last resort. A shortage of primary care doctors in urban neighborhoods is driving more and more patients to crowded hospital emergency rooms: ER visits in community hospitals rose from 92 million in 1990 to 106 million in 2001, according to the American Hospital Association. The ERs at 3 out of 4 urban hospitals are "at" or "over" capacity, and more than half of all urban hospitals sometimes turn ambulances away. Last year, 25,000 MCP patients -- 60 percent of the hospital's total -- came in through the ER.

Many of those patients can't pay their bills. Nationally, the number of uninsured people is on the rise after declining through the 1990s; in 2003 it stood at 42.3 million, 3.6 million more than in 1999, according to the National Center for Health Statistics. In Philadelphia, surveys by the Philadelphia Health Management Corp. show that the number of uninsured people in the city of 1.4 million has increased by nearly one-third, rising from 94,000 to 136,000 in only two years; that's 42,000 people who lost health benefits. And given that a single intensive-care visit can cost hundreds of thousands of dollars -- and that hospitals by law cannot turn away patients who need treatment -- any increase in the number of uninsured people is disastrous for a hospital's bottom line. In 2003, according to Richard Centafont of the Delaware Valley Healthcare Council, a hospital trade group, Philadelphia hospitals saw 22 percent more uninsured patients than they did the previous year, resulting in half a billion dollars' worth of uncompensated care.

Traditionally, hospitals subsidized their "charity" care for uninsured patients by collecting a substantial margin on private insurance reimbursements. But insurers, under pressure from employers, have pushed hard to trim those payments over the past decade. In the Philadelphia area, where a single private insurer -- Independent Blue Cross and its health management organization, Keystone -- dominates the market, this squeeze has become painful. Nationally, insurance payments cover 115 percent of hospitals' actual costs for patient care; in Philadelphia they cover an average of 104 percent. "It used to be that the rich subsidized health care for the poor," says Dr. Philip S. Mead, medical director of MCP's Emergency Department. "It ain't that way in Pennsylvania anymore."

Not that MCP is a poverty hospital. Though it never attracted the jet-set clientele you'd find at the best university medical centers, its patient base has always been diverse. The hospital traces its roots to the Female Medical College of Pennsylvania, founded in 1850 as the first school in the world established to provide full medical training to women. It outlasted other women-only institutions, admitting men for the first time in 1969. By 1900, at least 10 African American women had been trained at the school, including Dr. Eliza Grier, who was born a slave. Today, MCP retains an almost old-fashioned aura of collegiality. Most of its doctors, as one physician notes, are "not major egos or out to make money," but rather salaried academic medicine types in the traditional mold.

While many of MCP's patients have been the impoverished and working-class people of neighborhoods like Strawberry Mansion, to its north the hospital borders East Falls, a well-to-do district where Governor Ed Rendell, U.S. Senator Arlen Specter, and Rep. Chaka Fattah live. These high-profile neighbors have proved crucial in the fight to keep MCP open. But as patients, East Falls residents increasingly patronize upscale Center City hospitals.

Partly, this is due to the failure of MCP Hospital's academic overseers, most recently Drexel University College of Medicine, to cultivate relationships with private physicians that could bring in well-insured clients. To be a moneymaking hospital in today's market, it helps to do the sort of complex procedures well reimbursed by insurers or the federal government. For example, a wrinkle in the Medicare system explains why so many companies have opened "heart centers" in the past few years -- surgery on the heart is among the most lavishly reimbursed by Medicare. Unless a community hospital like MCP can attract the well insured, it's at risk.

As more such hospitals close, cities like Philadelphia are moving to a two-tiered health system. "If you have good insurance and want a hip replacement, there are plenty of nice hospitals that will schedule you at your convenience," says Dr. Steven Peitzman, a longtime MCP physician who has written a history of the Woman's Medical College and its successor. "Whereas if you're wheezing with the worst asthma attack of your life, there isn't likely to be a hospital nearby."

