Correspondence

Costs at For-Profit and Not-for-Profit Hospitals

N Engl J Med 1997; 337:1779-1780December 11, 1997

Article

To the Editor:

I am frankly amazed that people are still debating the merits of investor-owned and not-for-profit hospitals. I thought we had entered the age of enlightenment on this issue and accepted the fact that all hospitals, whether for-profit or nonprofit, have to make money to survive. Furthermore, both types of hospitals are paid by the government on the same basis. So what's the point of the recent article by Woolhandler and Himmelstein (March 13 issue),1 and furthermore, who cares?

Sure, if “administrative costs” could be reduced sufficiently, it probably would be enough to “fund” universal health coverage, assuming that this is our national policy. So would reducing defense spending, redesigning the Social Security system, and eliminating a couple of outdated Cabinet departments. The purpose of the study seems less to indict the “less efficient” administrative practices of the investor-owned sector than to build some artificial bridge to justify a program of universal coverage. How are these issues even related? Maybe nonprofit hospitals spend too much on clinical services. There is a point of diminishing returns, at which “more” does not equal “better” care, even in patient services, but instead equals inefficiency. Perhaps nonprofits have invested less in creating administrative systems for reducing lengths of stay, improving clinical outcomes, or reducing bad debts. Then again, maybe not. Who knows? The article certainly shed no light on any of these issues. The authors also produced no evidence that there are any differences in quality of care between the two sectors, which after all, is the real bottom line.

Charles R. Miller
Paracelsus Healthcare, Houston, TX 77067

1 References

1. 1

   Woolhandler S, Himmelstein DU. Costs of care and administration at for-profit and other hospitals in the United States. N Engl J Med 1997;336:769-774
   Full Text | Web of Science | Medline

To the Editor:

The method the authors chose for allocating mixed costs (building, equipment, and employee benefits) masks the possible effects of differences in this component (>20 percent of total costs) between for-profit and not-for-profit hospitals. Assume that the actual ratio of clinical costs to mixed costs is 90:10 for the for-profits and 80:20 for the not-for-profits; this would reduce the apparent administrative-cost gap by 4 percentage points. Perhaps some of the apparent difference between the populations is induced artifact, although mixed-cost allocation should not affect apparent differences in per-discharge and per-diem reimbursable costs.

Jack Epstein, M.D.
Flint Group, Ann Arbor, MI 48104

Author/Editor Response

The authors reply:

To the Editor: Mr. Miller suggests that for-profit hospitals' extra administration may streamline and improve care. Yet their total costs per admission were at least $625 higher, though they spent less for clinical staff — e.g., nurses. No research hints that their quality is better; precious little suggests that it is as good. Moreover, in Canada, which eschews profit-driven care, hospitals have leaner administration, lower costs, slower cost growth, more nurses, and equivalent outcomes.1-3

Administrators of for-profit hospitals amplify profits mostly by enhancing revenues, not efficiency. Contrary to Miller's assertions, Medicare payments are not fixed. Columbia/HCA hospitals game the system by “upcoding” diagnosis-related groups and transferring patients to Columbia-owned nursing and rehabilitation facilities and home care agencies, which collect a second Medicare payment.4 In our data, Columbia's average case-mix index was 15 percent higher than that of nonprofit hospitals — i.e., Columbia billed Medicare for costlier diagnosis-related groups despite a 10 percent shorter average stay.

Dr. Epstein posits an implausibly skewed allocation of mixed costs — employee benefits, capital, and maintenance. Such a skewed allocation implies that for-profit hospitals give far more generous benefits to clinical employees than to administrators and house and equip their administration shabbily. Finally, he miscalculates; his alternative assumptions would trim the administrative cost gap by 2, not 4, percentage points.

Steffie Woolhandler, M.D., M.P.H.
David U. Himmelstein, M.D.
Cambridge Hospital, Cambridge, MA 02139

4 References

1. 1

   Canadian health insurance: lessons for the United States. Washington, D.C.: General Accounting Office, 1991. (GAO/HRD-91-90.)
   

2. 2

   Himmelstein DU, Lewontin JP, Woolhandler S. Who administers? Who cares? Medical administrative and clinical employment in the United States and Canada. Am J Public Health 1996;86:172-178[Erratum, J Public Health 1996;86:790.]
   CrossRef | Web of Science | Medline

3. 3

   OECD health data 96: a software for the comparative analysis of 27 health systems. Paris: Organization for Economic Cooperation and Development, 1996.
   

4. 4

   Gottlieb M, Eichenwald K, Barbanel J. Biggest hospital operator attracts federal inquiries. New York Times. March 28, 1997:1.