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Mayhem in the Medical Marketplace

David U. Himmelstein and Steffie Woolhandler practice and teach medicine in Cambridge, Massachusetts. They cofounded Physicians for a National Health Program.

Even in the United States, some aspects of life are too precious, intimate or corruptible to entrust to the market. We prohibit selling kidneys and buying wives, judges, and children.

How far should such prohibitions extend? In recent years entrepreneurs and their friends in government have privatized many publicly-funded services previously provided by government or nonprofit agencies—including interrogating Iraqi prisoners. Even in liberal Cambridge, our school superintendent proposes enlisting a for-profit firm to set up a new “public” high school.

Health care epitomizes this trend. Tax dollars account for 60 percent of U.S. health spending (counting as government spending not just Medicare, Medicaid, and Veterans Administration hospitals, but also the costs of health benefits for public workers and the tax subsidies for private coverage). (Indeed, on a per capita basis, public funding for health care in the United States exceeds total health spending in nations with national health insurance.) Yet investor-owned firms have come to dominate kidney dialysis, nursing homes, psychiatric hospitals, rehabilitation facilities, and HMOs. They have made significant inroads among acute care hospitals (they own about 13 percent of such facilities), as well as outpatient surgical centers, home care agencies, and even hospices.

Market theorists argue that the profit motive optimizes care and minimizes costs. But a growing body of evidence indicates that this dogma has no clothes.

The latest studies—published in the Canadian Medical Association Journal and the Journal of the American Medical Association—come from a highly respected group of Canadian researchers. They painstakingly culled every study ever published that compares the costs and outcomes of care at for-profit and nonprofit hospitals and dialysis clinics. To avoid bias in selecting studies, a librarian blacked out all indication of whether the study showed an advantage for nonprofit or for-profit. The researchers then used sophisticated statistical methods to combine all of the data (which all came from studies of U.S. facilities).

Their meticulous analyses demonstrate markedly higher costs and death rates in investor-owned hospitals than in nonprofit ones, and poor outcomes in investor-owned kidney dialysis clinics. The excess cost of for-profit care is substantial—19 percent—implying that the $37.348 billion Americans paid for care at investor-owned acute care hospitals in 2001 would have cost only $31.385 billion at nonprofits; the waste amounted to $5.963 billion.

The waste in lives is more shocking; 2047 unnecessary deaths annually caused by for-profit ownership of hospitals, and 2500 killed each year by for-profit ownership of kidney dialysis centers.

It is easy to see why the profit motive might lead to skimpier care and lower quality. But why does investor ownership increase costs?

Investor-owned hospitals are profit maximizers, not cost minimizers. Strategies that bolster profitability often worsen efficiency and drive up costs. Columbia/HCA—the largest hospital firm—used several tricks to inflate its Medicare billings: exaggerating the severity of diagnoses; falsifying expense ledgers that form the basis of Medicare payment; and bouncing patients from its acute care hospitals to its convalescent hospitals and home care agencies, allowing it to bill multiple times for a single episode of illness. After paying fines and settlements totaling $1.7 billion, the firm continued merrily—and profitably—on its way. Tenet, the second largest hospital firm paid nearly $700 million to settle charges that it gave kickbacks for referrals and inappropriately detained psychiatric patients in order to fill beds during the 1980s, when the firm was known as NME. Tenet is back in the news for another round of alleged misdeeds, including performing hundreds of unnecessary, but lucrative cardiac procedures.

For-profit executives reap princely rewards, draining money from care. When Columbia/HCA’s CEO resigned in the face of fraud investigations he left with a $10 million severance package and $324 million in company stock. Tenet’s CEO exercised stock options worth $111 million shortly before being forced out in 2003. The head of HealthSouth (the dominant provider of rehabilitation care) made $112 million in 2002, the year before his indictment for fraud.

Enormous CEO incomes explain part, but not all of the high administrative costs at investor-owned health care firms. Investor-owned hospitals spend much less on nursing care than nonprofit hospitals, but their administrative costs are six percentage points higher—reflecting their more meticulous attention to financial details.

