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OCR for page 182
I O Sumn~ry and Conclusions
This inquiry has focused on questions about
for-profit health care organizations, partic-
ularly investor-owned multihospital sys-
tems, and about the fiduciary role of
physicians in a health care system increas-
ingly characterized by commercial and en-
trepreneurial activities. In examining the
many topics covered in this report the
sources and uses of capital funds for health
facilities, access to care, the costs and qu~-
ity of care, involvement in medical research
and education, en c! the relationships of phy-
sicians to organizations to which they refer
patients or in which they treat patients-
the committee found that only limited quan-
titative evidence was available on many im-
portant points. However, the committee was
charged to use its broad experience and di-
versity to make its best considered judg-
ments about the meaning and importance
of the available evidence for the future. ~us,
in addition to summarizing the major find-
ings from the previous chapters, this chap-
ter also presents the committee's view of the
major implications of these findings and of-
fers some recommendations, acknowledg-
ing that its conclusions and recommendations
reflect not only the empirical evidence but
also the committee's considered judgments
about the meaning of this evidence.
As befits the controversy regarding for-
profit health care, this study has examined
not only factual matters about organizational
782
behavior but also the value conflicts raised
by changes taking place in the organization
of health care in America. These value con-
flicts color people's interpretations of data
and persist after all empirical studies have
been reviewed.
Thus, some observers believe that the rise
of for-profit health care threatens the values
and ideals that should guide the activities of
health professionals and health care orga-
nizations and that, if realized, distinguish
professional work from commerce. Concern
has also been expressed that the growth of
for-profit health care may exacerbate cur-
rent problems in the health care system.
Problems frequently mentioned include ~n-
adequate availability of services for people
who lack the means to pay, duplicative high-
cost technologies and facilities for health care
delivery, deficiencies in the availability of
good primary care and services for patients
win chronic disease, and highly variable rates
of elective surgery. It is feared that some-
~ing essential will be lost if a service ethos-
expressed in terms such as caring, com-
munity responsiveness, fiduciary responsi-
bility is abandoned or replaced with a
principle based on economic goals. Many
who express these concerns also are op-
posed to the perpetuation of a multi-tiered
health care system based on the ability to
pay. They believe that scarce health re-
sources should be allocated not by whether
OCR for page 183
SUMMARY AND CONCLUSIONS
their provision will generate profits but by
their effectiveness in improving the health
of individuals and populations.
On the other hand, advocates of markets
and competition-rather than governmen-
tal planning and cost controls-as a way of
distributing services see the problem not in
the behavior of profit-seeking organizations
but in the failure of public policy. We fail,
they say, to provide the financial means that
would allow people who need care to obtain
it, as well as to structure payment incentives
to reward cost-effectiveness. These advo-
cates believe that a more economically based
ethic that emphasizes competition, busi-
nesslike efficiency, and responsiveness to
demand has become possible with the in-
creasing ability of patients to afford care (a
result of third-party payment, including
Medicare and Medicaid) and to participate
in decisions about their care and with the
greater ability of payers to monitor the ser-
vices they purchase. Furthe~ore, they tend
to be skeptical about the past realization of
selfless ideals by practitioners and institu-
tions.
This study took place in a swishy changing
environment. Available evidence about costs,
quality, and access to care in for-profit and
not-for-profit hospitals comes from a period
Mat was dominated by Medicare's cost-based
reimbursement ant! that saw little price
competition among providers for the busi-
ness of other payers. Now, Medicare's pro-
spective payment system for hospitals is
reversing the incentives presented by cost-
based reimbursement. The consequences of
this singularly important change are not yet
well understood. In other developments,
various forms of price competition (dis-
counting, expansion of HMOs and pre-
ferred-provider arrangements, contracting
in state Medicaid programs) are rapidly
emerging, and the growing supply of phy-
sicians is having perceptible effects. Be-
cause some of the committee's finings about
hospitals pertain to institutional differences
in response to economic incentives, they must
183
now be regarded as a point of reference, a
freeze-frame in a film of rapid action. The
comparative performance of for-profit and
not-for-profit hospitals could well change in
the future.2
Major organizational changes in health care
in recent years include (1) the development
of a significant for-profit component among
almost all types of providers; (2) the emer-
gence and rapid growth of investor-ownecT
for-profit organizations, whose owners are
mostly not involved in the operation of the
organization (in contrast to traditional "pro-
prietary" organizations); (3) the proliferation
and growth of multi-institutional arrange-
ments among both for-profit and not-for-profit
health care organizations; (4) the emergence
of several types of for-profit/not-for-profit
hybrid organizations; (5) the increasing
numbers of vertically integrated organi-
zations2 and the growth of organizations (in-
cluding, but not limited to HMOs) that are
involved in both the financing and provision
of care; and (6) a new wave of physician
entrepreneurship.3
Available data do not always distinguish
investor-owned from other for-profit or pro-
prietary organizations. However, investor
ownership can now be found in a] types of
health care organizations acute care hos-
pitals, psychiatric hospitals, lIMOs, nursing
homes (which have long been predomi-
nantly for-profit), home health agencies,
substance abuse facilities, and proliferating
types of ambulatory care, diagnostic, and
rehabilitation facilities. Although the goal of
this stubbly has been to gain an understanding
of the implications of for-profit health care
organizations in general, most comparative
information about the behavior of for-profit
and not-for-profit health care organizations
pertains to hospitals, where the for-profit
presence is relatively small, notwithstand-
ing the dynamism and rapid growth of the
investor-owned companies.
Investor ownership of general hospitals
constitutes only 13 percent of hospitals and
9 percent of beds. However, because inves
OCR for page 184
184
tor ownership is concentrated in certain states
and regions (in the South, Southwest, and
West), it constitutes one-third to one-half of
the hospitals in a few states. Approximately
60 percent of the 540 general hospitals owned
by the six largest investor-owned hospital
companies in 1984 had been acquired from
other for-profit owners. The others were di-
vided almost equally between hospitals that
had previously been public or not-for-profit
facilities and hospitals that were constructed
by the investor-owned companies. To date,
the growth of investor ownership of hospi-
tals has had little effect on the ownership
mix of for-profit/not-for-profit/public hospi-
tals. Yet, much consolidation of the inves-
tor-owned hospital sector has occurred (a
pattern that has taken place to some degree
among for-profit nursing homes as well), and
the larger hospital companies are expanding
rapidly into other sectors of the health care
economy, as are the larger not-for-profit
multihospital systems.
THE FOR-PROFIT/NOT-FOR-PROFIT
DISTINCTION
Although many differences between for-
profit and not-for-profit institutions can be
identified (see Table 1.1 in Chapter 1), most
positive and negative expectations about the
supposed tendencies of for-profit or not-for-
profit health care organizations stem from
some key legal differences.4 Not-for-profit
organizations are generally exempted from
fecleral, state, and local taxes and are char-
tered for limited purposes charitable, sci-
entific, educational, benevolent, or religious.
Their income and assets must be used for
these purposes. Ike people who operate the
organizations have no claim on such income
and assets; they do, however, receive com-
pensation for their services. Not-for-profit
organizations are typically responsible to a
voluntary, unpaid board of trustees.
For-profit organizations are owned by and
accountable to investors, who ultimately re-
ceive the profits either in the form of divi
FOR-PROFIT ENTERPRISE IN HEALTH CARE
deeds or increased equity. The property
rights that accompany equity ownership give
the for-profit organization more incentive
than the not-for-profit organization to act on
relatively narrow economic grounds. A for-
profit organization has options that have not
been available to not-for-profit organizations
to allocate profits either to its investors or
to entirely different types of businesses.
It is true that in recent years many not-
for-profit health care organizations have un-
dergone corporate reorganizations and have
created for-profit entities that operate under
their control (or in joint ventures). Although
these developments have blurred the dis-
tinction between for-profit and not-for-profit
organizations to some extent and have given
not-for-profits more flexibility than was his-
toncally the case, the after-tax surpluses from
the for-profit activities of not-for-profit or-
ganizations are nevertheless ultimately re-
turned to the not-for-profit organization.
Different types of ownership have access
to different sources of capital. Some public
institutions receive governmental appropri-
ations; not-for-profit organizations have ac-
cess to tax-exempt bond financing as well as
to philanthropic contributions (which today
constitute only a small fraction of capital fi-
nancing); for-profit organizations have ac-
cess to equity capital from investors.5 Each
of these sources of financial capital is tied to
certain expectations. Governmental appro-
priations are for well-defined purposes, as
are large philanthropic contributions in most
cases. Various requirements designed to en-
sure continued creditworthiness and the
continued value of pledged assets are at-
tached to debt financing. Investor equity
financing of health care companies has gen-
erally entailed the strong expectation of
growth in earnings.
