For-Profit Hospitals: Review Has Surprises : New Study Finds Entrepreneurial Chains Aren’t Living Up to Their Claims of Cost-Effectiveness

Confounding popular free-enterprise theory, a review of the nation’s for-profit hospitals concludes that chains of investor-owned hospitals that have sprung up in the last 25 years not only don’t operate more economically than traditional nonprofit centers but are more expensive and less cost-effective.

Moreover, the study--the product of a three-year inquiry by a special committee appointed by the Institute of Medicine in Washington--also warns that as entrepreneurism becomes more pervasive in medicine, new safeguards may be necessary to protect patients from the business self-interests of their doctors. The institute is part of the congressionally chartered National Academy of Sciences.

In fact, increasingly aggressive business practices of physicians may constitute a more serious consumer dilemma than ownership of the nearly 800 American hospitals that are now in the hands of for-profit chains, the report says. Among the alleged dangers of doctor behavior of which the report warns is the growing use of incentive bonuses by both nonprofit and for-profit centers that, in essence, financially reward doctors for not prescribing some types of costly care.

Economic Pressure

At the same time, the inquiry concluded that incursions of for-profit enterprises into medical care have been neither as insidious as critics had warned nor as beneficial as advocates had claimed. The report, which calls itself only a “snapshot” of the developing situation, concludes that all aspects of the increasingly marketing-oriented health economy must be closely watched.

But researchers stressed one point: Economic pressures brought on by past cost excesses by all branches of medicine are inexorably bringing fundamental change in the way Americans seek and get medical care.

The effects of this trend are already so pronounced that many practices that distinguished for-profit and nonprofit health centers as recently as a decade ago have disappeared and business operations and economic habits of the two sectors are increasingly alike.

The 556-page report concludes that the market penetration of for-profit ownership of hospitals may already have peaked nationwide at about 13% of all hospitals and 9.8% of the total of American hospital beds. Large for-profit chains own hospitals containing about 100,000 beds. The national total may be deceiving, however, critics of entrepreneurial medicine warn, because investor-owned chains are disproportionately prominent in a small number of Sun Belt states, including California (where 31% of all hospitals are for-profit), Florida, Georgia, Louisiana, Tennessee, Texas and Virginia.

The 22-member study committee’s chairman predicts that consumer pressures for quality care and the availability of care to the 35 million Americans who lack health insurance may doom the pervasive influence of strict cost-control pressures within the next two years by focusing greater attention on the plight of people who can’t get care or are forced to accept treatment that is significantly worse than that afforded people of greater means.

The Institute of Medicine study, which had been awaited eagerly both by advocates of entrepreneurial, for-profit medicine and the movement’s opponents, was released in Washington Wednesday. Today’s issue of the New England Journal of Medicine--whose editor, Dr. Arnold Relman, is a leading critic of the rise of for-profit health care and served on the study committee--summarizes the study.

Broad-Based Panel

The study committee was chaired by Walter McNerney, a Northwestern University health services management professor who is one of the nation’s most prominent health policy observers. The committee included a wide variety of top national experts in such fields as health care financing, insurance, management, ethics and medical practice. Key executives of two of the nation’s largest for-profit health center chains--National Medical Enterprises and American Medical International, both Los-Angeles-based--were also on the panel.

“The committee feels that our current path toward an increasingly competitive environment, with more investor-ownership, more for-profit activities by not-for-profit institutions and larger (hospital chains), raises enough issues to warrant careful monitoring,” the study concluded.

“The general conclusion was that, as the field gets more competitive, based more and more on incentive payments, encouragement of competition and all the rest of it, our eye should be on ownership to a certain degree, but more sharply focused on quality, access, cost and whether education and research institutions remain viable,” McNerney said in a telephone interview from his home near Chicago.

Though McNerney thinks strictly economics-motivated pressures on the health system may have about run their course, he predicted things may get worse in this regard before they get better. He and several members of the study group interviewed by The Times agreed the public at large remains significantly unaware of many of the subtle, behind-the-scenes economic changes that have taken place in medicine and will continue to occur.

“I think the state and federal governments and employers are going to encourage competition for another couple of years pretty vigorously,” McNerney predicted. “They’re looking for prices that are affordable. They’re determined to squeeze water out of the system. On a parallel track, I see that there’s going to be a concern growing about access for the underprivileged, who tend to get selected out in competitive markets, and a concern about quality.”

Among the key findings of the study were these:

- Although large for-profit hospital and health center chains have maintained that, as free enterprise-oriented business they can deliver better care at less cost than traditional nonprofit hospitals, available evidence indicates that just the opposite is true. Both in earlier studies and in research commissioned for the Institute of Medicine report, experts found that for-profit hospitals pay from 3% to 10% more than nonprofit centers to deliver care and collect charges from insurance companies and government health care programs that are between 8% and 24% higher.

A study commissioned for the new inquiry found for-profit hospitals have higher administrative and other costs than nonprofit competitors.

- In the murkier area of quality assessment, the report found no evidence to support a common argument against for-profit ownership: that profit-making health centers put return on investment ahead of quality of care. However, the new study acknowledged that existing ways to measure comparative quality of hospitals are generally unsatisfactory and that new data-collection techniques now being established will require several more years before meaningful comparisons in competence and quality can be made.