High administrative costs and lower quality have also characterized for-profit HMOs. Now the dominant private insurers in the United States, such HMOs take 19 percent for overhead, versus 13 percent in nonprofit plans, 3 percent in the U.S. Medicare program, and 1 percent in the Canadian national health insurance program. Not surprisingly, contracting with private HMOs has inflated Medicare costs. According to the Congressional Budget Office, Medicare HMOs have selectively recruited healthy seniors who, had they stayed in traditional Medicare, would have cost Medicare little—about $2 billion less annually than Medicare paid the HMOs in premiums. Private plans that were unable to recruit the healthy dropped out of their Medicare contracts, disrupting care for millions of seniors. The Republicans’ response was to sweeten the pot for HMOs by including $46 billion to raise HMO payments as part of the recently-enacted Medicare prescription drug bill.

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

First, it is absurd to think that vulnerable users of public services such as frail elders and the seriously ill who consume most care can act as informed consumers. They are usually unable to. They cannot comparison-shop, reduce demand when suppliers raise prices, or accurately appraise quality. Even lucid, educated patients may have difficulty gauging whether a hospital’s luxurious appurtenances bespeak good care.

Second, the “products” of complex services like health care are notoriously difficult to evaluate, even for sophisticated buyers. Doctors and hospitals create the data used to monitor them; when used as the basis for financial reward such data has the accuracy of a tax return. By labeling minor chest discomfort “angina” rather than “chest pain” a U.S. hospital can raise its Medicare payment rate by 9.2 percent and factitiously improve its angina outcomes. Exploiting such loopholes has proven more profitable than improving efficiency or quality.

Even for honest firms, careful selection of lucrative patients and services is the key to success, while meeting community needs often threatens profitability. For example, for-profit specialty hospitals offering only cardiac or orthopedic care (money makers under current payment schemes) have blossomed across the United States. Most of these new hospitals duplicate services available at nearby nonprofit general hospitals, but the newcomers avoid money losing programs such as geriatric care and emergency departments (a common entry point for uninsured patients). The profits accrue to the investors, the losses to the nonprofit hospitals, and the total costs to society rise through the unnecessary duplication of expensive facilities.

Finally, a real market would require multiple independent buyers and sellers, with free entry into the marketplace. Yet, many hospitals exercise virtual monopolies. A town’s only hospital cannot compete with itself, but can use its market power to inflate its earnings. Not surprisingly, for-profit hospital firms in the United States have concentrated their purchases in areas where they can gain a large share of the local market. Moreover, many health care providers and suppliers enjoy state-conferred monopolies in the form of licensure laws for physicians and hospitals, and patent protection for drugs (the pharmaceutical industry provides a virtual encyclopedia of market failure in U.S. health care, but we’ll leave that for another day). Moreover, it’s an odd market that relies largely on public funds.

Privatization results in a large net loss to society in terms of higher costs and lower quality, but some stand to gain. Privatization creates vast profit opportunities for powerful firms and investors. The Frist family, whose scion Bill leads Republicans in the U.S. Senate, amassed its vast fortune from Columbia/HCA’s hospitals. Ross Perot made his money selling computing services to Medicare. And each bump in Medicare payments to HMOs has driven HMO stock prices skyward.

Privatization also redistributes income among health workers. Pay scales are relatively flat in government and nonprofit health institutions; pay differences between the CEO and a housekeeper are perhaps 20:1. In U.S. corporations, a ratio of 180:1 is average. In effect, privatization takes money from the pockets of low wage, mostly female and often minority health workers and gives it to investors and highly paid managers.

Behind false claims of efficiency lies a much uglier truth. Investor-owned health care embodies a new value system that eradicates any vestige of the community roots and samaritan traditions of hospitals, makes doctors and nurses into instruments of investors, and views patients as commodities.

The inroads of the market have stimulated a new surge of support for national health insurance (NHI). Recently, 13,000 doctors have signed an NHI proposal (which appeared in the Journal of the American Medical Association) that would ban for-profit insurers and hospitals, echoing the sentiment of the 62 percent of Americans who favor NHI (according to an October, 2003 Washington Post/ABC News poll).

But market fundamentalists continue to peddle privatization as a panacea for health care and America’s other problems. They assure us that Aetna and Columbia/HCA will solve our health care woes, just as Edison will save our failing public schools, Enron will cut electricity rates in California, and Halliburton and Blackwater will rescue us in Iraq.