Investor-owned companies have powerful
motives for expansion. The price of their
stock and, therefore, their continued ac-
cess to equity capital, as well as the value
of the assets of their stockholders depends
heavily on growth in earrings, 6 particularly
OCR for page 185
SUMMARY AND CONCLUSIONS
for companies that represent themselves to
investors as growth companies. In a field
such as acute hospital care, in which the
market is maturing, achieving increased
earnings may require increasing the market
share or moving into new markets. Growth
can often be achieved more easily through
acquisitions than through internal opera
tions. Hence, some observers believe that
the growth imperative of the investor-owned
sector could change the overall for-profit/
not-for-profit/public composition of health
care even more in the future than it has in
the past.
Implications of the focal differences in
type of ownership can be overdrawn. As
governmental and philanthropic grants have
decTinec] (totaling less than 8 percent of the
funds for capital construction in 1981), debt
and retained earnings have become the
source of almost all capital needs for all own
ership types of hospitals. Ibus, not-for-profit
organizations share with for-profit organi
zations the need to generate operating sur
pluses for building reserves that can be used
as working capital and for future renovation,
equipment purchases, and new services. Al
though investor-owned hospitals' "profit
margins" on patient care services have sur
passed the margins of not-for-profit hospi
tals, when all hospital revenues (including
nonpatient care income such as gifts and
investment income) are added, and the ac
crued taxes of investor-owned hospitals are
subtracted therefrom, the margins of sur
plus of not-for-profit and for-profit hospitals
are very similar on a national basis.7 How
ever, more not-for-profit than investor-owned
hospitals operate at a Toss.
The same features (organizational size, di
versity, ancl ample revenue margins) that
attract investors of equity are also attractive
to the investors who lend money to not-for
profit and for-profit organizations. Changes
in methods of payment for services and in P~c
r . '' . e
sources ot capital nave mac .e economic per
formance a more dominant factor in most
health care organizations. Both for-profit and
~5
not-for-profit hospitals are increasingly or-
ganizing into multi-institutional arrange-
ments, becoming more market oriented and
more concerned with controlling expenses.
Yet fundamental differences in ownership,
accountability, and tax status remain.
FINDINGS ABOUT FOR-PROFIT
ENTERPRISE IN HEALTH CARE
lhe differences between for-profit and not-
for-profit organizations in their values, tax
status, and sources of capital have prompted
both theory and assumptions about their be-
havior regarding hospital costs, pricing,
quality, service to patients who are unable
to pay, involvement in research and edu-
cation, access to capital, and relationships
with medical staffs. As summarized below,
the committee's examination of the evi-
dence shows that many ofthese assumptions
are false and Hat others are only partly true.8
Furthermore, findings about for-profit and
not-for-profit hospitals may or may not typi-
fy performance in other types of health care
organizations at this point, something that
is largely unknown at this point.
Health Care Costs
The committee studied the cost implica-
tions of for-profit health care by examining
studies that compared for-profit and not-for-
profit health care organizations. Almost all
available data pertain to hospitals.
The committee found that the rise in
investor ownership of hospitals has in-
creased health care costs to payers under
both the original cost-based reimbursement
approach used by Medicare and some other
third-party payers and the charge-based
reimbursement methods still used by a large
number of third-party payers.
Both the amounts charged by investor-
owned hospitals to charge-paying patients
OCR for page 186
186
and the amounts they collect for the care of
cost-paying patients (e.g., Medicare before
DRGs and many Blue Cross plans) have been
higher than comparable figures for not-for-
profit hospitals. Studies show that collec-
tions per case from cost-based payers are
from ~ to 15 percent hider in investor-owned
chain hospitals than in not-for-profit hospi-
tals, and that prices paid by charge-based
payers are 17 to 24 percent higher. On a
per-day basis, charges range up to 29 per-
cent higher in investor-owned hospitals.
Expenses
Studies of expenses incurred in the hos-
pital care of cost-paying patients (Medicare)
show that per-day expenses are 3 to 10 per-
cent higher in investor-owned hospitals than
in not-for-profit hospitals. (See Table 4.1 in
Chapter 4.) On a per-admission basis, ex-
pense differences are smaller because of
shorter average lengths of stay in investor-
owned hospitals. Studies generally show
higher per-case expenses in investor-owned
hospitals, but the differences are not always
statistically significant.
Acquisitions and Costs
The acquisition activities of health care
companies have resulted in increased costs
to payers, because of the capital costs in-
volved and because of aggressive pricing by
the acquiring organizations. The extent to
which acquisitions by investor-owned com-
panies have prevented deterioration or clo-
sure of institutions that meet important local
needs or have contributed to the nation's
oversupply of hospital beds is unknown, as
is the answer to a similar question about the
new hospitals they and others have con-
structed. With national occupancy rates
among all hospitals at 65 percent, the prob-
lem of excess capacity transcends the for-
profit sector, but occupancy rates at for-profit
hospitals are particularly low (approximately
10 percent Tower than not-for-profit hospi
FOR-PROFIT ENTERPRISE IN HEALTH CARE
tats). Among both for-profit and not-for-profit
providers, it seems likely that more efforts
will have to be exerted to find productive
uses for unused space (e.g., extended care,
ambulatory services).
Nonhospital Settings
Data from nonhospital settings acid com-
plexity to the relationship between costs and
type of ownership in health care. Nursing
homes, for which approximately 50 percent
of payments is prospectively determined,
show expenses per patient day to be higher
in not-for-profit than in for-profit homes and
show little difference in pricing.
The growth in various types of ambulatory
care, home care services, and diagnostic
centers has brought about some impressive
reductions in unit costs, when comparisons
are made with in-hospital care and services
to which full hospital overhead expenses are
allocated. However, in the absence of stud-
ies comparing costs in for-profit and not-for-
profit centers, these savings cannot be at-
tributed to the for-profit mode. Further-
more, although the unit costs of services that
are provided appropriately on an ambula-
tory basis are likely to be lower than the
same services performed on an inpatient ba-
sis, the effect on total costs may not be the
same. Because new facilities add to the total
capital stock of health care organizations,
because hospitals cannot always eliminate
their ISxed costs (which are then spread over
fewer cases), and because total utilization
rates have not been carefully studied, the
existence and magnitude oftotal cost savings
through ambulatory services are uncertain.
Discussion
In sum, although standard economic theory
predicts greater efficiency in for-profit than
in not-for-profit organizations, the expected
ability of investor-owned for-profit orga-
nizations to produce the same services at
lower cost than their not-for-profit coun
OCR for page 187
SUMMARY AND CONCLUSIONS
tern arts has not been demonstrated. Large
organizations theoretically benefit from
economies of scale and reduced transaction
costs, but such savings may be offset by cen-
tral-office costs, higher capital costs result-
ing from a growth orientation, and the
payment of taxes and dividends.
Medicare's new prospective payment sys-
tem and the growth of price competition
change the incentives. Will investor-owned
institutions then provide services more ef-
ficiently? If so, how, and with what impact
on patients? These questions cannot now be
answered. However, in nursing homes where
payment by Medicaid has typically been by
fixed, prospectively determined rates, for-
profit homes have lower average expenses
on such budget categories as food, house-
keeping, and other patient care services, and
higher expenses for capital costs and rent
than do not-for-profit homes. Although cli-
rect analogy to hospitals ignores many im-
portant differences in the two types of
institutions (including the shortage of nurs-
ing home beds, which restricts choice and,
hence, minimizes punishment by market
factors), the nursing home experience is a
reminder that the responses offor-profit and
not-for-profit hospitals to prospective pay-
ment should be closely monitored. The ef-
ficiencies that some expect of investor
ownership may yet emerge, but it is also
possible that a tightening on the revenue
side will lead to undesirable cuts in services
to patients, particularly in institutions that
have a heavy burden of uncompensated care
or that are under pressure to increase earn-
ings and also must pay taxes.
Access to Care
The major concerns about for-profits and
access to care are the extent to which they
serve patients who are unable to pay, the
extent to which they offer services that are
needed in the community but that are not
profitable, and their impact on institutions
that provide substantial amounts of uncom
187
pensated cared and unprofitable services such
as medical education and community ser-
vices.
