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Why Free Markets Break in Healthcare | Wharton Professor Dr. Atul Gupta
23 Plays15 days ago
In this episode, we speak with Dr. Atul Gupta, a professor at the Wharton School, about the role of free markets in healthcare, along with the broader tradeoffs between quality and efficiency.
We start by discussing how information asymmetry, third-party payment, and limited competition make it difficult for the “invisible hand” to function in healthcare. Dr. Gupta then walks through his research on hospital readmission penalties, showing how financial incentives can improve care while also creating room for hospitals to game the metrics. We also explore the trade-offs behind hospital privatization and consolidation, including how efforts to make hospitals more efficient or profitable can affect prices, staffing, safety-net access, and patient outcomes. Finally, we examine private equity’s role in healthcare and what better regulation, transparency, and quality-linked incentives could look like in the future.
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Transcript
Introduction to Healthcare Theory Podcast
00:00:00
Speaker
Welcome to the Healthcare Theory Podcast. I'm your host, Nikhil Reddy, and every week we interview the entrepreneurs and thought leaders behind the future of healthcare care to see what's gone wrong with our system and how we can fix it.
Market Forces in Healthcare with Dr. Atul Gupta
00:00:15
Speaker
Today's episode is with Dr. Atul Gupta, a researcher and professor of health policy and economics at the Wharton School. And his research over the past 10 years has been answering what happens to healthcare when you bring in market forces that generally say market should be free, efficient, and invisible.
00:00:32
Speaker
what happens to those forces in healthcare. care And Dr. Gupta's research started off first as a consultant at BCG and eventually got a Stanford, PhD at Stanford where he focused on health economics just as the ACA was starting to shape how we think about healthcare care and health policy.
Why Healthcare Markets Differ from Normal Markets
00:00:48
Speaker
And today, in today's episode, we discussed some of his work around why healthcare markets don't behave like normal markets, how hospitals respond to profit and when quality collides with that, and what happens with private equity or consolidation when the hidden trade-offs behind healthcare care are making it more efficient, making healthcare care more profitable, and the making it more equitable all might overlap and coincide at once.
00:01:13
Speaker
So this is a great guide into how economics and traditional way you think about economics might fail a little bit in healthcare.
From Corporate to Academia: Gupta's Journey
00:01:24
Speaker
Hi, Dr. Gupta. Thank you so much for coming on. It's great to have you. Thanks for having me. It's great to be here. Of course, and before we get into your work on healthcare specifically, i want to start off with the baseline. i mean, what even drew that interest there? You worked in BCG Mumbai, eventually got a PhD in Stanford, but it's rare to go doing an academic PhD in the first place. So what was the itch that drove you into pursuing this field, especially given that healthcare is so hard within all the areas of economics? Why healthcare?
00:01:53
Speaker
Oh, it's a long story, but I'll try to keep it short. ah i I, you know, as you said, i actually had a pretty traditional background. I did engineering undergrad and then did an MBA. And I thought I was sort of happily settled in a corporate career.
00:02:07
Speaker
But you know after working in consulting for three years, I felt like I wanted to answer my own questions. If anybody's worked in consulting, they know you know what I mean in that you answer the questions that the client asks you and those are the questions you get paid to answer. and but But after doing that for some time, I felt like you know I had questions of my own and I wanted to answer those.
00:02:32
Speaker
um And I felt that one way to to sort of have the liberty to do that would be to become a researcher. and and And that's when this idea of becoming an academic sort of originated. it it was ah It was super unconventional for me because there was no academic in my family.
00:02:50
Speaker
I don't think, as far as I can remember, there's no direct relation who's done a PhD. So, it you know, it took some convincing folks to to be able to do it. But yeah, luckily, I was able to get into Stanford um for my PhD.
00:03:06
Speaker
um And, but even, you know, when I first went, healthcare was not something that I wanted to do.
Learning Curve in US Healthcare Systems
00:03:15
Speaker
I actually, when I came in, I thought that I would do something related to energy economics or or environmental economics. Actually, that was sort of the thing that was motivating me at the time.
00:03:26
Speaker
I wanted to do some work on environmental policy. and And just totally by a chance at Stanford, we had this requirement that we had to take classes outside our field.
00:03:38
Speaker
you know, like a breadth requirement. and And my fields at the time actually were environment and and industrial organization. and And to and fulfill breadth requirement, I took a class in health economics.
00:03:51
Speaker
and and And, you know, they say, as they say, the rest is history. So but the person who taught that class ended up being my dissertation advisor, Leroy Nainov. And, you know,
00:04:03
Speaker
Yeah, i don't know, it just sparked a sort of deep interest in healthcare. I realized that there were a lot of interesting issues. It was a very important topic, obviously.
00:04:15
Speaker
And it was also the time when the Affordable Care Act had been passed, but not yet been implemented. There was a lot of discussion at the time, a lot of debate about what would happen once the provisions of the ECA are implemented. So I think it was ah it was a very sensitive time in terms of health policy. So that also, I think, got me hooked.
