Code Red: Two Economists Examine the U.S. Healthcare System

November 3, 2010

In Appreciation of a Living Legend

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 2:24 pm

Robert Sigmund recently celebrated his 90th birthday. For seven decades, Sigmund has been one of the most respected thought leaders in the healthcare field. So it was with great interest that I read “Robert Sigmund in First Person: An Oral History,” in which Sigmund looks back at watershed moments in the history of healthcare system – the formation of the Blues during the Depression and the 1940s, the rapid growth of managed care in the 1970s, and his unsuccessful efforts in the 1980s to clarify the hospital’s role in the healthcare community.

There is a common thread in these reminiscences: hospitals, either individually or through the Blue Cross plans that they founded, were conceived of as nonprofit organizations that would enjoy tax benefits and the public trust. In exchange, they would provide community benefits that were antithetical to pure profit maximization. Hospitals lived up to these obligations for several decades, and while there was much to be desired in terms of cost containment and quality assurance, they at least gave us a viable social safety net. Today that safety net is torn and tattered.

Despite the efforts of Sigmund and others (including his close friend and one time mentor of mine, Walter McNerney), the Blues eventually divorced themselves from hospitals and many began operating as profit-seeking insurers to whom hospitals were the enemy. At the same time, hospitals formed corporations, many of which now actively pursue profits (even though they retain their nonprofits status and tax exemptions. Today’s hospitals view community benefits as something to be redefined to meet their own needs, rather than the community’s needs.

The acquisition of the religious, nonprofit Caritas Health System by the Cerberus private equity group once again reminds me how far removed we are from Sigmund’s vision. Cerberus is a turnaround group – they will either make Caritas a profitable enterprise or shut it down (if they can’t unload it on another unsuspecting owner.) They just might succeed in the turnaround. The Boston market in which Caritas operates has some of the highest medical prices in the nation, likely due to the absence of competition among health systems. (Partners Health System dominates the market.) Caritas needs an infusion of capital, which Cerberus promises to provide. Provided that Caritas’ comeback doesn’t trigger intensive competition, Cerberus could enjoy a handsome return on its investment. But what of Caritas mission to serve the community? Cerberus is saying all the right things about preserving mission but who can measure mission, and who will say for sure that Cerberus hasn’t put profits first? I don’t think anyone will.

There is no turning back. Leaders from the past speak only through their memoirs; the market has passed them by. Healthcare managers, from recent MBA grads through the leaders of the biggest provider and insurer organizations, all believe that market forces can save the industry. On those rare instances when I have the bully pulpit, I don’t try to dissuade them (no one can) so much as push them to find ways to make markets work for everyone, not just investors. But I fear the market to the same extent as Bob Sigmund. The good old days weren’t all that good and market forces are working to improve efficiency and quality, even if there are many bumps along the way. What I do fear is a disconnect between public policy makers, who expect healthcare institutions to serve the public interest, and private sector decision makers, who more than ever before equate the public interest with their own private ambitions. As health reform moves forward, we can be sure that individuals far more clever (and ruthless) than I am will be looking under every stone for a way to capture rents without necessarily creating value.

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