Cheering the bears on Wall Street

From time to time, I have written about problems being created by an ineffective market-driven approach to health care. Market forces and competition do not produce the expected "good-quality services at a reasonable price" where health care is concerned. Simply put, unique characteristics of health-care services and the health-care system prevent market forces from having the desired effect. In most markets the same person decides whether to purchase a product or service, pays for it and derives a benefit from it. When someone other than the consumer chooses to buy the service and pays for it, market distortions result. This, of course, is exactly what happens with the country's third-party-payer health-care system.

The system that has evolved

Another obstacle to an efficient, competitive health-care market relates to the benefits derived from health-care services. In markets that work according to theory, all benefits of providing a service are reflected in a company's revenues. But the societal benefits of good healthcare go far beyond monetary profits resulting from the delivery of services. If the health care system relies strictly upon the market to determine availability of services, the inevitable result will be limited availability based only on profits without regard to the societal benefits of health-care. This is precisely the system that has evolved.

Further compounding the problems created in health care by an "imperfect" market is the influx of outside investment into the health-care system over the last decade. This includes venture capital used to start many health-care businesses operating today and stock-related investments in publicly held health-care corporations.

Consider the traditional nonprofit community hospital. That institution was expected to provide benefits to the community above and beyond the revenues the facility accrued. In fact, while "nonprofit" corporate status should not be confused with the hospital's ability to turn a profit (nonprofit corporate status only limits what can be done with the hospital's profits), these hospitals frequently did lose money. The benefit of contributing to the health and well-being of the community was more likely the measure of the hospital's success than whether it had a balanced budget. Even community-based, for-profit hospitals had to be concerned about more than the financial bottom line. Since the leadership of those facilities usually lived in and interacted with the community served by the hospital, there was some accountability for providing adequate access to quality services.

This situation has been dramatically altered by the development of investor-owned, for-profit health-care companies providing services in multiple communities, states and regions of the country. The result is that "owners" of the company may reside in California, for example, while services are being delivered to patients in the District of Columbia. Revenues and profits become a more important measure of the company's success than the quality of care or degree of satisfaction by patients living 3,000 miles away. In fact, influential investors who are unhappy if profits are insufficient and stock prices too low often have the power to make significant management changes in an effort to reverse the company's fortune. The ultimate result, in case anyone has missed it, is that the people responsible for the day-to-day operation of health services are in reality accountable to stockholders and outside investors whose measure of success has little to do with overall quality of patient care.

Celebrating the bears in health care

What does it mean, then, that profits for the large health-care companies are dwindling, stock prices are slumping and investors are looking elsewhere besides health-care corporations? What does one infer from the Jan. 3 New York Times article "For managed care, free market shock"claiming that the number of health-care companies going public dropped last year to the lowest level in a decade? What is significant about the fact that the amount of capital that new health-care companies raised from the public in 1998 was only a quarter of the amount raised in 1995? There are those who see this turn of events as beginning to signify that investors can make money in health care in the short term, but not in the long term. These recent developments draw into question the basic assumption that health care under managed care, when left to free market forces, provides effective cost controls and maximum profits. Perhaps most importantly, these developments raise doubt that health care is a good investment to measure just in terms of dollars. Outside investors appear ready to leave health care behind and move on to other, more profitable industries.

Let me suggest keeping an eye on Wall Street in the coming months. But instead of cheering when stocks soar, let's celebrate the bears in health care.



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