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Use Profit Motive to Improve Health Care

By David Goldhill
January 21, 2013 6:30 PM EST
Illustration by Bob Gill
Illustration by Bob Gill

The fundamental problem with the U.S. health-care system, many people argue, is that medicine can’t operate well on the profit motive. It is a social good, and profit-driven behaviors undermine efforts to provide high- quality care.

It’s true that our private health-care system provides care that is extraordinarily expensive, excessive, wasteful, patient- unfriendly and often dangerously sloppy. But the problem with this argument is that for-profit and nonprofit providers alike produce the same bad result. The profit motive itself doesn’t seem to be the differentiator.

Federal tax data show that for-profit hospitals actually provide more charitable care than nonprofits do. Nonprofits performed no better -- in some cases much worse -- than comparable for-profits on safety scores recently assigned by the Leapfrog Group, a health-care research organization. For patients, it’s almost impossible tell the difference between nonprofit and for-profit hospitals.

Nevertheless, it is true that the profit motive -- and for that matter the nonprofit motive -- is failing us in health care. Why does no one in this industry compete to be the low- priced leader? To be the provider with the best outcomes for specific illnesses? To be the service and efficiency king? To be the safest hospital in your town?

Bad Incentives

Because none of these social benefits drives profits in the health-care business. Successful business models depend on completely different factors -- the amount of excess care for which you can win reimbursement, your ability to prove your costs are high, your savings from avoiding investments in service and safety, mind-bending complexity that makes straightforward accountability impossible. These are the incentives in our system and, unfortunately, our providers respond to them perfectly.

But perverse incentives are no more inevitable in health care than in any other industry. They’re a direct consequence of government intervention in the market. Medicare is an entitlement -- it will pay for all needed care for people who qualify -- so the industry responds by endlessly expanding the definition of need. We invest almost nothing in oversight (Medicare’s low spending on this is often cited as one of its advantages -- as if banks without security guards would be more efficient), allowing a flood of excess treatment and haphazard care that represents a true assault on beneficiaries.

Medicaid reimburses providers at extremely low levels for almost all services -- far below the private market -- so its beneficiaries get very little time-intensive primary care and lots of the tests and procedures that produce profits at high volumes.

Even presumably private markets are dominated by perverse incentives driven by government policy. Our tax code favors employer-provided private insurance to the detriment of any other way of paying for medical treatment. To preserve this competitive advantage -- and reduce their accountability to employer-purchasers -- insurers have implemented an impossibly opaque payment system that bars any competing form of finance.

I recently asked the cash price for my son’s surgery; the ensuing disbelief and confusion could not have been greater if I had told them I was wearing an explosive vest and demanding free care.

Finally, there’s us, the patients. Government policy -- culminating in the 2010 Affordable Care Act -- has been to shift our own financial contributions from direct payment for care to insurance premiums and taxes. As a result, our out-of-pocket payments now represent only 11 percent of our spending on health care -- one of the lowest shares in the world. That’s not a misprint.

Even as our nation’s medical bill rises inexorably, we the patients are further shielded from the financial consequences of our decisions. In theory this is for our own benefit, but in reality it means we never act on our natural skepticism about the need for, or safety of, suggested treatments and tests.

Economic Considerations

In talking about health care, we seem to forget what profits are: the return on capital employed in an activity. In the nonprofit world, this return may be called surplus, but there’s no escaping the need to service the capital employed in buildings, equipment, training and even labor. So nonprofits’ performance is, roughly, the same as that of for-profit providers.

Yes, we could have the government take over private functions in health care and benefit from a lower cost of capital (especially since government is so good at disguising that it has an actual cost of capital, as the bank bailouts illustrated).

But regardless of who provides the care, most of the costs involved -- time spent by doctors, nurses, and orderlies; building construction; equipment and supplies -- are still going to be set by private parties. The 15 million people who work in the health-care industry, and all of its outside vendors, will continue to be motivated by economic considerations.

Which is why abandoning the profit motive in health care would be such a waste. We rely on it to make almost all of life’s other essentials cheaper and better.

Yes, private actors require a little more return on capital than governments do; but their competition with one another produces better results and more innovative services that usually overwhelm this small government advantage. Our health- care mess actually proves that the profit motive is working in health care, even if it is in response to perverse incentives.

Let’s restructure those profit incentives to better match our social needs -- so that providers of more appropriate care with better prices, safety and customer service earn more, rather than less. We’ll get much better results.

(David Goldhill, the president and chief executive officer of the cable TV network GSN, is the author of “Catastrophic Care: How American Health Care Killed My Father -- and How We Can Fix It.” The opinions expressed are his own.)

To contact the writer of this article: David Goldhill at dgoldhill@gsn.com.

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net.

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