Unhealthy healthcare: hospitals

Posted: 29 August 2016 in Uncategorized
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hospital mergers

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Much of the debate about the U.S. healthcare system is focused on the role of public financing (in terms of subsidies and, for some, the possibility of a public option or even a single-payer program). But no one seems to want to look at the other key part, the actual delivery of healthcare to American workers and others. And that, regardless of the system of financing, remains mostly in profit-oriented private hands (which, as I argued earlier this year, undermines patient-centered healthcare).

There are a few exceptions, such as the Veterans Health Administration and Indian Health Service, whereby the government directly employs nurses, physicians, and others to provide health services to targeted populations. But the rest of healthcare is provided by private  (profit and nominally nonprofit) individuals, groups, and corporations.

As I discussed on Friday, a significant sector of private healthcare is the increasingly concentrated and enormously profitable pharmaceutical industry. Hospitals (which I’ve commented on many times over the years) are, of course, another key sector (at close to $1 trillion in 2014). That’s where Americans receive most of their in-patient care, critical care (including many without health insurance in emergency rooms), and an increasing number of out-patient treatments. And while hospitals appear to be independent from and non-overlapping with physicians (whose services accounted for roughly $600 billion in 2014), that’s an optical illusion. Not only do they compete with one another (in surgery, imaging, and other ambulatory services), each is forced to work closely with the other: hospitals rely on physicians to admit patients to their facilities, refer to their specialists, and to use their lucrative diagnostic services (with, as it turns out, illegal kickbacks), while physicians tend to their own patients within hospitals and are contracted for “in-house” supervision. And, increasingly, hospitals are directly employing physicians (and other healthcare workers) as salaried and piece-rate workers.

hospitals-profits

U.S. hospitals are, as it turns out, remarkably profitable. And, according to a recent analysis by Ge Bai and Gerard F. Anderson (unfortunately gated), 7 of the 10 of the most profitable hospitals (each exceeding more than $163 million in total profits from patient care services) are officially non-profit institutions.

According to Anderson,

The system is broken when nonprofit hospitals are raking in such high profits. The most profitable hospitals should either lower their prices or put those profits into other services within the community. We need to develop incentives that allow all hospitals to make a fair profit while at the same time keeping prices reasonable.

It’s true, many other hospitals (56 percent in their sample of acute-care facilities) are not profitable strictly in terms of patient services (the median hospital lost $82 per adjusted patient discharge). However, as the authors explain,

the median overall net income from all activities per adjusted discharge was a profit of $353, because many hospitals earned substantial profits from nonoperating activities—primarily from investments, charitable contributions (in the case of nonprofit hospitals), tuition (in the case of teaching hospitals), parking fees, and space rental. It appears that nonoperating activities allowed many hospitals that were unprofitable on the basis of operating activities to become profitable overall.

The most important factors boosting hospital profitability were markups (especially for uninsured and out-of-network patients and casualty and workers’ compensation insurers who often pay the hospital’s full charge) and the combination of system affiliation and regional power.

In fact, 50 hospitals in the United States are charging uninsured consumers more than 10 times the actual cost of patient care. All but one of the facilities are owned by for-profit entities. Topping the list is North Okaloosa Medical Center, a 110-bed facility in the Florida Panhandle about an hour outside of Pensacola, where uninsured patients are charged 12.6 times the actual cost of patient care. Community Health Systems operates 25 of the hospitals on the list. Hospital Corporation of America operates 14 others.

Again according to Anderson:

They are price-gouging because they can. They are marking up the prices because no one is telling them they can’t. These are the hospitals that have the highest markup of all 5,000 hospitals in the United States. This means when it costs the hospital $100, they are going to charge you, on average, $1,000.

number

systems

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It should come as no surprise, then, that, while the total number of hospitals has remained relatively constant over time, the number of those hospitals in health systems has continued to increase, thereby increasing regional power, markups, and profitability.

In another recent study, by Richard M. Scheffler et al., the authors found that the hospital markets in two states (California and New York) “were moderately to highly concentrated,” with mean Herfindahl-Hirschman indices of 2,259 and 3,708, respectively.* They also found that more concentrated hospital markets were associated with higher premium growth.

As expected, then, there is a continuing strong movement of hospital mergers and acquisitions—with at least 100 deals covering 178 hospitals, involving the takeover of profit and especially non-profit organizations, in 2014—leading to increased concentration in the hospital sector of the U.S. healthcare industry.

As Martin Gaynor explains,

There has been so much consolidation that most urban areas in the US are now dominated by one to three large hospital systems — examples include Boston (Partners), the Bay Area (Sutter), Pittsburgh (UPMC), and Cleveland (Cleveland Clinic, University Hospital). It is also now more likely that further consolidation will combine close competitors, given how many mergers have already occurred.

Clearly, the provision of healthcare through U.S. hospitals—both profit and, at least officially, non-profit—is generating enormous profits for their owners and top executives. But it’s Americans workers, who are both hospital employees and consumers of hospital services, who are paying the price.

 

*To remind readers, the Herfindahl-Hirschman Index is often used to evaluate the potential antitrust implications of acquisitions and mergers across many industries, including health care. It is calculated by summing the squares of the market shares of individual firms. Markets are then classified in one of three categories: (1) nonconcentrated, with an index below 1,500; (2) moderately concentrated, with an index between 1,500 and 2,500; and (3) highly concentrated, with an index above 2,500.

Comments
  1. Local monopoly power seems to be a relatively new problem. The other two were longstanding: Price discrimination. and people buying treatment when they’re already ill and their consumer surplus approaches lifetime earnings. There may also be a trust problem where excessive due diligence is done to limit liability.

    Both could be addressed to some extent by a “bundled payments” model that offers a flat fee for a complete episode of treatment, such as hip replacement or stroke, regardless of complications or who is paying. Hospitals, more so than pharma or insurers, ought to be efficient in a capitalist market if their job is to apply a few well-understood processes to lots of patients. Not to trivialise healthcare, but they have the same economics as hotels.

    Where this doesn’t work is for general hospitals that have to deal with anything and everything. Necessarily, these need to have idle equipment and idle physicians of every expertise, and have to either absorb or charge for huge cost spikes. I can’t see how these would work for profit without massive price discrimination, grants, or other “non operational funding”. The simplest answer is make these hospitals public. But they should be a minority.

  2. […] Unhealthy healthcare: hospitals by David F. Ruccio on occasional links and commentary. […]

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