Making a Fortune in the Hospital Biz

Bayonne Medical Center

Two years ago it was reported that the most expensive hospital in the country was CarePointe Bayonne Medical Center.  

The hospital was a a small, not particularly distinguished institution located in a slightly down-at-the-heels, working-class town in New Jersey.  

In fact, the hospital had not charged high, high rates until relatively recently.  

The hospital, BMC, opened in 1888 and operated as a non-profit. It was the only hospital in town.  Over time, costs rose and reimbursements declined. By 2007, BMC was losing as much as $1.5 million a month.  (This is not an unusual situation at small hospitals these days.)

The hospital filed for bankruptcy and was bought for a net of $32 million in 2008 by a group of investors. The new owners made several changes.

First, they reorganized the hospital as for-profit enterprise.  

Then they cancelled all its agreements with health insurance companies.  

Then they set some of the highest prices in the nation for virtually every procedure. 


An Example

Last summer a man went to BMC with a finger cut he got from the claw end of a hammer.  He was given a tetanus shot, antibiotic ointment and a bandage.  No doctor, no x-ray, no stitches.  

BMC hospital billed almost $9,000 for his treatment.  His insurance company paid most of the cost, and the remainder, about $2,000, was charged to him personally.  He worked out a deal with BMC, but he was steamed enough to appear in a television news report detailing the situation. 

A state medical authority estimated that his treatment should have cost between $400 and $1,000.  Even that sounds high to me. 

BMC was able to charge what it did because it did not participate with the man's health insurance.  As an out-of-network provider, it could set its own rate.  It chose to set the rate high.

Unfortunately, this vignette is the tip of the BMC iceberg.

When insurance companies have to pay wildly inflated prices, as this man's insurer did, insurance premiums go up.  

New Jersey health insurance rates are among the nation's highest.  Things like BMC's $9,000 charge for treating a small cut are one reason why this is so. 


How the System Works

In 2011, the New York Times reported, BMC charged more than $99,000 to treat COPD, a lung disease.  In 2012, according to a New Jersey paper, the price had increased to more than $112,000.  

At the time, Medicare reimbursement for COPD treatment was just over $21,000.

In fact, the BMC buyers were not particularly interested in Medicare patients and their puny reimbursements.  Their plan was to increase traffic to the BMC emergency room.  

As the closest hospital to everyone in Bayonne, BMC was the natural place for ambulances to transport patients in medical emergencies.   

New Jersey law requires insurance companies to pay for emergency room treatment.  With no insurance agreements, BMC could set its rates as high as it liked.  Turned out, the ownership group liked really, really high rates.  Here are some examples:

     -- Gastroenteritis:  $142,000

     -- Kidney and urinary tract infections: $106,500

     -- Fainting: $110,500

Another reported comparison was BMC's 2011 charge for treating a heart attack with complications:  $137,483.   Meanwhile, a more highly rated hospital in an adjacent county charged less than half that amount, $54,562, and some New Jersey hospitals billed as little as $30,000 for the same treatment.   

BMC did not advertise its exorbitant charge rates, of course.  What it did was put up big highway signs announcing very short ER wait times.

Within a few years, BMC became mostly an emergency room attached to a mostly empty hospital.  If you called your insurance company to get pre-approved for non-urgent surgery at BMC, you would be turned down or, at a minimum, strongly advised to choose a different hospital.

(Medical groups and insurance companies in the state were infuriated by the BMC prices and policies.  My guess is that the hospital lost quality doctors who preferred to affiliate themselves with other, more respected institutions.)

Anyway, the high prices and ER advertising worked.  By 2011, the hospital was reported variously to be generating operating income of $9.3 million or $17 million -- a nice return on a $32 million investment.  

After BMC became profitable, its investors sold the hospital building and its land for $58 million with an agreement to lease them back from the purchasers.  This is a common business practice that gives cash to company owners ($26 million more than the purchase cost, in this case) and allows them to deduct lease payments as operating expenses.

After some unpleasant court business a few years ago, the hospital agreed to treat patients insured by the state's Blue Cross/Blue Shield organization. But it refused to participate in the BC/BS managed care program for Medicaid patients.  Medicaid's low reimbursements did not appeal to the investors.

Expanding the Brand

The BMC investors named their group CarePointe and bought two other small hospitals in Hudson County -- Christ Hospital in Jersey City and Hoboken University Medical Center. 

They also bought a majority interest in the local Bayonne ambulance service.  Just this January, the city council voted, 4-1, to give the ambulance service the exclusive right to operate in Bayonne for the next five years.  The CarePointe guys are now trying to work out a similar deal in Jersey City where, not surprisingly, they just happen to own one of the two hospitals in town.  

The investors and their family members have donated lavishly to the campaigns of New Jersey politicians -- mostly the majority Democrats, but also people close to the Republican governor.  This probably has less to do with partisan enthusiasm than the wish to keep the state or its cities from enacting laws that would limit the CarePointe franchise.

For a number of years, CarePointe also has retained a former U.S. Senator from New Jersey for legislative and other advisory services.  The senator won his reelection primary some years ago but was forced out of the general election by his own party.  This happened after he was censured for more than the usual amount of unseemly behavior that Jersey folks have come to expect from politicians.


The CarePointe Argument

To be fair, in the last couple years there have been investments -- claimed at $30 million to $40 million -- in heart and cancer programs at Care Pointe BMC.  The hospital has announced a program to treat previously unwanted indigent patients.  

CarePointe has even set up its own health insurance program.  Turns out the investors have decided that insurance is a good business.  This is an interesting change from their earlier position. 

From the get-go, the BMC buyer group defended itself as a champion of underfunded hospitals pillaged by greedy health insurance companies unwilling to pay fair prices for quality medical treatment.  

The BMC investors have made sizable personal fortunes.  They also have invested heavily in public relations efforts that cast them as the good guys in the white hats.  

I'm not buying the story.