Op-Ed: Health Care For Profit

I’ve noticed at The Health Care Blog quite a few people are obsessed with the role of profit in the health care system. Many apparently believe that for-profit entities have no legitimate role in an ideal world and that all organizations should be nonprofit.

My own view, interestingly enough, is the exact opposite. Were I a Health Care Czar, I would remove the nonprofit status from almost all health care organizations and force them to be for-profit under tax law. I would be willing to consider some exceptions here and there, and in special cases allow for-profits to set up nonprofit subsidiaries. But the vast majority of all patients in my ideal world would be dealing with for-profits — in getting health insurance and in getting medical care. And in return they would get lower-cost, higher-quality care.

Why do we have such radically divergent views on this subject? As so often happens in public policy, much confusion is caused when people are not familiar with basic economic principles. In this case, the antiprofit folks are confused about (1) the economics of capital, (2) the economics of competition and (3) the economics of motivation in complex social systems.

Suppose the government builds a hospital and plans to have the entity be self-sustaining (all operating costs are to be paid from expected revenues). Following conventional public sector accounting, the cost of the capital needed to build the hospital will be treated as zero. (Afterall, all we need is for the Treasury to write a check.) And even though the plan to cover costs with patient revenues is far from certain to pan out, the accountants will also ignore the cost of that risky decision.

This example is Exhibit A in my case for abolishing the nonprofit status of hospitals.

There is a real social cost of the capital used here. It is the social value of the next best use of those dollars. Because we build a hospital, we have to forgo the opportunity to build a school or a library or even an oil refinery. Note: This cost doesn’t vanish just because accountants don’t write it down on the financial statements.
Making risky decisions is also costly, and the cost is implicitly borne by taxpayers. In the worst case, the hospital might never open its doors — in which case the taxpayers’ entire capital investment would be lost. More optimistically, the hospital might operate, but incur large losses that will have to be covered with additional taxpayer assessments. Again, these costs don’t vanish just because accountants don’t record them.
A better approach is to make these costs transparent. If the hospital has to raise money in the capital market, the cost of capital will be made explicit. If its plan is an especially risky one, the cost of that risk will be reflected in the extra premium the capital market will charge. Not only would a for-profit approach be more transparent, it would also be less costly. The reason? The social cost of raising money on Wall Street is a lot lower than the social cost of collecting income taxes.

Like other for-profit entities, hospitals should have to report the cost of capital they make and they should have to report the “profit” they earn in order to cover the cost of that capital. (See the discussion following Linda Gorman’s post at the John Goodman Health Policy Blog.)

The second issue relates to the economics of competition. In my book, Regulation of Medical Care (Cato, 1980), I summarized organized medicine’s 20th century efforts to drive for-profit entities out of the market. In the early part of the century, for-profit medical schools were replaced with nonprofits. By midcentury, for-profit hospitals were almost completely driven from the market. After World War II, nonprofit health insurers (Blue Cross and Blue Shield) were established for the express purpose of completely changing the way doctors and hospitals would be paid. They tried to dominate the market and drive their for-profit rivals from the field. In the American Medical Association’s (AMA) ideal health care system, the only people earning a profit would be the doctors themselves!

We are still living with the vestiges of this history. But it would be a mistake to conclude that the real issue was profit vs. nonprofit. The AMA’s real goal was a medical marketplace in which all the entities were subservient to the interests and vision of organized medicine. The AMA assumed, probably correctly, that nonprofits operating in a not-very-competitive market would be easier to dominate and control.
Today, no one thinks hospitals, health insurance companies and other entities should exist to serve the interests of doctors. And today everyone recognizes that nonprofits can compete for patients based on price and quality just as vigorously and successfully as for-profits can. In fact, in today’s environment the whole distinction between for-profit and nonprofit is an irrelevant distraction.

The final issue is motivation. As Adam Smith discovered 200 years ago, as a producer in a competitive market, I cannot succeed without meeting other people’s needs. Of course, Smith realized that the butcher, the baker and the candlestick maker were not primarily motivated to help other people. They were self-interested. But they could not pursue their own interests without serving the interests of others.
Now let’s suppose that Adam Smith was wrong about people’s motivations. Suppose that a lot of producers are actually completely altruistic. We can use modern economics to show that no matter what motivates the producer, he can’t survive in a competitive market without meeting other people’s needs the same way that all his selfishly motivated rivals are meeting them. Put differently, in competitive markets, the motivation of any particular producer really doesn’t matter very much.

