When I was a medical student and resident in Philadelphia in the late 1970s and early 1980s, there were a half-dozen medical schools within a 10-mile radius. That number was reduced to 5 in 1995 when two of the medical schools merged: The Medical College of Pennsylvania (MCP) and Hahnemann Medical College. Meanwhile, Jefferson Medical College and Jefferson Health grew by leaps and bounds, in part through acquisitions. Today, Jefferson owns 18 hospitals and a university commonly known as the Philadelphia College of Textiles and Science, renamed Philadelphia University.
While health systems may see mergers and acquisitions as the pathway to success, that’s often not how the story plays out.
The Woes of Rapid Healthcare Expansion
The union of MCP and Hahnemann was spearheaded by the late Sherif Abdelhak, the CEO of Pittsburgh-based Allegheny General Hospital. Abdelhak seized an opportunity to expand healthcare in Philadelphia much like the way Jefferson would expand — by acquiring over a dozen community hospitals. Abdelhak’s empire, known as the Allegheny Health, Education, and Research Foundation, or “AHERF” for short, accumulated inordinate debt and became the largest nonprofit healthcare failure in U.S. history at the time (1998). MCP-Hahnemann emerged from the debacle as Drexel University College of Medicine.
I worked at AHERF during tumultuous times, escaping just before the organization imploded. Abdelhak warned the medical staff not to “cross” him as he went about his spending spree. (He served time in prison for misappropriating funds and later changed his last name.) Abdelhak’s largesse had repercussions decades later, as years of hospital consolidation likely played a role in the closing of Hahnemann University Hospital in 2019, displacing over 500 residents and fellows in training.
Jefferson’s troubles, although not as devastating as AHERF’S, also began with the acquisition of hospitals, as well as the aforementioned Philadelphia University (which was acquired in the belief that a college known for clothing design could help redesign the delivery of medical care). This novel idea has yet to bear fruit, although self-proclaimed successes of the merged schools include increased enrollment, better educational value, increased funded research, enhanced rankings, and an impressive 97% job or graduate school success rate.
From 2009 through 2016, Jefferson allegedly invested money earmarked for a medical student loan program and siphoned the profits for its own purposes rather than reinvest them in the loan program — an allegation that Jefferson denies. (The loans provided favorable terms to students who agreed to work as primary care physicians for 10 years after completing their medical degrees.) Abdelhak did something similar: He raided endowed funds to prop up AHERF’s operations (he pleaded no contest to charges).
Jefferson recently announced it is cutting about 1% of its workforce of more than 40,000 employees as part of an effort to trim financial losses from decreased patient volumes and double-digit increases to costs. The health system also suffered its second credit downgrade from Moody’s since it began its significant expansion. Jefferson’s relatively new CEO appeared to blame the previous CEO and administration for the current state of affairs, saying, “One of the reasons we are at an inflection point now is that we have never rationalized the size of our workforce through four significant mergers.” Jefferson finished its 2023 fiscal year with a $231 million operating loss, excluding gains from the sales of businesses.
Jefferson seemed to follow the same playbook as AHERF, especially in its rapid expansion and alleged misuse of funds. You would have thought that Jefferson learned a lesson from the MCP-Hahnemann merger and buyout of Philadelphia hospitals.
The story is not unique to Jefferson, however. In fact, financial hardship is a tale told by many hospitals and academic medical centers and is further proof that exponentially mounting medical costs are unsustainable, if not incomprehensible, as pointed out by Time magazine 10 years ago.
Pick Two: Costs, Quality, or Access?
Healthcare was never meant to be profitable. The hundreds of hospitals and health systems that have closed their doors in the past 2 decades are a tribute to that fact. In 2022 alone there were 46 healthcare bankruptcies with liabilities of $10 million or more, and the number will likely continue to rise in 2023. Solvency is not easy to maintain given unstable market conditions and higher costs for labor, pharmaceuticals, and other supplies. In addition, hospitals nationwide are grappling with a shift toward outpatient services as improvements in technology make same-day surgery and other procedures more feasible.
A single-payor system is often touted as a solution to runaway costs, but as we all know, there are many issues associated with giving the government sole control of healthcare. Rationing care is frequently discussed in the context of spiraling healthcare costs. However, we already ration care implicitly; doing so explicitly opens up a hornet’s nest of ethical concerns.
I was fortunate to hear the late Princeton economist Uwe Reinhardt speak at a conference. He summed up the situation succinctly. He asked the audience to imagine an equilateral triangle with the three points of the triangle labeled as: costs, quality, and access. The problem, he said, is that we can only achieve two of the points as healthcare goals and the third must be sacrificed. For example, if we want to build a health system that provides easy access and top-notch care, costs will skyrocket. If we want the system to provide excellent quality and keep costs low, we will have to deny access to the sickest patients. Reinhardt joked that access is an elusive concept. Everyone has “access” to a Mercedes Benz, he said.
Reinhardt then asked, “What is the most expensive piece of medical equipment?” Those in attendance guessed MRIs, CT scanners, and other plausible answers. Reinhardt shook his head, then reached inside his jacket, pulled out a pen and held it high in the air for everyone to see. Individuals chuckled, suddenly aware and silently knowing that doctors’ prescriptions and orders — many written strictly for defensive reasons — are among the key drivers of costs and do not necessarily lead to improved outcomes.
The conference that Reinhardt spoke at was held in the 1990s. The truth is, no one has come up with an answer to the problem of soaring healthcare costs to this day. But at least we know that bigger is not better.
Arthur Lazarus, MD, MBA, is member of the editorial board of the Physician Leadership Journal and an adjunct professor of psychiatry at the Lewis Katz School of Medicine at Temple University in Philadelphia. His forthcoming book is titled Every Story Counts: Exploring Contemporary Practice Through Narrative Medicine.