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OCR for page R1
For-Profit Enterprise
in Health Care
Committee on Implications of For-Profit
Enterprise in Health Care
INSTITUTE OF MEDICINE
Bradford H. Gray, Ph.D., editor
NATIONAL ACADEMY PRESS
Washington, D.C. 1986
OCR for page R2
National Academy Press · 2101 Constitution Avenue, NW · Washington, DC 20418
NOTICE: The project that is the subject of this report was approved by the Governing Board of the National
Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National
Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report
were chosen for their special competences and with regard for appropriate balance.
This report has been reviewed by a group other than the authors according to the procedures approved by a
Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of
Engineering, and the Institute of Medicine.
The Institute of Medicine was chartered in 1970 by the National Academy of Sciences to enlist distinguished
members of the appropriate professions in the examination of policy matters pertaining to the health of the public.
In this, the Institute acts under both the Academy's 1863 congressional charter responsibility to be an adviser to
the federal government and its own initiative in identifying issues of medical care, research, and education.
Library of Congress Cataloging in Publication Data
For-prof~t enterprise in health care.
Bibliography: p.
Includes index.
1. Medical economics. 2. Health facilities.
Proprietary. 3. Medical corporations. I. Institute
of Medicine (U.S.~. Committee on Implications of For-
Profit Enterprise in Health Care. [DNLM: 1. Health
Facilities-United States. WX 27 AA1 F6]
RA410.5.F67 1986 362.1'1'0681 86-854
ISBN 0-309-03643-7
Copynght ~ 1986 by the National Academy of Sciences
No part of this book may be reproduced by any mechanical, photographic, or electronic process, or in the form
of a phonographic recording, nor may it be stored in a retrieval system, transmitted or otherwise copied for
public or private use, without written permission from the publisher, except for the purposes of official use by
the United States government.
First Punting, May 1986
Second Prindug, July 1987
Printed in the United States of America
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Committee on Implications
of For-Profit Enterprise in Health Care
WALTER I. McNERNEY, M. H.A.
(Chairman)
Herman Smith Professor of Hospital
and Health Services Management,
J. L. Kellogg Graduate School of
Management, Northwestern University,
Evanston, Illinois
KARL D. BAYS, M. B. A.
Chairman, Baxter TravenoT
Laboratories, Inc., Deerfield, Illinois
JOlIN C. BEDROSIAN, LL.B
Senior Executive Vice President,
National Medical Enterprises, Inc., Los
Angeles, California
ROGER J. BULGER, M.D.
President, University of Texas Health
Science Center at Houston
ALEXANDER M. CAPRON, LL.B
Topping Professor of Law, Medicine,
and Public Policy, University of
Southern California, Los Angeles
ROBERT A. DERZON, M. B.A.
Vice President, Lewan and Associates,
Inc., San Francisco, California
ELIOT FREIDSON, Ph. D.
Professor of Sociology, New York
University, New York City
JOHN K. KI11REDGE
Executive Vice President, The
Prudential Insurance Company of
America, Newark, New Jersey
. . .
ALAN I. LEVENSON, M.D.
Professor and Head, Department of
Psychiatry, University of Arizona
College of Medicine, Tucson
JOHN H. MOXLEY III, M.D.
Senior Vice President, American
Medical International, Inc., Beverly
Hills, California
STANLEY R. NELSON, M. H.A.
President, Henry Ford Health
Corporation, Troy, Michigan
KENNETH A. PLAIT, M.D.
Westminster Medical Center,
Westminster, Colorado
UWE E REINHARDT, Ph. D.
Professor of Economics and Public
Affairs, Woodrow Wilson School of
Public and International Affairs,
Princeton University, Princeton,
New Jersey
ARNOLD S. RELMAN, M.D.
Editor, The New England Journal of
Medicine, Boston, Massachusetts
STEVEN A. SCHROEDER, M.D.
Professor of Medicine and Chief,
Division of General Internal Medicine,
University of California, San Francisco
STEPHEN M. SHORTELL, Ph. D.
A. C. Buehier Professor of Hospital and
Health Services Management and
Professor of Organizational Behavior,
J. L. Kellogg Graduate School of
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Management, Northwestern University,
Evanston, Illinois
KATHARINE BAUER SOMMERS
Scholar-in-Residence, Institute of
Medicine, Washington, D.C.
ROSEMARY STEVENS, Ph.D.
Professor of History and Sociology of
Science, University of Pennsylvania,
Philadelphia
JAMES S. TODD, M.D.
Senior Deputy Executive Vice
President, American Medical
Association, Chicago, Illinois
JAMES WALLACE, C.P.A.
Partner, Arthur Andersen and
Company, Washington, D.C.
DONALD C. WEGMILLER, M.H.A.
President and Chief Executive Officer,
The Health Central System,
Minneapolis, Minnesota
DANIEL WIKLER, Ph. D.