These concerns should be considered in
light of He possibility that the investor-owned
health care companies' construction and ac-
quisition activities have made services more
convenient and readily available to the peo-
ple that they serve. Also, they have tended
to locate in areas of relatively rapid popu-
lation growth and in areas that do not have
high bed-to-population ratios (Watt et al.,
1986), and at least some of the hospitals they
have acquired were not in sound financial
condition (Pattison, 1986; Brown and Klos-
terman, 19861. Such facts suggest that they
have enhanced access. On the other hand,
their occupancy rates of around 50 percent
indicate the presence of unneeded beds, and
only 9 of the 365 hospitals on the Health
Care Financing Administration's list of "sole
community hospitals" are for-profit, which
suggests that relatively few patients sewed
by for-profit hospitals are without some al-
ternative sources of hospital care.
The provision of uncompensated care by
health care providers is vital in a nation where
35 million people are uninsured and not el-
igible for public programs and millions more
are underinsured and unprepared for the
expenses of a major illness. Nationally, un-
compensated care (charity mre plus bad debt)
provided by hospitals amounts to less than
5 percent of their revenues, a figure that at
best meets only some of the needs of the
people who are unable to pay for care. All
studies show that public facilities provide a
disproportionately large amount of uncom-
pensated care. This may be bearable if they
receive sufficient governmental subsidies,
but the financial position of many of these
institutions on which so many people de-
pend is weakening.
The committee found that most sources of
evidence show that for-profit hospitals pro-
portionately probe less uncompensated care
than do not-for-profit hospitals, although
there are substantial variations in the mag
OCR for page 188
188
nitude of this difference. In several states
where for-profa hospitals are numerous, the
uncompensated care difference betweenfor-
profit and not-for-profit hospitals is sub-
stantially larger than is shown in national
data.
National data are available from American
Hospital Association (AMA) surveys and from
a compulsory survey of all hospitals that was
conducted in 1981 by the Office for Civil
Rights (OCR) in the Department of Health
and Human Services. The OCR data show
that a lower percentage of patients in for-
profit than in not-for-profit hospitals were
uninsured (6.0 percent versus 7.9 percent).
(No such difference was found on service to
uninsured emergency room patients.) Un-
insured patients are a reasonable, if imper-
fect, proxy for "patients who are unable to
pay," and the OCR data provide the only
national figures available on the numbers of
such patients served by hospitals of different
types of ownership.
The AHA annual survey of hospitals pro-
vides data on the most widely used measure
of uncompensated care the percentage of
revenues that are accounted for by the sum
of bad debt and charity care. The 1983 AHA
data show the same pattern as the OCR data,
with not-for-profit hospitals reporting more
uncompensated care than for-profit hospi-
tals (4.2 percent versus 3.1 percent). This
difference was smaller in 1982 (Table 5.5),
when the level of uncompensated care among
all types of hospitals was somewhat smaller.
Although differences of the magnitude
shown in the OCR data and the 1983 AHA
data are hardly negligible, they could be
accounted for by factors (such as differences
in size, rural-urban location, or region) that
are not controlled in available analyses of
the data; that is, the differences could result
from factors other than a greater willingness
of for-profits to turn uninsured patients away
untreated, a matter about which systematic
comparative data are not available.22 How-
ever, it should also be noted that bad debts
go directly to the bottom line of a not-for
FOR-PROFIT ENTERPRISE IN HEALTlI CARE
profit organization, whereas in a for-profit
organization that has made a profit, the im-
pact of bad debt is cushionec! by the fact that
it reduces income taxes.
The committee examined data from five
states in which there are substantial num-
bers of for-profit hospitals (Table 5.6~. In
California, there was little difference be-
tween for-profit and not-for-profit hospitals
in the amount of uncompensated care pro-
vided, but in Flonda, Texas, Tennessee, and
Virginia, not-for-profit hospitals provided
substantially more uncompensated care (in
some instances twice as much) than did for-
profit hospitals. The differences are impor-
tant, because in these states there are both
large numbers of uninsured patients and large
numbers of investor-owned hospitals (30-40
percent of hospitals). The committee's ma-
jority believes that the comparatively low
levels of uncompensated care in for-profit
hospitals in such states is strong evidence
that the presence of these hospitals contrib-
utes to the problem of access to care for
people who lack the means to pay.~3
An institution's unwillingness to serve pa-
tients who may not pay can affect not only
the patients but also other institutions that
do not adopt the same policies. Efforts are
being made at many types of institutions to
reduce the amount of uncompensated care.
Nevertheless, the provision of dispropor-
tionately small amounts of uncompensated
care by some hospitals can threaten the fi-
nancial well-being of nearby hospitals that
serve larger numbers of people who are un-
able to pay. It seems likely that this is hap-
pening in states where there are many for-
profit hospitals that provide comparatively
small amounts of uncompensated care, but
no systematic studies are available on whether
certain institutions are diminishing the abil-
ity of other institutions to support indigent
care or how often this might be attributable
to for-profit rather than not-for-profit hos-
pitals.~4 Some data show the for-profit/not-
for-profit discrepancy in uncompensated care
to be smaller outside of metropolitan areas,
OCR for page 189
SUMMARY AND CONCLUSIONS
which may suggest that for-profit hospitals
are more willing to provide uncompensated
care when patients have fewer alternative
sources of care.
Concerns about access also have been
raised regarding the various types of am-
bulatory care centers that offer services that
have traditionally been provided by hospi-
tals. Although these centers, many of which
are physician owned, often attempt to fa-
cilitate access in some sense of the term
(i.e., though convenient locations and hours),
many follow policies such as requiring
payment at the time service is rendered and
accepting patients only on referral that al-
low the organization to provide services al-
most exclusively to paying patients. To the
extent that these paying patients are at-
tracted away from hospitals that subsidize
uncompensated care with revenues from
paying patients, the ability of such hospitals
to provide uncompensated care is dimin-
ished.
Further complicating the question of for-
profits and access to care is the nursing home
example, where Medicaid patients, who are
generally less lucrative than private-pay pa-
tients and who are therefore often discrim-
inated against in admissions, are served in
proportionately larger numbers by for-profit
homes than by not-for-profit homes. The
committee was unable to obtain data that
might document whether there are own-
ership differences in the care of other pa-
tients who have difficulty securing access to
nursing homes most notably "heavy care"
patients who are sometimes discriminated
against when reimbursement is fixed, and
patients who have exhausted their funds but
are not eligible for Medicaid.
Finally, the committee found that the
question of whether for-profit hospitals are
less likely to offer unprofitable services could
not be answered empirically. AHA survey
data do show that many services are not
offered in as many for-profit hospitals as in
not-for-profit hospitals of similar size. How-
ever, no systematic data are available on
189
which services are profitable (on their own
or because of other services whose use they
stimulate) and which are not.
Quality of Care
The limited indicators of hospital quality
that are now available primarily hospital
accreditation, board certification of stab
physicians, and amount of nursing person-
ne! show no overall pattern of either in-
ferior or superior quality in investor-ou)ned
chain hospitals when compared with not-
for-profit hospitals. On most quality-related
measures, differences between investor-
owned and not-for-profit institutions are
small, and the direction of the differences
varies.
On the most general measure available-
accreditation by the loins Commission on
Accreditation of Hospitals-investor-owned
hospitals (of which more than 90 percent are
accredited) fare slightly better than not-for-
profit hospitals. Regarding their medical
staffs, investor-owned hospitals accept a
slightly higher proportion of physician-ap-
plicants and have a slightly higher propor-
tion of physicians who are not board certified,
although in neither case were differences
among different types of multihospital sys-
tems statistically significant.2S AHA data on
nursing personnel per 100 patients show vir-
tually no difference between investor-owned
and not-for-profit hospitals. Hospital board
chairmen in investor-owned chains report
more concern with some issues that are re-
lated to quality than do chairmen of not-for-
profit hospital boards, but the relationship
of such survey data to reality can be ques-
tioned. An American Medical Association
survey conducted at the committee's re-
quest showed physician evaluations in-
cluding physicians with privileges at investor-
owned hospitals to be slightly less favor-
able toward for-profit than not-for-profit
hospitals, and almost one-fourth of the phy-
sicians with privileges in for-profit hospitals
said they believed the quality of care was
OCR for page 190
190
better in the not-for-profit sector (Musac-
chio et al., 1986~. The only available data
on outcomes and investor ownership of hos-
pitals was from a study conducted for the
committee, which examined mortality rates
among Medicare patients who had under-
gone elective surgery between 1974 and 1981
(Gaumer, 19861. No consistent patterns as-
sociated with type of hospital ownership were
found.