Around the time Tenet was negotiating to run MCP, Thomas Morgan, a community activist who has lived his entire life on the same quiet block in the Germantown neighborhood where Grace Kelly's family lived, was diagnosed with a thyroid disorder and kidney failure. On September 4, 1999 -- his 44th birthday -- Morgan, who has four children and works nights as a toll collector, went on dialysis for the first time. The procedure required at least 15 hours in the hospital each week, but there was a silver lining. It turns out that universal health care already exists for one kind of patient in America -- the dialysis patient.

Under a 1972 law, passed after an end-stage kidney disease patient testified before the House Ways and Means Committee while undergoing dialysis in the committee room, Congress expanded Medicare to fully fund the medical costs of kidney patients, whether or not they have private insurance. When it comes to dialysis, the American health care system actually lives up to its promise, says Dr. Walter Tsou, a former Philadelphia health commissioner. "The solution to the crisis at MCP and every health care facility in Philadelphia and the nation," he says, "is a properly financed, single-payer, national health-insurance program like this."

For reasons that are not entirely clear, blacks are four times more likely than whites to suffer kidney failure in America, and nearly all of the 130 or so dialysis patients at MCP are African Americans. Dialysis is an exhausting, at times painful, procedure, but for Morgan, who is dialyzed from 6:00 a.m. to 10:30 a.m. three times a week after he gets off work, it's almost something to look forward to. "It's my community," he says of the 25 or so patients who share his shift. "We talk for a while -- politics, sports, whatever -- then you drift off to sleep. And you care for the other patients. We look out for each other. We have a Christmas party. We've had bus trips to Atlantic City." The dialysis unit is attached to the hospital, which means that emergency or inpatient care is available for kidney patients when they need it.

Morgan's life's rhythms -- work, sleep, taking his six-year-old daughter to school -- are all linked to the dialysis center. If it closes, he will find another dialysis center, but many such centers are not located at hospitals. Morgan may have to wait months to find a rotation in a dialysis center with the care available at MCP. A warm, soft-spoken man with closely cropped salt-and-pepper hair and beard, Morgan, a Democratic Party committeeman for the city's 12th Ward, says his political activism has always come from a sense of duty to others in his neighborhood. But MCP's struggle, to him, is also profoundly personal. "If the hospital closes," he says, "it throws my whole life into turmoil."

For a while it seemed as though Tenet Healthcare had figured out a way around the hospital-financing conundrum, a way to game the system; gaming the system, in fact, turns out to have been one of the company's principal assets. The Santa Barbara, California-based company arose from the ashes of Santa Monica-based National Medical Enterprises, a firm that flamed out in the early 1990s after being targeted by the federal government for confining psychiatric patients over long periods to collect more money from their insurers. In 1993, Jeffrey Barbakow, a financial wizard who had been an investment banker and chairman of MGM, was brought in to remake the company.

For several years in the late 1990s, Tenet seemed to produce miraculous results in Philadelphia. MCP and Hahnemann hospitals, which had been losing millions, were suddenly in the black. At MCP, Tenet says it spent more than $43 million for capital improvements; it spruced up hallways, bed units, and operating rooms, and purchased a high-tech Gamma Knife to perform brain surgery.

The first inkling of trouble for MCP filtered east from California in 2002. Dr. Chae Hyun Moon, the chief cardiologist at Tenet's Redding Medical Center, and Dr. Fidel Realyvasquez, a cardiac surgeon, were accused that year of running a macabre for-profit fraud upon Medicare -- conducting hundreds of unnecessary heart catheterizations and bypass surgeries for which they billed the federal government. Tenet later agreed to pay the government $54 million to resolve federal fraud charges, although civil suits against the hospital and the doctors are still pending.

As it turns out, there was more to the scam than a couple of zealous cardiologists. In the 12 months ending in December 2002, Redding Medical Center reported $92 million in pretax income. Its similarly sized neighbor down the street in Redding, Mercy Medical Center, brought in only $4 million. There wasn't $88 million worth of difference in the services they offered. Moon's procedures were part of the explanation, but the hospital was also using a more general practice to squeeze millions out of Medicare. This involved a complex billing category known as "outlier payments." Intending to support the care of particularly sick, or "outlier," patients, Medicare essentially allowed hospitals with very high patient costs -- which were determined by whatever amounts the hospital chose to put in its bills -- to charge the government higher fees.

