Jessica Wilen Berg, JD is a professor of law and bioethics at Case Western Reserve University of Cleveland, OH, with joint appointments in the Schools of Law and Medicine. She conducts research and publishes in the areas of informed consent, human research, reproductive law and ethics, confidentiality, mental health law, professional self-regulation, and e-medicine.
Hospitals have transitioned from the charitable care model to a purely business model, some of them with hundreds of millions of dollars in annual profits and paying multi-million dollar executive salaries. How has that changed healthcare for better and for worse?
On the plus side, I think we’ve seen a lot of innovation. I think that’s commonly what you see in a business model, or hope to see in a business model, which is a lot of different attempts to try things in different ways — take on a new technology, try different models of providing services, and in theory, be fairly responsive to the market. Ideally, a business model is set up entirely to be very responsive to the market.
The downside … I don’t think we’ve ever really reconciled ourselves as a society to the notion that healthcare, of all things, is a business. It comes along with all the things that come with the business model. And that is profit motive: there’s a bottom line, you want to stay in business, you want to do better than others, you want to make as much profit as possible.
For people that can’t pay, a business model doesn’t incorporate into it, naturally, anything that affords you a mechanism to offer services for free.
There is no other business model that expects the people who are able to pay to subsidize those who can’t. How are hospitals effectively, or not effectively, meeting that need?
I don’t want to say there’s no other business model that doesn’t assume different sliding scales, because on an international market level, for example — although this, again, is a healthcare example — pharmaceutical companies do somewhat assume that they will make more money in some countries, like this country, to subsidize less money they can make in other countries.
I’m not familiar enough with lots of other business models to say that there aren’t other ones that do that. That being said, it is not typical that a business model always incorporates the fact that there are sliding scales. That some people are going to pay more, and that subsidizes the people who pay less.
Is the hospital industry effectively meeting that need as an efficient arbiter that says, “We can efficiently transfer money from those who can pay into those who can’t and it will all work out?”
It’s not, because it’s not a whole system. I think if it was a system, you might be able to do that, but the people who can pay are not always located in the same areas, either geographic areas or with the same problems, as the people who can’t pay. Within a system, you might be able to do that as long as you cover a large enough area that you’re getting both sides of it.
That’s a fundamental flaw of the way healthcare delivery is organized in the country overall, which is we’ve known for a long time — and this is true of any insurance market, for example — that what you ideally want is a wide mix of problems, and from that perspective here on the payment, you want wide mix of ability to pay in order to get an adequate subsidization.
You’re not going to get that, necessarily, in one inner-city hospital. It could be that your hospital in the high-income suburb has the ability to pull in people who have health insurance, or even out-of-pocket ability to pay for some things that they’re doing, and your inner-city hospital doesn’t have that at all.
The term has been to create hospital systems, so more and more you see hospitals merge together. You may have the satellite units in the suburbs and you may have the one inner-city unit. Usually, your inner-city hospitals are just going to lose money, and a lot of money. They’re dealing with a generally poor population. They’re dealing with significant health problems, a lot of chronic conditions.
Just, as a general rule — this is not always true — they’re going to lose a lot of money. Not to mention, of course, emergency rooms are huge cost losers, basically. Emergency rooms do not even break even. They cost institutions enormous amounts of money.
A hospital network I used to work for had a motto of, “We serve all, but market to few.” Does marketing and competing for paying patients raise costs?
It can drive up costs, and I think there are more fundamental flaws in the system that are really driving the costs than just concern about marketing or the few that can pay. There are lots of debates about what’s driving the increase in cost. The vast increases in new technologies, the fact that very rarely do we get rid of an old technology and add in a new.
Say when you come in, maybe it used to be that all we could do was a direct physician exam. Then, maybe we could do an exam and an x-ray. Now, maybe we could do an exam and x-ray and an MRI because now, if it’s not a bone, maybe it’s a soft tissue injury. Maybe beyond that you could then do a PET scan. I mean, we add technology. We very rarely replace it or get rid of some of the earlier ones.
The technologies, as a whole, do not tend to be things that drive the cost down considerably. Unlike in other fields where you’re saying, “Well, we used to have this way of doing it and it cost this much money and this much time. We found a new, very quick way to do it now, and it’s much less expensive.” That’s rarely what occurs in the healthcare field. Usually the new technology is very, very expensive and doesn’t drive the cost down at all. It drives it up.
