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COVID-19 has exposed the flaws in how we finance hospitals

North Shore University Hospital in Manhasset.

 North Shore University Hospital in Manhasset. Credit: Barry Sloan

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Though COVID-19 has filled hospital beds in hot spots across the country, the disease has walloped hospitals' financial well-being. Throughout the spring, the industry claimed financial losses of $60 billion a month because of postponed elective procedures. Health-care workers, lauded as heroes, have seen their wages cut even as they are pressed into service to battle the virus.

The pandemic has been so bad for hospitals because the health-care system was designed around profit rather than care. Administrators created specialty departments to generate profits, overselling high-priced surgical and technological procedures instead of aiming to provide needed, affordable care for everyone. COVID-19 has laid bare the cost of those decisions.

Starting in the early 20th century, hospital administrators and physicians found that innovations like X-ray and radiotherapy devices returned revenue greater than expenses, unlike the sort of day-to-day care hospitals traditionally provided. Eager to capture these profits, administrators purposefully developed high-tech specialty units as profit centers at the expense of less-lucrative services. They prioritized "super acute" specialty centers over badly needed general acute-care services, such as treating people with infections, asthma attacks, mental health crises and injuries from car wrecks.

Hospitals were not the only institutions driving this change. Insurance companies, which grew significantly after World War II as medical services and costs increased, agreed to pay more for procedures than for office visits or general acute care to offset the high costs of equipment and specialists. This created incentives for hospitals to build facilities for specialties with procedures reimbursed at the highest possible rates, rather than necessary services that promised lower rates from insurers.

The most common methods of financing hospital construction and specialty infrastructure compounded the situation. Business tycoons and their wealthy foundations funded the construction of many specialty-oriented academic hospitals in the 1920s as tax-deductible philanthropy.

Following two decades of very little hospital construction during the Depression and war years, government took up the slack. The federal Hill-Burton program initially provided grants to build community hospitals, although it limited the program to communities with the financial means to pay for hospital care, meaning the federal government was subsidizing community hospitals in wealthier areas. In the 1970s, this program switched from grants to loan guarantees, which increased not only the inequities but also the power of the finance industry that profited from the loans.

This period marked a critical moment when the financial sector began to play a major role in shaping hospitals. Medical care became a place for investors to realize high rates of return as investment opportunities in manufacturing dried up. As a bonus, Medicare payments functioned as additional loan guarantees, since the government was guaranteed to pay its bills. Soon, financial institutions were bankrolling a new generation of venture capitalists, who developed costly procedure-oriented medical technologies. In turn, bankers loaned hospitals money to purchase these technologies and build departments for them.

Specialty procedure units could have served as profit-making engines that supported needed but money-losing services. But the loans meant hospitals had to heed their creditors, who required each service to pay for itself with patient treatment income.

The influence of the financial sector hijacked health care in other ways as well. Organized national health-planning efforts initially sought to channel money toward community needs. The 1966 Comprehensive Health Planning (CHP) program affirmed that equal access to health care was a social right. This liberal legislation even recognized the need for a healthy environment, endorsing pure water, clean air, safe food and hygienic housing for all people. This vision, however, was never fulfilled. In 1972, as skyrocketing inflation added to rising costs, Congress instructed CHP agencies to assess new hospital services for financial viability.

Congress also encouraged states to copy New York's new Certificate of Need program, which required hospitals to apply for state permission to build or upgrade high-cost services. Theoretically, this requirement could have redirected hospitals to focus on community needs. Instead, the state officials administering the program judged hospital applications entirely on financial grounds.

Financial dominance meant that nearly all hospital projects that looked as if they'd be good for the bottom line got government approval. This reality drove continued growth of profitable specialty units over necessary, but unprofitable, general acute-care services.

Some government planners were troubled that interest payments and other banking fees doubled or tripled the cost of hospital projects to taxpayers — with the bankers pocketing the difference. But their concerns were dismissed. Taking the bankers' side, a federally funded, business-consultant-written guide advised that health planning's "most important consideration" should be hospitals' ability to repay debts.

In 1974, Congress replaced CHP with a new National Health Planning and Development program that more assertively weighed in on the side of financiers - while still claiming social equity values. This program pushed the focus on hospitals' ability to repay their debts and amass capital, reflecting both hospital industry claims of a pending crisis in access to capital and financial industry efforts to mold hospital development. Investment bankers advised that commercial banks preferred to put their money on profitable specialty services in large, respected institutions. This preference drove the expansion of hospital centers for open-heart surgery, cardiac catheterization, CT and MRI scanning, orthopedic surgery, colonoscopy, organ transplantation, and cosmetic surgery, among others.

By the early 1980s, while many planners had hoped to design the best, most cost-effective care for all people, thanks to government directives they had to follow financial rules that promoted procedure centers offering the biggest profits.

Consistent with the economic environment and its broader ideology, the Reagan administration abolished national health planning altogether in the name of the "market." Yet this approach simply exposed how poorly the finance-driven market model served the health-care system. Market champions held — even in medical journals — that financial accounting rules should replace epidemiological and efficacy research in allocating health-care resources.

Today we're reaping the disastrous results of the financial approach. Hospital specialty centers have grown with little regard for what is best for patients. Scientific research has found excessive use of spine and knee surgeries, hysterectomies, and many cancer therapies, among others. The latest heart disease intervention trial reinforced earlier findings that elective coronary artery bypass graft, angioplasty and stent insertion procedures do not reduce heart disease risks any more than noninvasive treatments.

Wall Street has driven the development of the American health-care industry for decades now. But Wall Street does not invest in, and the market does not produce, ventilators or even personal protective equipment and swabs that don't boost stock market values.

Even the coronavirus pandemic hasn't prompted government to rethink these problematic priorities. A number of states precipitously reopened nonessential procedures to protect hospitals' bottom lines. The hospitals being protected are not the ones caring for sick and low-income people, but the ones that enthusiastically (and successfully) built well-reimbursed patient services to increase operating margins and accumulate capital. Twenty hospital corporations receiving $5 billion in government bailouts, for example, were holding more than $100 billion in reserves.

The public should not be eager to pay to get such hospitals back to business as usual. America desperately needs, in the short run, to pay hospitals and staff to care for sick people. In the long run, the coronavirus experience reveals the need for organized, democratic public health processes that can design and finance a balanced, needs-based health-care delivery system that puts Americans' health first.

A retired public health professional and teacher, Perkins is the author of "Cancer, Radiation Therapy, and the Market," and "The Medical Delivery Business: Health Reform, Childbirth, and the Economic Order." This piece was writen for The Washington Post.

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