Professor of Bioethics, University of
Wisconsin School of Medicine, Madison
Study Stab
Bradford H. Gray (Study Director)
Committee on Implications of For-Profit
Enterprise in Health Care
Karl D. Yordy, Director
Division of Health Care Services
Jessica Townsend, Staff Officer
Division of Health Care Services
Sunny G. Yoder, Staff Officer
Division of Health Care Services
Wallace K. Waterfall, Editor
Institute of Medicine
V
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Contend
Preface
W alter J. M cN er7uey
Acknowledgments .. ..
Introduction to the Volume
B rac~ford H. G ray ......
Part ~
COMMIT 1hE REPORT
1. Profits and Health Care: An Introduction to
the Issues ....................................................
APPENDIX: Economic Theories of For-Profit and Not-for-Profit Orgaruzations
S u n nil G. Yocler ..............................................................
2. Changes in He Ownership, Control, and Configuration
of Health Care Services ....................................
3. Financial Capital and Health Care Growth Trends
APPENDIX: The Nature of Equity Financing
U w e R einhuzrdk ...........................................................
4. Investor Ownership arid He Costs of Medical Care
5. Access to Care and Investor-Owned Providers
APPENDIX: Data on Hospital Services and Facilities
6. Quality of Care
IX
, xiii
· .
XV11
19
26
47
........ 67
......... 74
97
..... 121
, . ~ ~ - . -
7. Implications for Education and Research
v
127
.......... 142
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vi
S. Physicians and Entrepreneurism in Health Care
9. The Changing Nature of Physician Influence in
Medical Institutions ...........................................
10. Summary arid Conclusions .....................
SuculementarY Statement on For-Profit Enterorise in Health Care
CONTENTS
, 151
..................... 171
......... IS2
~ ^, ., ~
Alexander M. Capron, Eliot Freidson, Arrows. Relman, Steven A. Schroeder,
Katharine Bauer Sommers, Rosemary Stevens, an3DanielWikler 205
Part II
PAPERS ON FOR-PROFIT ENTERPRISE IN HEALTH CARE
I. An Exchange on For-Profit Heath Care
Arnold S. Relman and Uwe Reinhardt
2. Ethical Issues in For-Profit Health Care
Dan W. Brock and Allen Buchanan . .
3. Trends in the Growth of He Major Investor-Owned
Hospital Companies
Elizabeth W. Hog and Bradfor3H. Gray
4. The Effects of Ownership and Muldhospital System
Membership on Hospital Functional Strategies
and Economic Performance
209
J. Michael Watt, Steven C. Renn,James S. Hahn, Robert A. Demon, and
CarlJ. Schramm................................................
5. Response to Financial Incentives Among Investor-Owned
and Not-for-Profit Hospitals: An Analysis Based on
Califomia Data, 1978-1982
Robert V. Patt&son ..............................................
6. Hospital Acquisitions and Their Effects:
Florida, 1979-1982
Kathryn]. Brown and Richard E. KJostennan
7. Hospital Ownership and Comparative Hospital Costs
Crayg G. Coelen .............................................
................. 260
, · - - ~ - ~ - . ~ .....
... 290
................................ 303
.................... 322
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CONTENTS
S. Medicare Patient Outcomes and Hospital
Organizational Mission
Gary Gaumer .................................................
9. Compliance of Multihospit~ Systems with Standards of
the Joint Commission on Accreditation of Hospitals
Daniel R. Longo, Gary A. Chase, Lynn A. Ahigren, James S. Roberts, and
Carol S. Wersn~an ...............................................................
10. Hospital Ownership end the Practice of Medicine:
Evidence Mom He Physician's Perspective
Robert A. Musacchio, Stephen Zuckerman, Lynn E. Jensen, and
Larry Freshnock .................................................................
Il. Physician Participation in the Administration and
Governance of System and Freestanding Hospitals:
A Comparison by Type of Ownership
Jeffrey A. Alexander, MichaelA. Morrisey, and Stephen M. Shortell
12. Medical Self Size, Hospital Privileges, and Compensation
Arrangements: A Companson of System Hospitals
MichaelA. Morrisey, Jeff:reyA. Alexander, and Stephen M. Shortell
13. Hospitals and Heir Communities: A Report on
Free Case Studies
Jessica To~vmer~1 ................................................................
14. Investor-Owned Muldhospital Systems: A Synthesis
of Research Findings
Dan Er7ruznn andJon Gabel ....................................................
15. The Changing Structure ofthe Nursing Home Industry
and the Impact of Ownership on Quality, Cost, and Access
Catherine Hawes and Charles D. Phillips ........