More to the point, you and I cannot control other people’s motives. But we can control public policies. With that in mind, it is in our interest as patients to promote institutional environments in which providers of medical care find it in their economic self-interest to deliver low-cost, high-quality care. And this is true regardless of all the many and complex factors that make up the underlying motivations of the doctors and institutional administrators who provide that care.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis.  He is also the Kellye Wright Fellow in health care. The mission of the Wright Fellowship is to promote a more patient-centered, consumer-driven health care system. Dr. Goodman’s Health Policy Blog is considered among the top conservative health care blogs on the internet where pro-free enterprise, private sector solutions to health care problems are discussed by top health policy experts from all sides of the political spectrum.

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  1. As in most debates, neither extreme is completely right nor completely wrong. A world with only for-profit hospitals would not provide the chartiable care or provide the community service we expect and deserve from not-for-profit hospitals. However, a world with only not-for-profit hospitals could lead to inefficiencies and higher costs. Not-for-profit hospitals are cost conscious and performance oriented to ensure access to necessary funding. However, they are more mission driven then their for-profit bretheren. Each type of organization plays an important role in our diverse healthcare delivery system.
    Robert Kaminsky, MedSpan, http://medspanresearch.wordpress.com

  2. The United States ranks 42nd in life expectancy. We also rank 34th in infant mortality. 75 million people are either uninsured or under-insured. One quarter of the countries population. 67% percent of people under 30 support healthecare reform. It’s time we expressed our support that HealthCare should be available and affordable for everyone. Health care is a right it’s not a privilege. For more current articles and information see this site http://www.supporthealthreform.com/. It has some great articles and is up to date on everything supporting health reform.

  3. Dr. Goodman, in focusing on what role for-profits play in healthcare, addresses an issue little discussed in public view during the reform process. Making for-profits the villains was much easier than a discussion of monopolistic behavior just as promoting death panels was easier than talking about the role of rationing. Judging by some early comments here, it seemed this blog was on the same path to a shouting match.
    This is why I was heartened by Matthew Holt’s early comments in which he offered areas of agreement with Dr. Goodman (which he notes will rarely happen). If these discussions are to be anything other than boxing matches this type of give and take is important. Likewise Margalit Gur-Arie makes a provocative contribution by offering up a simple but important statement for consideration – comparing the selling of underwear to healthcare. She does so in a manner that invites further comment – at least to me.
    The sum total of these types of comments showed me some surprising areas of common ground:
    O There is less difference between the behavior of profits and not-for-profits in healthcare than commonly thought.
    O The tax code is not being used to the taxpayers’ benefit.
    O Significant harm is being caused by lobbying efforts (and to me, represents a distortion of a free market).
    O Finally both John Goodman and other commentators, including Matthew Holt, touched on an extremely important underlying theme – what motivates human behavior, whether in complex settings or more basic ones.
    My own experience in healthcare, working with hundreds of hospitals, is that the culture of a particular organization is very much a deciding factor on what behaviors are exhibited, whether for-profit or not. Ultimately culture is driven by leadership.
    In one organization, what motivated leaders more than anything was being perceived as being in agreement with the top brass. The patient, sadly, didn’t factor into conversations about what was the best course of action, especially if it diverged from the senior management’s position… and yet the organization in question was a not-for-profit. The CEO was someone who had been in his post a very long time and most likely motivated predominately by the desire to maintain his position. But this very same story could be replayed at any organization.
    In another institution, the physicians were the ultimate power holders, and therefore staff did not step forward to offer conflicting opinions. Safety became an issue as those closest to the patient were afraid to question a physician. All were motivated to serve the doctor. Why? – that CEO had been trained that it was all about physician relationships.
    So what are we to do? Last fall, I read an important article in Health Affairs in which Donald Berkwick and others identified five critical components for the transformation of healthcare – all of which I support, especially “joy in the workplace.” http://qshc.bmj.com/content/18/6/424.full But at the end, the authors add an important caveat. “These transformations comprise a major culture change for healthcare. Achieving them will require enlightened leadership, commitment and support from all stakeholders.” I agree, but enlightened leadership doesn’t just happen, nor do I want to hope it shows up. Yes, once in a blue moon you have a truly gifted leader with altruistic goals including being a good financial steward. In my world of organizational development we call these high performers. But more times than not we don’t have enlightened leadership. We have average leadership. Our healthcare crisis needs something more than average.
    Ultimately I believe that developing and sustaining enlightened leadership is our challenge. We must engage in HOW to build enlightened leadership in healthcare. Dr. Goodman argues that the free market will take care of that, but in reality, information is not freely available so as to equalize the playing field between sellers and buyers (including the patient). Public policy can be used for good in this case or can be the guardian of the status quo. Transparency of information, usefulness of data and aligned goals are three areas with the greatest opportunities for changing how we create the right incentives for behaviors that will benefit the many, not the few. Ultimately though it will require calling out leaders whose motivation seems focused on something else… whether for profit or not!

