For-Profit Enterprise in Health Care (1986) / Chapter Skim
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1 Profits and Health Care: An Introduction to the Issues
1 Profits and Health Care: An Introduction to the Issues
Pages 3-25
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From page 3... ...
Investor-owned health service businesses range from large companies (such as Hospital Corporation of America, Beverly Enterprises, and Humana, Inc.) that own or operate hundreds of hospitals, nursing homes, and other facilities to independent institutions owned by local investors.
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3. Are changes taking place in physicians' relationships with health care institutions that will alter the traditional fiduciary aspects of the profession and the public trust that has been vested in it?
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for services rendered to individual beneficiaries of public programs and not for appropriations to governmental institutions. As a result of history and past public policy, then, the debate about for-profit health care is not about private versus public control of medical institutions but is instead largely about the differences between (and 5 relative virtues of two types of private institutions not-for-profit and for-profit.
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From page 6... ...
d. Govermental grants Management accountable to voluntary, often selfperpetuating boards Purpose: Has legal obligation to fulfill a stated mission (provide services, teaching, research, etch must maintain economic viability to do so Revenues derived from sale of services and Dom charitable contributions Mission: Often stated in terms of charity, quality, and community service, but may also pursue growth Mission and diverse constituencies often complicate decision making and implementation they see as appropriate in health care.)
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From page 7... ...
This is not behavior that bespeaks single-minded commitment to short-term profit maximization, although in the Tong term it can be presumed that hard economic criteria ordinarily guide American business behavior. Since Adam Smith, the fulcrum of economic theory about for-profit organizations is the objective of profit maximization.
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From page 8... ...
are controlled by the organization's patrons or members, who elect the board of directors (Hansmann, 1980:841; Horty and Mu~holiand, 1983:201. "Nonmembership" not-for-profit organizations are controlled by a self-perpetuating board, which is a common pattern among not-forprofit nursing homes and hospitals.
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From page 9... ...
Both types have been forming multiinstitutional arrangements in the hopes of gaining economies of scale and greater access to capital, aggressively marketing and vertically integrating (e.g., through the acquisition of primary care centers and longterm-care facilities) to increase control of patient Dow anc} market share, and paying more heed to the vigor of the bottom line by heightening cost control and limiting uncompensatec]
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From page 10... ...
These laws and regulations determine whether an institution may open, who may practice medicine, eligibility for governmental programs, governance and medical staff responsibilities, liability for negligence, restrictions on the "corporate practice of medicine," and so form. The larger economic or marketplace environment also places constraints on institutions and affects their ability to do many things, such as raise prices, cross-subsidize care of uninsured patients, or offer specialized services.
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From page 11... ...
Governmental involvement does not deny that other market factors and competitive forces should be allowed to operate, although the form of that involvement determines the extentofthe competition. For example, if beneficiaries of governmental programs could receive care only at governmental hospitals, the role of market forces would be minimal.
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From page 12... ...
Health Care as Social Good A contrasting set of views opposes Me idea that health care is properly seen as an economic good that is appropriately bought, sold, and disciplined by competitive forces in a marketplace. This view holds that health professionals and institutions should pursue the goals or ideals of applying biomedical science on behalf of patients and to meet community needs, whether or not it is profitable to do so.
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From page 13... ...
These elements include the great knowledge imbalance between providers and recipients of medical services; the inability of the patient to judge much more than superficial aspects of quality; the essential fiduciary role required of the physician; the necessity of thirdparty payment because of the unpredictability and cost of medical expenses, but which substantially reduces the patient's price sensitivity and attenuates market restraints on prices; the importance of a community-wide perspective on the need for services, particularly of high-cost, low-utilization ser vices such as 24-hour emergency room coverage, burn treatment units, and neonatal intensive care units; the fact that there are people who need care who cannot afford it; and the fact that individuals' needs for care are unpredictable en c! tend to be inversely related to ability to pay.
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From page 14... ...
In discussions of ideals that run counter to economic incentives, the question inev FOR-PROFIT ENTERPRISE IN HEALTH CARE itably arises of the extent to which the behavior of physicians or health care institutions has actually conformed to ideals of altruism, service, and science (Relman and: Reinhardt, 1986~. Skeptics point to several facts: the rise in physician fees and income that followed the shift from their depending for income on the means of their patients to their drawing on funds from ~ird-party payers who reimbursed under the "usual, customary, and reasonable" approach (Roe, 19811; widespread and long-standing varia tions in medical care (Nealth Affairs, 1984~; the tendency of volume of services to increase when they are covered by insurance (Aday et al., 1980~; low levels of hospitalization and surgery when fee-for-service incentives are not present (Luff, 1981; Bunker 19701; patterns of acquisition and use of laboratory and diagnostic testing equipment in physicians' offices (Schroeder and Showstack, 19781; widespread physician unwillingness to accept Medicare as fuD payment for their services (AMA, 1985~; and the struggles of legal services attorneys to force not-for-profit hospitals to care for more indigent patients (see Clearinghouse Review, 1969-present)
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The question of the physician's fiduciary responsibilities inevitably leads to questions 15 of the economic arrangements in medical practice and of the compatibility of professional responsibilities and the not-for-profit organization. This is the subject of Chapter 8.
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2For example, the merging health care supply companies, Baxter Travenol and American Hospital Supply Corporation, both have home care subsidiaries; several insurance companies (e.g., Prudential, John Hancock, Aetna, CIGNA) have HMO subsidiaries; the OwensIllinois glass company bought nursing homes and hospitals; W
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22Willingness to duplicate services without respect to need is, of course, in no way peculiar to the forprofit sector, as the experience of the past 20 years (including the history of the health planning proven and the growth of surplus beds) clearly shows.
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Legal Differences Between Investor-Owned and Nonprofit Health Care Institutions.
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In addition to directing resources 19 into their most productive uses, the competitive market model has the result that consumers attain their highest possible levels of economic satisfaction, given their preferences and incomes. Why, then, does an economy include governmental production or not-for-profit, private production?
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According to this theory, then, not-for-profit firms would be dominant in markets in which the quality of the product is difficult to monitor, because the preferences of consumers for the ostensible protection of the not-for-profit forIn would make it difficult or impossible for for-proIRt producers to remain in the market. However, we observe the continued existence of both forms in the nursing home and daycare industries, where presumably information asymmetry exists and where transferring to a different provider is difficult dames and Rose-Ackerman, Forthcoming)
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From page 21... ...
The nondistribution constraint reduces the tendency by managers of such organizations to misrepresent or produce lower quality. (BenNer does not discuss another alternative available to consumers, which is to form coalitions to reduce or remove information asymmetry by sharing information, seeking expert advice, or conducting research.)
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From page 22... ...
, these levels will be obtained at the expense of efficiency in comparison with the profit-maximizing firm in a competitive industry. As discussed below, however, the hospital industry has substantial entry barriers and other characteristics that cause it to differ from the purely competitive model.
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From page 23... ...
The presence of entry barriers and asymmetric information suggests that profit-maximizing firms may not operate efficiently in industries such as hospital care and education. However, there also is a question of whether pure profit maximization is the sole objective of private firms in this (or indeed any)
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From page 24... ...
For-prof~t hospitals, because of entry barriers, information asymmetry, and the ambiguity of the physician's role as the consumer's agent, may not be presumed to produce the quantity and quality of services desired by society at an efficient price. At the same time, economic theory suggests that there also may be reasons why not-for-profit hospitals do not behave in socially optimal ways.
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From page 25... ...
(Forthcoming) Property Rights in He Hospital Industry.
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