Florien Kruse, Patrick Jeurissen and Elias Mossialos discuss the rise in for-profit hospitals and why policymakers should be mindful of public payment plans when reshaping healthcare systems. This blog is based on their publication, For-Profit Hospitals Have Thrived Because of Generous Public Reimbursement Schemes, Not Greater Efficiency: A Multi-Country Case Study.
The 2019 coronavirus disease (COVID-19) has forced us to rethink fundamentally our future health systems and put hospital ownership back on policymakers’ agenda. For-profit hospitals face additional financial pressures due to delays in elective treatments and strong public claims about their capacity to assist in the fight against COVID-19. Our study of the history of for-profit hospitals looks at the role of public reimbursement schemes (e.g. access to public reimbursements for hospital services and reimbursement for private capital expenditures), physicians’ financial interests and the political environment in their success or failure. It offers useful insights for policymakers looking to redesign their healthcare systems.
Factors that explain the rise of for-profit hospitals
In recent decades, for-profit hospitals have been on the rise. Economics attribute for-profit hospital success to greater efficiency because, in theory, for-profit organisations are continuously incentivised to outperform others to maximise profit and satisfy their shareholders. However, we argue that this conventional wisdom does not seem to work in practice – numerous systematic reviews, such as those by Kruse et al. 2018, Rosenau and Linder 2003, and Schlesinger and Gray 2006, generally do not find that for-profit providers outperform other ownership types (i.e. non-profit and public providers).
In order to explore alternative explanations for the rise of the for-profit hospitals, we analysed the growth and development of the for-profit hospital sector in four countries: United States (US), United Kingdom (UK), Germany and The Netherlands. We looked specifically at three possible explanations:
(a) access to capital funding and reimbursement for services from government health care financing programs, together with the generosity of these reimbursements;
(b) the extent to which physicians’ financial interests coincide with for-profit interests;
(c) the political environment.
Access to capital funding and reimbursement for services
We find that public reimbursement is an important driver behind the rise (or absence) of for-profit hospitals. We found it matters in three ways:
(i) Firstly, we identified that regulations that determine access to capital subsidies and return on investments is a key element behind for-profit growth. The US offers a good example to illustrate this point. From the inception of Medicare in 1965 until about 1990, Medicare gave for-profits a clear competitive advantage in the form of more generous capital payments. Only after rising costs and a surge of for-profit hospitals, was the playing field formally levelled.
(ii) Secondly, an important determinant is whether for-profits are allowed to bill public programs for the care they deliver. This is the main reason why for-profit hospitals in the Netherlands never took off, as hospitals were banned from distributing profits to investors.
(iii) Lastly, the effects of systemwide cost-control policies influences the growth of for-profit hospitals. In the UK, this has been a driver for the growth of for-profit hospitals. Since the founding of the NHS, the service has faced serious shortages of capital funds. Inadequate public sector funding created an opening for private providers to attract modest funding from investors and to establish a parallel sector for those willing and able to pay.
Physicians’ financial interests
Around the late 19th century, physicians began to open their own private (for-profit) practice to secure their financial interest. After World War II, such interests became less important. Over recent years, small-scale physician-owned practices turned into larger for-profit companies. As a result, physicians were losing leverage over hospital management boards. In Germany, the wages of physicians in the for-profit sector are now lower than those in other sectors. In the US, the number of physician-owned hospitals is in decline – more physicians become employees of either private equity-owned or publicly-listed hospitals.
Political environment
Our study shows that the political environment is less important than anticipated. The for-profit sector in the US, UK and Germany has grown steadily since the 80s, despite fluctuations in the political leaning of the ruling party (see Figure 1). Actually, in some cases a left-leaning government facilitated the growth of for-profit hospitals. For example, in the US, a democratic administration implemented Medicare and Medicaid as part of a broad expansion of social programs and offered public subsidies to for-profit hospitals to gain broader support. These generous public subsidises facilitated the growth of the for-profit sector.
Instead, policies inspired by neoliberalism and New Public Management (NPM), including competition, privatisation and decentralisation, have been quite influential, but this has had mixed effects on the growth of for-profit hospitals. The NPM vogue benefited the for-profit sector in Germany and the UK. For example, the fall of communism in Germany spurred the privatisation of public hospitals in the East, which continued for more than 20 years. By contrast, in the US, the market-based policies, such as the Diagnostic Related-groups (i.e. DRGs, a payment system based on the diagnosis of the patient using bundled costs of the respective treatment with the aim to enhance efficiency), have proven less favourable to for-profit hospitals. The DRG system also made central cuts to payment rates, reducing the margins of for-profit providers. Furthermore, despite the NPM-inspired 2006 market-based reform in the Netherlands, for-profit hospitals have not advanced significantly due to political vacillation and, later, political opposition.
Conclusions
The main policy implication that we derive from our country comparison is that public reimbursement plans are critical determinants of the growth of the for-profit hospital sector. Policymakers seeking to influence the composition of the hospital market should focus on the design of payment plans, particularly the details of capital funding and reimbursement. Intervening to reduce the capital costs for one ownership form relative to others may induce long-run changes in the composition of the hospital sector. Our findings thus call for closer examination of how capital reimbursement plans “steer” the business of health. And it is important to keep in mind that the for-profit hospital sector has proven to be quite resilient: once it has grown, it tends not to shrink.
The COVID-19 pandemic opens a policy window for the redesign of our healthcare systems. Policymakers should be mindful when reshaping healthcare systems that efficiency has not been the main driver of the rise of for-profit hospitals in the past, rather access to and generosity of public reimbursement schemes.
The views expressed in this post are those of the author and in no way reflect those of the Global Health Initiative blog or the London School of Economics and Political Science.
Photo: Lt. Cmdr. Camille White, a U.D. navy nurse, monitors a patients vitals prior to a surgical procedure. Credit: Navy Medicine. Licensed under creative commons (CC BY-NC-ND 2.0).