Index ...........
vii
354
375
385
402
422
458
474
492
543
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Preface
For-Profit Enterprise in Health Care was stimulated by concerns among members
of the Institute of Medicine (IOM) and others that health services already heavily
dependent on monetary transactions through prepayment and insurance will be-
come excessively commercialized, with growing ownership by stockholders. The
issues closely associated with these concerns are examined in depth in this report,
against a background of such broad public policy challenges as how to balance social
justice and efficiency and to what degree regulation or competition can be relied
on to strike the proper balance.
In my view, this report makes clear that type of ownership is an important variable
affecting the entire health care system delivery and financing institutions alike.
And ~ believe that it wiD become even more important as competition among health
institutions increases and services are paid for increasingly on a prospective or
incentive basis. Indeed, it is an issue that will require close attention by regulators
and informed buyers in both the public and private sectors. In this context, special
attention must be given systemwide to such key outcomes as cost, access, quality,
and equity, as wed as to the viability of research and educational programs.
With regard to the broad public policy challenges, opinions differ as to the degree
to which the market can be trusted to allocate limited resources; but in my view,
there can be little doubt that the market alone cannot be trusted and that it must
be buttressed by enlightened public policy beyond what is seen today and by a
clearer commitment to excellence among professionals.
In a sense, little is new for those who have watched the health field evolve for
the past forty years. The same underlying public issues enlivened the debates when,
for instance, Medicare (1965), Medicaid (1965), and the National Health Planning
and Resources Development Act of 1974 were enacted. But today, these issues are
seen across a broader spectrum as market forces have been unleashed in such
commercial areas as banking and transportation as well as in education and wel-
fare- by a federal government that sees greater use of the private sector and the
sale of government assets as an effective, philosophically right way to reduce budget
deficits. This may be viewed, alternately, as pruning the excesses of the Great
Society or as dismantling the New Deal legacy. At the grass roots level, we may
ax
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x
PREFACE
be seeing a new conception of what is properly public or private in mature markets
and what is taxable.
In recent months, a series of incidents have arisen that suggest we are undergoing
a major reappraisal of our health institutions. For example, the House Ways and
Means Committee has acted to strip the nation's 85 Blue Cross and Blue Shield
plans of their tax-exempt status, a matter still being debated in Congress; proposals
to reduce or eliminate tax-exempt debt financing for hospitals are being seriously
considered; five major not-for-profit teaching hospitals in New York City recently
signed a preliminary agreement with Maxicare Health Plans, Inc., to plan the city's
first for-profit health maintenance organization; and the Utah Supreme Court cre-
ated a test that not-for-profit hospitals in the calm mart neck tm o.oim I;
from county property taxes.
The context within which this report is issued is clearly undergoing remarkable
change, and many of the underlying changes in values are having a substantive
impact on services well beyond the health field. The question of ownership of health
institutions per se is timely and of major consequence because it has refocused our
attention on effectiveness after a period of preoccupation with cost containment;
on our commitment to the underserved; and on the fi~ndamental significance of
education and research.
The study was a challenge. The facts bearing on the issues are limited, and, in
a health care system in which rapid change is pervasive, differences in institutions
of different ownership are blurring. Thus, the study committee had to exercise
considerable judgment in framing the issues and the conclusions. It was helped
significantly by a valuable group of commissioned research papers, three case stud-
ies, anti a public meeting at which testimony was received Tom many knowledgeable
individuals speaking either on their own behalf or on behalf of their organizations.
Furthermore, the study committee, by design, offered diverse shIls, experiences,
and points of view. Members varied widely in terms of their orientation to the
changes that have been taking place in the health care system, their willingness to
accept nonquantitative evidence as valid, and their beliefs about the likely course
of events (for example, whether investor-owned institutions will achieve dominant
market position or peak short of this). These differences enriched and enlivened
the committee process, but nevertheless, a high degree of general agreement was
reached. It should be noted that a statement, termed "supplementary" by com-
mittee members who signed it, appears at the end of the report, adding emphasis
or different interpretations to some of the points made therein.
In our examination of the characteristics and influences of investor versus not-
for-profit ownership, it is tempting to focus on the potential results of further
investor-owned initiatives. In my view, we should be equally concerned with the
responses of the not-for-profit institutions to these initiatives, as well as to a ma-
turing, inherently more competitive market in general. It is tempting to overlook
the crucial role of government in all of this. Without enlightened public policy, the
private sector cannot function effectively. Problems such as we face with the un-
derserved, for example, cannot be resolved on a community-wide basis absent
_ ~ ~-v ~w^~ LlV11
at.
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PREFACE
Xt
adequate protection for the poor and selective regulation bearing on the quality of
the services they receive. If this report were to avert our attention from this fiun-
damental fact, it would have failed. The committee's concerns with public policy
deserve careful note.
