Little stirs people more than profits in healthcare. Profits of hospitals, insurance companies, medical devices and pharmaceutical companies seem to many as making money from sick people who are forced into purchasing services out of no fault of their own. Clearly, if you’re in pain, it’s not likely a good time to go shopping around for the least expensive cure. When people become ill or injured, they depend upon skilled individuals, advanced medications and technologies to help them get better. Still, until those who provide services medications and technologies are willing to do so for free, healthcare will cost money.
The notion of profits first needs a little explanation. To an accountant, profits are what are left over after everyone and everything is paid, i.e. wages, rent or mortgage, electricity, water, employee wages, etc. Hospitals require buildings which someone had to design and build; they deserve to get paid for their skill and effort. Equipment needs to be innovated, designed, tested and installed; the people involved in these activities deserve to get paid. Physicians and nurses, who spend lots of time, often unpaid or certainly underpaid, to gain the necessary care skills required to be safe and effective; they too deserve to get paid, and so on. People who provide work deserve to get paid for the services they provide so that they in turn can make a living. Still, what about what is left over after all the building, utilities, supplies and labor are paid? For most hospitals, you may be pleased to know that what remains left over is very little – less than four percent – and often much less.
Economists, however, include another variable to the calculus of profit – that is the forgone profits or return on capital that are not realized. Let’s say you were to receive $10,000,000 as the result of an inheritance or perhaps you won the local lottery, and you wanted to put that to use so that your family and those of your children could receive income for the rest of their lives. You want to set up a fund where your heirs would receive money just from the proceeds of the investment – the ten million would not be touched. Or maybe you manage a $10M retirement fund upon which hundreds of fellow workers are depending on for their retirement. In either of these scenarios, would you recommend money be invested in build a hospital whose average annual profit margin is 3.9% per year, or a hotel whose annual profits are say 9 percent per year? The difference between these two investment choices is $460,000 per year.
The economist’s view of profits includes the amount of money one would have made on investment opportunities, so in this case if you invested in building a hospital making a profit of 3.9% and could have invested in a Hotel making 9%, your economic profit is negative or -4.1%. This is perhaps a long winded way of stating the obvious – that Hospitals are not a great place to park capital for investment, but the issues of profit are deeper than this.
Whether you take an accountant or economist’s perspectives of profits in healthcare, the existence of profits alone is not the issue; profits don’t “steal” money better spent on patient care. Profits to an organization are a measurement of the successful coordination of resources in which everybody gets paid with a little left over; it’s a vital sign. We all know, for example, that at a minimum all we need in a blood pressure is enough to push blood uphill to the brain, and perfuse our kidneys. Still, if you talk to any severe heart failure patient with a badly compromised cardiac output, you’ll quickly discover that the minimum blood pressure is not enough for a robust enjoyable life. Similarly, no one reading this piece would knowingly uproot their family to take a position across county in a hospital hemorrhaging money. Profits in healthcare or in any industry are not the result of greed, but health indicator. Falsely reported profits, i.e. Enron, Bernie Madoff, MF Global, Solyndra, Evergreen Solar, stand out as financial malpractice because they criminally misreported their vital signs. Could you ever imagine reporting a patient’s BP of 60/40 as 120/80, just so it looked better? The companies above did precisely that and reality soon caught up, as they most certainly would in the clinical world and display otherwise.
Profits in healthcare are not to be scorned; we can discuss the amount of profit one might deem acceptable versus too much but it will be a positive number all the same. We certainly can agree that healthcare needs to be profitable enough to encourage nurses and other professionals to make the necessary investment in education and training to later participate in this valuable industry upon which we all depend.