Although the committee does not regard
the data just reviewed as sufficient for a de-
finitive determination of whether there are
differences in quality of care, it concludes
that there is no strong pattern of evidence
to suggest that the quality of care in inves-
tor-owned hospitals is markedly better or
worse than in not-for-profit hospitals.
The growth of the investor-owned hos-
pital chains may have resulted in improved
overall quality of hospital care, because the
individual hospitals most commonly ac-
quired were independent proprietary hos-
pitals where accreditation rates tend to be
notably Tow. Two small studies in California
and Florida also suggest that hospitals ac-
quired by investor-owned chains were fi-
nancially weak and may have been poorly
managed, conditions that could well have
quality implications. More than 10 percent
of the hospitals acquired by the four major
hospital chains were subsequently replaced
with new facilities, and an unknown number
of additional hospitals were substantially
renovated.
Nevertheless, the committee believes that
the question of quality care will and should
assume greater importance. Cost-based and
charge-based reimbursement methods have
provided hospitals with little incentive to
take economizing steps that could lead to
reductions in quality. With fundamental
changes now talking place in methods of pay-
meet, standards of quality may change in all
types of hospitals. Problems could develop
in the form of too early discharge of patients,
excessive reductions in maintenance sched-
ules and replacement cycles of equipment,
FOR-PROFIT ENTERPRISE IN HEALTH CARE
excessive reductions in staffing, or undue
decreases in service intensity.
The committee recognizes that compari-
sons between nursing homes and hospitals
have many limitations, but its concerns about
quality were reinforced by the history of
quality problems among nursing homes,
which largely are paid prospectively set rates
and which have long been mostly for-profit.
A farther concern about quality arises with
the growth of freestanding ambulatory care
centers, where quality assurance proce-
dures are less well established than in hos-
pitals.
The committee concludes that the orga-
nizational, economic, and competitive
changes taking place in health care make
imperative the increased monitoring (by
regulators and purchasers of care) of health
care outcomes in at! settings, including hos-
pitaZs andireestanding centers and for-profit
and not-for-profit institutions. Additional
research is needed to develop and validate
more sensitive measures of patient outcome
and other indices of quality to illuminate the
relationship between such measures and type
of ownership. (Chapter6.)
Education and Research
The past lack of involvement of investor-
owned health care companies in health
professional education and unsponsored re-
search is documented in Chapter 8. The
companies have been accused not only of
unfairly benefiting from other institutions'
commitment to education and research, but
also of attracting away well-insured patients
to an extent that makes it more difficult for
teaching hospitals to generate patient rev-
enues to subsidize education and research.
Defenders of investor-owned facilities have
pointed out that the hospitals these com-
panies acquired were relatively small and
had no history as teaching hospitals; further
they have criticized cross-subsidization as a
method of financing education and research.
During the course of this stucly, circum
OCR for page 191
SUMMARY AND CONCLUSIONS
stances were changed by several visible ex
~ 1 _ _ _ ~ _ .
apes or ~nvesror-owned companies
becoming involved in medical education and
research. These examples are too varied and
experience is too limited to sustain firm con-
clusions. The committee floes not foresee
the acquisition of large numbers of teaching
hospitals by investor-owned companies.
Nevertheless, the increased involvement of
investor-owned companies in teaching hos-
pitals suggests more willingness on their part
to contribute to health professional educa-
tion and biomedical research. It also raises
many questions about faculty control, in-
stitutional priorities, and different values-
that deserve scrutiny as experience accu-
mulates.
CONCLUSIONS ABOUT INVESTOR
OWNERSHIP OF HEALTH CARE
FACILITIES
The committee concludes that available
evidence on differences between for-profit
and not-for-profit health care organizations
is not sufficient to justify a recommendation
that investor ownership of health care or-
ganizations be either opposed or supported
by public policy. Substantive goals regard-
ing cost, quality, access, education, and re-
search are more appropriate than a goal of
creating fair competition between for-profit
and not-for-prof~t health care organiza-
tions.
How the advantages and disadvantages of
the for-profit mode are perceived depends
to some degree on one's values and views
about the past and future of the health care
systemic However, the for-profit mode can-
not now be seen as a possible solution to
such important public policy issues as con-
tro] of health care costs, ensuring access to
care, or maintaining quality of care.
Studies comparing for-profit and not-for-
profit hospitals show clear disadvantages of
investor ownership regarding cost to payers
and smaller disadvantages regarding ex-
penses and service to patients who are un
197
able to pay. Some count the past lack of
involvement in medical education and re-
search as a disadvantage of the investor-
owned sector, although their becoming in-
volved has also raised concern. No clear dif-
ferences in quality have been demonstrated.
The cost and quality of care, access to care,
and the support of health professional ed-
ucation and academic health centers are all
major public policy issues that must be ad-
dressed on their own terms, rather than pri-
marily as an issue of for-profit health care.
The need for increased monitoring of the
performance of health care institutions and
the urgent need for public policy actions to
address the problem of uninsured patients
are discussed in more detail later in this
chapter.
Ibe presence of a for-profit sector has some
advantages that are not revealed in studies
comparing its performance with that of not-
for-profit institutions. First, the for-profit
sector's access to equity capital (and the re-
sulting enhanced access to debt capital) can
help meet the health care sector's capital
requirements and reduce the need for gov-
ernment to raise capital through taxes, which
the federal government is unlikely to do in
the forseeable future. However, over time,
investor equity is an expensive source of
capital, as discussed in Chapter 3. Further-
more, although investor equity is a capital
source that is not available to the not-for-
profit sector, viable alternative sources of
capital now exist for much of the not-for-
profit sector in health care.
Second, although there is little direct ev-
idence, it is likely that the acquisition and
construction activities of investor-owned
companies have preserved or enhanced the
availability of services for people who use
the institutions. These acquisitions may also
have improved the quality of care in ac-
quired institutions.
A third, less-tangible impact of the for-
profit sector pertains to competition, inno-
vation, and change in the health care sys-
tem. The influence of the for-profit sector
OCR for page 192
192
can be exaggerated and probably cannot be
quantified. However, the committee be-
lieves that the emergence of for-profit health
care companies, along with other factors such
as new payment methods, has in some in-
stances provicled alternative approaches and
has stimulated new forms of service deliv-
ery, greater attention to the desires of pa-
tients as consumers of services, multi-
institutional arrangements and the search
for economies of scale, innovations for ra~s-
ing capital, and the development of more
comprehensive health care organizations.
Although some of these developments are
not unique to for-profit organizations, the
for-profit sector nevertheless has increased
the pluralism of an already pluralistic, de-
centralized health care system. Great dif-
fuseness of responsibility for the health care
of populations is characteristic of such a sys-
tem, but this country's political system has
never found attractive the idea of a publicly
dominated, centralized, hierarchical health
care system, even though the need for a
more cohesive and comprehensive set of
public policies is continually debated.
ISSUES, CONCLUSIONS, AND
RECOMMENDATIONS
The presence offor-profit organizations in
an increasingly competitive health care sys-
tem is linked to a number of issues, includ-
ing (1) the increasing importance of attention
to economic incentives, (2) the social re-
sponsibilities of health care organizations,
(3) the Unction and viability of not-for-profit
organizations, (4) the growing problem of
parents who are unable to pay, (5) questions
of capital policy, (6) the fixture of the phy-
sician's fiduciary role, and (7) the need for
cereal monitoring of future developments.
The Increasing Importance of
Economic Incentives
Although systematic data are lacking, some
observers believe that investor-owned health
FOR-PROFIT ENTERPRISE IN [IEALTH CARE
care organizations tend to follow economic
incentives more quickly and closely than do
not-for-profit organizations. Others believe
that all types of health care providers are
becoming more attuned to economic incen-
tives. Whatever the case, in the committee's
view it is becoming increasingly important
to understand the operation of economic in-
centives in health care and to put in place
incentives for providers to fulfill appropriate
goals for quality and access, as well as cost.
This is not to suggest that for-profit hospitals
completely follow economic incentives. Even
if they sought to do so, there are practical
limits and considerations of public relations
and social conscience. In addition, because
of recent changes in reimbursement meth-
ods, all hospitals must be more mindful of
economic incentives.