  4. I think we have had our current healthcare system long enough and have seen what it does. Healthcare for profit should not be said in the same sentence, we should be keeping people healthy not making money off their bad health. People that are making a “killing” off of health care just justify and make excuses to help them sleep at night. Talk to any normal person that has to sell everything they own for an operation, or people that don’t have enough money to get the tests they need. Only a public option will help turn this nonsense around

  5. An idea I came across which I think has been adopted in some Asian countries is actually paying physicians for keeping their patients healthy!
    The providers get paid more for keeping them healthy and away from the health care system.
    Neat Idea.

    What is a “non-profit?” When its CEO can make $1.2 million? Some “non-profit!”
    What is a “for-profit?” When its CEO makes $175,000? (See W.H. Gates III, Microsoft).
    Answer: there isn’t a dime’s worth of difference between the two. As if the Socialists and Commies don’t have nice summer vacations, while the “working class” toils elsewhere.
    Orwell said it well: “four legs bad, two legs good.”

  7. It is possible that all those advocating that health care is no different than selling underwear are just fine with these consequences.
    some body write this in the comments is it true ? i do not think so, because we are alive due to these type of advocates because when we become careless about ourselves than needed help available due to these advocates.
    am i true?

  8. I cannot say that I’m that impressed with these types of arguments. There is an obvious distrust between the supplier of healthcare and it’s recipients. I doubt seriously, an economic dissertation will endear patients to select one over the other.
    Point number 2 is my increasing cynical outlook on the economics and politics of healthcare. We are not so removed or insultated from the temptations of Wall St. Healthcare professionals do not like to be in the “business” of healthcare but rather it’s practice. I would find it difficult to say that competition in a for-profit environment would drive down the cost of healthcare. It just doesn’t seem to work that way anymore, at least not in the textbooks.
    As my old Western Civ professor used to say, “As long as there are scumbags in the world, the perfect models that we professors try to teach, will never operate as outlined in textbooks”. I think he got it. So should you.

  9. Lots of verbage and neary a single actual fact to support them. Typical of Goodman’s posts.
    Now if he actually want to discuss “community benefit” and show some of the evidence that shows that non-profit hospitlas are actually behaving in many ways like their for-profit brethren then I would be much more interested to what he has to say.
    Instead this is a cherry-picking, ideologically-oriented rant trying to pass itself off as something else. Next.

  10. Hear, hear, rbar.Well said. Your observations about what “competition” (not really) has wrought are dead on target. The only thing I agree with in Mr.Goodman’s post is that non profits should not receive the tax exemptions they so freely abuse.

  11. “Suppose that a lot of producers are actually completely altruistic.”
    This is where “conservatives”/libertarians/free market advocates get in trouble. They forget that altruism has no place in the free market, regardless of the morality of those participating. The free market can be counted on to do only one thing: That which is most profitable. And what’s most profitable isn’t always what’s right.

