Hospitals and the Cost of Healthcare

For-profit entities usually are the height of efficiency and optimization. They want to make as much money as possible, and the best way to do this is by spending as little money as they can while still giving their customers a good product. Not only that, but they increase their production when supply starts to dwindle because they can make more profit this way. This is true for manufacturers of any good, and it is true for hospitals. Where is the incentive for non-profits to expand production? Why should they care? They will be making the same amount of money either way. And their drive to increase efficiency will not be as great because doing so would not make them any richer. Furthermore, non-profits generally get tax breaks from the government and so get a little leeway to be inefficient. For-profits do not get this break and must rely solely on pleasing their customers rather than petitioning the government.

Why is this important? Around the turn of the century in the United States, about 60% of the hospitals were for-profits. By 1968, that fell to 11%. This was due - as you can easily expect - to government favors: subsidies, exemptions from many taxes, charitable contributions that were a tax write-off, and zoning laws. For-profits were driven out of the market to the demise of us all. Gone was the motivation to become efficient, to lower costs, and to provide excellent service. Now, hospitals were merely local offices that produced a product solely from the good-will of the community. This may sound very nice and heart-warming, but from an economic standpoint it is doomed to failure. Without incentives, there is no reason to provide services cheaper and to offer good service. Sure, there is good will, but this is limited.

Efficiency is not the only problem with profits versus non-profits. Because the latter receives government favors it also means that they are more prone to government manipulation. With this change, government could find an ally in their quest to increase medical training, no matter how unnecessary it was. And this manipulation continues to this day. Any and all new requirements that the government has are easily accepted because they control the distribution of the resource.

This is another example of something that sounds good being terrible. Profit is used as a buzz word these days and is connotated with greed and evil. However, profit is our motivation to do a better job and to make our customers happier. Take away profit, and we rely on the goodwill of men. If we relied on the goodwill of men, then we would not need locks to our homes and cars.