Posted on June 9, 2004

The high costs of for-profit care


The high costs of for-profit care

CMAJ (Canadian Medical Association Journal)
June 8, 2004
The high costs of for-profit care
By Steffie Woolhandler and David U. Himmelstein

Why do for-profit firms that offer inferior products at inflated prices survive in the market? Several prerequisites for the competitive free market described in textbooks are absent in health care.

First, it is absurd to think that frail elderly and seriously ill patients, who consume most care, can act as informed consumers (i.e., comparison-shop, reduce demand when suppliers raise prices or accurately appraise quality). Even less vulnerable patients can have difficulty gauging whether a hospital’s luxurious appurtenances bespeak good care.

Second, the “product” of health care is notoriously difficult to evaluate, even for sophisticated buyers like government. Physicians and hospitals create the data used to monitor them; self-interest puts the accuracy of such data into question. By labelling minor chest discomfort “angina” rather than “chest pain,” a US hospital can garner both higher Medicare payments and a factitiously improved track record for angina treatment. It is easier and more profitable to exploit such loopholes than to improve efficiency or quality.

Even for honest firms, the careful selection of lucrative patients and services is the key to success, whereas meeting community needs often threatens profitability. For example, for-profit specialty hospitals offering only cardiac or orthopedic care (money-makers under current payment schemes) have blossomed across the United States. Most of these new hospitals duplicate services available at nearby not-for-profit general hospitals, but the newcomers avoid money-losing programs such as geriatric care and emergency departments (a common entry point for uninsured patients). The profits accrue to the investors, the losses to the not-for-profit hospitals, and the total costs to society rise through the unnecessary duplication of expensive facilities.

Finally, a real market would require multiple independent buyers and sellers, with free entry into the marketplace. Yet, many hospitals exercise virtual monopolies. A town’s only hospital cannot compete with itself, but can use its market power to inflate its earnings. Not surprisingly, for-profit hospital firms in the United States have concentrated their purchases in areas where they can gain a large share of the local market. Moreover, many health care providers and suppliers enjoy
state-conferred monopolies in the form of licensure laws for physicians and hospitals and patent protection for drugs. Additionally, government pays most health costs - even in the United States. Indeed, public funding for health care in
the United States exceeds total health spending in Canada on a per capita
basis. It’s an odd market that relies largely on public funds.

Privatization results in a large net loss to society in terms of higher costs and lower quality, but some stand to gain. Privatization creates vast opportunities for powerful firms, and also redistributes income among health workers. Pay scales are relatively flat in government and not-for-profit health institutions; pay differences between the CEO and a housekeeper are perhaps 20:1. In US corporations, a ratio of 180:1 is average. In effect, privatization takes money from the pockets of low-wage, mostly female health workers and gives it to investors and highly paid managers.

Behind false claims of efficiency lies a much uglier truth. Investor-owned care embodies a new value system that severs the community roots and Samaritan traditions of hospitals, makes physicians and nurses into instruments of investors, and views patients as commodities. Investor ownership marks the triumph of greed.

For the full commentary:

For the CMAJ article, “Payments for care at private for-profit and private not-for-profit hospitals: a systematic review and meta-analysis,” by P.J. Devereaux, et al:

Comment: Physicians for a National Health Program is a single issue organization, advocating for the single payer model of universal health insurance. But most of us are strongly opposed to the intrusion into the health care delivery system of for-profit corporate boards and their passive investors. Both the article and commentary should be read in their entirety for a better understanding of why we are so deeply offended by the ethical compromises of investor-controlled health care.