It boiled down to a remarkably simple scheme: To qualify for more outlier payments, Tenet hiked its prices. By 2002, when Medicare began to crack down on the practice, the company was earning more than $800 million a year on outlier payments. That year, Barbakow cashed in a whopping $111 million in stock options, a few months before resigning from his position as chairman and CEO.

At the MCP emergency room, Dr. Mead remembers one moment that tipped him off to the outlier system. An uninsured college student had come to the ER with a bad cut that required 27 stitches. About a month later, the student appeared in Mead's office, crying, in her hand a bill for $600 for the removal of the sutures, a procedure that had taken Mead all of 20 seconds using a pair of cheap scissors. Mead called administrators to complain but was told that was how things were done. What had happened, Mead would later realize, was that he had stumbled upon the iceberg of Tenet's inflated billings. "If Blue Cross had gotten the bill they would have said, 'Yeah, right,' and paid $30," he explains. "But since this was an uninsured person, they were charged the full price." Tenet had to charge someone the full price to demonstrate its high costs to Medicare.

"It turns out they don't know how to run hospitals," says Mead, who has a degree from Wharton Business School and was a Pepsico executive before going to medical school. "They know financial tricks."

With the outlier payments yanked out from under Tenet, MCP suddenly fell deep into the red -- the hospital lost more than $30 million in 2003, according to Tenet -- and the full consequences of some of the company's management decisions began to hit home. Many of MCP's potentially money-earning fixtures, including its orthopedics department and pathology labs, had been allowed to wither away as doctors left in droves. "Most people who used those services were insured," notes Ginny Holzworth, an intensive-care nurse. "They removed these services, leaving basically services for the poor, which brought in no money. They stabbed MCP and let it bleed to death."

A consultant's report delivered in December concluded that MCP could be turned around, "if given a new clinical direction and a reasonable period of time." Tenet, losing massive amounts of money and heavily exposed to lawsuits and multiple federal and state investigations, couldn't be bothered. Management advised Drexel's medical school of the closing on December 17, 2003, the evening before the news release was faxed out. More than 150 years of history would essentially be erased without so much as a sniff.

In public statements, Tenet officials have said that the company did the best it could under difficult conditions, but that MCP was simply no longer viable. "This hospital was run by competent people and by a competent hospital management company," Philip Schaengold, Tenet's vice president for Pennsylvania, told a testy meeting of the Philadelphia City Council.

After much protest, and an intervention by Governor Rendell, Tenet and the state agreed to keep the hospital open until at least June 30 to give it time to seek a buyer. Temple and Einstein, two large Philadelphia hospital systems, were said to be interested, but as of this writing, neither had made a commitment to either buy MCP or keep its doors open long-term.

Whether or not MCP can survive with a different owner, the critical condition of hospitals around the country shows that it is not an isolated case. One-third of the nation's hospitals are now losing money every year, according to a 2002 report from the American Hospital Association, and many are in such precarious condition, they can't even get loans for badly needed improvements: Only 30 percent of hospitals seeking credit to fix their buildings or buy new equipment, the association reported, were able to get commercial bank financing. "As Wall Street experts have recognized," the report noted, "many of America's hospitals are on the edge of financial viability."

Dragged before the City Council repeatedly to explain their decision, Tenet officials sometimes sounded like Howard Dean. "We need universal health insurance in this country," Thomas Leonard, a Tenet attorney, said at a February 12 hearing. "It's a national problem. You can't solve it. Tenet can't solve it. And beating up Tenet isn't going to solve it."

At the same hearing, Morgan, the activist and dialysis patient, told his story while Tenet's Schaengold sat a few feet away. Morgan described the high-tension juggle of a working life with severe illness -- the dozens of pills, the disturbed sleep and odd hours, the effort to be a normal father for his children. He told of his anxiety about finding another dialysis center. Then he began to weep. "I feel like you're playing with my life," he said, looking angrily at Schaengold. "I've got a family just like you. I've got a home, I live right."

Schaengold, a mustachioed man in his 50s, maintained an icy composure. A week later, Tenet sacked him too.