Every now and then someone gets the idea of claiming that hospitals are gaming the numbers on the charity care they provide and urge taking away the non-profit status hospitals. What would be the effect if that were to happen?
I want to take a little issue with the idea of gaming. There is a game that goes on, although who set the rules of the game and put it in place in the first time, it’s not necessarily the hospital. You do have a strange set-up going on where you incentivize the organizations to play a game a certain way, including making sure that their charity numbers become very high.
There’s a lot of debate about what would happen if you get rid of non-profit status. Some of it has to do with, what does it mean when you say you’ve gotten rid of non-profit status? The really quick answer is that non-profit status goes along with some other things, like the ability to get charitable donations from other groups and organizations; and those people, then, to tax-deduct those donations. For people who give money to a hospital, they may not be able to be deduct it if they lose their non-profit status.
I also should say this as a little aside, technically, as a legal matter, non-profit and tax-exempt are slightly different determinations. As a practical matter for whatever we’re doing, you don’t really need to worry about that. But it’s two, slightly different things that are going on here.
The other thing that you might worry about is grants. There are many grant organizations that will not provide grants except to a non-profit. There are some other kinds of things that go along with that. And then, the big part of course is if you take away their tax-exempt status, they’re going to have to pay a significant amount of money out in taxes.
It seems like in hospitals you’ve got these two, polar opposites — big IDNs that make enormous amounts of money and then these tiny community hospitals that struggle to not close up shop because they’re losing money every year. Do you think the larger groups will absorb the smaller ones and would that be good or bad?
I don’t know if it’s good or bad if it happens. Part of it’s going to depend on how we see the evolution of the provision of care, including charity care, over these next few years. But the question of this absorbing the other ones, that’s what’s already happening now if you look at many cities and many hospital environments.
It used to be you had many little hospitals, and by and far, the vast majorities have been absorbed into major systems. Most places have now, two, sometimes three hospital systems rather than many individual hospitals.
On the plus side, as I mentioned before, that does give you some ability to spread across the institutions between some of your hospitals that have the ability to make more money versus some of them that don’t have that ability. On the downside, you do have then, fewer choices of smaller community hospitals. You might get less in the way of unique ways of doing things.
It’s not clear what the overall effect will be of that, but I think we’ve seen the consolidation of hospitals now going on for quite a bit of time.
It’s interesting too, the recent case that came up where the hospital in Marin County is suing Sutter, claiming that Sutter basically pillaged the hospital for $120 million before they walked away and turned it back over. Is that going to be a concern when you’ve got hospital systems that, overall, have a fairly equal balance of income to services provided, but yet maybe not geographically equal?
It’s always a problem and it’s always going to be a hard thing to think about. If you look into the idea behind this, it’s that if you’re a business and you have a manufacturing plant that’s just constantly losing money, or an arm of your business is losing money, as a business, you’re inclination is to say, “Well, we no longer want to have that particular arm. That’s where we’re losing all our money. That’s what we have to do, we have to close that.”
And hospitals, even internally, have started to think that way when they say, “Look, we’re losing all our money on our prenatal care, “ or, “We’re losing all our money on our emergency rooms.” These are areas that don’t tend to be moneymakers. They’re pretty much just not. They’re areas where you lose a lot of money, and so the tendency’s to say, “Well, that’s where we’re losing money, that’s what we close.” The difficulty and the tension, I think, continues between this idea — even as I said in the beginning — that it’s a business model.
In a healthcare model, we’d say, “Well, that’s ridiculous. You’re open because you need those services. That’s the whole point. We need an emergency room. We need those things. You have to stay open.” Even though what we’re saying to you is, “You have to do that, although we know you’re losing money.” That’s the same thing that happens, just on a larger scale when you look at a hospital system that looks around and says, “Well, this hospital’s losing all the money.”
But one response to that might be, “Well that’s how it’s how it’s going to be. The system is that you have to have that there, we need this service. As a community, we need this service.” So then the question is, have we done something wrong in setting up our delivery system that creates this tension?
We told them that they’re a business, even a non-profit business, and then said, “Oh, but we expect that you’re going to provide these services we need for the community,” and created this very uneasy feeling where companies come in, or hospitals systems come in, and they have to say, “We’re going to accept that we’re losing enormous amounts of money on this institution or on this service,” as opposed to really thinking how we’re supposed to fund this in such a way that they don’t feel that degree of pressure. That either we don’t survive at all as a hospital system unless we get rid of this and there’s some other way to maintain the things that the community thinks that it needs.
