It Is Time to Liberate Hospitals from Profit-Centered Care
It Is Time to Liberate Hospitals from Profit-Centered Care
Sidney M. Wolfe
M.P.H. 0 1
David U. Himmelstein
0 Cambridge Health Alliance/Harvard Medical School , Cambridge, MA , USA
1 City University of New York at Hunter College , New York, NY , USA
2 Public Citizen Health Research Group , Washington, DC , USA
T requires, bad behavior from hospital leaders and stifles
he way we pay hospitals is toxic. It rewards, indeed
the better angels of their nature.
In our market-driven payment system, hospitals’ success,
and even survival, depends on generating profits. Even
nonprofit hospitals live or die based on profit margins (often
labeled Bsurpluses^ in non-profit facilities). Hospitals that lack
profits (or the prospect of future profits that can entice lenders
or investors) face a grim future. Unable to renovate or expand
their original facilities, purchase new equipment, acquire other
hospitals, or grow their provider networks, unprofitable
hospitals often spiral downward. As one public hospital CEO
admonished two of us, Bno margin, no mission.^
In this issue of JGIM, Ly and Cutler1 demonstrate one
noxious side effect of making profitability the arbiter of
hospital success. Their analysis of changes in hospital profit
margins between 2003 and 2013 indicates that hospitals won
the profit game by boosting prices, not by improving
efficiency, or through exemplary community service (e.g., by
increasing their care for Medicaid patients). The losers cared for a
disproportionate share of publicly insured patients (and
presumably the uninsured, although Ly could not assess that) or
had the bad luck to be located in rural America. Public
hospitals lagged, while not-for-profits grew their profits even faster
than for-profits. (Although not discernible from Ly’s analysis,
MedPAC data indicates that investor-owned hospitals had
much higher profit margins at baseline and retain a big profit
lead.2) Chaining up was a winning strategy, presumably
because it increased hospitals’ leverage in negotiations with
insurers, allowing them to command higher prices.
Ly’s conclusion that upcoding did not drive profitability
gains will surprise many clinicians whose hospital managers
obsess about capturing every billable diagnosis. While the
study found a positive relationship between growth in a
hospital’s casemix index (CMI) and growth in its profit margin,
this finding was not statistically significant. Unfortunately, this
analysis was underpowered because it used all-payer CMI
data, which was available for only a subsample of 587
hospitals in eight states. Nationwide, increases in the Medicare CMI
(available for almost all hospitals) strongly predict total
margin growth (Dickman S, Woolhandler S, Himmelstein DU.
Unpublished analysis of Medicare Cost Report and Medicare
casemix data, 1998–2016). It seems likely that upcoding is an
Hospitals did not always have to turn a profit in order to
survive. In our past (and today in Canada, much of Europe,
and our VA system), funds for capital investments came from
government grants or charitable donations.
During the first three decades of the twentieth century,
private donors funded almost all US hospital construction.3
The federal government stepped in to provide capital funds to
non-profit hospitals during the Great Depression, and its
HillBurton program was the major funder of hospital construction
in the post-war period. The seed of profit-based capital
funding was planted by the hospital industry-controlled Blue
Cross plans of that era, which paid hospitals a per diem rate
that covered operating costs (including interest on loans, i.e.,
payment for existing capital investments), plus depreciation
and a capital add-on to provide hospitals with reserves for
future capital investment.4 But even as late as 1965 (when
Congress passed Medicare and Medicaid), hospitals’ reserves
together with their long-term borrowing accounted for only
31.9% of hospital construction funds.5
Two developments in the mid-1960s accelerated the shift
from grant-based to profit margin-based funding for
not-forprofit hospital capital. First, a 1963 IRS ruling triggered
states to start offering tax-exempt bond funding for hospital
construction, allowing hospitals to obtain loans with minimal
down payments, and pay them off with future profits. Second,
Medicare adopted Blue Cross’ capital payment model (with
an extra profit allowance for investor-owned facilities). For
hospitals with a good payer mix, this assured a flow of public
dollars to build up reserves for future investments, and to pay
off bondholders and investors. By the 1970s, 70% of
construction was debt-funded, with much of the rest covered by
Before the mid 1960s, explicit (if often flawed) public
decision-making guided the allocation of government funding
for hospital construction. Thereafter, the flow of taxpayer
dollars surged but public control of decision-making shriveled.
Profitability determined which hospitals could afford new
projects, and private boards and executives decided how to
deploy those funds.
