Adam Smith, George Orwell, and the contemporary hospital.

Mark Pauly presents a timely review of one of the health care industry's most enigmatic paradigms. Whether reading this article from the viewpoint of a partisan to the cause of investorowned or tax-exempt hospitals, a Philadelphia health care lawyer, a California or Texas arbiter of community benefit, or a curbstone economist, there is much grist to mill. First, I have a duty in the nature of an informed consent or potential conflict of interest disclosure: I entered the field of health care administration in 1974 and have been continuously employed therein ever since. For twenty-one of the ensuing years I worked in positions of progressive responsibility in the so-called "notfor-profit" sector, the last thirteen of which included stints as a turnaround-oriented chief executive officer in three hospitals. Sixteen of these years were spent in the publicly owned subset of university teaching hospitals and five years were at the Tulane University Hospital and Clinic, a private, university-owned facility. My last day of work in a tax-exempt hospital was March 31, 1995, and, since then, I have been employed by Columbia/HCA, which is listed on the New York Stock Exchange and is the publicly traded owner of an 80 percent interest in the Tulane University Hospital and Clinic. Tulane University's rationale for selling its hospital and clinic forms, in part, the basis for this commentary. It would not have been an overstatement in the still relatively laissez-faire health care economy of the 1970s to conclude that investorowned hospitals were viewed as fringe players with suspect motives. The long history of hospital service in the United States was characterized by religious, governmental, or charitable values. With the advantage of hindsight, it appears that the paradigm shift in this value set very likely began with the introduction of diagnosis-related group (DRG-oriented reimbursement in 1983. Although Pauly, as a professionally gloomy economist, meets the expectations of his science by defining the possible motivators of charitable contributions ("donor-pleasing activities") and the effects on donor motivation of various government tax and regulatory policies, it seems to me that philanthropy has had an ever-diminishing impact on the hospital sector over the last twenty years. This is certainly a subject worthy of additional empirical study. However, the national mean proportion of hospital revenues derived from gifts is now just 0.69 percent and therefore not likely to be considered as critical an indicator of institutional behavior as Medicare or Medicaid policy or managed care contract pressures. In any event, in Pauly's view, "not-for-profit hospitals provide community benefits . . because they have to" (page 7). Regrettably, community benefit is less and less often a principal element of boardroom discussion and debate in the tax-exempt hospitals with which I have had an employment or consulting relationship. Rather, the typical environment is one in which profit and loss have become the major concerns. Agenda items related to such matters are very likely dominant when compared to all other issues enjoying board-level attention. Although there is no need to apologize for this reality, there is every reason to attempt to dissect the reasons for such. In truth the management and governance values necessary for success in the managed care-oriented marketplace produce a trend line that is bringing the critical success factors of tax-paying and tax-exempt institutions closer together. They may well soon be indistinguishable. Illustrative of this is the absolute need of both for-profit and so-called not-for-profit hospitals to develop competitively priced managed care offerings. An individual hospital's pricing strategy to a wholesale purchaser is, of course, quite different from its approach to the eversmaller number of retail purchasers. As a result, the somewhat higher listed charges of investor-owned hospitals referenced by Pauly (even if adjusted using the "suburban" factor) is already arguably immaterial. …