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John Livingston

Are Today’s Hospitals Big Business or Quality Healthcare?

Over twenty years ago I first was introduced to the concepts of “asymmetry, agency, and scale” while visiting my son’s finance class during parents’ weekend at Gonzaga. The teacher of the class, Mr. Kent Hickman was one of the authors of the textbook FOUNDATIONS OF CORPORATE FINANCE that is used even today at many colleges and universities across the world in first- and second-year college finance classes. Not all transactions are necessarily financial but all transactions by their nature are “transactional”.

Three days ago, I visited Kevin Miller’s radio station at KIDO 580 AM for an online Christmas party that included twelve frequent callers. During the show, a very irate caller called in and asked me questions about claims of better outcomes, better access and better prices at our local physician owned hospital compared to the big “non-profit” hospital systems who are leveraging their size and political clout to procure increasing amounts of transfer payments that now account for almost 60% of their total revenue. I hope I answered his questions and if I didn’t, I hope he avails himself of the resources that I recommended to him over the air. But the real “pickle” for him in my opinion was when I said the difference between the two types of hospitals was in the first case the administrators were working for the doctors who were working for their patients, and in the second case the doctors were working for the administrators and patients had no clue who was calling the shots.

The issue of “agency” who is working for who was obvious in the first case. In the second case the agency issue was at the heart of what happened in the political pandemic. Doctors were acting under rules promulgated by administrators who had been given clinical guidelines by bureaucratic government administrators in State and Federal agencies Department of Health and Welfare and the Health Districts (DHW), Center for Medicare and Medicaid Services (CMS), Center for Disease Control (CDC) and the Federal Department of Health and Human Services (DHHS). If clinical guidelines weren’t followed, opportunities for increased transfer payments and revenues to providers would be jeopardized. It wasn’t your doctor that was always calling the shots, it was your doctor following clinical guidelines and following protocols promulgated by people who had probably never taken care of a patient in their lives. Your own family doctor, a specialist in an ICU in a hospital, or a nurse at the bedside had very little leeway when attending to Covid patients.

Let’s briefly discuss the philosophical and not the clinical issues. Agency simply asks the question—who represents my interests. Management (hospital administrators for example) act as agents in the interests of principles (boards of directors) who are cognizant of the organizations obligations to their community and customers (patients). Not unique to hospital organizations, managers have cross concerns like legal liability, and having responsibilities to organizations like pharmacy benefit managers that may charge patients increased prices for drugs with the increased margins being sent back to the hospital itself. Acting on behalf of the hospital the manager-hospital administrator may act in the hospital’s best interest and be tempted to maximize profit. From the position of the patient, he may be increasing patient costs. As a hospital becomes more integrated—vertically it may even run its own insurance company, or horizontally it may buy up other hospitals thus eliminating competition, the organization benefits financially and patients pay the costs.

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Let’s take the issue down to the doctor-patient relationship that suffered severely during the pandemic. Medicine like engineering is an empiric undertaking. Doctors learn basic science in medical school, but they learn how to be doctors doing apprenticeships in internship and residencies. Today young doctors receive little education in medical ethics or medical economics. That may be the reason their addressing these problems is so difficult today. Doctors and hospital systems (mostly those founded by religious orders) have always tried to separate their own motives and prejudices from what is best for the patient. But the legal, regulatory and economics are increasingly putting providers skin in the wrong game. Providers—doctors and hospitals are becoming more conflicted regarding their agency issues to the patient and their families.

In the clinical as well as the financial transaction between doctor and patient the doctor always has more information than the patient and this puts the patient at an obvious disadvantage—asymmetry. Say for example a doctor’s reimbursements and reputation are based on five-year outcomes of their patients. Would that doctor be more likely to take care of a sick patient with a higher likelihood of a bad outcome and decreased future reimbursements? Most doctors go into medicine to take care of sick patients. Clinical risk and financial risk become intertwined. Patients and their families have no idea. Would a cancer doctor or surgeon rather take care of a young patient with an easy cancer to remove or a higher risk patient with comorbidities? Is the doctor’s fidelity to the wellbeing of his patient or to a future revenue stream? The doctor is placed in the position of shifting uncertainty (risk) away from himself and onto the patient—an issue of agency with the patient and family members having little understanding of the terms of the transaction—an issue of asymmetry of information.

Another problem arises when assessing metrics when used in the clinical setting. For example, radical surgery may provide longer survival over a twenty-year period than radiation or chemotherapy (usually combination therapies are most efficacious) but in the short run (5yrs) survivals may be better for the latter forms of therapy. The physician is thus pushed by his employer or an insurance company to transfer risks from themselves to the patients and from the present to the future. Also using whole populations to assess risks for individual patients is a misuse of “scale”. The fallacy of proportion is as true today as it was in Plato’s time.

By not identifying the at-risk patients—75% of Covid deaths occurred in patients over the age of 70 years and 90% of deaths occurred in patients over 50 years, and 90% of the rest of deaths occurred in patients with at least 2 comorbid conditions (diabetes and obesity being the most common). The risk to the overall population was much less than the risk of a defined group of patients. By making the big mistake of misapplying risk, we may also have delayed the time to develop herd immunity and thus put more patients at risk over time. We substituted a short-term risk and arguably created a bigger long-term risk. Think of a bell-shaped curve. By addressing the short-term risk on the left-hand tail of the curve, we may have increased the long-term risk on the right-hand tail of the curve—in fact, many have made that argument.

By not letting doctors advise patients and tailor treatment and mitigation strategies to individual patients, and not letting patients have a say and choice in how they would be treated created issues of asymmetry and agency that patients and families are just now beginning to understand, and that many in the public health, and hospital community fail to admit.

The centralization and socialization of medicine, the incentives created by Obama Care to deemphasize the care of sick patients by creating economic incentives to not take care of sick patients, and the loss of agency of doctors acting on behalf of their patients instead acting on behalf of institutional economic interests needs to be studied on a structural level, so the same mistakes and public policies won’t happen in the future. I would recommend that our Idaho legislature pass legislation forming a committee to assess Idaho’s Covid response. I believe we could and should do better in the future. I hope the Governor won’t veto such a commission. If he does, he would do so putting his interests ahead of WE THE PEOPLE—another example of “Agency”.

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3 replies on “Are Today’s Hospitals Big Business or Quality Healthcare?”

There are two questions that always need to be answered in transactions such as you have described:

1. Cui bono?

2. Quis custodes ipsos custodient?

The should be the focus into any inquiry

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