Similarly, because most available data have been derived from institutions, prin-
cipally hospitals, it is possible to overlook important committee observations and
recommendations on the practicing physician, who in many ways sets the tone for
all sectors and who, in a competitive environment, faces an increasing number of
potential conflicts between his or her fiduciary responsibilities to the patient and
more entrepreneurial opportunities. Concerns expressed in this regard certainly
need to be addressed.
Finally, the report should be viewed as a benchmark and not the final answer to
the issues addressed. Its essence lies in an illumination of the issues, not in their
resolution. As the health field matures and grows more slowly and as territory
becomes more precious, increased competition wiD put many of the quality and
service issues to test against a background of new institutions and relationships
where our experience is limited. Given the speed of change in the environment
and our unprecedented state of flux extraordinary in institutional terms we must
accent accountability and Ally support vigilant monitoring of important outcomes
involving costs, quality, access, and equity.
Any report of this complexity demands a highly shIled staiT, and, characteristic
of the Institute of Medicine's ability to attract first-rate scholarship, the staE work
was indeed exceptional. ~ particularly want to thank Bradford H. Gray, who headed
a fine team and who personally deserves credit for most of the organization and
composition of a report that is by far the most comprehensive and insightful on the
subject to date. Also, ~ should like to thank the members of the committee, all of
whom expressed themselves openly and honestly throughout the study, and gave
clear leadership to the staff. Because of the strength of the committee, the report
should serve as an excellent resource of lasting value on an issue that, almost like
no other, touches raw nerves in a field that is undergoing a major and troubling
transition.
WALTER J. MCNERNEY, Chairman
Committee on Implications of
For-Profit Enterprise
in Health Care
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xlv
ACKNOWLEDGMENTS
Brock and Allen Buchanan. The American Medical Association added several ques-
tions of interest to the study committee to one of its periodic surveys of physicians.
These and other data were analyzed in the paper prepared for the committee by
Robert Musacchio, Stephen Zuckerman, Lynn E. Jensen, and Larry Freshnock.
Costs associates] with the data analyses and papers prepared for the committee by
staff members of the loins Commission on Accreditation of Hospitals and the Amer-
ican Hospital Association's Hospital Research and Educational Trust were borne in
total or in part by those organizations. Merlin K. DuVal, M. D., now president of
the American Healthcare Institute, and Thomas Frist, Ir., M.D., Chief Executive
Officer of the Hospital Corporation of America, were instrumental in obtaining
financial support for the committee's work from the not-for-profit and for-profit
health care sectors.
The committee is particularly gratefid to all of the authors who prepared the
papers appearing in this volume. It also wishes to thank the many researchers who
shared unpublished work with the committee, including Frank Sloan, Diane Row-
land, Karen Davis, Deborah Freund, Mark Hiller, Burton Weisbrod, Mark SchIes-
inger, Jeffrey Alexander, Michael Morrisey, Stephen Shortell, Geri Dallek, Ruth
Hanit, Richard EgdahI, Howard Veit, and Michael Watt and colleagues at Lewin
and Associates. Frost and Sullivan, Inc., of New York, provided several of its major
industry analyses, and Douglas Sherlock of Salomon Brothers, Seth Shaw of Shear-
son Lehman/American Express, and Gerald Bisbee of Kidder, Peabody provided
their periodic published evaluations of the investor-owned health care sector. The
AHA s Center for Hospital Data, directed by Peter Kralovec re.cnond~A ~,irklv
and expertly to numerous requests for data.
The committee also expresses appreciation to four individuals who shared their
expertise with it at a special meeting at Airlie House, Virginia, in 1984: Paul Ellwood
of Interstudy, Henry Hansmann of Yale Law School, Clark Havighurst of Duke
University, and Burton Weisbrod of the University of Wisconsin. Many other in-
dividuals provided valuable data and/or consultation to the staff, including lack
Hadiey and Judith Feder of the Georgetown University Center for Health Policy;
Helen Darling of the Government Research Corporation; Alan Sager of Boston
University School of Public Health; Michael Watt of Lewin and Associates; Samuel
Mitchell of the Federation of American Hospitals; Steven Renn, The Johns Hopkins
University; Ross MulIner, Steven Wood, and Deborah Freko Reczynski of the
American Hospital Association; Philip Held of The Urban Institute; Brian Kinkead
of Moody's Municipal Department; Donald Cohodes of Blue Cross; B. I. Anderson
of the American Medical Association; Jeffrey L. Fielder of the AFL-CIO Food and
Beverage Trades Department; Penelope Roeder of American Medical International;
Peaches Blank of the Hospital Alliance of Tennessee; Lacy Maddox of the North
Carolina Center for Public Policy Research; Brian Sperry and Karen Greider, then
of the Texas Task Force on Indigent Health Care; Kristie ZamraziT of the Texas
Hospital Association; George Annas of Boston University Law School; Howard
Newman of Memel, Jacobs, Pierno anct Gersh; Robert Halper of O'Connor and
Hannan; Myron Straf of the National Research Council's Committee on National
, = _ _ ~ ~._.~,
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ACKNOWLEDGMENTS
XV
Statistics; Phyllis Virgil and James Smith of the Hospital Corporation of America;
Michael Stoto of Harvard School of Public Health; and Richard Knapp of the Amer-
ican Association of Medical Colleges. Judith Miller Jones's inclusion of the com-
mittee's staff in programs organized by the National Health Policy Forum was
consistently valuable.
