Capital Finance And Ownership Conversions In Health Care

PROLOGUE: The increasing presence of for-profit hospitals, nursing homes, and managed care organizations provoked expressions of concern in the health policy community during the 1980s. Since then turbulent change has continued to transform the American health care system, but Washington has taken no definitive steps to slow it down. One of the most visible activities has been the conversion of nonprofit health plans to for-profit status or the acquisition of nonprofit hospitals by for-profit hospital management companies. Health Affairs devoted a thematic issue to the subject of hospital and health plan conversions (Mar/Apr 1997), but, generally speaking, we receive very few manuscripts dealing with the business of health care. In this paper James C. Robinson, a professor of health economics at the University of California, Berkeley, sets out the basics on the economics of for-profit and nonprofit conversions in the health care industry. As one of the few health economists who has sought to better understand the implications of the changing financial nature of American health care, Robinson has become a frequent contributor to Health Affairs . His work has been supported by the California HealthCare Foundation and the Robert Wood Johnson Foundation. An earlier version of this paper was presented at a Wall Street roundtable on business and health in March 1999 that was supported by the California HealthCare Foundation. Robinson recently authored a book entitled The Corporate Practice of Medicine: Competition and Innovation in Health Care, published by the Milbank Memorial Fund and the University of California Press. ABSTRACT: This paper analyzes the for-profit transformation of health care, with emphasis on Internet start-ups, physician practice management firms, insurance plans, and hospitals at various stages in the industry life cycle. Venture capital, conglomerate diversification, publicly traded equity, convertible bonds, retained earnings, and taxable corporate debt come with forms of financial accountability that are distinct from those inherent in the capital sources available to nonprofit organizations. The pattern of for-profit conversions varies across health sectors, parallel with the relative advantages and disadvantages of for-profit and nonprofit capital sources in those sectors.