FHP had pushed for construction of a 120-bed hospital to “control” care and reduce costs for its enrollees. The hospital cost $60 million and was about 200,000 square feet. However, it had miscalculated the number of patients it would have, and found that enrollees outside of the immediate county would not travel to the hospital, preferring to be treated in their own geographic areas. The local paper reported on the hospital’s struggles:

FHP fell on hard times, finding that the South Salt Lake hospital, another in Southern California and its network clinics weren’t meeting expectations. There wasn’t enough patient volume and new HMO enrollees to absorb the expansion costs.

The quest for short-term profitability eventually drove the company to shed its hospitals and clinics. (Campbell 1997) Mitchell, the FHP regional vice president, who had since left for another position, told the reporter that, in retrospect, building the FHP hospital “was premature and I believe there were better solutions than construction in a community with 100 percent too many beds.”

FHP sold the hospital to Paracelsus Healthcare in 1996 with a 15-year contract for hospital services with FHP. But just over a year later, Paracelsus found that the hospital was a losing proposition. According to the report in the local paper, “a source close to the industry said that FHP officials felt they had negotiated a very ‘aggressive’ contract and Paracelsus may not have fully anticipated all of the costs associated with the deal.” By 1997, after only four years in operation, FHP enrollees made up 95 percent of the hospital’s patients. Of the 100 beds in operation, it had an average 10 ADC.

But the negotiated rate with FHP was so low that the hospital continued to lose money, and adding patients would only cause the hospital to lose more money. The hospital’s workforce of about five hundred people faced the prospect of losing their jobs.

Case Questions, Part 4 1. If additional patients would cause the hospital to lose more money, what does this tell you about the contract rates?

2. How could St. Mark’s make a profit on such low rates when the Paracelsus hospital could not?