00:04:36
Speaker
Yeah, and then, you know, I sort of pivoted and and and decided to focus on healthcare.
Challenges of Neoclassical Economics in Healthcare
00:04:43
Speaker
And then this may or may not be apparent to your listeners, but healthcare, care particularly US healthcare, there's there's ah there's quite a big fixed cost that you have to pay just to understand the institutions to get access to data and things of that nature.
00:05:00
Speaker
And so it makes sense that once you start working on healthcare, you sort of do more work in healthcare to sort of reap the you know returns of the investment that you've made. And so one thing led to another. And and so then before I knew it, I became a healthcare. Yeah, think there's almost some operating leverage over interest in healthcare, care high fixed costs. And as you learn more more, there's some variable rewards. But <unk> working with Dr. Aynav is great. I know he's had a couple of really important papers in this industry.
00:05:27
Speaker
And when you're an economist at Stanford, I guess neoclassical training says that you're thinking about rational actors, free markets, things like that. And It really is an elegant idea that you give firms and individuals the right incentives.
00:05:41
Speaker
You don't need to tell them what to do. You don't tell them to open up a store price this way. Instead, the incentives or the profit motive does the work for you, which to me is interesting. And you have this idea of like a restaurant. They serve bad food for customers.
00:05:55
Speaker
And if it's bad, they lose those customers. If they serve great food, the market rewards them. You see the same thing in every other industry where capitalism is like this... invisible hand that drastically rewards productivity and efficiency.
00:06:08
Speaker
So from an economist's perspective, there's a lot of necessary conditions for the profit motive to work. So someone with views in both healthcare and economics, where do you see it tends to break down and why?
00:06:20
Speaker
You're speaking like a true Chicago economist. you know This is like where you are, it's sort of the center of this markets are efficient. And and so, you're right. I mean, you know I think that is how sort of neoclassical economics, that's the sort of view of of how things work.
00:06:38
Speaker
and And typically there is the there is the assumption that markets are competitive, maybe not perfectly competitive, but you know competitive enough. People are well-informed, not perfectly informed, but you know enough that they can make the appropriate decisions. And then the third one is this this issue of self-interestedness that you also brought up, which is that I guess you know kind of how it works practically is that consumers pay out of pocket.
00:07:07
Speaker
And because they pay out of pocket and they have a limited budget, they are very careful about their decisions. If you think about all of those features, to some extent, all of those things are broken in healthcare.
00:07:18
Speaker
and and And this is, I should say, it's not just a feature of US healthcare. To some extent, this is a feature of all healthcare care markets across the world. um Firstly, there's this huge problem of information asymmetry.
00:07:33
Speaker
You can't really assess the quality of a healthcare provider, not only before you go to the healthcare provider, but also after you receive care of the provider because we're not experts. Most of us are not experts.
00:07:46
Speaker
And then there's also information asymmetry between the provider and the insurer who pays for the service. because you know the insurer doesn't know, can't observe all the things that the provider observes. And so they have to rely on the provider's judgment as an expert and and sort of go along with what they say. And so when when that trust breaks down, that leads to frictions and administrative burden.
00:08:10
Speaker
So there's that information asymmetry problem. The second problem is markets are not competitive, particularly healthcare care delivery markets. I think you can so you can argue that there are segments in healthcare care which are quite competitive and they work relatively better.
00:08:24
Speaker
ah But then, you know, our traditional healthcare segments like hospitals, you know some some types of nursing homes, some types of long-term care, some types of physician specialties, they're far from competitive because the healthcare markets tend to be very local because patients do not want to travel very far to receive care.
00:08:45
Speaker
And that gives providers leverage which they can then exercise in various ways, whether it's limiting their investments in quality or trying to renegotiate higher prices without giving a better quality product.
00:08:58
Speaker
And the third thing is that because of the extensive um role that healthcare insurance plays in payments for care services, most people typically do not pay out of pocket for care.
00:09:17
Speaker
Sure, you know you have some premiums that you pay in advance, but you don't actually pay out of pocket when you are choosing a provider. and and and the And the prices are are negotiated in advance by somebody else on your behalf.
00:09:32
Speaker
And a large segment of the population is insured by government programs. So they don't pay at all. And so all to say that this this third party payer system, it reduces the the burden on consumers to make good choices.
Hospital Investments and Quality Incentives
00:09:49
Speaker
and and And I think that leads to some other problems in healthcare as well. Yeah, even back with Milton Friedman, Kenneth Arrow, they would say that a lot of the free conditions, the conditions for a free market seem to fall apart when you have when you work in healthcare.
00:10:05
Speaker
So it's hard. It's hard to pick quality. I mean, for insurers, it's impossible to know who how healthy the enrollers will be. For doctors, it's hard to know what to pick. um It's just difficult system. So I love it's interesting, difficult things when you're dealing with health care.
00:10:19
Speaker
I'd love to hear from you when you got into this area. You had that fixed cost space, which you've eventually invested into. And you now and understood at least fundamentally what's going on or some of the driving questions that sparked your interest.
