Sunday, January 1, 2017

For-Profit Healthcare & Debt: A Bad Combination

"A hospital bed is a taxi standing still with the meter running."

--Groucho Marx

Since when did the term "free" come to be associated with "affordability"? It happened formally when Romney tried to link the term "affordability" with "free-loader."

Years ago when Tenant, Columbia, HCA and others were building out their networks, they purchased hundreds of local community hospitals, which were viewed as undervalued assets. These large health conglomerates issued bonds to finance their acquisitions, and the first post-acquisition step would be to sell the land the community hospital was on to one of their REITs. The community hospital then would begin paying rent to the REIT, and that in turn ultimately financed the acquisition. Community hospitals were effectively refinanced and mortgaged, instead of being free and clear of debt burden. No longer did the community hospital operate as an entity standing on fully paid for/self-owned land. This, in turn, introduced unit-based pricing for each hospital bed (which was also alligned with Medicare Part A & B reimbursement rates). Historically, before the massive re-consolidation by Wall Street's Financialization push, Community Hospitals paid no rent and were not for-profit, generally. Why is this (and De-Mutualization) important?

It turns out the biggest beneficiaries of Medicare are Tenant, HCA, private hospital owners, physician groups, et al. How can it be--with vacancy rates so high in hospitals--that healthcare costs also remain extremely high? It seems that the rules of supply and demand do not work when it comes to hospitals. What's behind that?

Consider 'capacity utilization.' Without debt, excess capacity poses no problem. Indeed, it is only with the addition of debt that capacity is commoditized. Consider a local fire department. Paid staff resides at stations 100% of the time, regardless of emergency conditions. 100% state of readiness. Payroll and basic operating expenses are ongoing, as a relatively minor percentage of total tax revenues collected. Now imagine if local tax revenues diminished and the fire station had to pay a mortgage: it would then be forced to convert it's unused (excess) capacity to a cost, and in turn focus on raising revenues to support its excess capacity, in addition to these other basic costs. This is exactly the case with hospitals (and many other large U.S. businesses). Also, consider the corollary to "excess capacity," which is under utilization. Basically, there are costs whether or not the system is accessed. In a wartime scenario a field hospital at times is fully utilized. Other times, it's dormant. We really should not treat these assets in the same way we treat typical plant and equipment.

Over the past 30 years nearly all Wall Street wealth was the result of leveraged debt and tax loopholes: paying for corporate re-financings using interest deductions and phantom loss carry forwards. I believe that in addition to the mortgage securitization debacle, we will soon realize--from a greater, long-term public good standpoint--how misguided Wall Street has been in its use of debt. Despite various rationales about "unleashing pent-up equity" and applying it to good use, the public policy implications of Wall Street's actions are essentially criminal. We've mortgaged our basic infrastructure, and it's a real national security issue.

Consolidation in virtually all industries was financed by securitized debt. And indeed, without such debt many businesses are profitable and cashflow positive--they're able to generate a profit in excess of operating and payroll expenses. (Debt-free health, by the way, should no longer a pass to pirate a company's equity.) All of our industries are and have long been suffering from too much debt and unfortunately, there currently exists no mechanism to put entire industries into Chapter 11 restructuring. (Even if California or the Big Three U.S. Auto Makers should require restructuring, there's currently no "easy" way to do this.)

Much of this restructuring would be unnecessary had Wall Street not squandered valuable equity to begin with. (Perhaps a Council of Financial Reconciliation should seek return of ill-gotten gains?:-) Which leads us back to hospitals and health care in general. The rationale that drove consolidation were scale efficiencies...the ringing out of redundancies via mergers and acquisitions. Such "efficiencies" have not been without problems. Yet diminishing redundancies via merger/acquisition still leads to reduced competition.

We have two interesting extreme points with regard to capacity utilization; (1) insureds that never use the system (yet pay premiums); and (2) uninsureds that never use the system. Between these two extremes we have a system that has varying degrees of utilization. How rational are pricing systems for services throughout the system? How is pricing set? (A practical example: a few years back my wife was in hospital for three days. Our bill was $22,000. Our insurer paid $9000, and we paid $1500, which was our deductible amount. The participating provider hospital charged off the balance and my guess is the hospital could also apply this write off against its taxes. The hospital took its aggregate cost--including its debt payment, and divided it by its total number of beds and applied that daily sum multiplied by 3 days. Yet consider all the empty beds. Absent the debt service, no way the charges would be so high.)

