Maybe For-Profit Hospitals Aren’t So Bad

Originally published on the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics Bill of Health blog.

For-profit hospitals have taken their fair share of flack over the years. Much maligned by many in the medical community, they are seen as money-hungry corporate machines that pervert the medical profession by putting the bottom line before patient care. This skepticism of profit-driven hospitals feels right. Medicine has long been the purview of charitable organizations and religious institutions. It’s supposed to be a calling — a public service to which practitioners are drawn — not a check to cash at the bank.

As for-profit hospitals proliferated, there was research done suggesting they had quality and cost issues stemming from their profit motives. For-profit hospitals had higher mortality rates, employed fewer trained professionals per bed, and were more expensive than their non-profit and government counterparts. Researchers speculated that this was the result of duties owned to shareholders by corporate leaders or compensation incentives for executives based on profitability rather than quality of care. These studies seemed to confirm what many thought they already knew: medicine and money don’t mix well.

More recent studies, however, suggest that for-profit hospitals may have turned over a new leaf. Since 2010, for-profit hospitals have out-performed non-profits in the “Top Performer” evaluation carried out by The Joint Commission — an organization that accredits hospitals in the US — with a higher percentage of for-profit hospitals qualifying for the honor than non-profits. A study published in JAMA from the Harvard T.H. Chan School of Public Health found that hospitals that converted from non-profit to for-profit improved their financial position by increasing their total margins and experienced no change in mortality rates.

The same researchers from Harvard reported a preliminary analysis comparing non-profit and for-profit hospitals in 2012, showing that — across a number of metrics associated with quality — for-profit hospitals were comparable to non-profit ones. Interestingly, the analysis also showed that the most dangerous hospitals for patients by far were government hospitals, which underperformed in almost every quality metric when compared with both non-profit and for-profit private medical facilities. The basic takeaway from the analysis was that there is variation in quality from hospital to hospital, but that variation it is not correlated with for-profit status.

Given the strides for-profit hospitals have made, why does the perception persist that they crank out profit at the expense of patient care?

Perhaps this negative perception endures because some continue to critique for-profit hospitals by focusing on the ways in which the predominantly private health care system in the United States lags behind government-run programs in other developed countries. It’s well established that the United States has higher costs and poorer outcomes compared to its peer nations. The U.S. spends far more of its gross domestic product on health care than any other industrialized country, and is 37th in the World Health Organization’s health system ranking. The U.S. strategy of having competing insurers individually negotiate with hospitals — which are gaining market power as they consolidate — simply doesn’t make economic sense. But while the health care system in the United States has some substantial issues, that’s an indictment of the private system as a whole — not of the for-profit hospitals within that system. Conflating criticism of a non-governmental health care system with that of for-profit hospitals within it is unfair to those hospitals which — at least as of late — have been performing just as well as their non-profit counterparts, but this confusion may explain why many still harbor negative feelings towards for-profit medical facilities.

Another reason for the continued skepticism of for-profit hospitals may be connected to concern over fiduciary duties owed by directors and officers to shareholders. As previously mentioned, some critiques of for-profit hospitals have posited that the fiduciary duty of care could force directors and executives to maximize profits at patients’ expense. This critique, however, doesn’t accurately reflect the obligations imposed on corporate directors and officers by the duty of care. When evaluating whether corporate management has satisfied the duty of care, courts have turned to a surprisingly deferential standard known as the business judgment rule. See, e.g.Kamin v. American Express Co., 383 N.Y.S.2d 807 (Sup. Ct. 1976). If a decision satisfies the requirements of the business judgment rule, courts will generally defer and not second-guess directors. According to the American Bar Association, a decision is a business judgment when it is made by disinterested directors who have been reasonably informed, and who are acting in good faith to advance the corporation’s interest. See Am. Bar Ass’n, Corporate Director’s Guidebook (2d ed. 1994). In other words, provided the board isn’t conflicted, uninformed, or acting in bad faith, the decision will be upheld even if it ends up having detrimental impacts on the corporation or its shareholders. Thus, it’s highly unlikely that shareholders could successfully use the duty of care to prevent measures designed to put patients over short-term profits.

This is by no means a comprehensive account or analysis of the criticisms of for-profit hospitals. It is simply meant to point out that some common concerns may not be entirely fair or accurate. To be sure, the jury is still out on for-profit hospitals. They have made impressive strides over the past few years, but still have a history tainted by poor quality of care and — at times — outright fraud. The intuition against them is appealing — I can sympathize with the discomfort some feel towards injecting profit motives into an area traditionally conceived of as a public service. But we should not let our biases impact our assessment of these institutions. If for-profit hospitals are delivering better or less expensive care than non-profit ones, they should get credit for that. At the end of the day, quality and cost of patient care should be the priority — wherever it’s given.