  12. Everyone who works in healthcare (at least in a competitive area) and keeps his/her eyes open knows what competition in today’s 3rd party payor world means:
    -oversupply of hospital beds, providers, scanners, etc.
    -valet parking and lobbies with water fountains
    -advertising for robotic prostate surgery or other services that are of doubtful value (or at least, value confined to a small subset of patients). It doesn’t matter whether it’s done by profit or nonprofit entities, and many growth oriented nonprofits admit to that (I used to work for one).
    We live in a culture that does not fulfill the patients’ medical needs in a rational manner. Unless one goes to clinics who practice a little closer to EBM like Mayo or many academic centers, it is not a Lexus what patients get (and is paid by a 3rd party) – it is a custom built Hummer with 750 hp, 7 wheels and a huge turkey fryer in the passenger cabin.
    To achieve reasonable care, we can make the market work and have patients pay large parts or the entirety of their own care (many will make poor decisions and pay with life and/or banktrupcy)… or you can make sure that everybody gets a reasonable minimum of coverage based on evidence based standards. And whoever wants to pay extra for the robot may do so. But I don’t want to pay for consumerist folly via sharing a risk pool with these folks.

  13. Wow, what rationalizations written by someone who seems to embrace the mentality of what an addict would say. Profit focus in health care is a loser, if you want to provide care, that is. And all the addicts and minimizers and hopeless romantics who have clueless expectations that those who are running the show will be responsible and ethical, well, get lives or shut the doors to your alternative realities, please.
    As Stacy in the first comment wrote, profit focus only rewards doing, ie why my perspective in this culture especially is that capitalism has become defacto addiction until proven otherwise, and doctors are humans first, so they are as much susceptible to this also until proven otherwise.
    You know, the more I read this site, the more it disappoints and reinforces how the silicon solutions will only logarthimically ruin the cultures that are more and more dependent on them. Well, those of you figuratively and literally banking on it, good luck!

  14. You didn’t see my comment on how the US pwned England last week, making them our tea B*&#$%, Healthcare comes and goes in 10 years cycles, US whooping England at soccer is forever

  15. “No one should ever make an entire living as a politician.”
    Nate – your best comment ever.

  16. Actually I agree 100% and then some. What drives my anger is the complete opposite of yours, for me it is Unions with Pension and benefit trust funded 30-40% of what is required giving billions of dollars to democrat politicians and now getting a $5 billion dollar early retiree kick back and a proposed $50 billion save teachers kick back. The latestest kickback works out to 77,000 to 210,000 per teacher. They either make a lot more then they have been telling us or the clause that left over funds can be used for other union jobs is more then a cleanup throw in.
    I don’t think you can ever get the money out, someone will always find a way to corrupt the system but you can very easily remove ther power. If DC had no influence in local education there would be no reason to buy their vote. This is why I am against federal intrusion into state’s rights. I have much more control over a politician who lives and works an hour away from me then one that can hide in DC…Harry Ried. Harry would not be Harry if he had to see his constituients every day.
    Politics is something people that have already been succesful in life should do for 5-10 years after they have retired to pay back society for what they have. No one should ever make an entire living as a politician. I want to see public service time limits for entire careers. We need to stop being willing host for these parasites.
    Finally my disdain for those with a D at the end of their name is only slightly greater then those with an R. I am firmly in the camp of throw them all out. I would prefer a good tar and feathering to make sure future generations of them don’t forget who is the master and who is supposed to be serving who

  17. Nate–you’re correct that there are few innocent parties, but my impression has been that PhRMA, AHIP and AdVaMed have been more aggressive than their non-profit brethren. And more importantly the results of their lobbying go straight to shareholders. But I essentially agree with you and Goodman, there’s little difference between the nons and the fors these days.
    We need to change public policy to isolate it from this type of lobbying–but I suspect you don’t agree with that

  18. It is very interesting to see the debate. Indeed, the article has received thoughtful responses from readers.
    Nevertheless, healthcare is a sensitive issue and it affects everyone. With the increasing healthcare cost, common man is feeling the heat. Healthcare Reforms are in order to give affordable medical care to people.

  19. Every time the NCQA quality rankings of health insurers come out, the insurers that dominate the rankings are non-profits. That is not an accident.
    I don’t know if a similar trend exists for hospitals, but I’d wager that it does.

  20. “according to the data from the Alliance for Advancing Non Profit Health Care, 48% of Americans with private health insurance are covered by non-profit plans”
    When you add in Medicare, Medicaid, VA, Indian Health etc only 20-30ish% of americans have for profit healthcare, how are they the root of all evil?
    If you switch to the provider side non profit hospitals are huge parasites of public money. I think the number is 60% of hospitals are non profit.
    It’s liberal Myth that profit motive is the problem with healthcare in Amnerica, it’s non profit and governemnt plans that are destroying it.

