Community Health Systems (NYSE:CYH) owns and leases over a hundred hospitals in 29 states, primarily in rural communities. While the company's growth is partially organic, the bulk of revenue increases have resulted from acquisitions, such as the purchase of Triad Hospitals Inc. which doubled the size of the CYH network, in terms of beds, and made it the largest publicly traded hospital operator chain in the country. The company earned $12 billion in revenue and $243 million in net income in 2009.
As U.S. demographics change - and trend toward urban or rural relocations - so do CYH's revenues. Population size and economic cycles help determine the number of potential patients living close to CYH's hospitals and the amount of healthcare they need. Medicare and Medicaid laws also impact the company's operating income, and the growing quantitative gap between insured and uninsured and/or underinsured patients are concerns as more private clinics and physician-owned hospitals attract the most expensive and specialized medical procedures funded by private insurance. To stave off competition from these smaller, more nimble providers, the firm often forms partnerships with them.
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Community Health holds a virtual monopoly in most of its markets simply because its hospitals are the only providers of emergency care services in the vicinity. This is common to most American rural hospitals and reflects years of industry consolidation. Thus, the firm's primary competition is not other area hospitals, but rather urban hospitals, which patients often choose for specialized care. The firm competes by recruiting more specialists and investing in new technology in order to widen the range of services available to patients.
Compared to its urban counterparts, Community Health's hospitals have several operational advantages that help them achieve higher margins. A rural location gives hospitals the benefit of less competition, since many are monopolies in their communities. In addition to making more flexibility in pricing possible, this type of market power can bolster a hospital's reputation, encouraging positive relationships with patients and local physicians. Furthermore, patients treated at rural hospitals often have less complex health problems, as those with more advanced illnesses tend to travel to urban hospitals to receive care. This results in a lower cost structure, as more common medical issues can be treated with fewer expenses. Finally, Community Health maximizes the revenues it receives from private insurance providers by avoiding contractual relations with them and shunning and risk sharing agreements. Instead, they negotiate payments with these institutions on a case by case basis. Because private insurers have a smaller presence in rural areas, they are essentially not interested in penetration of rural clients and thus offer fewer discounts and special promotions to them, which results in higher reimbursement for hospitals. At the same time, CYH cannot offer the same level of equipment and specialized care as urban hospitals, leading it to lose potential patients. It also lacks teaching and research facilities, which are common to urban hospitals.
In the past several years, new types of competitors have been entering Community Health's markets and decreasing patient volume: physician-owned hospitals and stand alone surgery and diagnostic centers. New technologies have made it possible for physicians to perform procedures that earlier had to be done in a hospital. Community Health is addressing this challenge by attempting to partner with physicians and other independent facilities.