Why healthcare is a boon for private equity

The New York Times recently did an expose on hospital overbilling by a group of cardiologists at some hospitals owned by the Hospital Corporation of America (HCA). Immediately after a few days, a rather gloating article about how HCA had become the poster boy of Wall Street with its double digit growth strategy appeared. If the first story had not raised enough doubt about the prudence of the profit motive in healthcare, the second story rammed the point right into place.

Back in the 1950s Kenneth Arrow (a side note: the Nobel winning economist is Larry Summers’ uncle if that’s of any interest) published a paper in the American Economic Review about how healthcare is unlike any other commodity that is freely tradable at the markets. The core of his argument was: that healthcare unlike regular commodities follows a warped logic that does not bow at the altar of demand and supply economics.

Here’s why: first, there is no real linkage between demand and supply with healthcare. In ordinary market economics, demand and supply tend to have an inverse relationship  with each other. Not so with health care; since nobody can really predict the need for a certain health service. And when you do need it, there isn’t really the time to shop around. So the demand and supply can’t really be moderated based on each other.

Second, and equally important, is the fact that there is a huge information asymmetry between the provider and the consumer of the service. As a result, the not only is the consumer not able to shop around for healthcare when he needs it, he has no idea about making an estimate about the quality of the same. Think about haggling around for a cardiac cath when  you have a heart attack. Or for that matter, think about trying to second guess your doctor when she says you need a certain procedure. That puts the doctor at a rather unusual predicament for a service provider; he is not only the provider but also oftentimes the person who determines when there is a need for a certain service. In an idealized situation, the doctor is expected to not only provide services to his consumers, but also be a vanguard the interests of his patients and the society at large.

When doctors are able to fulfill that obligation as the custodians of the well being of their patients and communities, that’s where they derive their reverence. When doctors choose to forgo that obligation, like the Florida cardiologists, it is too easy to make a quick profit. The price that you pay for earning that quick buck however depends upon how much of importance you place upon your moral obligations and failings. Physicians have ordinarily been expected to subscribe to their own ethical tenet. When they fail to do so, they can do undue harm to our communities by virtue of the trust that has been laid on them. The lure of money can be a powerful force to cause a breach of such trust.

And that has already been happening at an alarming pace. HCA is a very relevant case in point. Fueled by their own greed and the pressure from their administrators to upcode on their services as well as provide services that were not really required, these doctors sold themselves for a quick buck.

Like the Times story points out, it’s for a reason why the for profit healthcare industry has become the new darling of the private equity industry. At a time when demand for goods and services is sagging almost everywhere, healthcare continues to be a major exception. And when the provider himself can be the arbiter of demand, that is too fertile a ground for private equity firm to not try to stick its feet in.

One may argue, so what is wrong with making money if they provide better services, bring in efficiency and add value to the system. Here’s why that argument is faulty. First, the Florida story is a firm rebuttal to the fact that for profit hospitals provide efficient services. They just provide services that makes them more money irrespective of the need. That loses money for everyone in the longer run. Second the belief that such hospitals create value is faulty as well. Paul Levy has a really interesting blog post on his Not Running a Hospital blog, about how private equity firms dress up results for the short term for the consumption of wall street, fatten up the stock and make their quick exit, while holding such institutions hostage to maverick financial instruments in the longer run. There is a reason why the term “vulture-capitalism” sticks. Dive in, make a quick buck and make an equally quick exit.

A third argument is made about how private entities bring in investment that no non profit institution would have been able to manage on their own. That argument too has no merit when you consider the fact that, as Levy mentions,  no for profit hospital will have access to cheap capital the way a non profit will have given the need to pay taxes, the lack of access to charitable donation  and the constant need to placate the demigods of the markets.

As long as healthcare continues to be a societal good hinged on our belief that it should be a right for all irrespective of the ability to pay, health care services will not be tradable like every other good or service. When it’s defined as a societal good, healthcare is too easy a target to profit from; and making a quick buck out of it is not a terribly difficult thing to do; unfortunately such profiteering tends to be antithetical to larger societal interests. Either the profits or the common good. Unless we recognize that fact,our confusion with whether the market is the best vehicle for delivery of healthcare will continue to throw up buccaneers like these that try to make a quick buck at the expense of everyone else.

Kiran Raj Pandey is an internal medicine resident who blogs at page59.

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  • http://twitter.com/shihjay2 Michael Chen

    Kiran,
    Very excellent points made in your post. However, I fear that the discourse and discussion about health care delivery and the economics behind it are, right now, far from what you idealize. Unfortunately, there is not a consensus that health care is a right (which all further discussions are moot unless everyone recognizes this principle). There is a continued misperception that there is money to be made in health care (but may be fueled by medical technological advances and the perception that physicians make a lot of money and so are able to “afford” these advances); being a primary care physician like me, I think that perception needs to be shattered. Our profession is increasing being defined by economic terms (productivity being one definition) and it is incongruent with the concept of providing a valuable service to our patients. Our labels of patients being our “clients” further erodes the fundamental relationship between physicians and patients and our relationship is constantly being severed by intrusion by third party payors and ill-conceived governmental mandates that favor those who have the financial means necessary to steer health care policy and leaving behind the physicians who are trying provide meaningful and effective healthcare at their own expense.

  • rswmd

    Yawn.

    Doctors do too many procedures because they’re paid very, very, very well to do too many procedures. The solution is obvious, but no one’s interested in that.

  • buzzkillersmith

    Short version: Greedy docs and hospitals really like money. Business types really like money. We kinda already knew this.

    • http://onhealthtech.blogspot.com Margalit Gur-Arie

      Yes, but the question is where do we want to place the decision making piece of health care. Should it be entrusted to a few Wall Street driven large entities, or should it be dispersed amongst a million individuals, who may like money, but may have other drivers as well, and in case of moral failure, each has very limited effect on the system overall?
      [..and yes, I know patients should be the ultimate decision makers, and all that...]

      • southerndoc1

        Wouldn’t reducing what we pay for these procedures, including the outrageous facility fees that the docs never see and more appropriate professional fees (in the case of Medicare, overhead minus ten percent, like they pay for E&M codes!) make VCs much less interested in health care? They’re certainly not going to want to put money into family docs. As always, it comes back to the screwed up RVUs.

  • Docbart

    Very well written. The fact that doctors sometimes are influenced more by dollars than by the interest of their patients reflects the fact that they are products of our society. Money is how you keep score, after all, and whoever has the most toys when they die is the winner in our culture. That attitude is well-inculcated into people before they get to medical school and get brief exposure to teaching of ethics and professionalism. Med schools may be able to find some applicants who are not mercenaries, but I don’t know how many and I don’t know if they can present the polished appearance and c.v. that their less altruistic classmates seem to do.

  • http://twitter.com/CrushTheLeft Rules4FreeRadicals

    Health care is a boon to corrupt crony capitalist insiders who are going to make vast billions exploiting the totalitarian federal laws that expropriated one-seventh of the US economy.
    Doctors and patients? Not so great.

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