The Chicago-area hospital market is notoriously fragmented, competitive and dominated by not-for-profits. The few for-profit players there, notably national hospital chains Quorum Health and Tenet Healthcare Corp., have failed to gain share while their charitable rivals bulk up and expand. Tenet and Quorum each accounted for roughly 2% of the market in 2015, according to an analysis by independent Minneapolis-based consultant Allan Baumgarten.
Now the for-profits might be skipping town. Quorum, which owns Vista Health System in north suburban Waukegan, has already inked a deal to sell one of Vista’s two hospitals to a for-profit behavioral health company. Tenet is apparently entertaining offers from potential suitors for its four Chicago-area hospitals. In fact, the entire company might be for sale, according to the Wall Street Journal.
So why is it so hard for investor-run health systems to succeed in the Chicago area?
For one, for-profit health systems have shareholders to answer to, so they aren’t inclined to balance services that generate revenue like orthopedics and cancer treatments with ones that don’t. Plus, Chicago’s population isn’t growing. Actually, it’s shrinking. And unlike in some other states, Illinois regulators control the fate of big-ticket items, like a new hospital wing or a pricey outpatient building.
“If you think about the amount of capital a for-profit has, where are they going to place their bets?” asks Elyse Forkosh Cutler, president of Chicago-based Sage Health Strategy. “If they’re looking for low regulatory barriers and population growth, Chicago is not going to be where they come.”
There’s also this: The hospital industry in the Chicago metro area is one of the most fragmented in the nation, with 95 medical centers in the six-county area. Of those, 16 are defined as for-profit, and nearly half are general hospitals. The rest are specialty, according to 2015 state records, the most recent available.
The competition for patients and doctors is fierce. Add margin pressures for for-profits, and it’s even tougher.
“Each (hospital) fights in its own little niche for something,” says Brian Sanderson, Chicago-based national managing partner for healthcare at tax and advisory firm Crowe Horwath. “If you can’t differentiate, and there’s a number of ways to do that, then you can’t really position yourself any better to garner more market share.”
Representatives for Dallas-based Tenet, Quorum in Brentwood, Tenn., and some of its hospitals in the Chicago area didn’t return phone calls or declined to comment.
Large local not-for-profits, such as Advocate Health Care (the biggest hospital network in the state), UChicago Medicine, Northwestern Medicine and Rush are either scooping up community hospitals, forging less formal affiliations with them or investing heavily in outpatient facilities to feed back patients to their main campuses. “They’re leveraging themselves to create volume and expand the breadth of services,” says Dan Marino, a Chicago-based executive vice president at consultancy GE Healthcare Camden Group. “I don’t see the for-profits doing that. Historically, it’s a very traditional old-school model.”
To be sure, Vista has tried. With fewer dollars (about $203.2 million in 2015 net patient revenue) and a higher share of low-income patients than billionaire rivals such as Advocate and Northwestern, the system in recent years has expanded its intensive-care unit at its main general hospital, Vista Medical Center East in Waukegan, and opened a free-standing emergency center in wealthier Lindenhurst.
The system won state regulators’ approval to make all patient rooms at Vista East private, too, a move many hospitals have already made. But in June, Quorum put that project on hold, according to a letter interim Vista CEO Norman Stephens sent to state regulators. Perhaps the biggest blow was regulators rejecting Vista’s pitch to build a hospital in Lindenhurst, which the system argued would have been a lifeline to support its Waukegan facilities.
Quorum also owns MetroSouth Medical Center, a community hospital in south suburban Blue Island.
Some winners, more losers
Tenet arrived in the Chicago area in 2013, paying a premium for Vanguard Health Systems, which had four local hospitals. They are Weiss Memorial Hospital in Chicago’s Uptown neighborhood and three hospitals in the western suburbs: Westlake Hospital in Melrose Park, West Suburban Medical Center in Oak Park and MacNeal Hospital in Berwyn.
MacNeal was the most profitable of its sister hospitals by far, with $48.2 million in net income in 2015, according to Baumgarten’s analysis. Weiss and Westlake were money-losers, with losses of $2.8 million and $4.3 million, respectively, he said.
Weiss in particular is in one of the most competitive pockets of the Chicago area. Located along Lake Shore Drive, Weiss sits within a few miles of several hospitals with stronger branding power and cachet, including Advocate, and big Catholic provider Presence Health. Doctors and patients alike have plenty of options in terms of employment and care.
The Tenet hospitals in recent years have focused on smaller investments, too. Instead of glitzy new towers, improvements include renovations to an operating room waiting area, building a food pantry and buying software, state records show.
It’s not clear what the fate of Tenet’s investment is in the Chicago market. The company has been hustling to sell off weak hospitals in markets across the country that aren’t core to the brand. That could include Chicago: Piper Jaffray research analyst Sarah James says the market isn’t considered a major one for Tenet.
With a potential sale of the entire company, not-for-profit hospitals in the Chicago area would continue to dominate.