The committee staff end committee members who served as site visitors-Jessica
Townsend, Bradford Gray, Rosemary Stevens, Carleton Evans, Steven Schroeder,
Katharine Sommers, Alan Levenson, and Daniel Wikler express particular ap-
preciation to everyone who shared their time and knowledge in the committee's
three case studies of communities and hospitals.
The committee is most grateful to all of the individuals and organizations who
made presentations at the committee's public meeting on March 15, 1984, and to
Margaret A. McManus, who prepared an excellent summary of the meeting. The
committee received testimony from the following:
Quentin D. Young, President, Health and Medicine Policy Research Group, Chi
cago, Illinois
~ am e s E . B ryan, m e dical j ournali s t
Toby Edelman, Board Member, National Citizens' Coalition for Nursing Home
Reform
Paul R. WilIging, Executive Vice President, National Council of Health Centers
Ran Coble, Executive Director, North Carolina Center for Public Policy Research,
Inc.
Edward E. Berger, Director of Planning and Project Development, National Med
ical Care, Inc.
Ruth Watson Lubic, General Director, Maternity Center Association
Cecil G. Sheps, American Public Health Association
Joseph C. Hutts, Jr., President, Hospital Corporation of America, West
Robert M. Heyssel, Chairman, Association of American Medical Colleges
Duira Ward, Board Member, National Home Caring Council
Adele S. Hebb, President, Community Home Health Services of Philadelphia
James F. Doherty, Executive Director, Group Health Association of America
James Roberts, Executive Director, National Association of Freestanding Emer
gency Centers
I. Alexander McMahon, President, American Hospital Association
Judith G. Waxm an, Managing Attorney, East Coast Office, National Health Law
Program, Inc.
William S. Hoffman, Acting Director, Social Security Department, United Auto
Workers International Union
Frank S. Swain, Chief Counsel for Advocacy, U. S. Small Business Administration
Robert E. McGarrah, Jr., Director for Public Policy, American Federation of State,
County, and Municipal Employees
Stuart Wesbury, Jr., President, American College of Hospital Administrators
Linda B. Miller, Executive Director, Volunteer Trustees of Not-for-Profit Hospitals
Michael D. Bromberg, Executive Director, Federation of American Hospitals
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xv!
ACKNOWLEDGMENTS
lames F. Davis, Vice Speaker, House of Delegates, American Medical Association
Donald Arnwine, President, Voluntary Hospitals of America (written testimony)
Leslye E. OrIoff, National Women's Health Network (written testimony)
Finally, the contributions of the report's authors should be acknowledged. The
study director, Bradford H. Gray, was the primary author of the report. Jessica
Townsend drafted the chapters on changes in the ownership and control of health
services (Chapter 2), the costs of care (Chapter 4), and access to care (Chapter 5),
in addition to planning the site visits and writing the paper on the case studies that
is included in this volume. Sunny Yoder revised the first draft of the education and
research chapter (Chapter 7) and prepared the appendix to Chapter I. Committee
member Uwe Reinhardt did much of the writing for Chapter 3, on financial capital.
Elizabeth Hoy, a research assistant, prepared several tables based on American
Hospital Association data and collaborated on the paper on the growth of the six
major hospital management companies that is published herein.
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In~ucdon to He Volume
The growth of for-prof~t enterprise in health care has become a passionately
debated phenomenon. Investor-owned companies, which have come about in just
the past 20 years, have made a business of providing health services and achieved
great size and diversity. The proliferation of these companies is but one manifes-
tation of a broad trend toward more openly entrepreneurial activities in health care.
A wave of such activities involving physicians is also taking place, and the changing
relationship between physicians and institutions may have important implications
for the doctor-patient relationship. Both fearfill and hopefid expectations have been
expressed for these developments, but their policy implications have not heretofore
been systematically examined.
Ordinarily, in our predominantly capitalist society, it would be deemed odd to
inquire into the implications of making a business of providing services or of making
money from such a business. However, the services discussed here help people to
keep or regain their health and can affect, at minimum, whether they are able to
pursue their life goals, and, at maximum, whether they live or die. Many people
see health care as the sort of public good that should be the right of aD citizens,
but this view has never prevailed in public policy.
