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Market Forces Are Bad for Hospitals' Health

by Carol Kirschenbaum and Bob LeBow


We are told that the growth of for-profit hospitals will help contribute to the lower cost of health care and that competition is reducing excess administration. The standard market forces of supply and demand do not apply well to health care-unless one never gets sick. But free market advocates have repeatedly assured us that a market economy could reduce the spiraling cost of health care.

Finally we have some strong data that indicate the market-at least as represented by for-profit hospitals-is not so cost-effective as its proponents have asserted.

An article in the March 13 issue of the New England Journal of Medicine suggests that for-profit hospitals are actually less efficient at balancing administrative costs versus resources devoted to patient care than private not-for-profit and public hospitals.

In the article, entitled "Costs of Care and Administration at For Profit and Other Hospitals in the United States," authors Steffie Woolhandler and David Himmelstein used Medicare data for virtually every non-federal hospital in the entire country for fiscal year 1994 to compare the costs in for-profit, private not-for-profit, and public hospitals. They also compared the fiscal 1994 data with fiscal 1990 figures.

Some of the findings indicating not so stellar performances from the market-based for-profit hospitals:

  • For-profits spent 23 percent more on administration than private not-for-profits and 34 percent more than public hospitals.
  • Administrative costs accounted for an average of 26 percent of total hospital costs in fiscal 1994, up 1.2 percentage points from 1990.
  • Comparative 1994 administrative costs: 34 percent for for-profits, 24.5 percent for private not-for-profits, and 22.9 percent for public hospitals.
  • Among acute care hospitals, for-profits had higher adjusted costs per discharge ($8,115) than private not-for-profits ($7,490) or public hospitals ($6,507).
  • In NC in 1994, administrative costs for for-profit hospitals ran 36.9 percent of the total; for private not-for-profits 21.1 percent; and for public hospitals 19.6 percent, with the overall average for all hospitals being 24.4 percent.

The figures likely understate total overhead, as profits and marketing costs were not included.

The realities behind these statistics seriously affect the quality of our health care:

  • The administrative share of costs in US hospitals is nearly twice that of Canadian hospitals.
  • The percentage of costs devoted to administration increased between 1990 and 1994 for all three ownership categories. Result: less money for patient care.
  • There is a pattern of higher costs and reduced clinical staffing at for-profits.
  • Contrary to the rhetoric of the market, market forces are "upsizing" administration.
  • Between 1990 and 1994, the overhead of health insurers and HMOs rose from 12.8 percent to 14.8 percent, and the number of administrative and clerical personnel in doctors' offices rose from 613,000 to 819,000 full time equivalents.

Woolhandler and Himmelstein note that even before these recent increases in administrative costs, the US General Accounting Office calculated that the administrative savings that would result from a switch to national health insurance would fully fund universal coverage for all Americans.

Instead, we have a growing number of people who are uninsured (now estimated at over 41 million) and underinsured (another maybe 30 million). Increasing administrative costs mean fewer resources for patient care, or, in the harsh jargon of the medical entrepreneurs, "medical losses." Increasing stockholder profits in the for-profit sector also drain money away from patient care-indeed, from the health care system as a whole.

The article provides hard data to make us wonder seriously about the role of for-profits and market forces in health care.

What are our values as a society? Do we value the market economy so much that, for the sake of the "free market," we would tolerate even more injustice and lack of compassion in our health care system? It's becoming more apparent that this "free market" is creating obscene profits for a few while excluding an increasing number of Americans from needed health care.

It's time we re-examined our ethics as a society and included every American in our health care system. We can afford coverage for all Americans. Every other developed country covers all of its citizens-and at 30 to 60 percent less cost. As the data in Woolhandler and Himmelstein's article confirm, our experiment with the market to solve America's health care dilemma is failing.

  Carol Kirschenbaum, MD, is NC coordinator Physicians for a National Health Program, and Bob LeBow, MD, is Idaho coordinator of Physicians for a National Health Program.  

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