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The conversion of non-profit hospitals to for-profit ones has prompted a flurry of legislative activity to address the criticisms of higher prices, less charity care, and staffing cutbacks.

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JEFFREY KAYE: It used to be that just about every American community was served by one or more non-profit hospitals--institutions created by charity and taxes and often run by religious organizations. But in the 1990's corporate change, led by industry giant Columbia/HCA, found they could make money by taking non-profit hospitals and converting them to for-profit ones. Between 1990 and 1996, for-profit companies bought up some 200 non-profit hospitals. Linda Miller, president of an organization of non-profit hospitals, says a huge amount of money is changing hands.

LINDA MILLER, Volunteer Trustees Foundation: This is potentially and probably by now the largest redeployment of charitable assets in the history of the country.

SPOKESMAN: This hospital is very important to our community. Why are you selling it?

JEFFREY KAYE: Communities across the country have been locked into bitter battles over the sale of those assets. Opponents question how the deals are done and charge that conversions result in higher prices, less charity care, and staffing cutbacks. There's been a flurry of legislative activity because of these concerns. Last year, 16 states passed laws requiring greater oversight of hospital conversion. But in some states like here in Tennessee there are few regulations governing the sale of not-for-profit hospitals. And, as a result, say critics, deals can be made in secret, and funds, once dedicated by communities for health care, can be redirected. Dr. Jeff Pennington has been active in his community for decades. In the early 60's he helped found National Memorial Hospital, located in Madison, Tennessee, a suburb of Nashville.

DR. JEFF PENNINGTON: We were able to build a hospital by raising about $5 million. Most of it came from private solicitation, door-to-door, organizing teams, and raising money--just by asking.

JEFFREY KAYE: Pennington also contributed $28,000 of his own money. When a for-profit chain tried to buy the hospital in 1994, Pennington filed suit to stop the sale.

DR. JEFF PENNINGTON: You had the not-for-profit hospital, which was not built by investors, not paid for by investors, but paid for by donations by people who wanted their money to go to serve not just those who could pay but also those who can't pay. We did not give our money for this type of facility where there is an effort to make the biggest--the largest amount of money for the investment.

JEFFREY KAYE: Pennington lost his suit, and the hospital he founded was bought by a chain that months later merged with Columbia/HCA.

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JEFFREY KAYE: A spokesman for the Tennessee-based company said no one from the change would discuss conversions since the issue was "off our radar screens." Columbia has been the subject of a widespread federal criminal fraud investigation concerning Medicare billing. But the second largest chain of for-profit hospitals--Tenet Healthcare of Santa Barbara, California--was more forthcoming about its conversions. Tenet Vice President says that when her company buys up non-profits, the hospitals benefit by becoming part of a large hospital network.

CHRISTI SULZBACH, Tenet Healthcare Corporation: There's tremendous cost savings available for a hospital to be able to buy on a national basis the way Tenet can buy through its Buy Power program. We recently had a contract with Johnson & Johnson where we're saving tens of millions of dollars because we can purchase band-aids and other types of intravenous equipment on a nationwide basis.

JEFFREY KAYE: But critics say while costs may be decreased, charges to patients generally increase significantly when a for-profit takes over. Brian Lapps, Sr. is a health care consultant in Tennessee.

BRIAN LAPPS, Sr., Health Care Consultant: They will force the hospital to operate more efficiently as a business, but when they do that, the fallacy is that they do it all through low-cost operations and purchasing contracts. The greater part of their margin, if not all their margin, is usually made from the standpoint of increased charges.

JEFFREY KAYE: In fact, public records show average in-patient charges at Nashville Memorial increased by a third after Columbia took over. By contrast, at the nearby non-profit, Tennessee Christian Medical Center, charges went down slightly during the same period. At Columbia Nashville Memorial some charges, such as X-rays, doubled. In 1996, a head X-ray there averaged some $1300, double the price at nearby Tennessee Christian, which was a little more than $600. Tom Scully, president of an association of for-profit hospitals, doesn't dispute the fact that prices usually rise after conversions. He says the reason is for-profits inherit poorly-run hospitals which weren't billing correctly.

TOM SCULLY, Federation of American Health Systems: If you're running a business that's losing money, I guess one of the ways to increase your revenues is to, number one, make sure that you're billing more effectively, and number two, raise your charges to some people. But the companies came in, kept the hospital open, attracted new doctors, billed Medicare and Medicaid and private pay patients more efficiently. I'm sure they probably did raise costs in some cases. But basically they saved the hospitals.

JEFFREY KAYE: But John Leifer, a former executive with Columbia/HCA, thinks that by their very nature, for-profits don't operate for the benefit of the community.

JOHN LEIFER, Former Columbia/HCA Executive: I think that any time a not-for-profit community-based facility sells to a for-profit, I think the community suffers. I think that the needs of Main Street are incongruous with the needs of Wall Street.

