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The profit motive is irrelevant

In our most recent podcast episode (Privatizing the NHS: Who Profits?), my co-host Anish Koka reacted to our guest Bob Gill’s wish that the NHS insulated itself from the “profit motive” that is characteristic of the private sector.

Anish pointed out that, at least in the US, wait times for oncology or orthopedic appointments are measured in days instead of weeks or months.  Part of the reason physician productivity is so high here is because of the profit incentives that are present in a fee-for-service system.  He then asked:

I wonder how we can harness both things:  We certainly don’t want patients waiting 18 weeks to be taken care of.  At the same time, we want to not have a system where you have profit being taken out.  That is of no value to the patient.  So, it’s a tough balance.

In health care debates, the profit-motive is often conceived of as a two-faced Janus of economics.  On the one hand, it increases productivity.  On the other, it causes physicians to do too much.  But this conception of the profit motive immediately invites an economic policy of carrots and sticks to get to “the right balance.” The right balance, of course, never materializes.  On the contrary, health policy only causes mis-allocations of care.

The whole question of profit motives is actually irrelevant and should be ignored altogether for the following reasons:

First of all, the profit motive has no economic value.  I may be the most profit-driven cardiologist on the planet but If I don’t provide a service to someone who values it, all my motivation is for nothing.  Given that point, it is obvious that the problem in our healthcare systems—whether in the US or elsewhere in the world—is not per se the profit motive of doctors, hospitals, or commercial healthcare entities, but the fact that the motive is aimed at pleasing third-party payers and regulators first, rather than patients.

Secondly, the profit motive is a psychological state that cannot be objectively identified.  Seen for the outside, there is no way to tell if the orthopedic surgeon who wakes up at 5 am 5 days a week and comes home at 9 pm after a full day of total hip replacements is motivated by the love of money or by the love of mankind.  At best, a profit motive can be imputed to someone based on intimate knowledge of that person’s habitual behavior observed under many different circumstances.  Even then, it is at best an educated guess.

Thirdly, self-interest can take many forms other than financial profit.  For example, on a Twitter thread about our podcast episode a UK resident commented that one way for a patient in the NHS to get more attention from doctors is to have a rare condition: attending physicians are frequently looking for cases to present at their conferences.  And that brings up the fact that all actions are motivated by something that is pleasing to the person doing it, and therefore “profitable” to him or her.  Even Mother Teresa toiling in the slums of Kolkata was profit-driven.  Only her riches would be obtained in heaven rather than on Earth.

More often than not, the profit motive is a lazy explanation to smear people who are doing financially well.  It is a distracting and counterproductive assertion that is almost always applied without understanding the fundamental reason for someone’s success.

What patients need is competition, not mind-reading.  In a competitive health care economy, the selfish interests of physicians, hospitals, and commercial players become irrelevant, especially if the competition is aimed at serving the patient and not, as is unfortunately the case both here and in the UK, the whims of public and private bureaucracies.

1 Comment

  1. Brennen Hodge on 01/17/2020 at 9:54 PM

    I haven’t listened to the podcast yet, but this topic has been on my mind this week.

    I wanted to elaborate on one point you made about the profit motive: “…but the fact that the motive is aimed at pleasing third-party payers and regulators first, rather than patients.” I completely agree. Here are my thoughts on the subject:

    Capitalism is great. Profits are great. This economic model has built the modern world we live in. However, the powerful “corporation” that drives capitalism might not be the best type of organization for healthcare anymore.

    Most insurance corporations are majority-owned & controlled by institutional shareholders that exist to maximize profit, not to provide healthcare. Insurance corporations directly conflict with our best interests. We are all fighting over the same dollar.

    I’m working on a theory that healthcare corporations went off track in 1970 when Milton Friedman, an American economist and Nobel Prize winner, introduced the “Shareholder Theory.” In it, he argued that a company has no “social responsibility” to the public or society — its only responsibility is to its shareholders. He justified this view by considering who it is a company and its executives are beholden to:

    “In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires…the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation…and his primary responsibility is to them.”

    Shareholder theory has had a significant impact throughout healthcare, being taught at all leading business schools starting in the 1970’s. Harvard professors have stated that maximizing shareholder value “is now pervasive in the financial community and much of the business world. It has led to a set of behaviors by many actors on a wide range of topics, from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility.”

    Now that healthcare executives were financially motivated with a fiduciary duty to maximize shareholder profit, a blueprint for maximizing this profit was put into law.

    In 1983, the Health Care Financing Administration (now CMS) switched from a basic payment system, in which the government simply covered the costs of treatment retroactively, to a system involving something called diagnosis-related groups (DRG). That approach established fixed payments for the treatment of specific conditions. The basic idea was right, but it has proven to be overly complex and “gameable.” It created a Federally mandated blueprint for printing money — the more things you did to a patient, the more you got paid. And corporations took advantage of it.

    Healthcare corporations slowly drifted off track with poorly designed incentive systems. Executives’ salaries & bonuses started being tied to their company’s share price, which moves based on revenues & profits. So the CEOs of health insurance companies became focused on “winning” each quarter to generate more profits. While there is nothing wrong with profit, there is something wrong when you put profit ahead of people’s health.

    I’m not blaming individual executives, hospitals, and doctors for these actions. It’s simply the incentive system we were all partaking in. This perverse economic model has caused many irrational behaviors to form over the past 5 decades. It was slow at first, but now it’s clear we got the fundamentals wrong and now we need to start over with a better way to pay for healthcare services.

    As the famous Charlie Munger says, “Show me the incentives and I will show you the outcome.”

    And to answer Anish’s question about how to harness both things, we need to rebuild healthcare organizations as patient & physician/provider-owned cooperatives. Incentives are aligned for both providing great care & making a profit. The main difference is you take institutional shareholders out and spread equity across the population. You’re left with democratic healthcare that just works.

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