00:10:30
Speaker
um So what were your exploratory areas? Where did you start after you got your PhD and what were you most interested in?
00:10:37
Speaker
Yeah, so when I first got started, I was very interested in how hospitals or providers in general invest in quality and how do they trade off quality with their financial incentives.
00:10:51
Speaker
um and you know and And also specifically thinking about hospitals, what role quality plays in competition, in in driving competition. There was a lot of work that was done in this area in the 90s by Mark McClellan and his co-authors.
00:11:07
Speaker
But that strand of literature sort of faded away um you know probably by the mid I think... i think know various reasons, people kind of moved on to other topics.
00:11:19
Speaker
and mark but And Mark himself left academia and went into government. So I was curious about that. And i came across this this program that was implemented as part of the Affordable Care Act called the Hospital Readmissions Reduction Programme.
00:11:41
Speaker
where the government decided that it would impose penalties on hospitals if they had high readmission rates So just to just to clarify, you know for our listeners, readmission rates are a a measure of quality of hospital care.
00:11:57
Speaker
And a readmission is this idea that you go to the hospital for some service, and then when you get discharged, you go home. But then if you need hospital care, um for whatever reason, actually, it can be, these are all cause readmission, so they don't really care why you come back to the hospital.
00:12:16
Speaker
But if you are sick enough that you need hospital care, ah so you come back to the hospital and you get readmitted, that's considered a readmission. it's It's very costly, as you can imagine.
00:12:28
Speaker
And what the government decided was, you know following decades of medical research, is that readmissions, some of the readmissions are avoidable and they result from poor quality care by the hospital.
00:12:48
Speaker
And so they decided to penalize hospitals and then give them an incentive to reduce their readmission rates. I thought this was a fascinating policy because this was one of the first time, this is the first time i mean, not the first, but probably one of the first few policies in the US where providers were directly given a financial incentive to improve quality of care.
00:13:13
Speaker
um At the same time, it was also interesting because you could argue that readmissions, especially the way I described them just now, it's a readmission for any reason.
00:13:24
Speaker
So in the extreme case, you could have a skiing accident and you might get readmitted. And that has nothing to do with the hospital's quality of care, but the hospital would still get penalized. So at the same time, it does have this this problem that that most of these programs have, which is that they're only as good as the quality metric that they use.
00:13:44
Speaker
and And these quality metrics tend to be noisy. There's always some the the noisy signals of quality at best. So it was not obvious that giving them then this incentive would actually generate the response that they wanted, which is, you know, getting hospitals to improve quality of care.
00:14:02
Speaker
So I thought that it was an interesting program
Impact of Mandatory Penalties on Readmission Rates
00:14:04
Speaker
to study. And then a nice feature of the program which made it empirically very suited to to studying is that it was a mandatory program. So hospitals did not have to they more voluntarily choose to participate or stay out.
00:14:19
Speaker
as as you know As you know, as an economist, that that sort of leads to all kinds of selection issues. and but But the mandatory nature of the program allowed us to sidestep that entirely.
00:14:30
Speaker
So I decided to study that as part of my dissertation. Yeah, I find it very interesting. it's There's so many natural experiments in healthcare where just through data and experiments that happen naturally, you can get blinded and cause those studies that actually show really important things.
00:14:45
Speaker
And what's interesting is that readmissions did fall in this case. um It seems like things are working, but around half of those readmissions, from my understanding, weren't actually improving care.
00:14:55
Speaker
at least that's what the study would hypothesize. And I love to hear what makes it striking from the outside is that a metric like this does exactly what you want. But there's this idea good metric ceases to be a good metric when it's used as a target.
00:15:10
Speaker
So at the end of the day, what did you see going on here? Was it some level of gaming? Why was the fact that readmissions were down not necessarily a good thing? And what did you end finding about this? What does that teach you about how healthcare tends to function in how metrics kind of end up taking form when you put them in a healthcare care market.
00:15:28
Speaker
Yeah. So, you know, at a high level, the the the the metric that was targeted was readmission rates. Now, a challenge with readmission rates is that it's entirely under the control of the hospital because So when a patient comes back to the hospital to get readmitted, they first come in through the ED, mostly.
00:15:48
Speaker
I mean, obviously, some people might just do an elective procedure, but for the most part, they come in through the ED, upwards of 85% of them. And at the emergency room, the hospital has control over deciding whether a patient needs to be readmitted or not.
00:16:05
Speaker
and And so I'm just saying that ah you know so that you keep in mind that when you give a provider an incentive, um you also have to think about it in advance that they have control over how the incentive is measured and they can change their they can change the data generating process.
00:16:24
Speaker
So, as you were as you were saying correctly, what I found is that after this program was implemented, we do find a decline in readmission rates at at hospitals that are more likely to be penalized compared to hospitals that were not likely to be penalized.
00:16:42
Speaker
you know Thankfully, there was this variation across hospitals that I could leverage to sort of estimate the effect of the program. um So that's a good thing because it it does mean that there's a reduction in spending, right? So regardless of how you think the readmission, whether it reflects improved quality or not, an avoided readmission still leads to a reduction in spending.
