Where’s the Pareto efficiency in Illinois health care?

As a University of Chicago graduate in Economics, advocating increased regulation is almost a sin. You’re taught that free market economics trumps all, and the market will correct itself to some sort of homeostasis, which is better for everyone. Free markets produce Pareto efficiencies, in theory.  As we are seeing with the current financial crisis, extraordinary greed concentrated in the hands of a few people have made us all worse off. The same could be said about health care in Illinois.

I wrote previously about the need for non-profit hospitals, who gain significant benefits, mainly tax breaks from the state, to provide more programs and serve a  charitable mission to the surrounding community. What we’ve seen is that the charitable mission isn’t being served in many hospitals, especially Northwestern Memorial hospital. Many of these non-profit hospitals are serving very little charity care, while stockpiling significant cash reserves. In fact, Provena Covenant Medical Center, a Downstate nonprofit hospital, lost it’s non-profit status, because less than 1% of its total revenue went to charity care. This ruling is being challenged and headed to the Supreme Court of Illinois.

Looking at the charts of the charity care for each non-profit hospital in Illinois, you begin to see a consistency in the lack of quality charity care for the communities these non-profit hospitals are supposed to serve.  In the previous blog post I wrote about the topic, I proposed that there should be an organization set-up to be responsible for oversight over the non-profit hospitals, ensuring that services are being given to the local community, and serve as the innovative force to layer in some economies of scale by serving as an umbrella organization for bringing increased health care to the communities in the more destitute areas of the city.

Non-profits, like for-profits have to maximize revenue at some point to remain relevant and deliver services to their community. This is why I proposed something which is similar to a luxury tax agreement in professional sports, where the hospitals that are generating a great deal of cash after a finite point, are forced to contribute to the umbrella organization so that we can pool together those resources. No reason in having a struggling hospital, like Mount Sinai contribute the same amount as a Northwestern Memorial, if Mount Sinai has 4 days of cash on hand, and Northwestern Memorial has over 430 days of cash on hand.  The challenge in this mandate lies in how non-profit hospitals, like Northwestern Memorial hospital, will be incentivized to maximize revenue beyond that luxury tax strike point.

The current system isn’t working. In a recent article in the Chicago Tribune, hospitals like Stroger hospital are starting to get an influx of redirected patients, patients originally assigned for another hospital, but referred to another for one reason or another. This has contributed to why our state budget is hurting, and we are forced to make drastic moves, such as increase the sales tax, making taxpayers much worse off.  Non-profit hospitals in Cook County dedicated just 2 percent of total revenue to charity care in 2007, just one point higher than for profit hospitals! Some patients are referred from as far as Lake and Dupage counties, which can easily be an hour drive.

In an article today in the Chicago Tribune, over 32% of the redirected patients of the University of Chicago are poor. Over 7% of the patients that Mercy Hospital takes in from the University of Chicago Hospitals ( just the emergency room only) have no health insurance coverage. So what does any profit maximizing hospital do to outsource so many services to the poor? They create the Urban Health Initiative, which is essentially a partnership with about two dozen hospitals throughout the South Side. These patients go to these hospitals instead of the University of Chicago, and U of C gets to see less patients who are most likely not going to pay. The U of C states that it is a way to alleviate long waits and to give treatment at the appropriate location, but let’s call a spade for what it is, a spade. The U of C had to set up this partnership to ensure that everyone else takes on the burden of these patients, cutting into their profit margins. Let’s not mention the fact that the U of C has the best facilities and the best physicians.

What we need is more transparency behind why those patients were redirected from the University of Chicago Hospitals, with one in three being poor. What are the guidelines and policies? The public should be aware of this, because it’s their tax dollars that are making up for the difference. The minute we do this, the more we provide the Pareto improvements necessary to having a functioning state budget that isn’t nearly as wasteful as it is today.


One response to “Where’s the Pareto efficiency in Illinois health care?

  1. Well said Emile! UCMC needs to give back more to the community and stop building a new hospital each year that poor residents won’t even benefit from.

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