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Press Releases About NEJM Study Comparing Costs in For-Profit and Nonprofit Hospitals

For-Profit Hospitals Costlier and Less Efficient

A special article in the March 13 New England Journal of Medicine finds that for-profit hospitals are costlier and less efficient than public or non-profit hospitals, and that hospital paperwork costs are rising.

Paperwork costs per general hospital stay averaged $2,289 at for-profits, versus $1,809 at non-profit and $1,432 at public hospitals, and all of these figures exclude hospital profits, which average $123 per patient day at Columbia/HCA’s hospitals.

The data, covering 6227 U.S. hospitals, were obtained from the U.S. Health Care Financing Administration through a Freedom of Information Act request.

“This study shows that administrative costs in for-profit hospitals are soaring. In 1990, the average for-profit spent 31.8% of its budget on administration. By 1994, that figure had jumped to 34%. In medicine, market pressures are breeding inefficiency,” said Dr. Steffie Woolhandler, co-author of the study and Associate Professor of Medicine at Harvard.

The study also found that administration costs rose from 24.8% of total hospital costs in 1990 to 26.0% in 1994 – $61.8 billion. In contrast, Canadian hospitals spend only 10.4% on paperwork. Administration consumed 34.0% of the budget at for-profit hospitals, 24.5% at non-profits, and 22.9% at public facilities. In psychiatric hospitals, the percentage spent on administrative costs was 33% higher in for-profits than in not-for-profits.

“Bureaucracy costs jumped sharply when non-profit and public hospitals were purchased by for-profits. If all U.S. hospitals became for-profit, hospital paperwork costs would rise by $14.8 billion annually,” noted Woolhandler.

Hospital administrative costs vary widely from state to state, ranging from a low of 20.4% of total hospital spending in North Dakota to 31.1% in Hawaii. Hospitals in seven states devote more than 29% of total spending to administration: Hawaii, 31.1%; Alaska, 30.8%; Florida, 30.3%; New Mexico, 29.6%; Tennessee, 29.5%; Arizona, 29.4%; and California, 29.2%. The study found that states with more HMOs and for-profit hospitals had higher administrative costs.

“Wall Street is buying up hospitals. It’s a myth that for-profit hospitals are efficient. They save money by laying off nurses, then hire consultants and bureaucrats to figure out how to avoid unprofitable patients and maximize revenues. For-profits increase costs, decrease care, and generate windfall profits like the $359.5 million pocketed by Rick Scott of Columbia/HCA. They’re fat and mean,” said Woolhandler.

Co-author Dr. David Himmelstein, an Associate Professor of Medicine at Harvard and former staff physician at Public Citizen Health Research Group commented: “Both Republicans and Democrats are pushing managed care and for-profit medicine. The results: windfall profits, a flood of paperwork, and more Americans uninsured or worried that their HMO won’t pay for expensive care. Non-profit national health insurance like Canada’s could save $157 billion each year on bureaucracy and profits, more than enough to cover the uninsured and to upgrade coverage for the rest of us.”

Dr. Sidney Wolfe, Director of the Public Citizen Health Research Group added: “This study exposes for-profit hospitals as being more expensive and less efficient. This means higher six- and seven-figure salaries for CEOs and other top administrators but less money for patient care. How much longer must it be before we terminate our failing experiment with market medicine?”

Drs. Woolhandler and Himmelstein are co-founders of Physicians for a National Health Program, a 7,000 member organization that advocates for Canadian-style national health insurance in the U.S. Previous studies by Drs. Woolhandler and Himmelstein have emphasized the rising costs of hospital administration. A study published last year in the American Journal of Public Health on the changes in health care employment between 1968 and 1993 found the number of administrative personnel had increased from 719,000 to 2,792,000, from 18.1% to 27.1% of the health care work force. Another, a nationwide analysis of hospital administration costs in 1990, published in the New England Journal of Medicine in 1993, found that administration consumed 24.8% of total hospital spending, more than twice the Canadian level.

This is the first national study of data concerning the way hospitals spend their money. Contrary to the myth of for-profit hospitals being more efficient and thereby being able to offer the same or better services for less, the total amount spent by these hospitals per admission and the amounts spent on administration are significantly more than spent by not-for-profit or government hospitals. On the other hand, the amount spent on patient care is significantly less in for-profit hospitals than in not-for profit hospitals. The only way for-profit hospitals are efficient, according to these data, is in efficiently extracting money away from patient care and spending it for often-bloated administrative salaries and, according to data from the Congress’ PROPAC, skimming off further amounts of money in the form of profits.

The ratio of clinical personnel expenditures (per hospital stay) to the sum of administrative costs and profit in not-for-profit hospitals is $3296/$2176 or 1.51. For hospitals which operate for-profit, the comparable figures are $2954/$3287 or 0.90. (profits, as a fraction of hospital costs were 12.3% in for profit hospitals vs 4.9% in not-for-profit hospitals in 1994. (June, 1996 PROPAC Report to Congress, table 3-15))

In other words, Whereas not-for-profit hospitals spend 1.51 times as much on clinical personnel who take care of patients than on administration and profit combined, for-profit hospitals actually use more money to pay administrators and for profits than they do for patient care.

Previously documented evidence that patient care suffers in for-profit hospitals includes:

Studies based on HCFA patient dumping law violations showing that the rate of illegal dumping of medically-unstable patients from emergency rooms is significantly more common in for-profit hospitals than in not-for-profit ones.

Studies demonstrating that extremely important medical services such as burn treatment, spinal cord injury treatment, AIDs treatment, and neonatal intensive care are less likely to be provided in for-profit hospitals than in not-for-profit hospitals. The most important reason is that these community services generate little net revenue and are often operated at a loss.

Studies showing that the amount of charity care-for those who are uninsured and unable to pay themselves is less in for-profit hospitals than in not-for profit hospitals.