00:17:06
Speaker
And so that potentially was a good thing. But then, you know, to go beyond just that headline result, I thought it would be interesting to see the effects on other kinds of metrics which are not targeted by the government.
00:17:18
Speaker
And so what I found was that, like you said, about half of the readmissions could be traced to the fact that people were less likely to come back to the hospital.
00:17:31
Speaker
And so that is not gaming, right? Because that is under the control of the patient, presumably. And if the patient is deciding they don't want to come back to the hospital, then that's a good thing. You know, presumably patients don't care about hospital penalties. They just care about their own health.
00:17:48
Speaker
But about 50% of the decline could be traced to the fact that conditional on coming back to the hospital, the hospital was less likely to readmit these patients. So it seems that hospitals had changed their clinical guidelines, and and, you know, you almost raise their threshold, as you know, if you will, to decide who gets readmitted and who does not get readmitted. So those patients were either just discharged directly from the emergency room, you know, you go to the emergency room, they kind of stabilize you for a few hours and they let you go.
00:18:25
Speaker
Or what we found was that they were kept in in what is known as observation status. So you can be kept in observation status for quite a bit quite a bit of time, actually, more than 24 hours, up to 48 hours.
00:18:38
Speaker
And to the patient, it doesn't feel that different than if they were admitted. but But just the optics of it are different. They don't qualify technically as a readmission.
00:18:51
Speaker
They just kept in this sort of limbo period and then discharged from there. So that was the gaming aspect that I uncovered in my paper. But overall, I should say that i view the this program as as quite successful because, as I said earlier, about half of the readmission decline, it seems to be truly because patients are less likely to come back. And the second one is when I looked at other quality metrics like mortality rates, which is another well-established measure of hospital quality, I found that call that hospital mortality rates also declined, particularly for heart attack patients, not for all conditions, but for heart attack patients.
00:19:30
Speaker
So that is another signal that the introduction of this program um made hospitals sit up and take notice and make changes to either their technology or the way they take care of their patients that is improving outcomes for patients.
Profit Motives vs Public Service in Healthcare
00:19:50
Speaker
It's definitely great there's to that there was a big success there. um It's equally in french' interesting to see how incentives can be muddied a little bit. We just did an episode yesterday with Dr. Meredith Rosenthal at Harvard, who did a lot of research on incentives with value-based payments, which is where you see a lot of the behavioral economics comes into healthcare. care And it seems like every decision you can make, there is basically an infinite set of trade-offs in terms of what are good incentives.
00:20:14
Speaker
But I think the one I'm most interested in here is the profit incentive. You've touched on this a little bit, but of course, with free markets, Adam Smith, you can say that the profit motive should guide a market correctly. But...
00:20:28
Speaker
It seems like maybe there's a little bit of conflicting research whether that really happens in healthcare. American hospitals had a pretty complicated ownership history. They started off as public institutions for sick people where they'd be concentrated there to keep the rest of the population healthy like a government service. And then slowly so it became...
00:20:47
Speaker
a structural shift into private ownership. And there seems to be a case for either side. On the private side, you would say that it can make hospitals more efficient. On the public side, you'd believe that private markets don't really do that as well as you would expect.
00:21:00
Speaker
you see the argument today where both sides are very much true to some extent. But when you think about how the hospital industry is privatized over the past, in the past many decades, why do you see that as a driver? Why do you think that happened? And how do you think about it today in terms of whether it's a good or bad thing or is it a lot more nuanced than that is what I'm expecting?
00:21:21
Speaker
Yeah. so You know, this is actually, it's it's good that you're asking about this because it's it's actually not very well known that um if you go back, if you dial the clock back about 30 years, then almost one third of all hospital beds in the US were in a government-owned hospital or a government-controlled hospital.
00:21:41
Speaker
So so government governments used to play a much larger role in hospital care delivery than they do today. Today, that that ratio is something like 15%. So it's basically gone down almost by half.
00:21:55
Speaker
And, um you know, most of that decline is because governments have been either selling hospitals to private parties, or they've been stepping aside and letting private parties manage the hospital. So they don't necessarily sell the hospital, but they basically give a contract to a private party to operate the hospital on their behalf.
00:22:16
Speaker
And so we, we, In our work, we club both of those two things into what we call privatization. So this is joint work with my co-authors, Mark Duggan, who's at Stanford, who's also one of my advisors, and then Emily Jackson, who's at Michigan State, and Zach Templeton, who's a PhD student here at Wharton.
00:22:37
Speaker
And what we found is that, as you also hypothesized, you know there's both good and bad. So, why okay, first of all, why is it happening? It's happening because on average, government hospitals lose money.
00:22:51
Speaker
Most government hospitals are owned by, they're owned basically by a local government. So think about your city or county, or less frequently, they're owned by a state.
00:23:06
Speaker
So these are governments that, unlike the US federal government, they don't have the ability to kind of run budget deficits infinitely. They have to balance their budgets. In fact, some of them, it's written into their constitution that they have to run a balanced budget.
