Profit in Health Care

At the root of the debate over ObamaCare is the Marxist notion that all profit is waste, and if we can just take profit out of health care, we can reduce costs and improve services.

          -- Congressman Tom McClintock R-CA
              (4th District) April 26, 2013

Over the last several decades I've become accustomed to the dismissal of wacko notions from California as emanating from the "fruit and nut crowd."  I've also become keenly aware that there are nuts on both the left and the right.

I don't know much about Congressman McClintock, so I won't characterize him as a right-wing nut job, especially since some of my best friends might describe me using that term.  But if he thinks what this quotation suggests he thinks about profit in health care, he really is a nut.

I am inclined toward the decidedly non-Marxist idea that the profit motive drives efficiency and innovation and a strong inclination for a business to find out what the customer needs or wants and give it to him at the lowest possible price, assuming sufficient competition.  In the case of Apple, led by the visionary Steve Jobs, it even drove the company to figure out what the customer wanted but didn't yet realize he wanted.

But after three decades practicing medicine, I am convinced that the profit motive in health care yields many behaviors that are counterproductive.

It is sometimes difficult to tell whether profit-driven behavior is real or merely suspected by the cynical. Would a gastroenterologist really recommend a procedure for which he gets paid well by a patient's insurance when the patient could clearly do just as well without it?

That has been the assumption underlying some of the decisions made by governmental policymakers. They have, for example, tried since the Carter Administration to limit the supply of doctors, based on the belief that in health care supply generates demand - instead of the way it works in other parts of the economy, in which abundant supply relative to demand drives down prices.  Only much more recently have they realized that this muddle-headed approach has created a shortage of doctors, with dire consequences.

From that same perspective the feds created the sustainable growth rate formula, in which increases in the volume of services provided to patients by doctors are compensated for by lowering what doctors get paid by Medicare for providing those services if certain targets are exceeded.  This assumes that doctors have complete control over how much they do for patients.  For doctors in my specialty, emergency medicine, who have absolutely no control over how many patients we see or how much care they require, and who are generally driven to practice as efficiently as possible so we can take care of everyone who comes to see us, this is singularly ridiculous.

But there is no question that the profit motive does distort behavior in certain sectors of the industry.  In an earlier essay I wrote about the "60 Minutes" exposé on a hospital chain that pressured doctors to admit more patients to the hospital to increase revenues.
No, not to admit patients who clearly didn't need to be hospitalized, because then Medicare wouldn't pay.  But please do admit every patient for whom it can be justified, even if the doctor thinks outpatient treatment might work just as well.

The best example of the potential for the profit motive to promote undesirable behavior, quite fully realized, is in the pharmaceutical industry.

Drug Company Revenues

Just watch some TV commercials. Do you think you're seeing all those ads for agents used to treat erectile dysfunction because we have an epidemic of women whose men cannot meet their needs?  Hardly. (Yes, pun intended.)  No, it's because of the swollen profits on these drugs.  (OK, I'll stop.)  And why are there so many different drugs in each class used to treat (and over-treat) common conditions like high cholesterol and indigestion?  These are called "me-too" drugs.  Imagine yourself running a drug company.  Do you spend a little money to develop a new drug in a class that has already shown great profitability for the ones already on the market, and then a bigger chunk of money to get your share of that market, and reap big profits?  Or do you spend a lot more money to develop an entirely new drug for a disease that cannot currently be treated very effectively, not knowing whether there will be significant profit realized if you get FDA approval?

Is the money that is going to pay stockholder dividends - which is all profit - "wasted," in that it it is not reinvested in the business and therefore cannot benefit the customer - meaning the patients? Well, we could argue about that.  I'd rather see the money reinvested in new plant and equipment or research and development, but it is harder to attract money from investors if they realize gains on their investments only through rising stock prices and never through payout of dividends.

But if you're talking about hospitals that are classified as non-profit, that means they have no stockholders, and all of their "excess revenues" (can't call them profits, by definition) have to be reinvested to make things better for patients. Except for what they pay their executives.  We can't forget about that.  Because no one is telling them - yet - that they cannot pay their executives multi-million dollar salaries.  But that's going off on a tangent, and I'll save that for another essay.

What about health insurance companies?  Do you want them to spend all of their money on health care for the folks who are insured?  You know they have business expenses, but shouldn't they have to tell us what fraction of the premium dollar goes to administrative costs and how much of it gets spent on health care?  You'd rather they didn't pay their executives huge salaries and bonuses.  Whatever it takes to get the talent, sure, but be reasonable.  And payouts to stockholders? Well, that won't be an issue for a nonprofit.  So it only stands to reason that you'll be getting more for your premium dollar if you go with a nonprofit health insurer.

Now you can see that what Congressman McClintock describes as the "Marxist notion that all profit is waste" is, in the broadest economic terms, surely nonsense, exactly as McClintock says it is.

But in the health care industry, the profit motive drives some very undesirable economic behavior, and really does divert money from being used efficiently to finance health care and to drive innovation in the most useful directions.