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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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Robert
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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

teresa
Guest

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.

Oakleigh Ryan
Guest

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… Read more »

Justin
Guest

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

Physical Therapy Software
Guest

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.

J.S.
Guest
J.S.

DEFINE
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.”

Kashif
Guest

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?
http://mycorner99.com/healthcare

stop smoking help
Guest

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… Read more »

MG
Guest
MG

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.

bev M.D.
Guest
bev M.D.

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.

Joseph Puente
Guest

“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.

rbar
Guest
rbar

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’… Read more »

ExhaustedMD
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ExhaustedMD

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… Read more »

Nate
Guest
Nate

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

bev M.D.
Guest
bev M.D.

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