00:23:23
Speaker
So if the hospitals are are continuously losing money, you know the the government that's managed that owns that hospital continuously has to find extra money to kind of keep the hospital afloat.
00:23:37
Speaker
And at some point, they just give up and they say that, you know, we can't really do the same. anymore So they think that let's just sell the hospital or maybe as a first step, give it to a private party to operate. Potentially, they can operate it more efficiently. So that's the conventional hypothesis of, you know, a private party can operate this more efficiently than a government. And I think you can make good you can make good arguments for why that would be the case.
00:24:03
Speaker
um and But I think there's this implicit assumption in built into this idea that you can get something for nothing. What the government wants is they want they want that the hospital should operate because government hospitals play a very important role in the safety net. you know Government hospitals disproportionately take care of uninsured patients, low-income patients, the types of patients who private hospitals are not necessarily very excited about serving because they tend to be unprofitable for them.
00:24:41
Speaker
so So you need government hospitals. And if you see where government hospitals are located, that will tell you the story. Most most you know government hospitals are disproportionately located in low-income neighborhoods, in inner cities, or in you know sort of rural markets, which are hemorrhaging population and and in economic decline.
00:25:02
Speaker
So you need, they as they they're part of the safety net. And so the government thinking, you know, based on our review of of of the literature, of press releases, when you when you see these announcements of them privatizing hospitals, they always say things like, the hospital is still going to be there. It's still going to take care of you. It's still going to function exactly as before. It's going to be awesome.
00:25:26
Speaker
And by the way, it's also now going to be profitable. so So that's this fallacy of you'll get something for nothing. You'll get the care, you'll get the services just as before, but then somehow miraculously, they'll also find a way to do that without losing money.
Implications of Hospital Management Shifts
00:25:41
Speaker
I think that really is the hypothesis that's being tested, the privatization. What we did is we spent a lot of time collecting data on which hospitals got privatized in the US over the last 20 years, and then comparing them to other government hospitals that did not get privatized over all this period.
00:26:02
Speaker
um And we do a variety of things and and we use, you know, sort of the standard methodology to look at this. And and what we find is that after privatization, these hospitals do become profitable.
00:26:15
Speaker
They are wildly profitable. They you know they just turn from being from losing maybe 4% to 5% a year to maybe making a 3% margin or something of that sort. So they just kind of mildly swing into the profitable column enough to make it sustainable. So that i think is a good thing.
00:26:34
Speaker
The challenge is you don't get something for free. There's no free lunch. What we find is that these hospitals become profitable essentially by giving up some of their safety net features.
00:26:49
Speaker
So they cut back on the proportion of Medicaid patients they serve, they cut back on the proportion of uninsured patients they serve, they cut back on on service lines that are known to be loss making or less profitable.
00:27:04
Speaker
you know in our paper, we give this example of obstetrics and deliveries. Basically they shut down labor and delivery units. and And, you know, that's in a city, that's not as much of a problem because you have other options. But then imagine if you're in a rural area and the only hospital in your sort of county shuts its obstetric unit, then you have to drive a lot further, not just 10, 15 minutes, but potentially an hour more to to be able to deliver your baby. So, you know, these are the kinds of things that they have to do to to become profitable. Well, I shouldn't say they have to do, but these are the kinds of things they do.
00:27:41
Speaker
to become profitable. At the same time, they also cut back on staff. And when I say they cut back on staff, I'm saying that per patient. So on a per patient basis, you now have fewer staff hours available.
00:27:56
Speaker
um And unfortunately, we also find that among Medicare patients, there's an increase in mortality rates at these hospitals, which makes sense because in in this business, you know whether it's hospitals or nursing homes, staff availability is directly proportional to quality of care.
00:28:14
Speaker
And if you find a decline in staff availability, it's not surprising that there will be a decline in quality as well. Yeah, it's difficult. I think that to get into an example, you're seeing that there is no free lunch in health care so that you basically, if you want something be more profitable, something has to get caught off in the bottom line, which tends to be more marginalized populations or maybe a drop in efficiency. Something else has to happen.
00:28:39
Speaker
And we've seen this more and more. Hospitals are being privatized. But this is another trend that you've discussed and that maybe goes beyond this is that they're consolidating, too. So not only you getting to the fold of private ownership, but they're consolidating. And that means that it's not just I mean, usually what you would see is that these hospitals are run by a church or religious organization, a county government. But.
00:29:03
Speaker
I'd love to hear about the consolidation view from your perspective. The standard argument is that when you make hospitals more private, um it means that you can get better procurement, scale of finish efficiencies, maybe revenue synergies, and a large system like that has more purchasing power.
00:29:18
Speaker
So they can cut off some of the back office costs too. In theory, there's many reasons why this could work, but your research here is really interesting. When you look at a hundred of these acquisitions from a large commercial insurer, what seems to happen is that The cost went down, but the actual cost to the consumer went up. So there was some trade-offs there.
