US private hospitals eye overseas expansion in search of vast profits
Across the street from the Buckingham Palace Garden and an ocean away from its Ohio headquarters, Cleveland Clinic is making a nearly $1bn bet that Europeans will embrace a hospital run by one of America’s marquee health systems.
Cleveland Clinic London, scheduled to open for outpatient visits later this year and for overnight stays in 2022, will primarily offer elective surgeries and other treatments for the heart, brain, joints and digestive system. The London strategy attempts to attract a well-off, privately insured population: American expatriates, Europeans drawn by the clinic’s reputation, and some Britons happy to pay. The hospital won’t offer less financially rewarding business lines, like emergency services.
“There are very few people out there in the world who would not choose to have Cleveland Clinic as their healthcare provider,” said chief executive Tomislav Mihaljevic.
Facing the prospect of stagnant or declining revenues at home, about three dozen of America’s elite hospitals and health systems are searching with a missionary zeal for patients and insurers able to pay high prices that will preserve their financial successes.
For years, a handful of hospitals have partnered with foreign companies or offered consulting services in places like Dubai, where western-style healthcare was rare and money plentiful. Now a few, like the clinic, are taking on a bigger risk – and a potentially larger financial reward.
But these foreign forays prompt questions about why American non-profit health systems, which pay little or no tax in their home towns, are indulging in such nakedly commercial ventures overseas. The majority of US hospitals are exempt from tax because they provide charity care and other benefits to their communities. Non-profit hospitals routinely tout these contributions, though studies have found they often amount to less than the tax breaks.
Despite their tax designation, non-profit hospitals are as aggressive as commercial hospitals in seeking to dominate their healthcare markets and extract as high prices as they can from private insurers. Though they do not pay dividends, some non-profits amass large surpluses most years even as more and more patients are covered by Medicare and Medicaid, the US government’s insurance programs for the elderly, disabled and poor, which pay less than commercial insurance.
Cleveland Clinic, one of the wealthiest, ran an 11% margin in the first three months of this year and paid Mihaljevic $3.3m in 2019, the most recent salary disclosed.
The advantages of international expansion for their local communities are tenuous. Venturing overseas does not provide Americans with the direct or trickle-down benefits that investing locally does, such as construction work and healthcare jobs. Even when hospitals abroad add to the bottom line, the profits funneled home are minimal, according to the few financial documents and tax returns that disclose details of the operations.
“It’s a distraction from the local mission at a minimum,” said Paul Levy, a former chief executive at Boston’s Beth Israel Deaconess Medical Center and now a consultant. “People get into them at the beginning thinking this is easy money. The investment bankers get involved because they get the financing, and the senior faculty get on board and say, ‘This is great; it means I can go to Italy for two years’ – and there’s not a real business plan.”
There are financial hazards. For instance, Cleveland Clinic has warned bondholders that its performance could suffer if its London project does not launch as planned. There are also risks to a system’s reputation if a foreign venture goes awry.
Finance experts temper expectations that operations of overseas hospitals will have a major bearing on a system’s balance sheet. “Even though they do well, they’re small hospitals – they’re never part of the overall picture,” said Olga Beck, a senior director at Fitch Ratings. “It does help [the US operations] because it gives a global name and presence in other markets.”
Hospital executives say their foreign ventures provide an additional source of revenue, thus adding stability, and benefit the care of their hometown patients.
“As we go to different areas around the world, we learn and we continuously improve for all our patients,” said Brian Donley, chief executive of Cleveland Clinic London. He said the clinic has learned from UK practices more efficient ways to sterilize surgical instruments and perform X-rays.
One of the oldest foreign ventures is the organ transplant program the Pittsburgh-based non-profit system UPMC has run in the Italian city of Palermo since 1997, when Sicily’s government and Italian insurers realized it would be cheaper to perform those procedures there than continue to send patients to the US. Since then, UPMC’s Palermo facility has performed more than 2,300 transplants.
In this initial expansion, the US hospital was providing a highly specialized type of surgery – one that UPMC is renowned for – that was not available locally. But UPMC, one of the most entrepreneurial US health systems, didn’t stop there. In Ireland, UPMC owns a cancer center and provides care for concussions through sports medicine clinics. Since 2018, the system has acquired hospitals in Waterford, Clane and Kilkenny. They are staffed mostly by independent Irish physicians, but UPMC regularly sends over its leading US specialists to lend expertise, according to Wendy Zellner, a UPMC spokesperson.
UPMC has company in Ireland: in 2019, Bon Secours Mercy Health, a Roman Catholic system, merged with a five-hospital Catholic system there.
Over the past two decades, UPMC did advisory and consulting work in 15 countries but decided to narrow its involvement to four: Italy, Ireland, China and Kazakhstan, where UPMC is helping a university develop a medical teaching hospital. Charles Bogosta, president of UPMC International, said UPMC wanted to focus its efforts where it was confident it could improve the quality of care, bolster UPMC’s reputation and earn profit margins greater than its US hospitals do.
UPMC officials said the economics are favorable abroad because labor is cheaper and the mix of patients is heavily tilted toward those with commercial insurance, which pays better than government programs.
“What we’ve been doing overseas has been really helpful in addressing what everyone in the US is trying to do, which is come up with diversified revenue sources,” Bogosta said.
Even so, that extra revenue remains a small part of UPMC’s earnings. The health system’s foreign hospital business generated gross revenues of $96m, or 1% of UPMC’s $9.3bn total hospital revenues in 2019, according to a KHN analysis of a UPMC financial disclosure. Since that figure is before accounting for the costs of running the hospitals, taxes and other expenses, the actual profits the foreign hospitals might send back to Pittsburgh are much smaller.
In Ireland, where corporations are required to disclose audited financial statements, UPMC Investments Ltd, an umbrella group that owns the Waterford hospital operation and property, reported net profits of about a half-million dollars in 2019 on more than $47m in gross revenues.
In an email, Zellner said the Ireland statements “do not give you the totality of the picture in Ireland or International, where our results are far better than these documents would suggest”. UPMC declined to provide more detailed financial data.
But foreign ventures can misfire. “These partnerships can turn into nightmares, as Hopkins has learned,” Steven Thompson wrote in a 2012 article for the Harvard Business Review that described his observations as the founder and first chief executive of Johns Hopkins Medicine International, a for-profit venture jointly owned by Johns Hopkins Medicine and Johns Hopkins University.
Cleveland Clinic London is unusual in that US health systems rarely build a hospital abroad from scratch without a local partner. The clinic chose that more cautious approach with Cleveland Clinic Abu Dhabi, a 364-bed hospital owned by the Mubadala investment company that the clinic manages. It also has a consulting practice that is helping a Singapore healthcare company build a hospital in Shanghai.
Foreign enterprises appeal to the clinic because it has limited growth opportunities in Ohio, where the population is growing slowly and aging, meaning more patients are leaving high-paying commercial insurers for lower-paying Medicare. The clinic has expanded in Florida, acquiring five hospitals to take advantage of population increases and wealthier patients there.
The London project will have 184 beds and eight operating rooms. Donley said it will be staffed primarily by UK physicians, including ones who also work for the NHS.
“The clinic has a long track record of being able to execute on its strategies,” said Lisa Martin, an analyst at the bond rating agency Moody’s Investors Service. “The London project is obviously the biggest venture and the biggest financial risk that they’ve made abroad.”
- KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism about health issues. Together with Policy Analysis and Polling, KHN is one of the three major operating programs at KFF (Kaiser Family Foundation). KFF is an endowed non-profit organization providing information on health issues to the nation