The Problem With Institutional Provider Profit In A Medicare For All System

The Problem With Institutional Provider Profit In A Medicare For All System

Above Photo: Molly Adams/Flickr

I’ve avoided writing about hospitals and other institutions, because my focus has always been on the patient, and whether they get, or don’t get, health care under our horrid mixed system of Medicaid, private insurance, and Medicare (subject to a neoliberal infestation though it may be). However, as Medicare for All approaches the reality of House hearings and alternatives emerge to HR676 and S1804, the two bills now on the table, a greater focus on institutions beyond the health insurance industry becomes inescapable.

One key difference between health care institutions is whether they are profit or non-profit (caveating that a non-profit institution can be profit-making in all but name). As Naked Capitalism readers know, on the difference between HR676 and S1804, is that the latter bill, sponsored by Senator Bernie Sanders, allows investor-owned entities to be reimbursed for services delivered, like today’s Medicare. The House bill, by contrast, does not. Since it’s likely that a combination of ideology, donor class “speech,” Congressional sausage-making, and liberal Democrat duplicity will bias the process toward investors, it’s worth asking whether we should incentivize institutional providers with profit, or not. Incentives matter, after all! I think doing so is bad idea, for three reasons: (1) Profiteering inflates costs; (2) Profiteering increases patient mortality; and (3) The goal of a health care system should be health care, not profit. (Note that, politically, this means opposing Sanders as, in essence, too much of a moderate). I will take up these points in order, but first let me give more details on payment systems proposed by the two bills we do have (since we have not seen how Representative Pramila Jayapal will rewrite HR676). From Stephanie Woolhandler and David Himmelstein in Health Affairs:

While both bills would cover all Americans under a single, tax-funded insurance program, they prescribe different provider payment strategies. The Senate version largely adopts Medicare’s current payment mechanisms; the House bill’s is modeled on Canada’s single-payer program, also called “Medicare,” which pays hospitals global budgets (much as a fire department is paid in the U.S.) and sharply constrains opportunities for investor-owned care.

But these divergent payment strategies would create very different financial incentives for providers… The Senate version would, like Medicare, pay hospitals and other institutional providers on a per-patient basis, intermixing payments for current operating expenses with funding for future capital investments and profits. As at present, hospitals’ success, and even survival, would depend on generating profits (“surpluses” in non-profit facilities). Hospitals with a favorable bottom line could invest and add new buildings and programs, while unprofitable ones couldn’t modernize or expand, risking a downward spiral toward takeover or closure.

In contrast, the House bill would abolish per-patient billing by hospitals and other institutions, and its global budget payments would cover only operating costs; hospitals would be prohibited from retaining surpluses, and capital investments would be funded through separate government grants. The bill would also explicitly proscribe payments to investor-owned facilities, and it calls for their conversion to non-profit status financed by issuing bonds.

Summarizing, at least as far as the capital investment goes, S1804 puts markets first, where HR676 democratizes the process. So, as you can see with a little thought, these dry-as-dust “provider payment strategies” will really affect the quality of health care that you get under Medicare for All. Let’s see how.

Profiteering Inflates Costs

Here again we turn to Woolhandler and Himmelstein, who compare and contrast the payment mechanisms for S1804 and HR676:

Medicare’s payment approach requires hospitals to bill for and justify each hospitalization, a requirement that persists in value-based payment schemes like ACOs and would continue under S.1804. [Under S1804] hospitals would have to maintain much of their current wasteful billing, documentation, and internal cost-tracking systems….

Instead of bundled payment arrangements tied to individual patients, the House version would substitute an institution-wide bundled payment, i.e., a global budget covering all operating costs. As noted above, that approach has streamlined hospital administration in other nations, which have been more effective than the United States at restraining overall costs. In contrast, ACOs have increased providers’ administrative costs by about $200 per patient annually, and have generated trivial or no savings after accounting for Medicare’s “shared savings” bonus payments. Similarly, Medicare’s (and other payers’) pay-for-performance initiatives impose substantial administrative costs on providers, with no evidence that they’ve improved patients’ outcomes in any setting.

In sum, the financial viability of a single-payer reform turns on cutting administrative costs and minimizing incentives for financial gaming. Maintaining Medicare’s current payment strategies, as under S.1804, would be substantially costlier than adopting the non-profit global-budgeting strategy used in several other nations.

(Note that the requirement to “to bill for and justify each hospitalization” enables upcoding; see NC here and here.)