00:29:38
Speaker
um Of course, there's no free lunch, but I'd love to hear what did your study find in terms of the trade-offs between independent hospitals and consolidation? Where do we see the risks and benefits? And how do you think it's affecting health care more broadly?
00:29:52
Speaker
Yeah, I think... you know In my view, hospital consolidation is probably the main reason why you're seeing hospital prices go up so rapidly um in in in the past few years in the US.
00:30:06
Speaker
And I honestly think that it is one of the main issues that we need to deal with if we want to address healthcare costs. and And so that's why you know I was always interested in this question. you were talking about the data. So we luckily were able to get a partnership going with What used to be called Anthem is today known as Elevance. It's a very large health insurer in the US.
00:30:29
Speaker
And through this research partnership, we got access to claims data from Elevance. um And that gave us access to the actual negotiated prices between Elevance and hospitals.
00:30:41
Speaker
Because otherwise it's very difficult to get access to prices. Now the main the main trade-off as it were in hospital consolidation, you spoke a lot about cost savings, essentially various kinds of cost savings.
00:30:54
Speaker
So that's the plus side of of a system buying an independent hospital. Essentially, you know it can make things more efficient. And then the argument goes that it will pass on some of those efficiencies to consumers in the form of lower prices.
00:31:11
Speaker
um the The negative side of the trade-off is that it's well known that when a market becomes more concentrated, suppliers will renegotiate higher prices with buyers because they'll exercise their market power.
00:31:26
Speaker
right and And on top of this, there's another issue, which is that systems by virtue of being much larger organizations, they're also much more sophisticated than your sort of average standalone community hospital, which might just be, you know as you were saying, like some church run thing or or you know historically some community hospital that was potentially even managed by some disinterested leading members of the community.
00:32:00
Speaker
Once you bring in a large system, they are you know they have large specialized teams that negotiate prices with insurers. They have more resources, more data, more analytics. and And so in addition to the fact that they have more market power, you could argue that they're also more expert at negotiating prices with insurers.
00:32:27
Speaker
So we look at this And we we were basically trying to understand this trade-off. And what we found is, as you said, you're looking at over a hundred acquisitions of independent hospitals by systems.
00:32:39
Speaker
We found that, you know, operating costs go down by 5% approximately at these independent hospitals. And we also found that their prices go up by about five to 6%.
00:32:55
Speaker
Now, one thing that you have to keep in mind here is that the prices go up only on the commercial insured prices. But a big segment of hospital volume is is government insured. So it's Medicare, Medicaid.
00:33:08
Speaker
And those rates are not negotiated. They're just set by the government. It's like a take it or leave it offer. So those those rates are not affected directly or directly in fact even, but the the the prices that are negotiated between insurers and and and hospitals, those rates go up by about five to 6%.
00:33:28
Speaker
So overall our our view was that you know the operating costs be going down about 5%, actually that's quite a big saving because that's on the entire cost base of the hospital across all patients.
00:33:44
Speaker
the prices are only going up for about 30% of the patients who are privately insured. I mean, it's 30 to 35% on average, obviously some hospitals, it'll be higher, some will be lower.
00:33:56
Speaker
um And so there is this potential for these cost savings, if if they truly are passed through to consumers, that it could actually make the whole system more efficient.
00:34:09
Speaker
In that paper, you know, we couldn't begin With the methods that we were using in that paper, we couldn't perfectly get to the bottom of whether the cost savings were being passed through to consumers.
00:34:23
Speaker
But we did show some suggestive evidence that it you know in the deals where they realized higher cost savings, it seemed that the price increases were lower.
00:34:36
Speaker
And that's consistent with some cost savings being passed through to consumers. it's it's not It's not causation, but it's it's it's a correlation, but it's consistent with this idea that potentially some of these savings are being passed through.
00:34:52
Speaker
so So that, I think I view that as you know potentially positive story that you know they are passing through some of these savings. Of course, the challenge is that they're also using their market power to get higher prices.
00:35:06
Speaker
so So consumers on net are paying more for this for care. It also raises this concern of, or question of, you know is the is the product quality better?
00:35:19
Speaker
We did not find any evidence to suggest that the product quality was better in the sense that, you know if you look at quality metrics like readmission rates and and mortality rates, they did not improve after acquisition.
00:35:33
Speaker
In fact, readmission rates went up after acquisition. So you could make the case that at best, it's the same quality product, but consumers are paying a lot more for it
Private Equity and Healthcare Quality
00:35:44
Speaker
now. And so, of course, on net consolidation is is is bad, but I think it did it did confirm this idea that there are some trade-offs.
00:35:56
Speaker
And so I'm actually working on a follow-up to that project where we're trying to, using a different approach, we're trying to quantify what proportion of the cost savings are passed through.
00:36:08
Speaker
And that paper is not out yet, but our sort of current results suggest that about 50%, 50 to 60% of the cost savings are actually passed through the form of lower prices to consumers.
00:36:23
Speaker
Yeah, there definitely very interesting scenario where things are privatized, but I guess the no free lunch idea stands here too, where it's a little bit more optimistic. I mean, to expect things to be passed through, it's not just collected in the way that you'd see with other companies, but which is definitely a good thing to see that there is a lot of pass-through, but...
