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An Often Contentious Problem

[By Staff Writers]

In general industry, as well as in healthcare, there has been a longstanding discussion on the relative efficiencies of for-profit businesses versus not-for-profits, which concerns the very merits of competition itself.

The Studies

According to Robert James Cimasi MHA, ASA, AVA, CMP™ of Health Capital Consultants in St Louis, a number of recent studies, some more controversial than others, have investigated the effect of tax status on the relative costs and quality of services at these different types of hospitals.

For example, Bob Cimasi of www.HealthCapital.com reported that one study, published in the New England Journal of Medicine (NEJM), compared Medicare spending (adjusted for local costs, patient demographics, and the types and numbers of local healthcare providers and facilities) in markets with only non-profit hospitals, only for-profit hospitals, and those with both types.

The results for the years studied, 1989, 1992, and 1995, showed that the government spends more for every type of service studied (hospital, physician, home health, and other facility services) in those areas with only for-profit hospitals. Costs for areas with only not-for-profit hospitals were the lowest, with spending in markets with both for-profit and not-for-profit hospitals falling in the middle of the range.

This study also tracked adjusted mean per capita spending for hospitals that had a change in their tax status.

For the period of the study, 1989-1995, they found that areas where all hospitals were non-profit, and remained so, had cost increases of $866, compared with $1,295 for areas where non-profits converted to for-profit status. Areas with only for-profit hospitals had cost increases of $1,166 from 1989-1995, whereas those which changed to non-profit hospital areas had the smallest cost increases of $837.

These results may indicate that the tax status of hospitals affects the costs of health services provided by physician providers and other healthcare facilities. Further, this reported effect, if real, may be considered by many to be detrimental to the public good. In the six years examined by this study, the difference in costs between these market types was indicated to have grown from 12.7% to 16.5%. In 1995, annual Medicare spending was $732 higher per enrollee in markets with only for-profit hospitals than in non-profit markets. This difference may be extrapolated to $5.2 billion dollars in total extra annual costs to Medicare.

Even More Studies

Other studies, according to Cimasi, have examined these cost differences and have found them to result from increased administrative and ancillary services costs. For-profits appear to spend less on personnel, charity care, hired help, and length of stay than not-for-profits. Moreover, spending differences are reflected in measurements of outcomes and quality. A study of death rates has presented them to be 6-7% lower in not-for-profit hospitals as compared to for-profits and 25% lower for teaching hospitals.[1]

The fact that costs in those markets with both for-profit and not-for-profit hospitals were in the middle of the range may be interpreted as resulting from the averaging of costs from these different classifications of organizations. However, the behavior of the not-for-profit class was apparently also affected by this “competition” with for-profits in mixed markets. For example, studies have shown that charitable care by non-profits in these markets is reduced to levels similar to those provided by for-profits. 

The NEHJM Editorial

A NEJM editorial, several years ago, discussing several hospital costs studies attributes these higher costs to a lack of competition (or other motivation such as charity) that might act to prevent for-profit companies from seeking to maximize their profits at the cost of the public good.

“Market medicine’s dogma, that the profit motive optimizes care and minimizes costs, seem impervious to evidence that contradicts it.” Then further, “The competitive market described in textbooks does not and cannot exist in health care for several reasons.”[2]

Thus, even if competition could improve care and lower costs, this isn’t happening because expected results from competition are missing in the healthcare markets.

Competition

An examination of hospital competition is also of interest, as many hospital markets are too small to support more than one hospital (a monopoly) or more than a very few competing organizations. The authors of the NEJM editorial went on to cite hospital monopolies and “virtual monopolies” as one of the barriers to competition, stating that roughly half of Americans live in markets too small to support medical competition and that for-profit chains have focused acquisitions on these markets.

More Barriers

The next barrier discussed is constraints on consumer demand imposed by illness. The authors point to the difficulties consumers have in comparing costs, outcomes, and quality in order to choose among competing services.

Lastly, the fact that the government makes the purchasing decisions and pays the majority of healthcare costs, rather than the consumers or employers who are using the services, is presented as a significant barrier to competition.

Assessment

Many healthcare planners find these studies to be a stark illustration of the argument that the benefits of competition for profits are lost whenever competitive market controls are absent to prevent the abuses of profiteering. As one might expect, for-profit hospital companies might point out that this is the case for both not-for-profit and for-profit dominated markets.

References:

1. Wolfe, S. M., M.D., Editor, “Hidden Rip-off in U.S. Health Care Is Unmasked In New England Journal of Medicine Articles.” Health Letter 15: 9, Public Citizen Health Research Group, (Sept. 1999):

2. Woolhandler, S. and Himmelstein, D. U. “When Money Is the Mission — The High Costs of Investor-Owned Care.” NEJM 341: 6 (Aug. 5, 1999): 444

Conclusion

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Filed under: Health Economics, Health Law & Policy, Healthcare Finance, Practice Management, Research & Development | Tagged: for-profit hospitals, not-for-profit hospitals | 9 Comments »