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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
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
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
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
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
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
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,
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
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
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
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
SUMMARY AND CONCLUSIONS are faced with the need to choose between economic realities and traditional concepts of mission and service. Circumstances have developed whereby economic incentives make it difficult or im- possible for institutions to subsidize uncom- pensated care from other patient care revenues, but in which the government has not made provision to deal with the prob- lem. Without explicit public policy atten- tion, an increasing number of people in need of care will suffer. The Social Responsibilities of Health Care Organizations The social acceptability of a more com- petitive and pluralistic health care system that includes both for-profit and not-for-profit organizations depends on the degree of so- cial responsibility with which institutions operate. The committee believes that all health care institutions have a basic moral obligation to respond to human need. This is consistent with the traditional values and purpose of not-for-profit and public hospi- tals. Even if they have not always responded adequately, the rules that pertain to the tax- exempt status of not-for-profit institutions and the accountability of public institutions provide, at the least, mechanisms for influ- encing their social responsibility. In the ab- sence of such mechanisms, concerns have been raised about how for-profit health care organizations define their social responsi- bilities and to whom they are accountable in this regard. The committee believes that if for-profit organizations are an impediment to the practical efforts of other institutions or of local or state governments to deal with un- solve`d problems in the provision of health services, as has been alleged by some, they will increasingly be seen by the public as part of the problem. As is discussed later in this chapter, the committee recognizes that the solution to the problem of uninsured and unclerinsured patients is essentially societal, 193 not institutional. The reasons for this the failure of charity to keep pace with extraor- dinary increases in health care costs and the growing unwillingness of third-party payers to pay rates that permit institutions to sub- sidize indigent care-have little to do with the growth of for-profit health care. Never- theless, any institution (of whatever own- ership) that responds to the problem of the uninsured patient by refilling to provide care to people who are financial risks or by re- sisting arrangements to spread the burden of uncompensated care must expect to be seen as problematic. The for-profit sector would be well advised to resist the temp- tation to let tax obligations exclusively de- fine social or moral obligations,27 particularly in view of the fact that tax-supportec! pro- grams now fad! to assure the availability of funds to meet the needs of uninsured and underinsured patients. Although institu- tions must be mindful oftheir own economic realities, the committee concludes that no sector should absolve itself of the respon- sibility to help meet the needs of people who are unable to pay for health care. This raises the question of what, if any- thing, should be expected from tax-exempt institutions that is not expected of a tax- paying institution. Because all health care institutions derive most of their income from charges for services, what should institu- tions do in exchange for the benefits of tax exemptions and eligibility to receive chari- table contributions? Although there are many circumstances under which health care in- stitutions should be expected to perform services for which they will not be paid, no standards exist to judge which institutions have done "enough" economically unre- warding activity (Brook and Buchanan, 1986) The committee believes that, just as the for- profit sector pays taxes, a reasonable rela- tionship should be expected from not-for- profit institutions between (1) the amounts of charitable contributions that an institu- tion receives plus the amount of taxes that it does not have to pay by virtue of its tax
194 exempt status (an amount that would vary according to the amount of the institution's surplus) and (2) the amount of uncompen- sated service that it provides in the form of charity care, unprofitable standby capacity, unsponsored research, and institutionally subsidized educational activities. The Future of Not-for-profit Institutions The more that not-for-profit organizations are unable or unwilling to engage in activ- ities that do not contribute directly or in- directly to their economic bottom line, and the more that for-profit organizations see their social obligations as limited to paying their taxes, the more the benefits of diver- sity could turn into liabilities from the stand- point of meeting some very important, but inadequately fi~nded health care needs. This would be particularly true if no institution in a locale is both willing and able to assume the role of provider of last resort. Not-for-profit and public institutions have long been essential in caring for the unin- sured poor, in education and research, and in offering a wide variety of health care ser- vices, not all of which are profitable. They have embodied important values of giving, volunteering, self-help, and community in- volvement. Since their economic well-being has never been fully dependent on the gen- eration of profits from operations, they have provided a degree of stability in the provi- sion of needed services, rather than enter- ing and leaving markets depending on profit opportunities. Ike not-for-profit bottom line is measured not only in the inevitable eco- nomic terms but also in terms of service to patients and communities. Performance in this regard is monitored, although some- times more in theory than in fact, by gov- ernmental agencies, funding sources, and voluntary boards, whereas stockholders monitor the for-profit sector's bottom line of profitability. So long as the not-for-profit and public