00:36:42
Speaker
um To show this argument even further, you've talked about consolidation and privatization, and you have private equity, have private ownership and consolidation, which has which you've talked about, but...
00:36:53
Speaker
um It seems like they're talking about bringing a few things, private equity firms. They bring facilities, they bring discipline, capital, management expertise, and that also, they often end up buying the hospitals that are underfunded and poorly run in the first place.
00:37:10
Speaker
And you had a study, and I know you adjusted for that to make sure these comparisons are accurate, but on one side, you have patients that advocate that aggressive billing and quality of care goes down, mortality goes down,
00:37:22
Speaker
And there's two sides. You have the private equity saying they're a bit more efficient. You have the other side saying it's predatory and maybe it's not really one or the other so directly. But in terms of this trend, how do you see leveraged buyouts and private equity taking shape in healthcare? care i know your study illustrated this in the amount of lives lost, but why do you think lives are being lost and to what extent?
00:37:43
Speaker
And... To me, it is an interesting question because private equity has done a lot for a lot of different healthcare care firms, but there's also constant public backslash, which not all of it's completely unjustified to.
00:37:57
Speaker
Yeah. So, so, you know, private equity is kind of a different animal relative to just the type of consolidation that we've been talking about, because, you know, what we've been talking about is hospital system buys an independent hospital. It's still a hospital system that businesses to run hospitals and they're just expanding by buying one hospital at a time.
00:38:19
Speaker
Private equity is entirely, you know, It's a creature of the finance world. These are firms that have grown on Wall Street.
00:38:30
Speaker
They operate across sectors, you know not just like hospital or nursing home, they operate across industries, across the economy. And they combine this sort of very innovative financial structure with, as you said, you know, managerial expertise and and they invest in firms.
00:38:52
Speaker
But they have this unique structure which creates, I think, challenges in healthcare. care So let me explain. So A classic canonical private equity deal involves a lot of debt it to fund the acquisition.
00:39:09
Speaker
Usually 50 to 70% of the deal value is funded through debt, which is okay. I think you could argue that other types of acquisitions also have large amounts of debt. The the key difference though is that the debt is placed on the balance sheet of the target firm.
00:39:24
Speaker
So if a private equity fund buys a nursing home, they use a lot of debt to buy the nursing home, but then the debt is placed on the balance sheet of the nursing home. So the nursing home now has an additional debt servicing obligation that they did not have previously. So it's an additional hit to their cashflow.
00:39:40
Speaker
um Secondly, the again, in the classic private equity deal, they they typically have to sell their investment in five to seven years,
00:39:51
Speaker
so that they can return the funds to their their investors with returns. so that So that time horizon, it creates a lot of time pressure that they, whatever they need to do to improve the value, increase the value of their investment, they have to do in that limited five to seven year period.
00:40:09
Speaker
And so I think, you know, that's given rise to critics of private equity who say that, In such a short period of time, you really don't have too many options available to you to increase the value of the firm. And so it forces you to look at things that can be achieved in the short run, which usually is cost savings.
00:40:28
Speaker
And in healthcare, a big part of the cost base labor. And so it forces you to kind of, you know, even if you don't want to, if that's some set some oftentimes that's sort of the primary way to cut back and increase profits. so So I think that's a challenge of of introducing private equity in healthcare. And then, you know, at the start of the call, we talked about the the imperfections in healthcare. So think those...
00:40:56
Speaker
further compound the challenges of private equity because on the margin you could reduce quality and patients would not figure it out, payers would not figure it out and you could still continue operating. So, so you know, that's where we we thought that private equity's introduction into healthcare could lead to some potentially negative outcomes. And so we thought it was an interesting space to study. We looked at what happens when nursing homes are bought by private equity firms. Sorry.
00:41:23
Speaker
student phone rings Yeah, so we looked at what happens when nursing homes are bought by private equity phones. And at a high level, what we find is that they cut back the staff,
00:41:37
Speaker
on average, and particularly the the frontline nursing staff, so nursing aides, licensed practical nurses. and And that, I think, is one of the main factors, but potentially other reasons too, that you know they they they cut back on the care quality.
00:41:56
Speaker
And as a result, we see declines in and health outcomes for patients. We see declines on a number of different outcomes, but of course the outcome that I think we all care about the most and and the one that sort of caught a lot of the attention was mortality rates go up.
00:42:12
Speaker
We find an 11% increase in patient mortality rates. This is Medicare patients. So these are already very old and frail, but still an 11% increase is is quite surprising and large.
00:42:25
Speaker
and And so that really made us sit up
Regulatory Measures and Transparency in Healthcare
00:42:28
Speaker
and take notice. I should say this this is on average. Of course, there's variation. You know, in some cases you find no effects also.
00:42:37
Speaker
and we thought And we found one interesting result, which is that these harmful effects tended to be exacerbated in deals where the private equity firm was more specialized into healthcare.