It hasn’t been too many decades ago when hospitals were mostly run by nuns or by people who were trained in healthcare administration or by doctors. Now they’re mostly run by people who have mainline MBA-type training. Could it be that people trained to think in terms of cost centers and widgets and market share don’t see healthcare as all that different from other businesses?
I don’t know. I mean, some of the people who work and have the degrees have health sciences backgrounds or health administration backgrounds. It’s not like they’re completely foreign to the notion of delivery of health systems versus the business of health, versus the business of anything else. I don’t think you see a ton of transplants across fields, for example. You know, someone who ran Ford and General Motors suddenly running a hospital system. It is a fairly unique and specialized area that people get in to.
It could be different, although there are some great studies that show how horrible physicians are as business people. There’s the same with lawyers, so I can’t say much on my field either. There are studies that show it’s a skill. Management’s a skill, administration is a skill. You might need some more specialized information, and there are degrees in those. There are business degrees in health administration.
But maybe you should have people running an organization whose degree is in running organizations, not in caring for patients. That’s not to say you don’t need some level of communication. You need some way to bridge the gap and we’ve seen that problem. We’ve seen it at its worst in institutions where you have no communication and you really feel like people are making business decisions without thinking about the patient decisions.
It could be that the best model here is some combination of people who have some understanding about how to run and administer a healthcare organization, and people who have understanding about direct patient care.
Hospitals are spending all these millions to implement electronic medical records, subsidized by the government stimulus money. How do you see that changing the hospital business?
Ideally, it reduces cost. The wonder of the electronic medical record is supposed to be that it has all these benefits in terms of actual care to patients, as well as reducing costs, reducing medication errors. Maybe even the ability to engage in some kind of comparative effectiveness research on broad scales if you gather enormous amounts of patient data.
The problem is that it can take many years before it’s actually implemented. In the mean time, you have compatibility issues, you have learning curve issues. You have enormous cost outlays if you do this.
I think, in the end, it’s still the best place to be heading, but it’s hard to say in the short term whether we’re just not going to see a lot of growing pains.
You would think that the for-profits, especially the investor-owned chains, would be the most aggressive in their adoption of information technology like any other industry. And yet in healthcare, they’re probably among the most backward outside of tiny, standalone hospitals. Is that surprising to you?
Not necessarily, because it’s a long-term investment issue and it can be very difficult to do long-term investments. You’re balancing bottom lines at different points. You’ve got to somehow be able to deal with the fact that you have a certain amount of money outlay that you’ve got to do to put in place an electronic medical record system, and the cost estimates are enormous. Somehow you have to then — when you balance your books that year when you’re showing your profits and losses, that’s going to cut into your bottom line significantly — you have to be in a position where you can look long term. And to a certain extent, non-profits have a slightly better situation in doing that.
They’re not quite as focused on the bottom line. They’re not going to have some of the same pressures, or shareholders looking at things going, “Wait a second. What happened here? Why did you authorize this giant outlay that we’re not going to see the effects of for 5-10 years down the road?” They also have possibly the ability to take advantage of, as I said earlier, some grant organizations will give grants to anything but non-profits. The non-profits have the ability to take advantage of some of the grants and such that are out there to encourage the adoption of some of these records.
To the extent that some of them are government institutions — not all non-profits are government institutions, but the ones that are government institutions can have an additional impetus that are getting pushed on from the government itself saying, “You need to go ahead and implement records.” The Veterans Administration hospitals are far ahead of the game in the electronic medical records world, and much of it is because basically, word came from above: “This is what you’re going to implement and what you’re going to do,” and they didn’t have anybody going, “Well, we’re worried about the bottom line in the end.”
I was interested in your research with e-medicine and its impact on the healing aspects of physician-patient relationships. What were your conclusions?
That there are some excellent, excellent tools out there in e-medicine if you use them appropriately and carefully; and there are some that can cause significant problems if you’re not careful. But like anything else, it can be used very well.
Any concluding thoughts?
I do think we’re going to see some movement around this. There’s certainly a lot of interest in it, and at various times we get a lot of political interest and concern about non-profit hospitals and charity care and tax-exempt basis. I think we’ll see something, and we’ve seen some states start to put in place, creative mechanisms to deal with it. I’m not sure if we’ll see something on a federal level, but I do think that we’ll see additional state movement. We’ve already seen localities, as you have already noted, remove tax-exempt status from hospitals where they say, "You know what? You’re not really fitting the model of what we thought we should be using for tax-exemption."