Traditionally, health services have been provided primarily by not-for-profit in-
stitutions and by professions whose codes of ethics disdained commercial practices
and a commercial image. Until recently, health care was seldom thought of in terms
of business or investment; medical institutions typically were rf,~arde,`1 a.s oharitahl~
o ~ _ _ _
or community service organizations.
A change in that outlook has taken place for several reasons. Scientific and tech-
nological advances that have made cure and rehabilitation a more likely outcome
have also made health care a more plausible "product" that organizations can sell.
The development of a flexible, open-ended system of health insurance, although
incomplete, allowed most Americans to choose services from a wide array of pro-
viders and organizations. Revenues from services provided have become the pri-
mary source of income for health care institutions. And costs of health care have
risen to almost Il percent of the gross national product.
Although proprietary organizations have long existed in health care, their history
xvii
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~ . ~
chit!
INTRODUCTION TO THIS VOLUME
is largely irrelevant in today's discussions of for-profit enterprise in health care for
two reasons. First, many of the profit-making organizations, such as pharmaceutical
and hospital supply companies, have not been directly involved in patient care, at
least until recently. Second, health care organizations such as the original proprie-
tary hospitals (which constituted 40 percent of hospitals in the 1920s) were typically
small, independent, and locally owned, usually by physicians as extensions of their
medical practices. Often such hospitals were a community's only place for treatment
of patients who could not be cared for at home. However, there was not a "for-
profit sector" as a factor for consideration in health policy matters on the national
scene. The archetypal hospital was voluntary or governmental.
Today's for-profit health care companies are a new type of organization in health
care. They were established explicitly as business ventures, in response to govern-
ment programs (and private insurance plans) that made money available for pro-
viding health care services. Many of these companies are publicly held and thus
responsible to stockholders. Company ownership of multiple institutions often means
that ownership is no Icnger local. Some of the health care organizations-both
investor owned and the not-for-profit systems that have grown in tandem have
exhibited growth trends that have led some observers to speculate that most health
care in the United States could be controlled by as few as 20-30 organizations by
the end of the century.
ORIGINS OF THIS INQUIRY
In June 1981, the Institute of Medicine (IOM) invited a diverse group of people
for a one-day workshop to identify and discuss issues raised by a topic of growing
controversy: "Trends in For-profit Health Care." Although a very broad range of
perspectives was represented, most of the discussion focused on four issues: (~) ethical
problems raised by physician involvement in for-profit enterprises that provide
health services, (2) the effects of such involvement on professional autonomy and
power, (3) the behavior or performance (for example, cost, efficiency, quality, and
types of patients served) of institutions with different types of ownership, and (4) Me
eEects of for-profit trends on medical education and research. There was broad
agreement that the growth of for-profit enterprise was a very important develop-
ment, that the issues raised were poorly defined, and that the available data were
inadequate for a sound assessment of the issues.
The Institute was encouraged by workshop participants to examine the topic
further, and in subsequent discussions the outline for a study was developed. It
was decided that the Institute would appoint a committee to examine professional
issues raised by for-profit health care, including questions of physician conflict of
interest, professional autonomy, and trust in the physician-patient relationship.
This relatively narrow scope was suggested in part because few studies were
available that compared the behavior of the new investor-owned institutions with
their not-for-profit counterparts. It was felt that several years of work by health
services researchers at institutions around the country would be required to develop
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INTRODUCTION TO THIS VOLUME
Ax
the body of empirical research that would be needed by an lOM study committee
concerned with issues of comparative organizational behavior. Meanwhile the In-
stitute should examine the professional issues.
During the following year a proposal was prepared, hinds were sought and ob-
tained, a series of background papers were commissioned and published as The
Neil: Health Care for Profit (Washington, D.C.: National Academy Press, 1983),
and a study committee was appointed.
At the committee's first meeting in July 1983 the questions and issues to be
acIdressed in the study were broadened well beyond a focus on professional issues.
The committee had a strong sense that the behavior of investor-owned health care
organizations demanded examination. As a result, much of this report is concerned
with the comparative behavior of health care organizations under different types of
ownership and control. Furthermore, it was becoming apparent that a research
literature was developing rapidly and that much more research could be conducted
that would utilize existing data. Eventually, a substantial group of research papers
was stimulated by the committee's activities and is published as Part I! of this
volume.
FOCUS OF THIS STUDY
This study attempts to understand the provision of health care by investor-owned
organizations and to illuminate the issues that are involved. It focuses primarily on
the development of the newer forms of investor-owned health care providers, with
attention to other types of organizations (including physicians' office practices; public
and not-for-profit health care organizations; and traditional, independent proprie-
tary hospitals and nursing homes) for purposes of comparison and contrast. It does
not examine other commercial enterprises in the health field, such as insurers,
suppliers, and pharmaceutical and equipment manufacturers, except as these en-
terprises have diversified into the provision of services. The intent is to understand
what, if anything, is new and significant about the provision of health care by
investor-owned health care organizations.