  21. ” there is one area at which the for-profits’ perversion of the system exceeds that of the non-profits, albeit only just. And that of course is lobbying over public spending.”
    Matt are you saying non profit insurers lobby less then then for profit ones? I find that very hard to believe. You seem to also ignore AARP, one of the biggest lobbyist in the world, also the major Med Supp MA marketer. Aren’t PACs non profit? Also major lobbyist. Unions, are they getting a free ride?

  22. I agree with John (not this, won’t happen often!). The distinction between for-profit and non-profit actors in health care in the US has been a shell game in which both sides of the divide have behaved in a similar manner. I agree the distinction and the inherent tax advantages should be abolished. (Same thing goes for churches too)
    But until we change the public policy regime to promote rational competition (and John and I will not agree about what that means), there is one area at which the for-profits’ perversion of the system exceeds that of the non-profits, albeit only just. And that of course is lobbying over public spending.
    With for-profit entities in health care, the private theft from the taxpayer has increased exponentially. Exhibit A being the Medicare Modernization Act which included straight bribes to health insurers to the benefit of lots of health plans execs and shareholders, at the taxpayers expense.
    Until we get a rational way of paying for health care that incents the right behavior from all actors in the system, keeping a very very wary eye on the for-profits & especially on their interaction with government is extremely necessary.
    And I suspect that’s not what John is arguing for here.

  23. Greg ever heard of Killer Drew? What was their excuse for poor care that killed people? I could name a dozen public hospitals that killed people with substandard care.
    Bev MD;
    ” The U.S. has yet to find that system,”
    What was wrong with the US Healthcare system pre 1965? We had great healthcare before the Democrats tried to improve it, 45 years of reform have made it progressivly worse.

  24. “I find it amazing how all “free market” advocates always begin by telling anybody who disagrees that they “are not familiar with basic economic principles”, and therefore confused.”
    Margalit Stacey and Gregg prove John right just a couple comments in.
    Stacey starts;
    ” at the mercy of a system that will only allow for care, if it is profitable. I am sorry to inform you, that the reason our system is so far gone, is we are in too deep, in this for profit only system.”
    Then Gregg reaffirms;
    ” In regards to health care, for-profit status IS the root problem.”
    Both seem ignorant of the fact Medicare and Medicade are non profit, over half of private insurance is non-profit, and majority of hospitals are non profit. We are not in a profit driven system when well over half of all healthcare spending is done through non profits.
    John’s point proven, you on the left don’t know what your talking about.

  25. What Mr. Goodman proposes destroys the shell game commonly played by many healthcare organizations who shift assets/revenues between their not-for-profit and for-profit entities. Today’s shell game ensures no taxes are paid on enormous profits and precious little “benefit” is ultimately delivered to many communities.

  26. No John Goodman. In regards to health care, for-profit status IS the root problem. There is no way around it, health care is labor intensive. Cutting corners undermines the whole mission of health care. Private initiative is a good thing but it should not lead to a cold society, lacking any compassion for human beings, in pursuit of financial gain.
    I’ve seen this first hand in for-profit nursing homes where profits take a higher priority than resident care. The individual home ends up being run from the board room rather than from a resident focus.
    In addition, many of these for-profit nursing homes are budget or census driven. The administrators want to come in under budget to make more profits for the corporation. The desire for profit margins translates into less staffing at nursing homes, less training for the staff that they do have, less food (or a lower quality of food) for the residents, and less management and oversight. A conflict arises between saving dollars and providing good care.
    As a rule, the “profit” motive and “free” enterprise are hard to beat when it comes to systems for allocating resources in a free society but some institutions like churches, education and healthcare are and should be exceptions to that rule.