Those who argue that health care insti-
tutions should be highly responsive to eco-
nomic incentives must consider whether it
is possible to perfect the incentives suffi-
ciently to avoid unfortunate results, such as
providing unnecessary but lucrative ser-
vices or not offering unprofitable services
that are needed in the community. Those
who argue that health care institutions should
be selectively indifferent to economic in-
centives must consider how to encourage
cost-effectiveness and the right selectivity
(e.g., to concentrate surpluses on indigent
care rather than on duplicating expensive
technologies to "keep up with" neighboring
hospitals). They must also face the question
of whether the tradition of using revenues
earned from patient care to subsidize indi-
gent care and educational activities has vir-
tue other than being the only practical way
that institutions can engage in such activities
in He absence of more explicit funding. Even
if cross-subsidization is a virtue, it is in con-
flict with increasing efforts by governmental
and other payers to reduce their expendi-
tures for the care that they purchase. If it
is at best a poor substitute for explicit fi-
nancing, then the pursuit of such financing
should be the goal. Increasingly, institutions
OCR for page 196
196
health care companies-like all other tax-
payers-are eventually spent for purposes
other than health care.20 However, unlike
most other individual and corporate taxpay-
ers, investor-owned hospital companies re-
ceive half of their revenues from tax-
supportec! government programs. Thus, the
corporate taxes paid by the investor-owned
companies represent a complex and very in-
direct transfer of revenues from the Medi-
care and Medicaid programs to the Defense
Department, interest on the national debt,
and other governmental activities. Ways
should be explored whereby the taxes paid
by investor-owned health care companies
(whose revenues are so substantiatZy derived
from tax revenues) could be devoted to un-
met health care needs particuZarly the
medical needs of indigent patients, although
there should be no illusions that the amount
is adequate to meet such needs.
Other tax-related approaches also merit
consideration. One option would be new
dedicated taxes at the state or federal level
to be used for paying health insurance pre-
miums for people who are currently unin-
sured and not covered by public programs.
A second approach is state programs, such
as in Florida, that create a pool of money to
pay for uncompensated care by taxing all
hospitals a percentage of their net patient
revenues. A third approach would be to give
health care companies the option of provid-
ing service to indigent patients at marginal
cost as a direct credit against taxes.
Conversely, as was suggested earlier, more
consideration should be given to ensuring
that hospitals, HMOs, home health agen-
cies, and other not-for-profit institutions that
receive charitable contributions and that
benefit from a tax exemption provide public
goods in the form of uncompensated care,
unprofitable standby capacity, unsponsored
research, or institutionally subsidized edu-
cational activities.
In the meanwhile, it is essential that there
be monitoring of and publicity about (1) the
extent to which institutions that provide un
FOR-PROFIT ENTERPRISE IN HEALTH CARE
compensated care find themselves in finan-
cial distress and (2J the extent to which people
are unable to get needed medicaZ care. Al-
though the need for public policy action is
already very apparent, it is important that
there be ongoing public information about
the dimensions of these problems.
Financial Capital
Policy decisions regarding health care
capital may affect the for-profit/not-for-profit
balance of hospitals, because the need for
financial capital is usually the force that
pushes trustees of not-for-profit institutions
to consider closure, sale to an investor-owned
company, or joining a not-for-profit chain or
alliance. (Discouragement or lack of com-
mitment of hospital boards in the face of
increasingly difficult economic circumstan-
ces also is clearly a factor in some instances.
Declining occupancy rates and reducer! rev-
enues are leading some boards to question
the value of keeping open all institutions in
an area.) As the analysis In Chapter3 shows,
in the absence of governmental grant pro-
grams for financial capital, capital growth for
all health care institutions depends on their
financial condition and the prospect of fu-
ture earnings. Institutions must generate
sufficient earnings to cover not only current
expenses but also to provide for future fi-
nancial capital requirements.
The advantage that for-profit organiza-
tions have in this regard is clear: greater
focus on economic goals and access to a
unique and flexible source of capital, inves-
tor equity. But the not-for-profit sector also
has certain advantages. Although only a small
number of institutions obtain significant phi-
lanthropic support for their capital require-
ments, not-for-profit institutions' access to
capital has been facilitated by the growth of
multi-institutional arrangements, debt in-
surance mechanisms, and, most impor-
tantly, the availability of tax-exempt debt
instruments.
In its examination of capital issues in health
OCR for page 197
SUMMARY AND CONCLUSIONS
care, the committee reached three general
conclusions:
197
of eligibility for tax-exempt debt to make
sure that institutions that obtain approval
for tax-exempt bonds appropriately serve a
1. The committee concludes that Medi- public nurnose regarding 1ln~omn`>ncnt^
care payments to health institutions must
continue to include funds for capital. This
is important not only to the continuing vi-
taTity and standards of quality in health care
but it could also affect the for-profit/not-for-
profit composition of health institutions.
Medicare is the largest single purchaser of
care in a hospital industry that is highly de-
pendent on reasonable retained earnings.
Failure to incorporate a reasonable factor for
capital costs would harm all hospitals, but
particularly those whose location or mission
results in their bearing unusually high costs
for indigent care or for health professionals'
education. In the absence of adequate fund-
ing, such institutions may find themselves
unable to compete for paying patients, doc-
tors, and capital and may be forced to aban-
don important aspects of their service,
teaching, or research missions.
2. The committee concludes that it is rea-
sonable for capital costs to be built into the
prospectively set prices of the Medicare pro-
gram. If this is done, there is no reason for
differential treatment of institutions (for ex-
ample, regarding return-on-equity pay
ments) according to their for-profit/not-for-
profit status. However, it is essential that
provisions be made for institutions that are
in exceptional situations-for example, ter-
tiary care facilities with high costs for tech-
nology and specialized personnel ant} public
facilities that are overaged and under-
equipped.
3. The committee concludes that it is im-
perative that policymakers recognize the im-
portance of tax-exempt bonds as the kite
source or capitat~or the not-for-profit health earnings
care sector. It would be unwise to do away
with such an important mechanism without
much more study of the possible impact on
the vitality of the not-for-profit sector and
on health care costs. However, it would also
be appropriate to review the requirements
~ ~ _ __= ~ 0 ~ ^r~
care, unprofitable services, anc! education
and research.
The Future of the Physician's
Fiduciary Role
Physicians and Entrepreneurism
The committee examined entrepreneur-
ial activity by physicians from the traditional
ethical premise that the physician's first re-
sponsibility is to the patient. This primary
role is becoming ever more complicated as
a result of technological change, mounting
economic pressures, and the widening range
of organizations in which patient care takes
place. Maintaining and transmitting the val-
ues on which the fiduciary aspects of the
physician's role are based is a fixture task for
professional organizations, medical educa-
tion, and public policy.
Certain physician involvements in entre-
preneurial activities can compromise the
physician's fiduciary responsibilities to pa-
tients and the medical professions' moral au-
thority. These involvements include (1)
physicians who make substantial capital in-
vestment in office technology and equip-
ment, which they then may overutilize to
recoup their investment, (2) physicians who
own interests in organizations to which they
make referrals, or receive other economic
benefits for making referrals, (c) bonus in-
centive arrangements for sharing an insti-
tution's earnings with physicians whose
patient care decisions have influenced those
the committee reached conclusions on
three such types of involvement.
1. The committee concludes that pur-
chasers of health care should favor physi-
cian compensation systems that break or
attenuate the link between physicians' pa
OCR for page 198
198
talent care ~cmons and the money they make
on investments in equipment or personnel
in their own medical practices.
2. The committee concludes that law and
professional ethics should regard as uneth-
icaZ and unacceptable physicians having
economic interests in health care facilities
to which they make referrals or receiving
payments for making referrals. In the ab-
sence of prohibitions on such arrangements,
it is essential that disclosure standards be
developed so that patients, referring phy-
sicians, and third-party payers are aware of
the conflict of interest.
3. The committee concludes that bonus
incentive plans, under which institutions of-
fer physicians a share in surplus revenues
generated by an organization in which they
practice, are usually inconsistent with the
physician's obligation of primary Fidelity to
the patient's interests. Such plans present
less difficulty when patients are a party to
an agreement (as in a subscriber-owned
HMO) or when they have been informed of
an agreement in advance of their need for
services (as when signing up with an HMO).
The ejects on patient care of the many va-
rieties of physician-incentive arrangements
designed to control costs are not well un-
derstood. Where they are implemented, their
use should be closely studied and moni-
tored.