Because expansion of investor-owned chains of health care facilities involves two
elements investor ownership and multi-institutional arrangements efforts have
been made whenever data permit to compare independent and chain institutions,
both for-profit and not-for-profit. The distinction between independent and chain
institutions is examined in part because of the possible implications for institutional
governance if the institution is owned by a larger organization whose home office
is elsewhere. In addition, the hospitals of investor-owned companies are different
from independent proprietary hospitals on several other important grounds. For
one, their growth mirrors the decline in the number of proprietary hospitals. They
also differ in terms of accountability of management to stockholders, who typically
have no contact with the hospital, and in terms of the sources of capital to which
they have access. Whether such differences translate into behavioral differences is
an empirical question that is examined in this report whenever relevant data are
available.
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INTRODUCTION TO THIS VOLUME
Although this report attempts to illuminate the implications of the growth of for-
profit provision of health services in general, its emphasis is on hospitals. This is
partly because most available data comparing for-profit arid not-for-profit providers
pertain to hospitals. Time and space limitations were factors as well. However, the
report's emphasis also derives from the fact that different types of health services
providers nursing homes, home health agencies, dialysis centers, ambulatory sur-
gery centers, psychiatric hospitals, urgent care centers, and so forth each have
their own particular characteristics and issues. Data from such types of providers
are cited where available and relevant, but no systematic attempt has been made
to address issues that are specific to any type of provider other than hospitals.
THE COMPLICATIONS OF CHANGE
Any serious consideration of the implications of for-profit trends in health care
must contend with the ubiquity and rapidity of change throughout today's health
care environment. Public policy in the last decade has shifted from the goals em-
bodied in the passage of the Medicare and Medicaid programs to enhance access
, ~ , ~
~.. . .. . .. . ~. ~. ~
to care en cl trom the incentives emoouleo in cost-nasecl ano cnarge-nasea relm-
bursement for services provided. Such incentives in the 1960s and 1970s rewarded
the provision of additional services, stimulated the development of new technologies
and the growth of health care expenditures, and helped to ensure institutional
survival and the growth of the health care economy as a whole. In contrast, public
policy during the 19SOs has emphasized competition, organizational innovation, and
control of the costs and use of medical services.
Medicare's so-called prospective payment system* fundamentally changed hos-
pitals' incentives by paying prospectively set rates per case, rather than reimbursing
for expenses incurred in the care of a patient. Other payers are seeking to reduce
their costs through a wide variety of mechanisms for example, by more cost-
sharing by beneficiaries, by establishing second opinion and pre-admission screen-
ing programs, by creating over incentives for beneficiaries to use low-cost provid-
ers, by negotiating discounts from providers, and by entering into health maintenance
organizations (HMO) or preferred provider arrangements that include controls on
utilization of services.
Some sectors of health care now have the appearance of a maturing market: excess
beds and physicians in some areas, leveling or falling demand for hospital beds,
the growth of one provider coming more and more at the expense of another,
increased attention to market share, segmentation of the market, and shake-outs
of unsuccessful competitors. Remarkable changes have begun to take place in the
use of hospitals as admission rates and lengths of stay have declined rapidly in recent
years. Patient visits per physician show a similar pattern of decline as the number
*The term "prospective payment" is conventionally used to refer to the payment system that
Medicare instituted in 1983 to pay hospitals according to prospectively set rates per case. Although
the committee recognizes that what transpires prospectively is the setting of rates, not the making of
payments, it bows to convention and uses the term "prospective payment" to refer to the new system.
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INTRODUCTION TO THIS VOLUME
text
of physicians in practice has increased rapidly. The Federal Trade Commission has
become active in health care by discouraging regulations and practices it deems
anticompetitive, even if done in the name of preserving professionalism or con-
trolling costs.
The changing environment is putting pressure on all parties, and the rapidity of
their responses constantly outpaces our ability to document them adequately. For
example, because of inevitable lags in the availability of data, the committee had
access to very little systematic information about how health care organizations of
different types of ownership are responding to the new f,~onami~ in~?ntiv~c in
~ ~_¢ ~ ~¢ ~^~ ~ ~_ ~ ~ ~^A ~ ~A ~A ~ wO 111
. ~ .. . . ~ . ,
nealtn care. in a period of rapid change, available numbers always describe a reality
that has changed. The committee's response to this problem has been not only to
report on various pieces of factual information, but also to interpret those facts in
light of our current theoretical understanding of the nature of for-profit, not-for-
profit, and public organizations and in light of our understanding of the changing
environmental constraints that health care institutions face.