Profiteering Increases Patient Mortality

A notorious recent article, “Goldman Sachs asks in biotech research report: ‘Is curing patients a sustainable business model?’” poses the question of profit-driven health care from the investor/owner perspective in a pleasingly open and direct manner. Nevertheless, the question of whether profit-driven institutions like hospitals increase mortality relative to non-profit institutions is an empirical one, and naturally highly contested; the best studies I could find indicate that it does (as will, I am sure, many anecdotes from readers here and from the literature generally; I remember my doctor, who and whose institution I actually rather like, trying to upsell me on tests for the sort of disease old codgers like me die with, and not of; he was quite excited about the technology, though I was not). I’ll quote the studies in chronological order, and then give some caveats about them:

1) Janice Hopkins Tanne, “Mortality higher at for-profit hospitals,” BMJ. 2002 Jun 8:

Patients in for-profit hospitals in the United States are more likely to die than those in non-profit hospitals, a new systematic review and meta-analysis says. The study, by researchers at McMaster University in Hamilton, Ontario, and the University of Buffalo, New York, has been published in the [CMAJ].

The study compared mortality in private, for-profit and private, non-profit hospitals in the United States between 1982 and 1995. It reviewed 15 observational studies that included 26000 hospitals and 38 million patients.

Patients treated at for-profit hospitals had a 2% increased risk of death (relative risk 1.020, 95% confidence interval 1.003 to 1.038), the report says.

In the United States, said co-author Dr Holger Schönemann, assistant professor at the University of Buffalo, a 2% increased risk means that 14000 people die each year at for-profit hospitals who would have lived if treated at non-profit hospitals.

The higher death rate at for-profit hospitals occurs for two reasons, Dr Devereaux said: “Shareholders expect a 10% to 15% return and the hospitals have to pay taxes. Funding is fixed [from Medicare and other schemes in the United States and from national health insurance in Canada], so they cut corners on skills.”

Here is a methodological critique of the Devereaux study cited by Tanne:

[T]he authors may, if anything, have weakened their case by generating a pooled estimate of the for-profit effect. Even without aggregation of the data, there are 3 compelling reasons to believe the overall result.

First, the finding of excessive mortality associated with for-profit hospitals recurs in one study after another. It also recurs in most of the studies that were excluded and is evident with multiple modelling techniques.

Second, these studies are not clustered in one time or place. Excess mortality associated with for-profit hospitals is evident in separate comparisons covering most of the United States, over more than a decade in which the US health care system underwent a major transformation in finance and organization.

Third, the authors’ secondary findings lend strong plausibility to the overall conclusion. For example, individual study findings are consistent with the literature showing outcome advantages for teaching hospitals. The authors also astutely separated out variables that might be under the control of hospital administrators and found that adjustment for staffing levels diluted the advantage of the not-for-profit hospitals. Other research suggests that, ceteris paribus, excessive cuts to the number of skilled bedside nurses lead to an increase in adverse in-hospital outcomes.

2) Richard C Lindrooth, Tamara Konetzka, Amol S Navathe, Jingsan Zhu, Wei Chen, and Kevin Volpp, “The Impact of Profitability of Hospital Admissions on Mortality,” Health Serv Res. 2013 Apr:

We modeled risk-adjusted 30-day mortality of patients discharged from 21 hospital service lines as a function of service line profitability, service line time trends, and hospital service line and year-fixed effects. We simulated the effect of alternative revenue-neutral reimbursement policies on mortality. Our sample included all Medicare discharges from PPS-eligible hospitals (1997, 2001, and 2005).

The results reveal a statistically significant inverse relationship between changes in profitability and mortality. A $0.19 average reduction in profit per $1.00 of costs led to a 0.010–0.020 percentage-point increase in mortality rates (p < .001). Mortality in newly unprofitable service lines is significantly more sensitive to reduced payment generosity than in service lines that remain profitable. Policy simulations that target service line inequities in payment generosity result in lower mortality rates, roughly 700–13,000 fewer deaths nationally.

3) Manish Mittal, Chih-Hsiung E. Wang, Abigail H. Goben, Andrew D. Boyd, “Proprietary management and higher readmission rates: A correlation,” PLOS One, September 18, 2018:

Multiple studies have shown that ownership structure of Health Care organizations (HCOs) affect the performance of providers and patient outcomes [7–14]. While hospitals are different than many other HCO’s, we compare the literature to other HCO as few studies on HCO ownership have been published. Similar to our study, Horwitz et al. have reported higher readmission rates for patients at for-profit hospitals among the 4474 hospitals analyzed for Medicare beneficiaries from July 2013-July 2014 [16]. Daras et al. have reported higher readmission rate for rehabilitation patients in the for-profit IRFs (Inpatient Rehabilitation Facilities) than the non-profit IRFs [8]. Although, the authors also reported geographical variation in their study with more readmission rates in IRFs in the South Atlantic and South Central regions than the New England, these readmissions were related to all cause-unplanned population which may have different mix of patients than what was observed in this study [8]. In another study, Devereaux et al. performed the meta-analysis of published and unpublished observational studies from 1973 to 1997, to compare the mortality rate of patients in for-profit vs not-for-profit dialysis centers, and reported significantly higher mortality risk associated with for-profit dialysis centers [9]. Another meta-analysis study based on 82 articles, performed by Comondore et al., from 1965–2003, reported higher quality of care in non-profit nursing homes compared to the for-profit facilities [10]. The non-profit nursing homes were associated with higher quality staffing and lower pressure ulcer prevalence compared to the for-profit nursing homes [10]. Hillmer et al. similarly reported better quality of care associated with non-profit nursing homes using qualitative systematic review of 38 studies from 1990–2002 [11]. Rosenau et al. reported that non-profits were judged 59% of the time superior, whereas for-profits were judged to be superior only 12% of the time [12]. Their study was based on the systematic review of two decades of articles published since 1980–2003 [12]. Some of the studies, however, have reported better care quality in for-profit institutions [13–14]. Leleu et al., for instance, have shown reduced readmission in for-profit teaching and fully integrated hospitals than their counterparts [13]. Akintoye et al., have reported reduced mortality in for-profit hospitals among HF patient from 2013–2014 nationwide [14]. There could be multiple reasons ascribed to this discrepancy such as specificity to a particular disease category*, temporal differences or use of different database.

NOTE * Or, more pointedly: “concentration on the most lucrative services, such as elective cardiac and orthopedic services.”

And now some caveats: The meta-study with the largest n, #1, reviewed data from 1982 and 1995, although work from 2013 (#2) and 2018 (#3) reinforces both the institutional logic it reveals, and its conclusions. The point could be made that HMOs/AOCs, CMS regulations, and various quality initiatives render that data obsolete. In response, I would argue that we should therefore regard 1982–1995 as a “state of nature,” as it were, and that every kludge installed to mitigate that state — highly-salaried “leadership,” for example — falls under the heading of inflated costs, as outlined in the first section of this post. It’s hardly a victory if you tame a market at high cost when the market doesn’t need to exist in the first place. Finally, the two studies I found that contradict the material presented above have very small ns, and cover limited geographic areas (here; here).

The Goal of a Health Care System Should be Health Care, not Profit

David Graeber’s famous concept of “everyday communism” has some theoretical issues, to say the least, but I think at a pragmatic and intuitive level it makes a lot of sense. From Graeber’s “On the Moral Grounds of Economic Relations” (PDF). I’ve helpfully added material in square brackets to make the relevance of Graeber’s passage more evident:

Whenever action proceeds “from each according to their abilities [doctor, health care institution], to each according to their needs [patient]”—even if it is between two people—we are in the presence of “everyday communism”. Almost everyone behaves this way when collaborating on a common project [the alleviation of suffering or restoration of health]. If someone fixing a broken water pipe [or bodily organ] says “hand me the wrench” [or scalpel], their co-worker will not usually say “and what do I get for it?”… This is why in the immediate wake of great disasters—a flood, a blackout, a revolution or economic collapse [or medical emergency]—people tend to behave the same way [leaving aside health insurance administrators], reverting to a kind of rough-and-ready communism…. Anyone who is not an enemy can be expected to respect the principle of “from each according to their abilities…” at least to some extent: for example, if you need to figure out how to get somewhere [health], and they can give you directions [treatment], they will.

Citizens and patients are used to our profit-driven health care system denying care, whether through lack of insurance, or through health insurance gatekeepers. Heck, that’s what GoFundMe is for. They are not used to thinking of health care institutions and personnel doing the same thing. They imagine, that is, they when they ask a hospital for directions (treatment) the hospital won’t send them deliberately astray (to Pain CIty as opposed to Happyville). But if profit is the driver, and there are investors to think of, it is in fact their fiduciary duty to do just that.[1]


In short, HR676 and S1804 propose two different modes of managing capital for hospitals, S1804 proposes that health care institutions accumulate profit and allocate it themselves. HR676 proposes that capital for health care institutions be treated as a public good and allocated by the government through our process of representative democracy. Because profiteering inflates costs, increases patient mortality, and renders the doctor-patient relationship morally suspect, I think that HR676 has the right approach. Representative Jayapal should retain that approach when she rewrites the bill.


[1] Reputational damage? Don’t make me laugh.

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