Tuesday, March 21, 2023
Is Profit Maximization Hopelessly Inconsistent with Efficient, Community Needs -- Based Health Care?
A really interesting quick read in the Harvard Business Review implicitly asks whether profit maximization correlates to less efficient health care for the least able and sickest patients. Along the way, the report questions whether a market-based approach to health care delivery is even appropriate. The authors don't answer the question but indicate that if market based health care is to be the norm, safeguards should be strengthened to ensure against inefficiency and decreased community benefit. I think the discussion has relevance to nonprofit hospitals which are, in any event, discussed in the report. Here are a few snippets from "What Happens When Private Equity Firms Buy Hospitals?"
In the decades leading up to the Covid-19 pandemic, acquisitions of hospitals and health systems by private equity firms soared, sparking debate about how the growing influence of PE in U.S. health care would affect costs, quality, and access. Supporters of PE cite its established track record of creating value for companies and investors across a variety of industries by improving operations, promoting an innovative culture, providing access to capital to support infrastructure improvements like IT systems and new facilities, leveraging economies of scale, and adopting managerial best practices. Critics point out the downsides of PE’s focus on maximizing returns such as surprising patients with costly bills, scaling back nursing staff, and avoiding low-margin service lines primarily used by vulnerable populations. Critics also question whether PE funds’ relatively short life cycle of seven to 10 years might have negative implications for the entities they acquire and, as a result, for the communities and patients those entities serve.
Our study of 42 leveraged buyouts of hospitals by PE firms from 2003 to 2017 suggests that these competing views do not fully characterize the reality of these acquisitions. Instead of framing PE’s influence in health care as simply “good” or “bad,” we believe that future policy discussions around PE should do the following:
- Make recommendations specific to each provider community (e.g., nursing homes, physician practices, hospitals) because the issues — potential benefits, risks, and what’s inciting investments — raised by PE acquisitions may vary considerably across them.
- Focus on strategies aimed at aligning economic incentives, penalties, and oversight (e.g., antitrust regulation, public disclosure requirements, and monitoring of fraud and abuse in claims coding practices) so that PE’s capital resources and management expertise can be redirected to maximizing benefits for patients (e.g., expanding access to care, increasing care quality, and improving the patient experience).
In this article, we provide an overview of the existing research on the effects of PE ownership of U.S. hospitals and health systems. Specifically, we highlight the key changes in health systems after they’ve been acquired by PE firms with respect to their financial health, staffing levels, care quality, and availability of service lines. We conclude by calling attention to the key issues that should shape future policy deliberations on PE in health care.
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After their literature review generally showing that profit maximization does not seem to decrease quality or availability, the researchers set out a few recommendations, two of which are included here. Overall, the researchers assert, implicitly if not explicitly, that even profit maximizers have nonprofit like obligations to eliminate inefficiency and pursue community benefit.
Loopholes should be examined.
Loopholes in payment policies that create opportunities for profit maximization, at the expense of patient welfare, should be the primary focus of regulatory scrutiny. The United States has a market-based approach to paying for care and uses a blend of private and government-financed health coverage that reimburses at different rates rather than the type of universal coverage adopted by many other wealthy nations. The current approach in the United States causes high levels of administrative waste, limited information on price and quality, workforce shortages, and growing consolidation among insurers and hospitals.
Such inefficiencies create opportunities for PE investors, but these incentives are not unique to PE, as many of the business strategies they use to profit from health care’s bloat and waste are indistinguishable from those of major non-profit health systems seeking to maximize their own margins. In recent months, we have witnessed alarming reports of a large, non-profit hospital manipulating and pressuring poor patients for financial gain even when they were eligible for free care and another that exploited a loophole in the 340b drug-pricing program in which the government reimburses hospitals that serve poor communities by allowing them to mark up certain pharmaceuticals.
As some have suggested, PE strategies in the hospital sector could be used to identify payment loopholes like surprise billing or perverse incentives that may adversely impact the affordability and quality of care. For instance, Medicare’s reimbursements for drugs is currently higher for those administered by physicians in their offices, which are covered by Part B, than for the same drugs prescribed under Part D. Regulators and policymakers should address such underlying issues and not target any one entity or class of investors given that other firms not owned by PE could behave the same way.
Community needs should be prioritized.
All hospitals have a “social contract” with their communities (i.e., to deliver high-quality, equitable, and timely care), a relationship that should take precedence over a PE fund’s goal of maximizing stakeholder returns. To that end, PE-acquired hospitals should be required to have manageable debt obligations to ensure that they can provide adequate care to the communities they serve. Other examples of needed policies include increasing the transparency and public reporting of deal terms when a PE fund is in the process of acquiring a hospital and disposing of it. State and federal requirements that PE firms provide advance disclosure of hospital acquisitions would also allow stakeholders to adequately evaluate and provide feedback on such proposed deals. All of these changes would significantly improve the ability of researchers and policymakers to monitor the impact of PE on hospital-based care.