00:42:51
Speaker
relative to the more generalist private equity funds. and And our hypothesis is that the more specialized private equity funds, you know they I think they they view themselves as more knowledgeable about healthcare. care And so they might be making more interventions on the operation side relative to more generalist private equity funds, which might just be contained to it, doing financial engineering or maybe changing the governance structure of the firm.
00:43:21
Speaker
Yeah, I wrote that as something really interesting to me that you'd expect it to be the opposite. When you buy these services, you'd expect it to be they buy these services and don't know what they're doing. But um it goes wrong. And I think it could definitely be to the contrary, where it's for people that understand these businesses when you have a transaction at 70% loan-to-value or 70% debt, you need to cut costs in other areas. So the best managers aren't the ones that are best in terms of improving hospitals, but can extract the most value to some extent.
00:43:52
Speaker
Stewart Healthcare collapsed in Massachusetts, and you had um that was a by six Catholic community hospitals, which all bought out by a firm called Cerebus Capital, tended to fall. And it does seem like private equity involvement is diminishing in healthcare.
00:44:04
Speaker
More often, it's in other areas in healthcare care services, which tends to be less heavily leveraged and also have better financial structures from the get-go. So to end things off, maybe on a more positive note, um we have a mix of things like consolid consolidation, privatization, private equity.
00:44:21
Speaker
Sometimes they're good, sometimes they aren't. And in terms of the policy response we've had around that time, nursing care reform and the Biden administration started looking into this a little bit more. And there's been a larger crackdown of where private equity can be involved in healthcare. care But to you more broadly, maybe this isn't so optimistic, but where do you see healthcare care going in terms of regulation, consolidation, privatization? um where do you think it'll go? And where do you think it should go in terms of how we can regulate, better regulate this in terms of a private market industry that has its failures?
00:44:53
Speaker
I really think we should have a fine line between free markets and American style economies of scale and capitalism, but It's a difficult story in healthcare. So how do you see those two interacting over the next few years?
00:45:06
Speaker
Yeah, it's hard because the consolidation that's already occurred, you in some ways have to undo it, but that's that's very difficult. So the best that we can do, at least now, is to be very vigilant about preventing future consolidation.
00:45:20
Speaker
And so I think what we really need is more funding for antitrust agencies and, you know, giving them the tools and resources so that they can be more vigilant and active in blocking more consolidation.
00:45:32
Speaker
The other thing that I think i it's it's good to see some movement already is the states have already taken on more of a role. Many states are now actively considering how they can be more vigilant, you know, whether it's private equity or corporatization more broadly in healthcare.
00:45:49
Speaker
And that's great. I think states have a lot more freedom to do this. um
00:45:55
Speaker
We need more transparency in ownership. We need more transparency in quality. I think that really gives consumers and and you know public policy sort of intellectuals and and public policy research institutes, researchers like myself, it gives us the data to to actively monitor what's happening in real time.
00:46:19
Speaker
um and And the government's made some progress on that front, but I think a lot more can be done. we need to do more to link performance to financial incentives.
00:46:31
Speaker
So, you know, private equity is is a highly powered, you know, high financial incentive structure. If you link their financial incentives to quality, it's always, i mean, it's so there's always some concerns around doing that, but if it's done correctly, then they'll respond that.
00:46:51
Speaker
And you know and then there's evidence that that they do respond to it. So I think if it's done well, even private equity can be a force for good in healthcare. So I so i blame not private equity itself, but the fact that healthcare is so imperfect quality is so opaque and things move so slowly. So we need to we need to focus on those issues.
00:47:14
Speaker
And we particularly need to become very vigilant about further consolidation. Otherwise, prices will keep going up and and you know this this issue about healthcare care not being affordable is gonna get out of hand.
Conclusion and Call to Action
00:47:28
Speaker
Yeah, definitely two things there. I think that we've seen the Trump's FTC and SEC be a little bit more relaxed with many corporate lawsuits and health care and even more broadly where it comes into states' rights.
00:47:39
Speaker
But what I'm definitely most excited for is that hopefully to get more transparency and consumers get more choices around health care. I think that's one of the biggest levers out of the three that we talked about earlier that might happen um in terms of making health care more efficient market is not just giving them the cost of their health care, but giving them research into how to make the right decisions so the costs are more visible.
00:47:58
Speaker
And there's many things going on, but I really appreciate you, um Dr. Grupta, coming on today, walking through your story. And of course, it's a muddy world of how health care and private markets in interact, but I really appreciate the time.
00:48:13
Speaker
Yeah. Well, thanks for having me. it was great chatting with you.
00:48:21
Speaker
Thanks for listening to The Healthcare Theory. Every Tuesday, expect a new episode on the platform of your choice. You can find us on Spotify, Apple Music, YouTube, any streaming platform you can imagine. We'll also be posting more short-form educational content on Instagram and TikTok.
00:48:37
Speaker
And if you really want to learn more about what's gone wrong with healthcare care and how you can help, check out our blog at thehealthcaretheory.org. Repeat, thehealthcaretheory.org. Again, i appreciate you tuning in and I hope to see you again soon.