Consider the analogy of a small town fire department. Since it cannot afford to pay full-time salaries to a staff of firefighters, many towns resort to part-time volunteer staffs. This is one way of dealing with excess capacity. This would not work in the health care field, but if we look at towns and cities throughout the state of California, many have too many "professional" full-time police and fire fighters...more than the economy can support. How to transition these excess workers to part-time, on-call, as-needed? With respect to health care, reorganization can both bring down costs and unveil the current waste (as excess capacity) within the current system. A team approach requires fewer workers.

The Health Care system overall needs find more rational ways to make the prepayment for care--which to a large degree insurance is--affordable. As it stands, medical costs include too much debt service--not just charges for basic labor and materials. Not everyone uses the system all the time. So, what exactly determines fees for service rates? How much of it is debt service? Competition hasn't worked due to over-consolidation--which is why now a public option is needed. Also, in terms of an ethical justification, the U.S. must invest in its people, for the sake of national security, dominion, and sovereignty. This extreme individualism and market-determinism has destroyed our industrial base.

Prescription: Health care for all is not just a moral ought. Practically, it's about a society's committed investment into each of its members. We do this with public education, not as a moral imperative, but as a practical guidance. Social wealth is enriched by contributions of its individual members, and public investment is key to this. Health care is no different.

Finally, when healthy people pay insurance premiums they are not accessing the system but are paying for future capacity that will be there if and when they need it. A good place to start would be $100 per month for each adult, and $50 per month for those under 21. Add to this small co-pays and a small annual deductible. Make it a baseline mandatory coverage and add in subsidies for those unable to pay. (Note: prior to Anthem's purchase of Blue Cross from Well Point, we were paying $4800/yr.--family of 4--with a $5000/yr. annual deductible. Now, the rate is $7200/yr. with a $12,000 annual deductible. 2009)

Alas, we require a system designed around wellness, with incentives to patients only to use the system when necessary. Massive debt restructuring must be part of any economic stimulus package (and health care reform bill)... massive debt write down and/or conversion of debt to equity. A stimulus should focus on technology infrastructure, debt elimination and possibly downsizing or eliminating insurance carriers from the equation. Also, given the nature of medical capacity, fee for service may not be the optimal approach. Do we need to reduce/remove much of the [institutional] debt service from health care, and place a moratorium on debt financings pertaining to expanding health care capacity? If we limit the private profit from the issuance of public debt, will we be taking a step to slow corporate welfare for institutions (and the folks that run them)? The answer is unclear. Yet considering the serious impact of debt default by large institutions it's time for society [and heretofore sleepy regulators] to take an interest in these private business behaviors. The Corker proposal for the automakers [back in November] turned out to be prescient and may have broader applications in the future. Will specialists be forced to join groups? We'll see.

The bottom line is...5% of patients use 95% of capacity. Hence, build ample capacity to cover growing demand, and get rid of fee for service. Operating costs, less debt service equals affordable health care. Today, laissez-faire has resulted on a virtual monopoly with 5-6 major providers nationally.

Also, hospitals are open 24/7 regardless of traffic. My two kids do--at most--a couple of well-visits a year. Why must our family pay $12,000 per year for this? Makes no sense. Yet this is exactly how the system now works. Not-for-profit vertical integration could change this. The private for-profit system--a result of milking Medicare--now incorrectly charges for capacity distribution, and actually penalizes those who are well. They can only profit by building in systemic short-term memory loss and billing for new procedures all the time, many of which are unnecessary. This for-profit system caters to the total basket cases. The fact is, there is currently excess capacity in the U.S. Health Care system due to gross inefficiencies (having to do with too many specialized discoordinate private practice physicians) that must excessively outsource for too many of the services that should be able to be offered in-house...and could be offered in house were they in a group. So many atomized doctors, each paying rent, a staff, etc. Why? Why not more consolidation? Indeed, absent Medicare the private practice would have long ago become extinct.

Dec. 2011

Orig. 9/2009

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Anonymous Anonymous said...

What policy prescriptions would you suggest to
help with the healthcare crisis? Are you implying that the reason health costs are so high is because profit (and debt service) are
built into the pricing for services (over and above labor)?

--Carol Rudenluzer

January 14, 2009 at 5:16 PM  
Blogger Greg Hall said...

Thanks for your comment. There is a role for profit and retained earnings, which is to reinvest in upgrades. Ever wonder why a brief visit to an emergency room costs $750-$1200--after insurance--for even the most minor procedure?


January 14, 2009 at 5:26 PM  
Blogger marry said...

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April 12, 2010 at 4:45 AM  
Blogger Rinkesh said...

You may have not intended to do so, but I think you have managed to express the state of mind that a lot of people are in. The sense of wanting to help, but not knowing how or where, is something a lot of us are going through.
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August 20, 2010 at 4:41 AM  
Anonymous Chudex's said...

Nice read, thanks for shared.

January 24, 2011 at 9:21 PM  

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