Do Profits Drive Innovation and Cost-Savings in Health Care?

We hear a lot about how people want choice and giving them those choices will drive competition.

“Competition” is really code for the profit motive, and free-market believers want to convince us that greater competition between for-profit companies will improve our health care system. The facts just don’t bear that blind faith out. The reality is that while profit and competition are not the root of all evil, they are also not the solution to every problem.

In 1992, the Cato institute, a conservative think tank and free-market devotee, made the following claim [1]:

“One reason why our health care system has evolved to its current condition is a series of legislative steps in the post World War II period designed to remove the profit motive from virtually every aspect of medicine. Doctors are trained in nonprofit medical schools. Until recently most hospitals were nonprofit, and the health insurance industry was dominated by nonprofit entities (mainly Blue Cross/Blue Shield) as well… In those areas in which the profit motive is still the major driving force (for example, the manufacturer of medical equipment and pharmaceuticals) innovation and change are rampant. But in the area of solving patient problems, cost-reducing innovations have been few and far between.” [Emphasis added.]

So what has happened? The health insurance care industry is now mostly for-profit [2] and health care costs have never been higher [3].

In fact, the very industries that Cato lauded for their profit-driven innovation have been found to be driving health care costs in the United States through the proverbial roof. According to a new report from the Center for Studying Health System Change (HSC) titled “High and Rising Health Care Costs: Demystifying Health Care Spending [4],” the cause of long-term health care inflation is advancing medical technologies.

Maggie Mahar of the Century Foundation explains the results [5] in this way:

“Paul Ginsburg, the report’s author, bases his study on an in-depth review of an ‘extensive literature that examines which drivers are most important in explaining increases in health spending over time.’ The conclusions ‘have been very consistent,’ he observes. ‘Technological change (which in the world of medicine includes innovations in equipment, devices, drugs, tests, and surgical procedures) is the most important factor.’

“But one thinks of ongoing technological advances as one of the great virtues of U.S. healthcare: how can we regret the high cost of that technology?

“The answer: some of the treatments are valuable, some are not. As Ginsburg notes, ‘Advancing technology may have a particularly large impact on spending in the United States because of few requirements that effectiveness be demonstrated before technologies are used broadly.’

“Moreover, much of our technology is overpriced. The U.S. pays significantly more than other nations for precisely the same products and services. Finally, and most importantly, we often use the technology on a broad swathe of patients when only a few, who fit a very specific profile, actually benefit from it.

“But the technology itself is not the only problem; low productivity also contributes mightily to runaway health care inflation. In other industries, technology has boosted productivity. Not so in healthcare, Ginsburg explains, in large part because ‘healthcare delivers these new technologies relatively inefficiently.’ For example, the report notes that ‘too many small facilities’ that invest in bleeding edge technologies run ‘well below capacity.’

“The problem is this: rather than collaborating to share new technology, hospitals and outpatient centers all invest in the same equipment as they vie for well-insured patients. As a result, ‘costs in outpatient settings are higher’ than they need be, and higher than in many hospitals ‘because of subscale operation of facilities.’ Ginsburg explains: “In contrast to a hospital where CT equipment is being used for 20–30 scans per day, freestanding outpatient facilities,’ which charge ‘very high prices’ and enjoy ‘lower overhead’ can ‘earn a profit at 4–8 scans per day.’” [Emphasis added.]

In other words, competition and the profit-motive are driving the United States healthcare system into the poor house!

Even, Mark V. Pauly, Ph.D. [6], a proponent of free-market competition in health care, admitted there are limits to what competition can accomplish at the FTC/DOJ Hearings on Health Care Competition Law and Policy. He said “competition alone can never [7] get all or even most of the uninsured insured; stop the real growth in medical care spending; lead to optimal rates of product innovation; or maximize quality or minimize errors.”

Watch this film [8], which makes a compelling case that profits do more harm than good to our health care system at all levels.

It’s time we looked in a new direction for the solution to these thorny problems! What we need is:

Learn More [9]