Physician Influence in Medical
Institutions
In Chapter 9, the committee examined
changes taking place in the control of health
care organizations, particularly regarding
physician influence. In the governance and
management of medical institutions, power
and influence conventionally are shared
among physicians and other patient care
personnel, administration or management,
and governing boards. Although some goals
are shared, the successes! operation of an
institution frequently requires some balanc-
ing of conflicting interests. Some past prob
FOR-PROFIT ENTERPRISE IN HEALTH CARE
lems in the operation of institutions have
been attributed to physicians' excessive
power and influence. Now, however, the
growth of centrally managed multi-institu-
tional systems is removing certain types of
decision making from the local level, and in
independent institutions, boards and man-
agement are being forced to take a much
stronger role in the face of more difficult
competitive and economic conditions. An
excessive emphasis on financial and mana-
gerial concerns could negatively affect pa-
tient care. The committee's concern is that
there be a reasonable balance of power in
institutions, not that physicians (or admin-
istrators/managers) should be in a position
of complete control.
The committee examined two primary
methods by which physicians can exercise
influence: through their power to choose
which institution to use with their patients
(using the option of exiting the institution,
if dissatisfied with it) or by having a signif-
icant voice in the decision-making bodies
within the institution. Both of these options
can be used on behalf of patients, although
they have often been used for other pur
poses.
'' Regarding exit and voice mechanisms, stab
physicians in investor-owned hospitals are
now particularly likely to have multiple hos
pital privileges (thereby facilitating changes
in admitting patterns), and these hospitals
have particularly high levels of physician
representation on their governing boards,
although these boards typically have less au
thority than do the boards of independent
institutions.
Future developments are difficult to fore-
see and the need for monitoring change is
apparent, but the committee believes that
physicians will increasingly be tied to par-
ticular institutions. If so, the option oftaking
their patients elsewhere will decline as a
source of influence and the importance of
physicians having a voice wfl] increase. But
a greater voice seems incompatible with the
trends toward multi-institutional arrange
OCR for page 199
SUMMARY AND CONCLUSIONS
meets and ever-larger-scale organizations.
Physician voice may take new forms, such
as through physician corporations working
jointly with hospitals, physician advisory
councils to corporate system management,
board membership by physicians, physician
involvement in management, and key full-
time clinical appointments. It is important
that physicians and other patient care staff
continue to play an effective role in ensuring
that patient care concerns are not subordi-
nated to economic concerns.
The committee urges professional asso-
ciations in the health occupations to develop
their own criteria for defining appropriate
modes of ensuring effective participation of
practitioners in monitoring and sustaining
the quality of care in both traditional and
new forms of health care delivery and of
discouraging excessive restriction of their
voice in such issues.
The Need for Monitoring
Most questions about the comparative be-
havior of for-profit ant! not-for-profit insti-
tutions can now be answered only
provisionally, because the behavior of in-
stitutions is affected by economic, compet-
itive, and regulatory factors in their
environment. In an era when these factors
are changing rapidly, the behavior of dif-
ferent types of institutions also is likely to
change.
Medicare's change from cost-based reim-
bursement to its prospective payment sys-
tem (PPS) fundamentally changed incentives
in ways that are affecting virtually all aspects
of the American health care system. During
the course of this study, most hospitals in
this country began the transition to a system
that put them at much greater financial risk,
although operating margins have initially
improved (American Hospital Association,
1985~. However, no data were available to
the committee about ownership differences
in the way hospitals are responding to the
199
problems and opportunities presented by
the new payment system, which will ulti-
mately affect more than 40 percent of their
revenues. Furthermore, little information is
as yet available with which to assess He move
among hospital companies and not-for-profit
hospital chains to become involved in the
financing of care by starting, acquiring, or
joint venturing with an insurance company,
in addition to providing health services. Ids
and other trends toward vertical integration
present some new incentives and challenge
our ability to understand and measure im-
plications for cost, quality, and access to ser-
v~ces.
In several chapters of this report, atten-
tion has been called to the need for moni-
toring key aspects of the performance of
health care organizations: indices of quality
of care, cost of care, service to patients who
are unable to pay, the auspices and values
of health professional education, and the fi-
duciary role of the physician.
At the local level, a recast health planning
program that is able to provide information
to consumers, buyers, and policymakers
could be valuable in monitoring perfor-
mance by health care providers and in pub-
lishing reports that identify gaps,
redunclancies, and other problems. These
activities should be concerned as much with
quality as with cost and access. Professional
review organizations (PROs) could provide
much valuable public information. The Joint
Commission on Accreditation of Hospitals
also could be involved. There may also be
a role for a new type of organization or agency
to monitor and report on the performance
of health care institutions.
At the national level, it would be useful
for the National Center for Health Statistics
to include in its annual report to the Con-
gress, Health, United States, comparative
information on the performance of all types
of health care institutions on such measures
as amount of uncompensated care, costs per
adjusted admission, occupancy rates, bed
turnover rates, profit margins, and quality
OCR for page 200
200
indicators. Both theory and the evidence
reviewed in this report suggest the impor-
tance of analyzing information about the
performance of health care organizations in
a way that illuminates the effects of type of
ownership (for-pro~t, not-for-profit, pub-
lic), membership in a multi-institutional sys-
tem, and involvement in both the financing
~ . . ~ .
ano provision ot services.
As a result of acquisitions, mergers, and
networking arrangements, health care or-
ganizations of considerable size and diver-
sity have come into being. This is true not
only among the investor-owned hospital
companies but also among for-profit and not-
for-profit HMOs and the affiliation organi-
zations of not-for-profit hospitals. Several
organizations now operate hundreds of fa-
cilities and generate billions of dollars in
revenues. The element of scale or size has
not yet been examined caraway, but it could
prove to be as important as the distinction
between for-profit and not-for-profit orga-
nizations or between independent institu-
tions and those that are part of multi-
institutional systems. Indeed, some observ-
ers believe that relatively few large orga-
nizations with origins variously in today's
investor-owned corporations, the organiza-
tions of affiliated not-for-profit hospitals, in
HMOs, in insurance companies, and per-
haps in major teaching hospitals or cTinics-
will come to dominate the American health
care system in the same way that a few large
national organizations dominate many areas
of the U. S. economy.
However, although some organizations
have clearly adopted aggressive growth
strategies, the horizons of growth do not
appear limitless. Future growth and con-
solidation are likely to be curbed by forsee-
able limitations in Medicare payments for
capital costs; by fear and likelihood that in-
crea~singly large organizations will attract
more regulation; by a dearth in the number
of territories where institutions are ripe for
acquisition and where there are large num-
bers of well-insured, middle class people;
FOR-PROFIT ENTERPRISE IN HEALTH CARE
and by constraints on economies of scale in
what remain essentially local marketplaces.
Studies that compare the behavior of in-
stitutions that are under different types of
ownership and control provide hints of what
a health care system dominated by ever larger
anc! more comprehensive organizations would
be like. However, some important ques-
tions about the increasing scale of health
care organizations are probably not answer-
able by aggregating data from health care
institutions. For example, how and in what
ways will health care organizations of in-
creasing size and diversity influence health
care policy and public financing both na-
tionally and at the state or local levels? Will
they become an effective voice on behalf of
those who need medical care? Will stories
of corruption within the health care industry
become more commonplace as larger and
larger economic interests are involved? Will
large organizations use their economic power
and diversity to cut prices at selected insti-
tutions long enough to drive out local com-
petition? What would happen if such
companies, even if economically healthy,
were to be sold to conglomerates or to for-
eign corporations for which American health
care is, perhaps, only a minor line of busi-
ness?
Other questions concern the impact of
large-scare organizations on the policy en-
vironment. Might the growth of massive
health enterprises increase the vulnerability
of the political process to the sophisticated
use offinancial and lobbying pressures? Might
the growing presence of multibillion dollar
health care providers lead government to
view health care as just another marketplace
service of perhaps no particular public pol-
icy importance? If a direct relationship be-
comes evident between the amount of
increase in federal health care expenditures
and the amount of profit in the nation's health
care companies, will there be movement to-
ward a public utility mode} in which the
amount of profit is negotiated between gov-
ernment and the providers of service?
