U.S. Hospitals: Mission Versus Market

In the 1990s managed care went to war against unsustainablehospital spending with selective contracting, utilization management,and discounts. Provider protests were often dismissed as self-interestedwhining, but thoughtful policymakers knew that as reimbursementshrank, there were legitimate reasons to worry about erodingcross-subsidies for teaching, research, charity care, and unprofitableservices. Some of these worries were held at bay during an interludewhen managed care weakened and hospital revenues bounced back.But resurgent health care costs and relentless budget pressureon Medicare and Medicaid reimbursement have renewed concernsabout how hospitals’ mission-driven activities will besupported.

But a new conceptual framework now surrounds discussion of thisproblem. A decade ago the health sector was viewed as havinga brand of prodigality that was all its own—a system renderedinsensitive to market forces by third-party payment and helplessagainst supply-induced demand because of an information chasmbetween buyers and sellers of care. Managed care and managedcompetition were solutions that were matched to the peculiarproblems of the health sector—supplying respectively acheck on provider-driven utilization and a framework for a functionalmarket.

In the new millennium, though, a more sweeping vision of thehealth economy’s predicament is offered. Traditional healthcoverage, in this view, was a kind of "quasi–social insurance,"which, by common consent, allowed cross-subsidies of uncompensatedcare, teaching, and other public needs in private as well aspublic financing arrangements. Now, in a deregulated, global,hypercompetitive economy, where Wal-Mart is a more typical employerthan General Motors, price transparency and the eliminationof all unnecessary supply-chain costs are the ruling imperatives.Conceptually, if not practically, the threat to hospitals’mission-driven activities is greater than ever.

This new global context for the old debate about financing thehospital mission is clearly reflected in the first of the followingthree papers, in which Stuart Altman and colleagues from BrandeisUniversity draw their apt analogy to the airline industry, whichhas been so quickly and dramatically transformed by deregulationand price transparency. Allen Dobson and his Lewin Group associatesfollow with a detailed description of cost shifting in the hospitalbusiness and what the implications would be of shutting offthis mechanism. Finally, Bruce Vladeck outlines the extent ofservices that are supported by cross-subsidies and concludesthat "the more the financing of hospital care moves in the directionof a ‘perfect’ market, the less...funding for communityservice there will be."

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U.S. Hospitals: Mission Versus Market