Institution of diagnosis-related groups

The Medical—Industrial Complex since 1980

Turning first to the recent history of the medical-industrial complex, I am glad to report that my earlier concern about the possible domination of the hospital sector by investor-owned chains was not justified by subsequent events. In 1980 there were approximately 1000 investor-owned hospitals. Ten years later their number had increased to barely 1400 of a total of some 5000 hospitals. In the past few years there has been virtually no growth in the chains. The reason is that hospitals are no longer as profitable as they were in the days before the institution of diagnosis-related groups (DRGs) and all the other cost-control measures now used by third-party payers.


Numerous studies published during the past decade have compared the economic behavior of Investor-Owned hospitals during the early pre-DRG days with that of similar voluntary hospitals.3 Most reports (including those of the most carefully conducted studies) have found that the investor-owned hospitals charged approximately 15 to 20 percent more per admission, even when similar cases with similar degrees of severity were compared. This difference was largely attributable to increased use of, and higher charges for, ancillary services such as laboratory tests and radiologic procedures. During that earlier period, Investor-Owned hospitals were no more efficient, as measured by their operating costs per admission; if anything, their costs were a little higher than those of comparable voluntary hospitals. Furthermore, there was strong evidence that the investor-owned hospitals spent substantially less of their resources for the care of uninsured patients than did the voluntary hospitals.4 There are few or no published data on whether these differences persisted after all hospitals began to face a more hostile and competitive market, but from what we already know it seems clear that for at least the initial phase of their existence, the investor-owned hospitals did not use their alleged corporate advantages for the public benefit. In fact, by seeking to maximize their revenues and avoiding uninsured patients, they contributed to the problems of cost and access our health care system now faces. A few studies have attempted to compare the quality of care in voluntary and investor-owned hospitals, but quality is much more difficult to measure objectively than economic performance, and there is no convincing evidence on this point.


Although the predicted rapid expansion of for-profit hospital chains did not materialize, investor-owned facilities for other kinds of medical care have been growing rapidly. Most of the recent expansion has been in services provided on an ambulatory basis or at home. This is because there has been much less governmental and third-party regulation of those services, and the opportunities for commercial exploitation are still very attractive. Investor-owned businesses have the largest share of this new sector.


Free-standing centers for ambulatory surgery are a good case in point. Ten or 15 years ago, all but the most minor surgery was performed in hospitals. It has now become apparent that at least half of all procedures, even those involving general anesthesia, can be safely performed on an outpatient basis, and in the past decade there has been a rapid proliferation of ambulatory surgery. Some of it is performed in special units within hospitals, but most of it is done in free-standing centers, of which there are now at least 1200. Most of the free-standing facilities are investor-owned, with the referring surgeons as limited partners, and many of the in-hospital units are joint ventures between hospitals and their staff surgeons.


Sophisticated high-technology radiologic services, formerly found only in hospital radiology units, are now provided at hundreds of free-standing facilities called “imaging centers.” Most of them feature magnetic resonance imagers and CT scanners. They usually are investor-owned and have business arrangements with practicing physicians who refer patients to the facilities. Diagnostic laboratory services, formerly provided only in hospitals, are now available in thousands of free-standing laboratories, many of which also have physicians as limited partners. Walk-in clinics, offering services such as those provided in hospital emergency rooms and other services formerly provided in doctors’ offices, now flourish on street corners and in shopping centers and are operated by investor-owned businesses that employ salaried physicians. Investor-owned companies now provide all sorts of services to patients in their homes that were formerly available only in hospitals. These include oxygen therapy, respiratory therapy, and intravenous treatments.


Health maintenance organizations (HMOs) are another important part of the ambulatory care sector. Over the past decade they have continued to grow at the rate of 4 or 5 percent per year, and now there are an estimated 40 million patients enrolled in some 570 different plans. Approximately two thirds of these plans are investor-owned.5 Some investor-owned hospital chains have expanded “vertically” — that is, they offer not only inpatient, outpatient, and home services, but also nursing home and rehabilitation services. One or two of the largest chains have even gone into the health insurance business. The largest now insures more than 1.5 million subscribers, under terms that offer financial incentives to use the corporation’s own hospitals.


In short, the investor-owned medical-industrial complex has continued to grow, but in new directions. No one has any clear idea of its present size, but I estimate that its revenues during 1990 were probably more than $150 billion, of a total national expenditure for health care of some $700 billion. This would mean that it represents an even larger fraction of total health care expenditures than it did a decade ago. The absence of reliable data on this point reflects the unfortunate consequence of government indifference and proprietary secrecy. And yet we obviously need such information to make future health policy decisions.

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