- For-profit hospitals tend to provide less charity care or services for which they eventually are not paid than nonprofit centers. But the differences in provision of free care were not as great as some critics of for-profit hospitals had predicted. The documented differences, the committee concluded, “show little or no difference between for-profit and not-for-profit hospitals, suggesting either than concern about for-profit hospitals has been exaggerated or that not-for-profit hospitals often do not fulfill their assumed social mission.”

Nationwide, committee researchers found 6% of the care in for-profit hospitals was rendered to people without insurance, compared to 7.9% in general nonprofit hospitals and as much as 16.8% in publicly owned hospitals, which tend to function as health centers of last resort for hundreds of thousands of poor people.

- However, in a few states where investor-owned hospitals have achieved significantly greater market penetration than in the nation as a whole--specifically Florida, Tennessee, Texas and Virginia--the ratio of uncompensated care in for-profit hospitals is significantly lower than in the country as a whole. “The majority of the committee agreed that the comparatively low levels of uncompensated care (in states where for-profit hospitals) constitute 30% to 40% of the (total market) suggest that the presence of such hospitals lessen access to care among people who lack means to pay.” Uncompensated care in California for-profit hospitals did not show the disparity of the other four states.

- In general, for-profit ownership of hospitals and health facilities has not grown as quickly as the public may believe. Acquisition activities by the six largest investor-owned hospital chains have generally focused on the buying of independently owned for-profit hospitals, not in conversion of previously charitable institutions into profit-oriented enterprises.

- Most surprising of all, though, is a finding that perhaps the most insidious danger in today’s trend toward for-profit health entrepreneurism pertains not to hospitals but doctors themselves. With pressure building on hospitals, nursing homes, group practices, health maintenance organizations and other institutions to attract a greater share of the market for health services, the committee found doctors are being subjected to--and succumbing to--new temptations to put their economic well-being ahead of the welfare of their patients.

In what McNerney characterized as possibly the most significant single chapter of the report, the committee warned that physician entrepreneurism poses a significant risk. Among specific developments of which the report warned were the increasing trend of hospitals and group practices to give doctors cash incentive bonuses if they refrain from using certain types of expensive services and the growing tendency of doctors to hold hidden ownership interests in such things as for-profit diagnostic laboratories and radiology clinics to which they refer patients, possibly unnecessarily, physician ownership of such ancillary services as home-care, respiratory therapy, sports medicine clinics and alcoholism, weight-loss and drug abuse treatment centers.

Financial Disclosure

Hidden physician ownership and other concealed financial arrangements are becoming so commonplace and represent such a potential risk for patients, the committee concluded, that policy makers should give careful consideration to requiring doctors to disclose to their patients all details of their financial holdings in any business related to medicine. The committee also urged insurers of all types to develop rules that would prohibit paying for services that are provided by a business partially owned by the doctor who prescribes the services in the first place.

“I think the one (major) finding is there is a lot of evidence that the problems that have become apparent in the question of for-profit versus not-for-profit are (really) deeper problems within the system,” said Bradford Gray, staff director of the study. “There are serious problems that go beyond just the question of profit.

“One thing that really strikes me is how some of the things we have traditionally relied on or assumed about our health institutions and providers has changed and how, in many ways, that change is taking place faster than we are able to react to it.”

Lumping States Together

In a telephone interview from his Boston office, Relman said the final report was significantly more charitable toward for-profit medical enterprises than he is personally. He said that by lumping all states together to base many conclusions on national data, the committee glossed over the disproportionate influence of for-profit health enterprises in states like California.

“The committee was like the United Nations,” Relman said. “We could support motherhood and apple pie and denounce sin, but beyond that, we weren’t going to go very far.

“I’m afraid if we allow this development to continue as it’s going, health care will, in fact, become industrialized. It will become simply commerce. If we allow this development to grow and to achieve more and more power and a larger and larger share of (available) resources, we have institutionalized a for-profit, commercial approach which will be very difficult to undo without a major political and social revolution.

“The for-profit interests are already very powerful. In 10 years, they are going to be much more powerful. I think it’s time for the American public to stop and think about what is going on.”

Dr. James Todd, senior deputy vice president of the American Medical Assn. and a committee member, said the new study “provides a framework and raises many questions by which the future should be judged.” But Todd contended that “physicians as a profession will not be as swayed by the economic considerations as the committee would lead you to believe.

A Need for Vigilance

“The for-profit movement is there and it is not going to be stopped, as much as Relman would like to stop it. What we need to do is be very vigilant to see what happens as it plays out.”

John Bedrosian, senior executive vice president of National Medical Enterprises and one of two committee members representing the for-profit health care industry, said he “would hope that the contribution of the report would be to put to rest all the emotionalism and theoretical argumentation regarding the role of investor-owned entities in health care in the country.”

“I think we are going to get back to issues of quality,” Bedrosian said. “I don’t think five or 10 ‘megasystems’ are going to control the delivery of health care in this country. What the report really says is that this country has no national health policy.”