sectors act in accord with their FOR-PROFIT ENTERPRISE IN HEALTH CARE traditional values of charity, community in- volvement, and finding ways of meeting needs regardless of incentives, preservation of their vitality should be a major public policy concern.28 Public concern is warranted about the continued vitality and even the survival of important not-for-profit and public health care institutions particularly those that are sole community providers, those that pro- vide large amounts of uncompensated care, and those that are valuable centers of ed- ucation, research, and tertiary care. Two issues are key to the future for-profit/not- for-prof~t composition of health care insti- tutions: financing indigent care and meeting capital needs. The Indigent Care Problem Unlike other developed nations that have some type of universal health insurance, the United States has never provided for the availability of care to all in need. Numerous commissions and researchers have pointed out this gap in public policy. The committee believes that the private sector's ability to deal with the consequences of this failure in public policy is limited and diminishing. It is essential that public debate focus on the financing of certain activities that are of pub- lic benefit, but that institutions on their own will find increasingly difficult to support. More than 35 million people have no private or public third-party payment coverage, millions more are seriously underinsured, and insurance coverage for long-term care needs is very limited. Except in the few states that have made some provision for the problem of the uninsured patient, public policy in the United States has never ade- quately dealt with the entire problem of as- suring the availability of care to all who are unable to pay. In most states, the care of such patients depends on hospitals' and phy- sicians' knowingly providing services that will not be paid for. The fragility of the current arrangements
SUMMARY AND CONCLUSIONS for indigent care must be appreciated. Ap- proximately one-third of such care is pro- vided by local or state government-owned hospitals, which typically receive direct public subsidies and are often chronically underhanded. However, about two-thirds of such care is provided by private (i.e., not tax-supported) hospitals. Not-for-profit hos- pitals, which own most of the beds en cl pro- vide most of the indigent care, on average obtain about 5 percent of Weir revenues Mom sources other than patient care. (For-profit hospitals obtain less than 2 percent of their revenues from other sources. ~ The ability of institutions to subsidize indigent care Dom other patient care revenues is now seriously Greatened. As governmental and over ~ird- party payers change payment methods and amounts to minimize their health care costs surplus patient care revenues wail decline and disappear. More and more reports will be heard of indigent patients who are unable to obtain care and of institutions that are financially threatened because of their com- mitment to the care of uninsured patients, until there is governmental action. The committee concludes that public pol- icy cannot rely indefinitely on the ability and willingness of health care institutions to generate the funds needed to provide care for those who are unable to pay. Ensuring adequate health care is a societal obligation, and government should make provision for its financing when private coverage is Zack- ing. Various options merit consideration. A list of possible approaches to this problem ap- pears at the end of Chapter 5 (note 21), but several possibilities can be notec! here. Provisions should be made at the local, state, and federal levels to ensure that gov- ernment-owned hospitals acquired either by investor-owned or not-for-profit chains con- tinue their historical community service mis- sion, particularZy if the acquired hospital is the only source of uncompensated care or if a change in mission would jeopardize an- other hospital that provides a dispropor 195 tionate share of uncompensated care.79 A similar recommendation might be made for not-for-profit hospitals that have had an im- portant historical mission of providing in- digent care and community service. Trustees of not-for-profit institutions should seek safeguards for that mission if sale or lease of a facility is contemplated. In addition, government should take steps to spread or ease the burden on institutions that provide a disproportionate amount of uncompensated care and to correct payment inequities resulting from hospitals' locations or the severity of the cases that they treat. Such steps might inclucle an expanded Med- icaid program, adjustments to Medicare payments to take into account indigent care, or the creation of pools for indigent care at the state level. Institutions that have main- tained a commitment to the poor have urged the Department of lIealth and Human Ser- vices to make adjustments in Medicare's DRG payment formulas to help institutions that carry an unusually large burden of uncom- pensated care. Legislative proposals to make such adjustments are mired in a debate about the appropriateness of using Medicare funds to subsidize the care of non-Medicare pa- tients. Although this is a serious concern, it is less urgent than the growing problem of care for indigent patients and of the eco- nomic well-being of institutions that attempt to serve them. Most of these approaches have little or nothing to do with the distinction between for-profit and not-for-profit health care in- stitutions. However, there is one issue on which for-profit institutions' tax-paying sta- tus is directly relevant. The not-for-profits pay no taxes on their surplus margins; investor-owned hospital companies have an effective tax rate of ap- proximately 42 per cent, although in recent years they have been able to defer a sub- stantial amount (almost half in 1983) of this tax obligation under provisions of current tax laws (Chapter 31. Most of the taxes paid by investor-owned
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
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
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
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
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?
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
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.
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.
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.
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.