  27. Nothing like the well-worn undergrad sophomoric “False Dilemma” to start the day.
    e.g., from one of my blog posts (wherein I responded to John Mackey’s claim that we have “no intrinsic right” to health care):
    “How can we say that people have an “intrinsic right” to military defense, or to police and fire protection, (or to safe food and water, or to otherwise safe products that won’t electrocute us when we plug them in)? Well, we simply say it. And then we codify it. And, then, having codified it, we don’t lie awake nights worrying that everyone will demand a Special Forces FOB dug into his or her front yard, or an occupied Metro PD Black & White, an ambulance, and a hook & ladder truck parked at the curb 24/7…”
    I also observed (and this goes to the heart of the False Dilemma):
    “I, for one, would oppose any type of “single payer” reform plan, such as “Medicare For All” that did not permit ancillary supplemental “private option” choices according citizens the freedom to buy coverage beyond that provided by a public program (as in the Swiss system, and as we already unremarkably seen with widely available “Medi-Gap” insurance here). As I have stated before, notwithstanding, for example, that we take basic police and fire protection as a tax-funded given, people are quite free to buy all the additional enhanced private sector protective products and service their wishes dictate and their financial resources can sustain.”
    And, “Adam Smith”? LOL, that’s rich. Very easy to ignore that he was first and foremost a moral philosopher when cherry-picking his observations.
    But, at least you had the circumspection to spare us the Ayn Rand stuff.

  28. I find it amazing how all “free market” advocates always begin by telling anybody who disagrees that they “are not familiar with basic economic principles”, and therefore confused.
    The next argument is almost always that one sentence from Adam Smith (which appears at the very beginning of his most famous book), never mind that this one sentence, completely taken out of context, doesn’t really mean that self interest should drive everything we do. I would suggest another book by the same author, for an explicit notion of what Adam Smith was all about: The Theory of Moral Sentiments.
    The fallacy of the “free market” approach is that the overwhelming majority of this earth’s population cannot participate. And the reason they cannot participate is embedded in the concept of “free market” as implemented by contemporary capitalism, not as put forward by Adam Smith.
    Furthermore, when it comes to health care, the consequences of a “free market” approach, i.e. the existence of non-consumers, translates into people dying, not into folks having to make do without a fancy car or Russian caviar. There is no equivalent to a beaten down old Chevy, when you need a liver transplant. You either get the Porsche or you don’t, and if you don’t you die.
    It is possible that all those advocating that health care is no different than selling underwear are just fine with these consequences. Some of us are not and I don’t believe Adam Smith would be either.
    The suggestion that, as a society, we abdicate morals and ethics and base all theory and execution on greed and quarterly dividends is interesting and may even prevail in the short term, but I have no doubt that after enough misery has been inflicted on enough people, history will record these times as the darkest of all dark ages.

  29. I settled in expecting an evidence-based treatise on the benefits of for profit health care,but all I got was unsupported, George Bush-type “the free market knows all” opinion. Guess that’s why they call it op-ed, but it’s way too short on fact and evidence for me.
    And btw, I have no ideological bias either way. I only observe that every country in the world struggles with its health care, and some have found systems that work for them better than others. The U.S. has yet to find that system, and this post contributes nothing but air to help it improve.

  30. John,
    As a widely advertised and commercial consultant, this commentary is obviously an act of your feathering your own bed. Delete and ignore.

  31. Stacey its not confidence or faith that he has but rather knowledge of history and empirical evidence.
    I would highly recomend this textbook
    There are several chapters that model the difference between for profit and non-profit health entities. The difference is very smalll for many reasons and is certianly not the cause of high prices. No economist would ever make the claim that profits are the sole reason for high prices. Profit motives in fact often drive prices down in a competative market.

  32. Sir, with all due respect: You seem to have so much confidence in your fellow humans to carry out all of these wonderful things in which you speak. As though conflict of interest does not exist- You have managed to convince yourself, that what looks good on paper, will be carried out as such in reality. How much time have you spent as a patient? I personally have had 28 surgeries, and spent countless hours, weeks, months in hospitals, at the mercy of a system that will only allow for care, if it is profitable. I am sorry to inform you, that the reason our system is so far gone, is we are in too deep, in this for profit only system. Profit motivates individuals to create technology that is among the top in the world (not the only, but among many other countries that develope on the same scale per capita) I have family members who are doctors in France, and have developed technology that has changed and improved the way medicine is practiced in the world today. They have expressed to me how disappointed they are in the way the U.S has evolved with respect to medicine and profit.
    The truth is, if doctors and others are only rewarded for DOING, not for LISTENING or THINKING, patients like me, and your family too, will continue to be spun around, used, and become ill, or die, all for the bottem line.