The High Costs of For-Profit Care
Public Citizen Health Letter July
This editorial was written by Drs. Steffi
Woolhandler and David U. Himmelstein, long-time colleagues of
PCHRG and appeared in the June 8, 2004 issue of the Canadian Medical
As we have written elsewhere, some aspects
of life are too precious, intimate or corruptible to entrust to
the market. We prohibit selling kidneys and buying wives or judges.
But the market has unquestionably gained new territory in recent
years, as more and more activities previously performed by government
or nonprofit agencies - including interrogating Iraqi prisoners
- have been turned over to private enterprise. For ordinary citizens,
the drive to privatize is most evident in health care. In the
United States, investor-owned firms have come to dominate renal
dialysis, nursing home care, inpatient psychiatric and rehabilitation
facilities and health maintenance organizations (HMOs). They have
made significant inroads among acute care hospitals (now owning
about 13% of such facilities), as well as outpatient surgical
centres, home care agencies and even hospices. Canada has lagged
behind the United States, but by increments the private delivery
of publically funded services increases. The for-profit barbarians
are at the gates.
Those who favour for-profit health care
argue that the profit motive optimizes care and minimizes costs.
In this issue P. J. Devereaux and colleagues add to the considerable
evidence that this dogma has no clothes. Their meticulous meta-analysis
demonstrates a pattern of higher payments for care in private,
investor-owned hospitals as compared with private not-for-profit
hospitals. The only significant exception was a small study comparing
private for-profit hospitals with nominally not-for-profit hospitals
run by a private, for-profit firm - in other words, both groups
of hospitals in this study were under for-profit management.
The excess payments for care in private
for-profit institutions were substantial: 19%. This figure implies
that the US$37 billion that Americans paid for care at investor-owned
acute care hospitals in 2001 would have cost only US$31 billion
at not-for-profit hospitals - a waste of US $6 billion. But higher
acute care (and rehabilitation) hospital payments are not the
whole story on investor-owned care. For-profit hospitals and dialysis
clinics have high death rates. Investor-owned nursing homes are
more frequently cited for quality deficiencies and provide less
nursing care, and investor-owned hospices provide less care to
the dying, than not-for-profit facilities.
Why does investor ownership increase costs?
Investor-owned hospitals are profit maximizers, not cost minimizers.
Strategies that bolster profitability often worsen efficiency
and drive up costs. Columbia/HCA, the largest hospital firm in
the United States, has paid the U.S. government US$1.7 billion
in settlements for fraud, the payment of kickbacks to physicians
and overbilling of Medicare. Tenet, the second largest US hospital
firm, paid more than half a billion dollars to settle charges
of giving kickbacks for referrals and inappropriately detaining
psychiatric patients to fill beds during the 1980s, when the firm
was known as NME. In March 2004, Tenet agreed to pay the US government
US$22.5 million to settle one of several cases; recent allegations
against them have included performing cardiac procedures on healthy
patients, offering kickbacks for referrals and exploiting Medicare
loopholes to claim hundreds of millions in undeserved payments.
For-profit executives reap princely rewards,
draining money from care. When Columbia/HCA's CEO resigned in
the face of fraud investigations, he left with a $10 million severance
package and $324 million in company stock. Tenet's CEO exercised
stock options worth $111 million shortly before being forced out
in 2003, and the head of HealthSouth (the dominant provider of
rehabilitation care) made $112 million in 2002, the year before
his indictment for fraud.
Enormous CEO incomes explain part, but
not all, of the high administrative costs at investor-owned health
care firms. Investor-owned hospitals spend much less on nursing
care than not-for-profit hospitals, but their administrative costs
are 6 percentage points higher (presumably reflecting their more
meticulous attention to financial details).
High administrative costs and lower quality
have also characterized for-profit HMOs, now the dominant private
insurers in the United States. Such plans take 19% for overhead,
versus 13% in non-profit plans, 3% in the U.S. Medicare program
and 1% in Canadian medicate. Strikingly, contracting with private
HMOs has substantially increased US Medicare costs. For the past
decade, Medicare has paid HMO premiums for seniors choosing to
enroll in such private plans. According to official estimates,
the HMOs have recruited healthy seniors who, had they not switched
to an HMO, would have cost Medicare little -about $2 billion less
annually than the HMOs' premiums. Private plans that were unable
to recruit healthy people dropped out of their Medicare contracts,
disrupting care for millions of seniors. Washington's response?
Sweeten the pot for Medicare HMOs by including $46 billion to
raise HMO payments as part of the recently enacted Medicare prescription
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 U.S. 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
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.