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St. Vincent’s Is the Lehman Brothers of Hospitals

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The emergency room.  

New York’s hospital system, like other major features of its critical infrastructure—subways, roads and bridges, schools—is rooted in the nineteenth century and has adapted itself haphazardly to contemporary demographics and economics. Most of New York’s hospitals were originally sponsored by religious, ethnic, or civic groups and emphasized neighborhood care. That was a functional notion in the days when medicine was mostly a low-tech, reasonably priced affair. But everything changed after the Second World War, with the explosion of advanced and increasingly costly technology. X-ray machines were replaced with CT scanners. Heart transplants and complex cancer therapies became commonplace. Breakthrough drugs were developed to treat previously intractable diseases. The average life expectancy of an American has risen from 69 to 78 years between 1960 and today. But at the same time, health-care spending has jumped from 5.2 percent of GDP to 17.3 percent. Even adjusted for inflation, the cost of a night in a U.S. hospital bed rose from $128 in 1965 to $1,289 in 2002, a tenfold increase.

New York has been a leader in the modern medical revolution. It is home to five major medical schools—with two others just outside city limits—and staffs nearly every local hospital with medical residents. (One in eight residents in the country is currently being trained in New York City.) New York also has a tradition of providing broad access to health care. In many states, children from families whose incomes are marginally above the federal poverty line don’t qualify for government insurance; in New York, children whose families earn four times the federal poverty level remain eligible for that. In most parts of the country, for-profit hospitals exclude poor patients from inpatient services, diverting them to substandard public hospitals; in New York, every private hospital is constituted as a nonprofit organization, subject to a web of federal and state regulations that oblige them to provide care to low-income and indigent residents. New York’s eleven city-run hospitals are also, by far, the largest municipal system in the country.

During the city’s fiscal crisis in the seventies, when many middle-class New Yorkers fled to the suburbs, leaving behind a higher proportion of poor residents, the city was hit by a wave of hospital bankruptcies. After Mario Cuomo was elected in 1983, his administration took tight control of the hospital industry. The model was that of a regulated public utility: In exchange for providing a socially essential service, the state would ensure a hospital’s profitability—barely. “It was small-s socialism,” one expert in hospital finance says. “The state set the reimbursement rates everyone, even private insurance companies, paid. The whole thing was centrally controlled, and if hospitals got in trouble, the state simply adjusted the rates. Hospitals survived but were prevented from building up reserves and were chronically short of capital.”

Then George Pataki took office in 1995, determined to allow hospitals to test their mettle in the free market by negotiating their own terms with insurers. It turned out to be an exercise in shock-therapy capitalism. Inexperienced at the bargaining table, hospitals engaged in intramural rivalry with each other, cutting unfavorable deals with insurers in order to hold on to patients in the short term. With their already thin margins pared down further by deregulation, many hospitals soon built up paralyzing debt loads. Even the largest and seemingly least vulnerable facilities decided that their best hope for survival was to get bigger. A flurry of mergers and buyouts ensued, and by the end of the nineties, the hospital system began to assume its current bewildering patchwork of partnerships and affiliations. Columbia Presbyterian and New York Hospital, both attached to elite medical schools, joined forces. NYU and Mount Sinai forged a deal (it later came undone). On the eastern edge of the city, North Shore hospitals merged with nearby Long Island Jewish, staking out an enormous swath of the hospital market on Long Island, Queens, and Staten Island. Beth Israel and St. Luke’s–Roosevelt, debt-ridden and left on the sidelines by the major academic hospitals, decided to try making a go of it together. It was unclear if bigger was actually better—for patients or the bottom line—but size seemed to offer hospitals a buffer against collapse.

By 2005, less than a decade into its dalliance with free enterprise, the city’s hospital system had taken on something of a post-Soviet tinge, with winners ruling the roost like oligarchs and losers reduced to a state of grim dependency. A pecking order emerged, with elite academic centers at the top, well-regarded independent hospitals like Lenox Hill in the middle, and community hospitals on the bottom. Yet even the prestigious academic centers continued to underperform financially by the standards of their peers around the country—whose margins are often two or three times as high—and on the whole, New York hospitals remained in a state of chronic financial distress. In 2005, when hospitals nationwide reported average profits of 3.7 percent, those in New York City were 1.3 percent in the red, with the weakest ones a lot worse off than that. Hospitals were closing across the city and the state.


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