Medicare’s (and private insurers’) capital payment policies
have undergone many twists and turns over the past half
century. But the link between profitability and ability to
expand and modernize has been a constant. In effect, all
nonfederal hospitals have been forced to become
quasicommercial enterprises, and to think of themselves in business
rather than social terms4. As profitability became mandatory
for hospital survival, the distinction between for-profit and
non-profit hospitals began to erode—although even decades
later, for-profits continued to deliver inferior quality care at
The price-boosting that Ly identifies as a key profit-driver
(among non-profit as well as investor-owned hospitals) is just
one of the ill-effects of making profit margin the mission.
Hospitals’ manipulations of their payer and service mixes,
the efforts squandered on financial gaming, and the ethical
compromises that have become commonplace in the
healthcare milieu are also, like price gauging, antithetical to
the public’s interests.
Hospitals’ efforts to avoid money-losing patients, effectively
excluding many of those most in need, have become so routine
that many of us have become inured to this disgrace. New York
City’s private academic medical centers exclude almost all
uninsured persons and maintain separate clinic systems for
patients with Medicaid, leading to the de facto racial as well
as socioeconomic segregation of care,9 a situation that is not
unique to New York. The CEO of the Mayo Clinic—which
generated an operating surplus of $707 million last year, while
investing $714 million in new capital projects—instructed
employees to Bprioritize^ patients with private insurance over
those with Medicaid, and even Medicare.10,11
The profit imperative, even among non-profit hospitals,
similarly distorts the mix of services that hospitals choose to
offer or promote. Money-losing services like mental health
and primary care are accorded second-class status, in contrast
to the opulent resources devoted to elective cardiac and
orthopedic interventions, even those of dubious value.
Selectively recruiting profitable patients and excluding the
unprofitably ill require considerable bureaucratic effort and
expense. But that is just the beginning. Much more is spent to
maximize billings and collect payment. At one non-profit Utah
hospital system, 2300 employees, 6% of all employees, work
on claims processing and bill collections.12 Meanwhile, the
patient chart has morphed from a clinical diary for facilitating
care into a billing document driven by commercial
imperatives, padded with redundant (and even misleading) material.
Physicians now spend half their time on electronic
documentation and other clerical/administrative tasks.13 Overall, the
average US hospital now devotes more than one quarter of
its budget to administration, a share that is continuing to
increase, and is already twice that in Canada (or Scotland).14
Why is hospital administration so much leaner in Canada?
Although physician payment in Canada’s single-payer system
looks a lot like US Medicare’s, its hospital payment strategy is
dramatically different, more akin to the way we fund the VA.
Canadian provinces (and Scotland) pay hospitals’ global
operating budgets, with separate government grants for capital
costs. Even countries like France, Switzerland, and Germany
which have more complex universal social insurance schemes,
fund much of new hospital investments through government
grants rather than hospitals’ profits. This dampens US-style
entrepreneurial incentives, leading to lower bureaucratic costs,
less price-inflating gaming, and greater healthcare equity.
Profit-seeking does not just undermine efficiency and
equity, it also fosters corruption. For-profit hospital firms have
been most frequently implicated in the most egregious
incidents, paying billions to settle fraud and abuse claims. But the
faltering moral compass of non-profit and even public hospital
leaders has an even greater impact because they control 80%
of community hospitals, and almost all academic medical
centers. Massachusetts General Hospital received $123
million in royalties and licenses over a four-year period,15 mostly
from orthopedic device-makers whose high prices are borne
largely by Medicare. In 2013, 73 leaders of academic medical
centers also sat on the boards of 85 publicly traded healthcare
firms, receiving median compensation of $209,000 per
directorship, and, in addition, held 5,493,946 shares of stock in
those firms.16 It takes extraordinary ethical gymnastics to
justify such dual commitments.
Ly implies that a crackdown on hospital prices would lead
to salutary change, goading hospitals to seek profit through
efficiency. But controlling prices without eliminating profits
could amplify current profit-inflating misbehaviors, e.g.,
prioritizing the care of privately insured patients. As long as
profit-centered care remains the key to hospital survival,
patient-centered and community-centered care will suffer.
No law of nature requires that hospitals make profits in
order to thrive. What is needed is a single-payer reform that:
Pays hospital lump-sum operating budgets, like those for
schools, fire houses, or VA hospitals;
Claws back any money they do not spend on care; and
Allocates truly needed capital funding through a
regionwide accountable government grant program that directs
investments to the highest priority, community responsive
Corresponding Author: David U. Himmelstein, M.D.; City University
o f N e w Yo r k a t H u n t e r C o l l e g e , N e w Yo r k , N Y, U S A
Compliance with Ethical Standards:
Conflict of Interest: No conflicts of interest to report.
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