OCR for page 201
SUMMARY AND CONCLUSIONS
CONCLUSION
A health care system that is excessively
responsive to short-term economic incen-
tives would be unacceptable in terms of im-
portant social values, but a system that
disregards economic constraints would
quickly seal its own doom. The drive for a
surplus of revenues over expenses is an es-
sential goal of for-profit and not-for-profit
providers, but it should not replace the broad
goals regarding access to care, cost-effec-
tiveness, quality of care, protection of the
consumer, and the processes of education
and research. As the investor-owned sector
matures and the competitiveness of the en-
vironment increases, all institutions must be
evaluated and monitored with respect to
these broad goals, as well as with respect to
the economic performance that is now fol-
lowed so closely by investors. The issue of
ownership will become more critical if these
goals are jeopardized. The committee feels
that our current path toward an increasingly
competitive environment, with more inves-
tor-ownership, more for-profit activities by
not-for-profit institutions, and larger multi-
institutional networks, raises enough issues
to warrant careful monitoring. Concur-
rently, more adequate public policy atten-
tion needs to be given to some key topics
discussed in this report the needs of un-
insured patients, the maintenance of quality
of care, and the fiduciary role of physi-
cians-whose importance is heightened by
the changing economic and market forces
that affect the ways Americans receive health
care.
NOTES
Nor this and other reasons, the committee also sought
clues from the nursing home industry, in which the
incentives generated by prospectively determined rates
have long characterized state Medicaid program pay-
ments. More than 75 percent of nursing homes are for-
profit operations and about half of their patients are
paid through Medicaid. The committee hoped to com-
pare proprietary and investor-owned nursing homes
207
with not-for-profit homes concerning cost, quality, and
patient access. Although available data have been in-
cluded in this report, they are generally very inade-
quate on the major comparisons.
2Some diversification in hospitals goes beyond ver-
tical integration, involving separate lines of business,
usually through subsidiary organizations such as travel
agencies, computer services, supplies, laundries, rental
properties, and so forth. Such activities among not-for-
profit organizations have led to concern about unfair
competition with organizations that do not enjoy the
not-for-profit organization's tax benefits. (See U.S. Small
Business Administration, 1983.)
Professional practices are themselves the scene of
several trends the decline of solo practice, the growth
of practices under trade names, franchised practices
(particularly in dentistry and optometry). For more on
entrepreneurial trends in the health professions, see
Trauner et al. (1982~.
Controversy about for-profit health care substan-
tially concerns the relative advantages and disadvan-
tages of two types of private corporations for-profit
and not-for-profit not about government-owned ver-
sus privately owned health care organizations. See Horty
and Mulholland (1983) for a more complete analysis of
the legal differences between for-profit and not-for-
profit health care organizations.
sIn reality these distinctions in sources of capital are
not so neat. Thus, government-owned institutions rely
heavily on debt as a source of capital. Not-for-profit
institutions that have entered into one of several types
of for-profit/not-for-profit hybrid arrangements may have
access to equity capital for certain purposes, and, under
limited circumstances, for-profit institutions have been
able to use tax-exempt debt financing.
6A vivid illustration of the importance of earnings
growth is seen in the reaction of one Wall Street analyst
to the merger of Hospital Corporation of America and
American Hospital Supply Company that was proposed
(and later derailed) early in 1985:
We do not believe HCA will be able to maintain
its pre-merger third-year growth rate expecta-
tion of 15-20 percent without subsequent ac-
quisitions. From what we assess to be acquirable
in the health care arena, Farther mergers would
either be dilutive or a further drag on earnings
growth. Then why is HCA taking such risks?
We are still unsure, but unless, or until, the
new proposed combined entity can justify higher
growth expectations, we think its long-term ex-
pansion rate (assuming that merger is consum-
mated) will hover over 12 percent. Thus, we are
removing Hospital Corporation from the Rec-
ommended List (Straw, 1985, emphasis in orig-
inal).
7The American Hospital Association (1985) reports
that the average U. S. hospital in 1983 had a net patient
OCR for page 202
202
margin of 1 percent and a total net margin of 5.1 per-
cent. The Federation of American Hospitals (1983) re-
ported the average after-tax margin among investor-
owned acute care general hospitals to be 4.2 percent.
Nonpatient revenues accounted for 5.2 percent of total
net revenues of not-for-profit hospitals in 1983, but
only 1.6 percent of the total net revenues of for-profit
hospitals. (Data provided by telephone by the Center
for Hospital Statistics at the American Hospital Asso-
ciation.)
8It should also be remembered when reviewing cat-
egorical comparisons of institutions that there are wide
variations within categories. Although the data gen-
erally have not been analyzed and reported to show
these variations, many of the differences between groups
of hospitals of different types of ownership may be
smaller than differences among hospitals of a given type
of ownership.
9Few available data allow a true comparison of ef-
ficiency, because of the difficulty of establishing that
different health care organizations are producing the
same "product." For example, without more infor-
mation than is generally available on the severity of
illness for which patients are being treated in different
institutions, doubt remains whether identical services
are involved when expenses are being compared. How-
ever, there is no evidence that investor-owned hos-
pitals treat more severe cases than comparable not-for-
profit hospitals (i.e., nonteaching facilities). The Med-
icare case-mix index in investor-owned hospitals barely
differs from the average for all hospitals.
Although "charity" comprises a greater proportion
of uncompensated care at not-for-profit hospitals than
at for-profit hospitals, the committee concluded that
the numbers that distinguish between bad debt and
charity care are not reliable. Thus, the committee fol-
lowed the common convention of using the measure
"uncompensated care," which expresses the sum of bad
debt and charity care as a percentage of gross patient
revenues. However, this measure is a seriously flawed
indicator either of charitable activities by institutions
or of the extent to which the needs of those who are
unable to pay are being met. It includes dollars of gross
patient revenues that are written off either as charity
care or as bad debt. Although these two concepts are
quite different, they are not used consistently by dif-
ferent hospitals' accountants, in part because the only
institutions that have any reason to account separately
for charity care are not-for-profit and public hospitals
that have an undischarged Hill-Burton "free care" ob-
ligation and hospitals that are located in states in which
Blue Cross pays a portion of charity care. Uncompen-
sated care that might be written off as charity care at
one institution may be written off as bad debt at an-
other.
Lithe Health Care Financing Administration uses a
stringent definition of sole community provider (e.g.,
FOR-PROFIT ENTERTRISE IN HEALTH CARE
no other hospital within 50 miles), designed in part to
minimize the number of such institutions. In a large
number of communities, people may view their own
hospital as the only one that is reasonably convenient
and available. It should also be noted that the investor-
owned hospital companies' activities likely include the
management of some sole community hospitals.
Hospitals may carry a relatively small uncompen-
sated care burden because of location (which affects not
only the demographic characteristics of the surround-
ing population but also the generosity ofthe state Med-
icaid program), the type of emergency services they
offer, whether they offer services that may attract un-
insured patients (e.g., obstetric services), the reputa-
tion and historical mission of the hospital and competing
hospitals, and so forth. Thus, there are many circum-
stances that determine whether an institution that seeks
to minimize bad debt and charity care actually has to
refuse to provide services to certain patients.
however, some members ofthe committee believe
that before such a conclusion is drawn, more direct
evidence is needed regarding the extent to which the
ability to obtain care by people who are unable to pay
was affected by the coming of investor-owned hospitals.
The only two available studies of uncompensated care
before and after acquisition by an investor-owned firm
were both conducted for the committee. Their results
are inconsistent and therefore inconclusive. Brown and
Klosterman (1986) found in Florida that hospital ac-
quisition by investor-owned companies was not fol-
lowed by a decrease in the number of uncompensated
care patients, although the percentage of such patients
decreased because of an increase in total admissions.
Pattison (1986) found in California that hospital acqui-
sitions by investor-owned companies were followed by
substantial decreases in uncompensated care, although
it is not clear how much of this decrease resulted from
changes in collection procedures rather than in admit-
tirlg criteria. In the two states almost all of the hospitals
acquired by investor-owned chains had previously been
under for-profit ownership.
24 Indeed, in one of the cities visited (in the com-
mittee's case studies) a public hospital closed its emer-
gency room so as to shift some of its uncompensated
care burden to two nearby not-for-profit hospitals.
Blithe physicians on the staff of for-profit hospitals
are much more likely than those on the staff of not-for-
profit hospitals to be in general or family practice (22
percent versus 13 percent) and much less likely to be
in internal medicine (9 percent versus 18.5 percent)
(Musacchio et al., 19861. (The distribution of specialists
in public hospitals was similar to the distribution in
for-profit hospitals. ) However, without data about re-
strictions on privileges or about what physicians with
different specialties actually do in different types of
hospitals, the committee felt unable to interpret these
differences in quality terms.
