HOSPITALS/POLICY: For-profits cost more, but that’s not the point!

In a publication that (hat-tip to Jacob at Family Medicine Notes who is also to be congratulated on the excellent upgrade to Medlogs) comes from the Journal of the Canadian Medical Association a meta-analysis confirms that in the US for-profit hospitals charge about 20% more than non-profits. This is not new news by any means. In fact I remembered reading almost exactly the same thing when I first learnt about the US hospital sector back in 1990. What the Canadians have done is to do a really thorough evaluation of every and any study of the topic, and it basically confirms my (often faulty) memory. Unsurprisingly Steffie and David go almost apoplectic about this in an accompanying opinion piece.

    “Investor-owned hospitals charge outrageous prices for inferior care.” said Dr. Steffie Woolhandler. “That’s not just an opinion, it’s now a proven fact. The for-profits skimp on nurses, but spend lavishly on their executives and paper-pushers.” Previous research by Drs. Woolhandler and Himmelstetin, based on financial filings by virtually all U.S. hospitals, found that administration accounted for 24.5% of total costs at non-profit hospitals vs. 34% at for-profits, while payroll costs for clinical personnel were 7 percentage points higher at non-profits.

    Dr. Woolhandler also noted that: “Previous studies have shown a consistent pattern – investor-ownership compromises care and raises costs. For-profit dialysis clinics have higher death rates. For-profit nursing homes deliver lower quality care. For profit hospices give dying patients less care. For-profit rehab facilities cost Medicare more. And for profit HMOs deliver poor quality care and have extraordinarily high overhead costs.”

Indeed their article quotes many very well known instances of for-profit companies caught with their hand well inside the cookie jar, usually that belonging to Medicare, and yes Messrs Scott, Barbakow and Scrushy know who they’re referring to! But what I’m going to say now probably will stun many of my readers who still think I’m an unreconstructed Lenninst, even though I voted for Maggie Thatcher twice in the 1980s:–I don’t believe that it’s the for-profit nature of the hospitals that’s the problem.

While it’s impossible to judge from the Canadian meta-analysis, I don’t think that these studies are necessarily apples to apples comparisons. Now get ready for some gross THCB oversimplifications here, but follow my line of reasoning. In the US there are basically three types of hospitals: a) big academic teaching hospitals, which often are in the inner cities but have a strong reputation for excellence and receive massive cross-subsidies from Medicare; b) smaller inner-city or rural hospitals that cater to a poorer population; and c) suburban hospitals that have a wealthier population. In crass terms, the first group muddles along financially cross-subsidizing from a variety of funding sources, the second group lives in the financial toilet (and is the venue for most hospital closures) while the third group tends to do very nicely thank-you. Almost all for-profit hospitals are in that group (of course) but that doesn’t mean that they are necessarily much worse offenders in terms of how much they charge, how much they upcode Medicare DRGs, and how little they give away in charity care/or fail to recover bad debts than their non-profit neighbors. Non-profit hospitals in the suburbs tend to act very like their for-profit equivalents and have tended historically to be fairly profitable. It’s not entirely a joke that Ian Morrison called one of his clients “The Sisters of Sustainable Competitive Advantage”.

I stand to be corrected on this but my guess is that if you directly compare for-profit hospitals with non-profit hospitals of the same ilk, rather than a random selection of all non-profits, you’ll most likely see that the for-profits charge slightly more and give slightly less charity care, but not by the huge amounts suggested in this study. So in other words, there’s not too much wrong with for-profit hospitals per se. Yes they tend to be in chains that centralize decisions and centralize profits, and yes more often than not they get involved in dubious practices like upcoding and paying their CEOs way too much. The problem with that line of argument is that many of the same things happen on a lesser scale in many other hospitals. And as the vast majority of hospitals are independent or are in very small non-profit systems, if you multiply up the minor “infractions” at each one, you might end up with a total in dollars that rivals the big nauseates we see in the newspapers from a Columbia or a Tenet.

Now, I do believe that these infractions are indeed a problem. So who do I blame? Most of the problem lies with the incentive system that we put hospitals under. And that system (as I’ve been saying since my very first ever post on THCB) is mostly controlled by the graduated fee-per-episode system that Medicare uses to reward hospital care. A very similar system also incents physicians and other providers to do as much as they can (and in some cases to commit outright fraud). Whether they are officially for-profit or not, everyone in the system likes extra income, and if you set up a payment system that incents more activity at a higher price and has no corresponding checks or balances, then you are going to get higher costs. This could be fixed by changing the way Medicare pays providers (and its HMO intermediaries). Potentially the very baby steps CMS is taking down the Pay for Performance path might help in that direction. But focusing on purely the role of the for-profits is like blaming the guy who owns the bar for making a profit off his patron being an alcoholic.

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