Saturday, March 26, 2011

The Profit Motive in Health Care

In case there was any doubt, Gapenski and Pink's textbook Understanding Healthcare Financial Management spells out the decision drivers for profit and not-for-profit hospitals. They're specifically referring to capital budgeting, but the principles hold across the health care financial board:
Projects that will contribute to shareholder wealth should be undertaken, while those that will not should be ignored. However, what about not-for-profit businesses that do not have shareholder wealth maximization as a goal? In such businesses, the appropriate goal is providing quality, cost-effective service to the communities served. (A strong argument can be made that investor-owned firms in the health services industry should also have this goal.) In this situation, capital budgeting decisions must consider many factors besides a project's financial implications. For example, the needs of the medical staff and the good of the community must be taken into account. In some instances, these noneconomic factors will outweigh financial considerations. [Emphasis mine.]
What does this mean? Simply put, when it comes to the for-profit sector, health care is no different than any other business: Maximization of shareholder wealth trumps all other considerations, including the good of the community and medical staff needs. For not-for-profit health care institutions, conditions are the opposite: freed of the responsibility to shareholders, they may make decisions based on the needs of the community.

Champions of privatization contend that the very nature of the profit motive dictates that maximizing shareholder wealth and community good are congruent, and that decisions based on the former will lead inevitably to the latter. Skeptics point out that given a choice between the two, the community good will always come in second and therefore suffer. One might also ask that if decisions based on profit are inherently good, what exactly prevents decisions driven by community good from producing maximized profits?