OCR for page 203
SUMMARY AND CONCLUSIONS
26Actions that may be seen as beneficial by one party-
for example, a local government that does not want to
make the expenditures necessary to replace an aging
facility- may turn up as a third-party payer's increased
costs or as an uninsured patient's reduced access to
care. Furthermore, advocates and critics see the drive
for income differently. For example, facility construc-
tion or acquisitions that kept open facilities that would
otherwise have closed may have enhanced access to
care for many patients and facilitated the practices of
many physicians. Critics argue that the low average
occupancy rates in these companies' hospitals show that
investor ownership has helped to overcapitalize the
nation's acute health care system. The higher expenses
and charges that resulted from their investments in-
creased costs to third-party payers, including Medi-
care. However, proponents contend that unrealistically
low pre-acquisition price structures and inadequate
provision for future capital needs had created problems
that could best be met at many institutions through an
infusion of outside capital, which had to be paid for.
restatements to this effect appear from time to time.
One of the most fully articulated ones comes from a
Humana certificate-of-need application for West Her-
nando Medical Center in Florida
Public policy in the United States has deter-
mined that providing hospital care to indigent
patients is a government responsibility. In order
to meet this responsibility, various levels of gov-
ernment collect taxes and make funds available
to certain hospitals for this purpose. As a tax-
payer, Humana contributes to the provision of
this care through payment of property taxes,
sales taxes, income taxes, franchise taxes, and
other taxes. As a result of public policy and their
status as taxpayers, Humana hospitals do not
have the responsibility to provide hospital care
for the indigent except in emergencies or in
those situations where reimbursement for in-
digent patients is provided.
28The health of the not-for-profit sector may also
have spill-over effects that benefit the for-profit sector.
Indeed, some leaders of investor-owned companies be-
lieve that they can survive and prosper so long as the
reimbursement and regulatory environment permits
the survival of not-for-profit institutions. For example,
Richard Ragsdale, senior executive vice president of
Republic Health Corp., was recently quoted in Fores
as arguing that being in the same business as not-for-
profit institutions provides "a political umbrella....
If the government gets to the point of hurting us, it
will also be pushing some not-for-profits out of busi-
ness. That's not politically feasible" (Teitelman, 1985~.
Tithe concern about potential changes in historical
missions or in behavior following acquisitions by inves-
tor-owned chains has arisen in several states. The only
203
two studies of changes associated with acquisitions were
done for this committee (Brown and Klosterman, 1986;
Pattison, 1986~. Although both studies are small and
include few examples of acquisitions of not-for-profit
and public hospitals, both studies show poet-acquisition
changes (e.g., reductions in uncompensated care) that
could signal a change in hospitals' historical missions.
20Income taxes (which are paid by for-profit but not
by not-for-profit medical institutions) purchase health
care that is provided by the Defense Department, Vet-
eran's Administration, and Public Health Service, in
addition to 75 percent of Part B of Medicare (approx-
imately $25 billion-the other 25 percent comes from
premiums paid by beneficiaries), and the federal share
of the Medicaid program (approximately $23 billion).
(At the federal level, Part A of the Medicare program
is paid for by payroll taxes a tax that does not distin-
guish between for-profit and not-for-profit institutions.)
Only about 12 percent of the total federal budget of
more than $925 billion (1985) goes for health care (Of-
fice of Management and Budget, 1984~.
REFERENCES
American Hospital Association (1985) Economic
Trends l(Spung).
Brock, Dan W., and Allen Buchanan (1986) Ethical
Issues in For-Profit Health Care. This volume.
Brown, Kafllryn J., and Richard E. Klosterman (1986)
Hospital Acquisitions and Their Ejects: Florida, 1979-
1982. This volume.
Federation of American Hospitals (1983) Statistical
Prod of the Investor-Owned Hospital Industry, 1983.
Washington, D.C.: Federation of American Hospitals.
Gaumer, Gary (1986) Medicare Patient Outcomes
and Hospital Organizational Mission. This volume.
Horty, John F., and Daniel M. Mulholland (1983)
Legal Differences Between Investor-Owned and Non-
Profit Health Care Institutions. Pp. 17-34 in Bradford
H. Gray led.), The New Health Carefor Profit. Wash-
ington, D.C.: National Academy Press.
Musacchio, Robert A., 'Stephen Zuckerman, Lynn
E. Jensen, and Larry Freshnock (1986) Hospital Own-
ership and the Practice of Medicine: Evidence from
the Physician's Perspective. This volume.
' Oflice of Management and Budget (1984) Budget of
the U.S. Government, FY 1985. Washington, D.C.:
U.S. G'overnment Printing Once.
Pattison, Robert V. (1986) Response to Financial In-
centives Among Investor-Ourned and Not-for-Profit
Hospitals: An Analysis Based on California Data, 1978-
1982. This volume.
Shaw, Seth H. (1985) Hospital Corporation of Amer-
ica (an "Equity Research Company Comment" from
Shearson Lehman Brothers). May 2.
Teitelman, Robert (1985) Selective Surgery. Forbes
(April 22):75-76.
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204
Trauner, Joan B., Harold S. Lull, and Joy 0. Ro-
binson (1982) Entrepreneurial Trends in Health Care
Delivery: The Development of Retail Dentistry and
Freestanding Ambulatory Services. Washington, D.C.:
Federal Trade Commission.
U.S. Small Business Administration (1983) Unfair
Competition by Nonprofit Organizations unto Small
FOR-PROFIT ENTERPRISE lN HEALTH CARE
Business: An Issue for the 1980s. Washington, D.C.:
U.S. Small Business Administration.
Watt, J. Michael, Steven C. Renn, James S. Hahn,
Robert A. Demon, and Carl J. Schramm (1986) The
Ejects of Ownership and M.ultihospital System Mem-
bership on Hospital Functional Strategies and Eco-
nomic Performance. This volume.
OCR for page 205
SUPPLEMENTARY STATEMENT ON
For Profit Enterprise in Health Care
Alexander M. Capron, Eliot Freidson, Arnold S. Relman,
Steven A. Schroeder, Katharine Bauer Sommers, Rosemary
Stevens, and Daniel Wikler
The work of the committee and its staff and
consultants has been thorough and thoughtful.
Although we concur with most of the report,
we add this statement to stress certain findings
and implications that are important for public
policy and need more emphasis.
In our opinion, the major finding of this
report is that the investor-owned hospital chains
have so far demonstrated no advantages for the
public interest over their not-for-profit com-
petitors. The report shows that on average the
for-profit hospitals have been slightly less ef-
ficient, have charged payers more, and have
rendered less uncompensated care to unin-
sured patients than not-for-profit hospitals.
Their most notable capability has been their
greater access to capital, which in some places
may have allowed them to build or renovate
needed facilities. However, the current un-
derutilization of hospital beds, most evident
among the investor-owned hospitals, suggests
that easy access to capital has also encouraged
overexpansion of inpatient facilities and may
not always be a virtue.
Second, data are lacking on many significant
points. The data do not allow an adequate com-
parison of the quality or kinds of services pro-
vided at for-profit and not-for-profit hospitals.
Moreover, the committee did not measure the
effect of for-profit hospitals' practices on not-
for-profit institutions. Since the committee fo-
cused on national data, the special problems
in states where the for-profits are concentrated
205
and have a large share of the beds were not
analyzed. We were therefore unable to lay to
rest fears expressed by some observers that,
particularly in those states, the for-profits are
skimming the profitable patients and dumping
the unprofitable ones, thus threatening the
solvency of hospitals that adhere to a policy of
not turning away medically indigent patients.
Finally, we are concerned about what would
happen if for-profit institutions assumed a
dominant role in our health care system as a
whole. Nationally, less than 15 percent of pri-
vate acute care hospitals (the main focus of the
committee report) are for-profit, but a majority
of nursing homes and private psychiatric hos-
pitals are for-profit; and investor-owned busi-
nesses are expanding into other parts of the
system. A substantial increase in the for-profit
sector's share of the health system could
1. Put further pressure on hospitals, vol-
untary organizations, and other facilities that
provide needed but less profitable services;
2. Create powerful centers of influence to
affect public policy; and
3. Increase the drift of the heal care sys-
tem toward commercialism and away from
medicine's service orientation.
These concerns reinforce the implication of
the committee's report that we would have
little to gain, and possibly much to lose, if for-
profit corporations came to dominate our health
care system.
OCR for page 206
Representative terms from entire chapter:
care organizations
