Nonprofit hospices can learn valuable lessons from for-profits

For-profit hospices provide clues to financial stability

Any perception of how hospices are faring these days depends on whom you ask. Someone who works at a small hospice may say his or her hospice is having a tougher time than a large hospice is. Staffers at rural hospices may say they’re hoeing a tougher row than their metropolitan counterparts.

But there is one segment of the hospice population that seems more optimistic than the rest of the industry: for-profit hospices.

According to Health Care Strategic Management, a monthly newsletter for hospitals and health care systems, the hospice business is attracting investor-owned companies who are either buying or opening hospices at a record pace.

Health Care Strategic Management cited the acquisition frenzy of Dallas-based Odyssey Healthcare Inc. Odyssey operates 65 Medicare-certified locations in 30 states, with 14 more locations under development.

According to Investor’s Business Daily, Odyssey’s fundamental rank is the highest of 19 stocks in the medical-nursing home group, due in large part to its growth strategy. During the second quarter of 2002, Odyssey spent about $11 million to acquire five hospices. These purchases were financed entirely by Odyssey’s 2001 initial public offering of common stock. Seven more hospices were acquired in 2002 for $9 million. Last year, Odyssey bought seven more hospices, spending nearly $20 million, the newsletter reported.

The company’s chief executive officer, Richard Burnham, told Investor’s Business Daily that Odyssey plans to accelerate its schedule for the launching of new programs.

It seems three factors are giving rise to for-profit hospices’ enthusiasm:

  • the relatively low start-up costs for hospice;
  • an aging U.S. population;
  • favorable Medicare rates.

While at least two of those three points are worthy of debate, the fact remains that for-profit hospices are succeeding under the same rules and regulations that nonprofit hospices must follow.

"We’ve known for some time that for-profits are more efficient," says Stephen Conner, PhD, vice president of international development and children at the National Hospice and Palliative Care Organization (NHPCO) in Alexandria, VA.

For-profit hospices are faring better than nonprofits in a few telling categories. For one thing, for-profits serve proportionately more patients than nonprofits do. For-profit organizations account for about a quarter of the hospices in business today and serve 35% of the people who choose hospice care, according to NHPCO figures. Nonprofit organizations make up 72% of hospices and serve 65% of all hospice patients.

For-profit hospices also are averaging longer lengths of service compared to nonprofits. According to Connor, for-profit hospices average about five days more service per patient than nonprofit hospices. That’s about $118 in additional revenue per day, per patient. Depending on a hospice’s average daily census, the lost revenue can easily equal 10% of a hospice’s revenue.

For-profit hospices generally show a year-end profit or at least break even, while nonprofit hospice costs run an average of 10% to 20% above reimbursement revenue.

With for-profit hospices performing financially better than nonprofits, can nonprofits learn something from for-profit providers? Yes, says David English, chief executive officer of The Hospices of the National Capitol Region in Washington, DC. "It’s a comparison that many nonprofit hospices can learn from," English adds.

Note the differences

That comparison begins with an acknowledgement of the differences between the two types of hospices. For one thing, for-profit hospices strive to maximize profit, while nonprofits endeavor to maximize their resources. That doesn’t mean for-profit providers cut corners and sacrifice quality to increase their margin, nor does it imply nonprofits are fiscally irresponsible.

To be fair, there are well-known examples of high-quality, financially successful for-profit providers. Quality and profit do not have to be opposed to one another, says Mark Cohen, vice president of public relations and communications for Miami-based Vitas, a for-profit company with 29 hospices in eight states.

Another significant difference can be found in administration. For-profit companies operate their hospices from central locations. Nonprofit organizations are run locally, each provider having its own administration.

Yet, both hospice types are similar in a number of ways. Most importantly, both adhere to the same federal regulations. Certification as a Medicare hospice provider doesn’t depend on a hospice’s status. All Medicare-certified hospices must provide a basic level of care and receive the same per diem payment.

For-profit and nonprofit hospices face the same market pressures that affect length of service, rising labor costs, expensive high-tech palliative care, and, ultimately, the bottom line.

One advantage many for-profit hospices have over their nonprofit brethren is economies of scale—the ability to spread costs across a multi-hospice organization or larger volume of patients.

For example, Vitas has one administrative office serving hospices scattered across the country. Rather than having 29 separate administrative offices, each handling its own marketing, payroll, and human resources, the cost of one corporate office is spread across the entire organization.

