The Downsizing and Flattening at General Electric (1981-1985)

The Adoption of Prospective Payment in Medicare (1983)

President Reagan's Executive Order 12564 Establishing the Drug-Free Federal Workplace (1986)

The Rise and Fall of Richard Scott and the Columbia Hospital Corporation (1987-1997)

The Formation of Concentra (1997)

On  Wednesday,  April  25,  2001  U. S. HealthWorks acquired the occupational medicine division of HealthSouth. The transaction may help both organizations. HealthSouth can shed a less profitable division to focus on its core business in an attempt to continue the recovery of its stock price. U.S. HealthWorks emerges as a very major player in occupational medicine, doubling in size. Its 162 locations in 29 states make it the second largest for-profit occupational medicine clinic chain behind Concentra. 

This transaction demonstrates the size and sophistication of the current occupational medicine marketplace. In many communities, occupational medicine clinic competition is fierce with for-profit chains competing against the hospital and/or independent occupational medicine clinics that still make up the bulk of the provider market. To survive, occupational medicine clinics have become more knowledgeable, technologically wired, and market savvy. As a consequence, worker surveillance and injury care have probably never been better.

How much things have changed in the last twenty years!

Twenty years ago, we installed SYSTOC^® in a small occupational medicine clinic in Skowhegan, Maine. The clinic’s office was a converted broom closet near an emergency department. The clinic had three corporate clients and was one of only two fledgling occupational medicine programs in the State. We did not realize at the time that we were participating in one of the landmark events of occupational medicine development in the last quarter century—using the personal computer would reshape occupational medicine as it did many other businesses. We struggled to make the software perform, never imagining that SYSTOC would become the first commercially successful personal computer application in occupational medicine. Nor did we appreciate that the field of occupational medicine was getting ready to explode.

As a field, occupational medicine did explode. The small Maine clinic now has 350 corporate clients. It is one of over twenty proficient occupational medicine clinics in the state that aggressively compete to provide a wide array of services to increasingly sophisticated corporate clients. Many factors have influenced this development in occupational medicine. In retrospect, five events stand out as being particularly important:

The Downsizing and Flattening at General Electric (1981–1985)

By 1981, a revolution was underway in corporate America, although at the outset it went unnoticed in the occupational medicine community. American corporations were laying off workers ("downsizing") and reducing levels of management ("flattening"). Nowhere was this more apparent than at General Electric (GE). In 1981, Jack Welch, nicknamed "Neutron Jack", started his tenure at GE eliminating hundreds of thousands of jobs and removing large segments from the corporate hierarchy. These changes fundamentally altered GE and positioned it for the ’90s boom. Although long a target of critics, many "experts consider Welch one of the 20th century’s greatest corporate leaders, ranking with General Motors Corporation’s Alfred P. Sloan."¹ 

Thousands of American companies followed, using a downsizing and flattening approach similar to that at GE, fundamentally changing the way American business worked. These changes affected occupational medicine in three major ways:

1. Often one of the casualties of downsizing was the corporation’s employee health department. Corporations began to look for outside organizations to handle their medical surveillance and injured worker care ("outsourcing"). In the early 1980s, this created demand for independent occupational medicine providers.

2. Medical providers downsized from corporations began to look for new places to practice. Often these providers would select or start a freestanding or hospital-based occupational medicine program.

3. As fewer providers practiced within the corporate setting and more practiced in freestanding and hospital settings, occupational medicine’s values, which previously had reflected a corporate-governmental-academic basis, now took on the interests and values of the independent providers. New organizations, such as the National Association of Occupational Health Professionals, emerged to meet the needs of these providers.

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The Adoption of Prospective Payment in Medicare (1983)

Prior to 1983, Medicare reimbursed hospitals based on the hospitals’ costs. This system provided an incentive for hospitals to increase their costs, encouraging inefficiency. Medicare scrapped that system in 1983 and introduced Diagnosis Related Groups (DRGs) as the basis for a prospective payment system in Medicare. Medicare paid hospitals a fixed amount based on the diagnosis. Not surprisingly, inpatient days plummeted—declining by about 50 million patient days within five years of implementation.² 

Hospitals responded to this substantial loss of inpatient revenues in two major ways. First, they diversified into outpatient care. Second, they sought stronger relationships with payers, particularly employers. Occupational medicine fit both these strategies; hospitals eagerly developed programs and clinics. In 1988, hospitals reported that industrial medicine programs were the fourth most successful diversification strategy they had implemented.³ By 1989, occupational medicine was the most requested continuing medical education topic from hospitals.