SOURCES OF INFORMAllON
This report of an TOM study committee, whose members were selected for both
diversity and expertise, synthesizes information from several sources:
I. Committee discussions and deliberations over nine meetings between July
1983 and June 1985;
2. A public meeting on March 15, 1984, * at which testimony was received from
23 witnesses (named in the section on acknowledgments);
3. Case studies based on site visits in three small cities with populations between
50,000 and 150,000 in which hospitals owned by for-profit and not-for-profit multi-
institutional systems could be studied in the same environment;
4. Original research studies, literature reviews, and scholarly papers conducted
or prepared for the IOM study committee by independent researchers. These
papers are published after the committee's report, in Part I! of this volume.
Much additional information was obtained from the published literature and, as
the acknowledgments section notes, from unpublished studies, data from trade
sources and regulatory agencies, and discussions between the staffand those people
who are involved in the developments examined in this report.
THE PRODUCTS OF THIS INQUIRY
The results of the study committee's activities take two forms: the committee
report itself and a group of 15 papers-most of which convey original research-
that were prepared at the committee's request or as part of its work. Although
*Some copies of a summary of this hearing are available from the Office of Information, Institute
of.\Iedicine, 2101 Constitution Avenue, NW, Washington, DC 20418.
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INTRODUCTION TO THIS VOLUME
designated members of the committee reviewed the caners they reflect the views
of the authors, not of the committee.
These papers are published in the second part of this volume. They include
literature reviews on ownership differences among hospitals and nursing homes'
an analysis of the ethics of for-profit health care, and new empirical studies on the
growth of the hospital management companies and the impact of their acquisitions,
on ownership differences in hospital governance and control and in the cost and
quality of hospital care, on physicians' experiences with different types of hospitals,
and on the operation of different types of hospitals in the same market. This group
of papers constitutes a very substantial addition to the empirical literature on for-
profit versus not-for-profit health care and was used by the committee in its delib-
erations.
The committee report itself makes up the first half of this volume and is organized
as follows:
Chapter ~ introduces the topic and sets forth the value conflicts that underlie
most of the concerns about the growth of for-profit enterprise in health care. It also
contains an appendix by Sunny G. Yoder that summarizes economic theories re-
garding the behavior of for-prof~t and not-for-profit organizations.
Chapter 2 documents the various trends that are part of the organizational trans-
formation taking place in health care: the growth of investor ownership, of multi-
institutional arrangements, of new types of health care organizations that provide
ambulatory services, of vertically integrated organizations, and of for-profit/not-for-
profit hybrids.
Chapter 3 examines the issue of access to capital, a factor that underlies many
changes taking place in health care. It also contains an appendix by Professor Uwe
Reinhardt on the cost of equity capital.
Chapters 4 through 7 examine the comparative performance of for-profit and not-
for-prof~t health care organizations in four key areas: cost, quality, providing access
to care, and involvement in education and research.
Chapters 8 and 9 examine how changes taking place in health care affect the
fiduciary aspects of the role of the physician, either by their becoming involved in
entrepreneurial activities or by changing their involvement in institutional decisions
that may affect patient care.
Chapter 10 summarizes the conclusions from the earlier chapters and offers the
committee's analysis of the issues raised by empirical and theoretical inquiries.
CONCLUSION
In many ways, as committee member Rosemary Stevens noted, the topic of this
inquiry is a lens that brings into often troubling focus many fundamental problems
and issues in the health care system:
How to provide access to medical care for those who are unable to pay
~ How to regard the occurrence and likely further development of a multi-tiered
or multicIass health care system
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INTRODUCTION TO THIS VOLUME
· · ~
xxt~t
· How to control health care costs under cost-based and charge-based methods
of payment, a problem whose "solution" via administered prices and price com-
petition raises its own set of questions about health care quality and institutional
survival
· How to create incentives that serve patients' interests but that do not rewarc]
either inefficiency or greed
· How to obtain the potential benefits of multi-institutional arrangements while
keeping local identity ant] sensitivity in our health care institutions
· How to sustain or encourage responsiveness to noneconomic values (altruism,
service, caring, science-based rather than clemand-based services) when capital for
all types of health care institutions (both for-profit and not-for-profit) comes from
lenders and investors of equity
~ How to support professional education in the health care field (particularly
graduate medical education)
· How to avoid increasing conflict of interest in the physician's role
· How to ensure an appropriate dynamic balance between market forces and
community interests in health care
These problems were not created by the emergence or growth of a significant
investor-owned sector in health services in the 1970s and 19SOs, and their solution
wiD require attention to much more than the for-profit sector. Yet the existence of
a vigorous and growing investor-owned sector in health care raises many questions
of public policy, the implications of which are not yet fully understood This report,
bringing together the available data on comparisons between for-profit and not-for-
profit institutions in recent years and examining changes in the role ofthe physician,
is a beginning-a baseline for ongoing debates and filture explorations.
BRADFORD H. GRAY, Study Director
Committee on Implications of
For-Profit Enterprise in Health Care
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