According to Cohen, Vitas serves about 8,000 patients per day. That means the administrative cost per patient for Vitas is significantly lower than that for a local nonprofit that serves 500 patients per day.

Most hospices would have difficulty emulating this particular trait of for-profit hospices because few hospices are in the position to expand their coverage area or acquire hospice programs.

Better marketing

While this is a significant feature of large organizations like Vitas, it isn’t the only characteristic that contributes to their success. For-profit hospices are better marketers, says English. While for-profits may enjoy greater financial resources to devote to marketing, their strategy cannot be dismissed.

Their marketing is more selective, English observes. Hospices as a whole strive to increase patient lengths of stay. Cancer patients generally inhibit a hospice’s ability to break even because of the high cost associated with admission, coupled with a week-long stay that barely allows enough time for the hospice to recoup its up-front cost. The desired patient — from a financial perspective — is one whose illness lends itself to a longer hospice stay.

Selective marketing is a concept that English doesn’t completely accept. "We have difficulty with selective marketing from a mission perspective," he says. But he says he believes that specific populations could be targeted as areas in which hospice can improve access.

Nursing homes are a good example. Skilled nursing, assisted living, and other residential facilities have long been underserved by most hospices. English has noticed how for-profit hospices have successfully reached out to this market segment, which carries a number of financial benefits:

  • Lower travel costs. Rather than having a nurse spend hours on the road between visits, a hospice nurse has to travel to one location to see several patients.
  • Lower labor costs per patient. With the ability to see more patients in a shorter amount of time, the cost of a single nurse is spread across a higher number of patients.
  • Longer lengths of stay. Most patients in this setting require less complicated care and suffer from non-cancer illnesses.

For-profit hospices, by virtue of their fiduciary responsibility to shareholders and investors, are better managers of costs. Of course, this can be construed as sinister or an example of misaligned incentives: In order to cut costs, one must sacrifice quality.

According to Health Care Strategic Management, VistaCare expects 30% to 35% growth in 2004. Its chief financial officer, Mark Liebner, told the newsletter: "Our profitability is largely dependent on our ability to manage costs of providing hospice services and to maintain a patient base with a sufficiently long length of stay to attain profitability. We are susceptible to situations, particularly because of our open-access philosophy, where we may be referred a disproportionate share of patients requiring more intensive and therefore more expensive care than other providers. Although Medicare and Medicaid currently provide for an annual adjustment of the various hospice payment rates based on the increase or decrease of the medical care expenditure category of the Consumer Price Index, these hospice care increases have historically been less than actual inflation. If these annual adjustments were eliminated or reduced, or if our costs of providing hospice services, over one-half of which consist of labor costs, increased more than the annual adjustment, our profitability could be negatively impacted. In addition, cost pressures resulting from shorter patient lengths of stay and the use of more expensive forms of palliative care, including drugs and drug delivery systems, could negatively impact our profitability."

Bottom-line pressures

What Liebner is saying is no different from what nonprofit hospices have said in the past. Medicare rates, lengths of stay, and complex patients in an open-access model are all pressures that affect a hospice’s bottom line. The only difference between nonprofit and for-profit hospices is that one relies on charitable donations to make up a cost/revenue deficit, while the other suffers from disgruntled investors.

The wrinkle in Liebner’s statement is his emphasis on managing cost. This is a concept with which both English and Cohen are comfortable. In addition, both maintain that quality care can still be achieved in a cost-management environment.

"[Nonprofit hospices] need to have a better sense of how our money is spent," English says. "We want our employees to be passionate about whatever role they play, we ask them to strive to be the best in the world at what they do, and we want them to be good stewards of our resources."

Vitas is an open-access hospice that emphasizes quality care regardless of patient circumstances. Cohen emphasizes that Vitas does not manage cost by denying access to patients who require expensive treatment, such as cancer patients who need palliative chemotherapy.

To manage costs and achieve a better understand of its business as a whole, Vitas invested in information technology. The company developed proprietary software, Vitas Exchange, that allows it to collect data on costs, patient care, referrals, records, and other areas that are useful in decision-making. In the end, Vitas is able to cite data that show how quality is improved by using a particular therapy, even when that therapy is less expensive than another. The availability of data allows Vitas to abandon the practice of relying on anecdotal evidence to promote itself.

"We tell our representatives not to talk about hospice anecdotally, but to show real data," Cohen says.