Mark Hall on HCA's Acquisition of Tax-Exempt Health System

Wake Forest law professor Mark Hall has released the latest chapter in his exhaustive preliminary report on the 2019 acquisition of Asheville, North Carolina's tax-exempt Mission Health System. As he writes in this new chapter: "As a result, Mission’s flagship facility became the fifth largest for-profit hospital in the country. Prior to HCA’s purchase, Mission had been operated as a nonprofit “charitable” organization ever since its founding in 1885." Prof. Hall's goal is to describe in as much detail as possible the decision-making process that led to the acquisition, how Mission Health performed before the acquisition, and how the system has performed over the next 5 years. (McKenzie Wicker wrote a comprehensive piece for the Asheville Citizen Times in 2020. Mission Health has been a major news story for the five years since the acquisition. See also NBC News, Nov. 13, 2023 and related stories.)

 

The hospital world is divided into three types of entity: public hospitals, private for-profit hospitals, and private nonprofit (and almost always tax-exempt) hospitals. For-profits are expected to generate net revenues that may be put to various uses but are also expected to be distributed to investors (increased share values, dividends, etc.). Nonprofits are also expected to generate net revenues, but are barred from benefitting private interests by state and federal laws (including § 501(c)(3) of the Internal Revenue Code, which is applicable to most nonprofit hospitals). A major question that garners the attention of state courts and legislatures as well as members of Congress from time to time is whether the tax subsidies that flow to tax-exempt hospitals are justified by a corresponding benefit to the public (principally but not exclusively improved access to care, higher quality of care, lower prices for that care, medical education, medical research, and charity care). Across the country, the answer appears to be mixed: sometimes yes, sometimes no.

These three categories are not impermeable spheres. Various combinations are permitted and mostly take the form of joint ventures, mergers, or acquisitions. These different arrangements raise all sorts of legal and public-policy issues. To perform any sort of useful analysis, however, we need facts. 

With mergers and joint ventures, policy-makers tend to be most concerned with making sure the nonprofit/tax-exempt entity doesn't become a profit-making (and profit-distributing) arm of its for-profit partner. 

With outright acquisitions, the issues are different because the acquired tax-exempt entity will be operated as a for-profit business. Prof. Hall is analyzing each one in a separate release. As described by the Nonprofit Law Blog (as of May 30, 2024), the entries so far are these:

• Mission Hospital’s Financial Performance Under HCA. Working Draft (2024).
by Professor Mark Hall
• Mission Hospital’s Quality Ratings Following HCA’s Acquisition. Working Draft (2024).
by Professor Mark Hall
• Mission Hospital Charity Care Following HCA’s Acquisition. Working Draft (2024).
by Professor Mark Hall
• Private Equity and the Corporatization of Health Care (abstract). Stanford Law Review (2024).
by Professors Erin Brown and Mark Hall ("These investors seek to earn handsome profits by rapidly increasing revenues before selling off the investment. Private equity’s incursion into health care is especially concerning. The drive for quick revenue generation threatens to increase costs, lower health care quality, and contribute to physician burnout and moral distress. These harms stem from market consolidation, overutilization and up-coding, constraints on physicians’ clinical autonomy, and compromises in patient care."). My recent blog post on this topic is here.
• Rediscovering the Importance of Free and Charitable Clinics. New England Journal of Medicine (202[3]; abstract).
by Professor Mark Hall

To this list we can now add Thursday's entry, Mission Hospital’s Decision to Sell to HCA. Working Draft (2024). by Professor Mark Hall.

"Private Equity and the Practice of Medicine"

Harvard Magazine has published a useful summary of the quality issues that appear to arise when private equity firms invest in health care facilities:

According to associate professor of health care policy and medicine Zirui Song and other Harvard researchers, patients in hospitals owned by private equity firms suffered significantly more hospital-acquired adverse events than those being cared for in similar hospitals with no such investor participation. [Song] analyzed more than 4.8 million Medicare claims tied to hospital stays between 2009 and 2019. Patients in the hospitals acquired by private equity firms experienced 25.4 percent more hospital-acquired conditions. Underlying that alarming overall difference was a 37.7 percent increase in central-line associated bloodstream infections and a 27.3 percent increase in falls, compared to peer hospitals with no private equity involvement.

The problem is particularly acute when the private equity firm employs a leveraged buy-out to acquire the facility. The investor funds the acquisition with debt that goes onto the facility's books. The equity partners typically do quite well with their investment, but servicing that debt often requires cuts in services and staff. And some facilities don't survive, removing a health care provider from the community. The closures haven't discouraged private equity investors from seeking profits from health care providers, with "investors taking a $1-trillion stake during the past decade in everything from nursing homes and rehabilitation facilities to physicians’ practices and hospitals. According to the nonprofit Private Equity Stakeholder Project, approximately 460 U.S. hospitals are currently owned by private equity firms, representing eight percent of all private hospitals and 22 percent of all proprietary for-profit hospitals."

Song and his colleagues have a few suggestions for reform:

• "[S]tates could better enforce existing regulations designed to prevent commercial exploitation of physicians, though most states have broad exceptions to these “corporate practice of medicine” laws."
• "States might also grant their attorneys general more authority to block private equity healthcare deals they deem harmful to patients or to competition. Federal policymakers and legal scholars have put forth similar views."
• "Critics also suggest lowering the threshold for mandatory reporting of private equity deals to the Securities and Exchange Commission, established by the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Currently, that ceiling, which changes yearly, stands at $119.5 million. Song notes, 'Most private equity acquisitions, especially of physician practices, are well below that threshold, so they never get reported."

A similar concern with quality after private equity comes on the scene was expressed by Edward P. Hoffer, "Private Equity and Medicine: A Marriage Made in Hell," 137 Am. J. Med. 5 (Jan. 2024) (may be behind a paywall).