President Reagan’s Executive Order 12564 Establishing the Drug-Free Federal Workplace (1986)

On September 15, 1986 President Reagan issued an executive order establishing the Federal Drug-Free Workplace Program. In that order, he said:

The Secretary of Health and Human Services is authorized to promulgate scientific and technical guidelines for drug testing programs, and agencies shall conduct their drug testing programs in accordance with these guidelines once promulgated.

In 1988, the Department of Health and Human Services issued the Mandatory Guidelines for Federal Workplace Drug Testing Programs that provided a basic methodology for drug testing. The Department of Transportation (DOT) mandated drug testing program began in 1990. In 1994, the DOT added alcohol testing in accordance with the Omnibus Transportation Employee Testing Act, passed in response to a 1991 fatal New York City subway crash attributed to alcohol.

Drug and alcohol testing now affects millions of workers. The regulations requiring meticulous specimen collection and reporting of results created a major market when employers looked for organizations that could provide these technical services. Occupational medicine clinics were the logical location for testing centers in many communities. The need for this service helped propel the development of occupational medicine.

The Rise and Fall of Richard Scott and the Columbia Hospital Corporation (1987–1997)

On Monday, October 19, 1987 a date known as "Black Monday," the Dow Jones Industrial Average fell 508.32 points, or 22.9%. On a percentage basis, it was the worst stock market crash in history. On the same day, Richard Scott and Richard Rainwater each put up $125,000 to start Columbia Hospital Corporation.⁴  Over the next ten years, Mr. Scott was one of healthcare’s influential and controversial figures.

With both the stock market and the hospital industry in chaos, Mr. Scott used leveraged cash flow and partnerships to buy hospitals one and two at a time and form networks. He improved the hospitals’ profitability by aggressive cost-cutting and revenue-enhancement techniques. The hospital chain, renamed Columbia/HCA, grew to 340 hospitals.

The revenue enhancement techniques ultimately lead to a federal investigation, Mr. Scott’s resignation, and a huge fine. The company, renamed HCA—The Healthcare Company, has undergone a significant restructuring of its size, mission, and business practices. As of December 31, 2000 the Company operated 196 hospitals.

Richard Scott affected the hospital and occupational medicine in several ways:

1. Columbia/HCA was a strong competitor in many markets. The entrance, or threat of entrance, of Columbia/HCA into a market required competing hospitals to attempt to lock up their referral base. Occupational medicine programs were one vehicle hospitals used.

2. Columbia/HCA demonstrated the potential power of a large, for-profit network of providers. Although the long-term success of the network is uncertain, several occupational medicine corporations are using the model.

3. Columbia/HCA serves as a cautionary tale to everyone in healthcare about the limits of growth and the dangers of adopting aggressive revenue enhancement techniques.

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The Formation of Concentra (1997)

On Monday, April 21, 1997 OccuSystems (an occupational medicine clinic network) and CRA Managed Care (a case management network) merged to form Concentra. Initially, the stock markets seemed to react unfavorably to the new company, and Concentra stock lost 83% of its value by September 8, 1998. Considering the stock undervalued, it was taken private on March 3, 1999, by Yankee Acquisition Corp., a corporation formed by Welsh, Carson, Anderson & Stowe (WCA&S). In March 1999, Concentra had 156 clinics. It now has 216.

Concentra is a test of two occupational medicine integration strategies:

1. Concentra represents the vertical integration of occupational medicine clinics with a case management cost-control corporation. Conceptually, this arrangement should increase the efficiency of cost-effective care delivery for employers.

2. Concentra represents horizontal integration of a large number of occupational medicine clinics. Conceptually, this integration could create improved conformity of care and allow effective national branding of occupational medicine services.

It is too early to tell how well these two strategies will work in the marketplace. Concentra’s success or failure will likely indicate the direction of occupational medicine over the next decade.

Footnotes

1. Welch, Jack: The Welch Era at General Electric. BusinessWeekOnline, December 11, 2000.
2. Medicare and Health Care Chartbook, Committee on Ways and Means, United States House of Representatives, 
February 27, 1997, p. 25.
3. Sabatino, F.G. The diversification success story continues. Hospitals 63(1):26, January 5, 1989.
4. Flower, J. Rick Scott and the Columbia/HCA Healthcare System. Healthcare Forum Journal, March-April 1995, Vol. 38 #2.

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