Not-for-profit survival in a competitive world.

VERNON WECKWERTH is exactly right; the issue isn't not-for-profit versus investor-owned hospitals. The issue is the economic viability of hospitals. However, the problem is not that the investor-owned hospitals have pecked away at the advantages that the not-for-profits have enjoyed, nor is it that new burdens have been imposed on the not-for-profits, although both of these are true. The key to understanding the past and the future of hospitals is an appreciation of the two forces of profitability and technological advance. TECHNOLOGY It's hardly an insight to observe that technology has changed healthcare. Microsurgery, improvements in anesthesiology, and the beckoning of new biotech drugs are changing what can be done and where it can be done. But healthcare technology is not the only force that changes healthcare; advances in diverse arenas have had and will continue to have dramatic effects on the hospital industry. Consider the slow demise of rural hospitals identified by Weckwerth. This comes about for several reasons, but partly because of improvements in health services for neonates, cardiovascular disease, and cancer, together with technological advances in transportation and oil production/refining. The former meant that more sophisticated services with better volumerelated outcomes could be had in larger (urban) facilities. The latter meant that better, cheaper cars and interstate highways made travel to urban centers inexpensive. It was no surprise that by the mid-1980s over half of all rural pregnant women in Alabama were bypassing their nearest hospital offering maternity services to go elsewhere for care (Bronstein and Morrisey 1991). Technology matters. PROFITABILITY Profitability matters too, but not in the way that not-for-profit CEOs may first imagine. As an economist and former AHA employee, I appreciate the need for not-for-profit hospitals to generate a surplus to allow them to undertake all manner of good works. Indeed, I have suggested that not-for-profit hospitals have been not-for-profit because it paid to be so. I think that one of the reasons we see such striking similarities between notfor-profit and investor-owned hospitals is that they both typically play the pricing and cost control games the same way. Rather, the importance of profitability is that it promotes entry. Coupled with technological advance it changes the structure of an industry. Weckwerth commented on the demise of community rating in the context of for-profit insurers pecking away at the advantage that not-for-profit Blue Cross plans had in the 19505 and '6os. I tend to think of this history a bit differently. The Blue Cross and Blue Shield plans of that era were effectively overcharging their lowrisk subscribers. Perhaps the plans did this to allow them to do good works for highrisk individuals, but fundamentally they were setting prices in excess of their costs for low-risk subscribers. The result was entry by commercial insurers who were able to provide equal or better health insurance coverage at lower premiums. Yes, the Blues were able to do fewer good works, but the superiority of experience rating (setting premiums based on expected risk) in the market led the last Blue Cross plan to give up community rating for group coverage in the mid-1990s. One can push the insurance analogy a bit further. Large employers discovered in the early 1980s that experience rating was apparently profitable for entrenched insurers. Entry into the "risk-bearing" segment of the health insurance industry followed as larger employers used the innovation of self-insurance. ERISA and state insurance taxes and mandates helped too, but they weren't the whole story (Jensen, Cotter, and Morrisey 1995). During the same decade, the profitable claims-processing line of business saw "third-party administrators" (TPAs) enter the market as a result of the innovation of low-cost computing. Finally, the profitability of providersubscriber relations was lost to traditional health insurers due to entry of PPOs, which were able to use the innovation of selective contracting to undercut the prices insurers established with providers. …