JEFFREY KAYE: As a regional senior vice president for Columbia/HCA in 1994 and 1995, Leifer helped arrange takeovers. He's now convinced conversions are bad medicine.

JOHN LEIFER: The community-based hospital has as part of its mission meeting the total health care needs of the community, and it doesn't have an obligation to pay a return on investment to its shareholders, whereas, a for-profit has a very different motivation. They have earnings expectations on the part of their investors, and they have earnings expectations on the part of Wall Street analysts.

JEFFREY KAYE: Charity care is one measure how responsive a hospital is to its community, what happens to those who cannot afford to pay their bills, who need uncompensated care. A study commissioned by Tom Scully's organization of some recently converted hospitals says they maintain the same level of uncompensated care.

TOM SCULLY: There's zero difference in charity care between non-profits and shareholder-owned companies.

JEFFREY KAYE: But other research indicates that in states where corporate hospitals are most highly concentrated, such as Florida, Georgia, and Tennessee, for-profits tend to provide less charity care than their non-profit counterparts. Non-profit hospitals are considered by federal law to be charitable institutions. And the law requires that the proceeds of sales continue to be used for charity.

LINDA MILLER: When a not-for-profit hospital--community-owned hospital--is sold to a for-profit company, the fair market value of that asset, not some piece of it, but the fair market value of that asset has to be returned to the community in order to stay in the charitable stream to serve the community in an ongoing fashion.

JEFFREY KAYE: And Tenet Vice President Sulzbach says that's exactly what's happening.

CHRISTI SULZBACH: The community benefits. There's additional resources in that community for perhaps education programs, things that might not have been available beforehand.

JEFFREY KAYE: More than 80 charities that fund AIDS research, medical teaching, and clinics and schools have been formed as a result of hospital conversions. These foundations now control about $9 billion in assets. But the more controversial ones have diverted funds once earmarked for health care away from medical purposes. In Dickson, Tennessee, the Jackson Foundation is building a $15 million arts and science center. The foundation was created with assets from the 1995 sale of the non-profit Goodlark Hospital to Columbia/HCA. The Jackson Foundation also foots the bill for flying lessons to high school students who pledge to remain drug free. Student pilot Shawn Constance thinks it's a great idea.

SHAWN CONSTANCE, Student: I'd just be getting home from school and wouldn't have anything to do but, you know, sit home and watch TV and now I'm sitting in an airplane.

JEFFREY KAYE: But consultant Lapps argues that the $80 million the Jackson Foundation received from Columbia actually adds to health care costs.

BRIAN LAPPS, Sr.: We've taken about 80 plus million dollars out of the health care system and put it into doing other things for the community. Realistically, when we look at health care costs and the escalation, we've added 80 plus million dollars worth of debt to the health care system in Dickson, Tennessee, that has to be paid for then by the users of the hospital.

JEFFREY KAYE: One person who benefitted from the sale is Douglas Jackson. His family founded the hospital in 1958. Jackson, Dickson's state representative, was the hospital's lawyer. He is now the $209,000 a year president of the Jackson Foundation. Jackson had agreed to be interviewed on camera but didn't show up and didn't return subsequent phone calls. The practice of rewarding key decision makers in these sales was not uncommon, according to John Leifer. Leifer helped arrange takeovers for Columbia/HCA.

JOHN LEIFER: Our intent was to clear the roadblocks to acquisition. And at times clearing the roadblocks meant offering enticements to senior management of the organization that would perhaps persuade them that a sale to Columbia was the appropriate strategy.

JEFFREY KAYE: What kinds of enticements are you talking about?

JOHN LEIFER: Well, the scope of the responsibilities might increase, whether it's with a new hospital, or whether they were put into a corporate position, or whether they were put into a foundation.

JEFFREY KAYE: Critics of the deals made in Tennessee complained they were shrouded in secrecy. Linda Miller says that's not unusual.

LINDA MILLER: As we went around the country, trying to ascertain how the hospitals were being bought up by Columbia/HCA and other for-profit companies. It became apparent to us that all of the questions that communities need to know, like what was the price paid for the hospital, where did the money go, who got jobs in the process, all of those questions were unavailable to the community. Basically, all of these sales were being done totally enshrouded in secrecy, with no availability of information to the community before, during, or after the sale.

TOM SCULLY: I think that might have been fair five or six years ago. I wasn't here then. I mean, when these first happened, there might have been a fair amount of secrecy. I think there's very little evidence there's much secrecy now. I mean, there have been a lot of states that have looked into this. There's been an awful lot of attention on it.

JEFFREY KAYE: Indeed, an increasing number of states are requiring public hearings and more disclosure of hospital conversions before allowing them to go through. And there is debate over whether greater oversight is needed to safeguard the level and quality of patient care when corporations take over non-profit hospitals.

JIM LEHRER: And that's precisely what Jeffrey Kaye will explore in part two of his report.

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