Introduction
Over the past decade, private equity has invested roughly $1 trillion acquiring hospitals. There are now 1235 for-profit U.S. hospitals, 20 percent of all hospitals. Previous reports suggest over-charging in for-profit hospitals, but now there is evidence of substandard quality.
For-profit hospitals
In a large December 2023 study comparing private equity for-profit hospitals to not-for-profit institutions, patients in the former experienced an increase in falls (27 percent), more central line infections (38 percent increase), and double the number of surgical site infections compared to controls.
A 2004 meta-analysis of charges in more than 350,000 patient encounters among 324 hospitals reported “statistically significant higher payments for care at private equity for-profit hospitals than at private not-for-profit hospitals,” along with higher risk-adjusted mortality. Authors concluded, “the likely explanation is the necessity to generate revenues to satisfy investors, a requirement absent in private not-for-profit hospitals.”
Is profit motive the culprit for substandard medical outcomes and venal pricing?
Generating profit
Hospitals, whether public or private; for-profit or not-for-profit, are businesses. To stay in business, they must generate more revenue than expenses, aka profit. Often, hospital profit is reinvested in facilities or services, but in private equity, for-profit institutions, it may be distributed to investors.
One can increase profit by generating more revenue and/or reducing expenses.
In healthcare, payments are fixed by federal allowable reimbursement schedules. Hospitals can only increase revenue by maximizing occupancy or accelerating throughput of patients (rapid discharge). Of course, manipulation of the billing process–upcoding, duplicate or phantom codes– can be done but this is illegal and can draw severe penalties when uncovered.
The most common (and legal) way to generate profit is by cutting costs. For example, hospitals can reduce expenses by cutting nurses or by purchasing cheap disposables and less durable goods. These approaches can reduce quality of patient outcomes.
Healthcare market
The healthcare market is fundamentally different from all others.
All markets except healthcare have only two parties, buyer and seller. Each makes decisions in self-interest. They interact directly with no one and nothing in between. Sellers profit by exchanging goods or services for buyers’ money. Buyers profit by possession of the goods or services. Because buyers pay with their own money, they have incentive to spend less. Sellers, in competition with other sellers for buyers’ dollars, must keep prices down and quality high.
Uniquely, healthcare has a third party–insurance and/or government–that interposes itself between buyer and seller, making financial (and medical) decisions rather than buyer (patient or consumer) and seller (provider or institution). Third party, not the patient, makes the “buy” decision: what, when, if, and by whom? Third party, not the physician, makes the “sell” decision, specifically how much providers are paid, for what, when and again if? By subverting free market forces, “disconnection” of buyer from seller makes national healthcare spending ($4.5 trillion in 2023) “unsustainable,” and is why medical care is both unaffordable and unavailable.
In the healthcare market, the third party determines the amount of profit. The third party is also the primary recipient of that profit.
Types of profit
Profit comes in many forms, most often personal financial gain, money in someone’s pocket. However, profitcan be anything of value such as institutional money; power; credibility, reputation, or prestige; and good health.
University research hospitals profit by obtaining large grants.
Consider how Washington politicians profit, i.e., gain power, by passing laws that create millions of healthcare bureaucrats grateful for their BARRCOME jobs: bureaucracy, administration, rules, regulations, compliance, oversight, mandates, enforcement.
There is profit in q-factor, prestige, or credibility. This profit likely drove Anthony Fauci constantly in front of microphones and TV cameras.
Generating profit to augment investors’ ROI (return on investment) may induce private equity hospitals to engage in cost-cutting measures that reduce quality of care such as cutting nurses to reduce payroll expenses. Cutting nurses means more patients per nurse and less time with any one patient.
Finally, patients profit by restoring or maintaining good health.
Solutions
Following are proposed solutions for profit-induced, over-priced, low quality health care: 1) new regulations prohibiting for-profit healthcare; 2) legislating profit motive out of human behavior; or 3) passing value-based care. None will work.
Regulations generate huge BARRCOME expenses that takes money away from patient care. With every new regulation, viz., ACA to reduce the uninsured rate, patients suffer by reduced access to care.
Any attempt to legislate profit motive out of human behavior is the pinnacle of hubris, believing that Washington can make saints of us all.
As for value-based care, “value” to a government or insurance bureaucrat may not be value to the individual patient.
The solution to both poor medical outcomes and overspending is not to deny the existence of self-interest but to make profit motive work to everyone’s benefit.
Best use of profit motive
Restore decision-making authority to buyer and to seller. Let them interact directly with no third-party in between, no third-party choosing. Patients would be free to decide how to spend their money. Sellers would compete for patients’ dollars, not for contracts with health plans or insurance companies.
Profit motive will encourage patients to spend less and wisely. Profit motive will force sellers to offer high quality, readily available services and goods at affordable prices. In such a (free) market, the over-priced, low quality, inaccesible provider, whether a person or a facility, would quickly be out of business, not by federal decree but by customers, aka patients, taking their business and their dollars elsewhere.
Deane Waldman, M.D., MBA is Professor Emeritus of Pediatrics, Pathology, and Decision Science; former Director of the Center for Healthcare Policy at Texas Public Policy Foundation; former Director, New Mexico Health Insurance Exchange; and author of the multi-award winning book, Curing the Cancer in U.S. Healthcare: StatesCare and Market-Based Medicine.
